Annual Report Annual Report 2006

Transcription

1 Annual Report 2006 (Company No X) No. 2 Jalan Apollo U5/190 Bandar Pinggiran Subang Seksyen U5, Shah Alam Selangor Darul Ehsan Tel : Fax : / mergebhd@streamyx.com MERGE ENERGY BHD. (Company No X) Annual Report 2006

2 cover rationale for MERGE ENERGY BHD. ANNUAL REPORT 2006 The cover design focuses on Merge Energy s range of portfolio. It clearly illustrates the organisation s business. The background signifies the detailed and strategic planning and execution that lie behind each and every project. It is all about providing continuous quality products and services. The colour green signifies growth and refreshing changes that will take the organisation to greater levels of success.

3 Corporate Information 2 Profile of Directors 3 Executive Chairman s Statement 7 Financial Highlights 8 Corporate Structure 9 Statement on Corporate Governance 10 Directors Responsibility Statement 16 Audit Committee Report 17 Statement on Internal Control 22 Other Compliance Information 24 Financial Statements 25 List of Properties 70 Analysis of Shareholdings 72 Notice of Annual General Meeting 75 Statement Accompanying 77 Notice of Annual General Meeting Proxy Form what sinside 2 corporate information 7 executive chairman s statement 9 corporate structure

4 2 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 CORPORATE information BOARD OF DIRECTORS Dato Muhammad Azaham bin Abdul Wahab Executive Chairman Encik Yusof Badawi Executive Director/Chief Executive Officer Encik Maseri bin Basirah Non-Independent Non-Executive Director Dr Mohd Soib bin Mustakim Non-Independent Non-Executive Director Mr Sheah Kok Fah Senior Independent Non-Executive Director Encik Abd Latiff bin Ahmad Independent Non-Executive Director Encik Tahirruddin bin Ahmad Independent Non-Executive Director AUDIT COMMITTEE Chairman Mr Sheah Kok Fah Members Encik Yusof Badawi Encik Abd Latiff bin Ahmad Encik Tahirruddin bin Ahmad NOMINATION COMMITTEE Chairman Mr Sheah Kok Fah Members Dr Mohd Soib bin Mustakim Encik Abd Latiff bin Ahmad REMUNERATION COMMITTEE Chairman Mr Sheah Kok Fah Members Dr Mohd Soib bin Mustakim Encik Abd Latiff bin Ahmad COMPANY SECRETARY Ms Yoong Wai Ling (MAICSA ) REGISTERED OFFICE AND BUSINESS ADDRESS No. 2 Jalan Apollo U5/190 Bandar Pinggiran Subang Seksyen U Shah Alam Selangor Darul Ehsan Tel : Fax : / mergebhd@streamyx.com SHARE REGISTRAR Symphony Share Registrars Sdn Bhd ( D) Level 26, Menara Multi-Purpose Capital Square No. 8 Jalan Munshi Abdullah Kuala Lumpur Tel : Fax : / AUDITORS BDO Binder (AF 0206) 12th Floor Menara Uni.Asia 1008 Jalan Sultan Ismail Kuala Lumpur PRINCIPAL BANKERS Affin Bank Berhad (25046-T) Hong Leong Bank Berhad (97141-X) Citibank Berhad ( M) STOCK EXCHANGE LISTING Bursa Malaysia Securities Berhad Construction Sector, Main Board

5 3 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 PROFILE OF directors DATO MUHAMMAD AZAHAM BIN ABDUL WAHAB Aged 66 Malaysian Executive Chairman Dato Muhammad Azaham was appointed to the Board on 3 January He graduated from the University of Malaya in 1966 and did a post-graduate course in Urban Management and Planning at University of Westminster, London. He specialises in organisational development, quality management and leadership studies. Wilayah Persekutuan, Selangor, Pulau Pinang, Johor, Negeri Sembilan and Pahang. He had served in a Second Board construction and development company. As the Executive Chairman and substantial shareholder, he is the founder of Jalur Cahaya Sdn Bhd, a company involved in water management and non-revenue water. Dato Muhammad Azaham served in the Malaysian civil service from and acquired extensive management experience in the middle and upper echelon of management. Subsequently, he resigned and ventured into business. He has more than 23 years of experience in the construction and property development industry and has served in listed and non-listed companies involved in construction and property development. As the General Manager of Syarikat Perumahan Pegawai Kerajaan Sdn Bhd, Dato Muhammad Azaham was instrumental in the development of housing projects in Dato Muhammad Azaham is active in consumer affairs and has served as a member of the National Consumers Consultative Council, Ministry of Trade and Industry. He was active in the youth movement and was the President of the Malaysian and Asian Youth Council. He was also active in politics and has served in the Branch and Division of UMNO and currently he is the Head of UMNO Cawangan Pemancar in Pulau Pinang. He has co-authored a book titled The Malays Par Excellence... Warts and All, published by Pelanduk Publications.

6 4 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 profile of directors ENCIK YUSOF BADAWI Aged 44 Malaysian Executive Director/Chief Executive Officer ENCIK MASERI BIN BASIRAH Aged 45 Malaysian Non-Independent Non-Executive Director Encik Yusof was appointed to the Board on 2 May He graduated with a Bachelor of Science in Engineering, major in Civil Engineering and minor in Construction and Mathematics from Southern Illinois University, United States of America. Encik Yusof has 20 years of experience in the construction industry at various levels including senior/board level. He has been actively involved in numerous infrastructure, waterworks and maintenance projects which had been successfully implemented. Encik Maseri was appointed to the Board on 18 November He holds a Certificate in Operation and Basic Knowledge on Boiler from the Japan Chamber of Commerce and Industry. Since 1987, Encik Maseri has been actively involved in the landscaping and construction sector. Presently, he is the Managing Director of several private organisations which have participated in several landscaping and construction projects for Lembaga Pembangunan Langkawi (LADA) and Majlis Daerah Langkawi. Encik Yusof is a member of the Audit Committee.

7 5 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 profile of directors DR MOHD SOIB BIN MUSTAKIM Aged 49 Malaysian Non-Independent Non-Executive Director MR SHEAH KOK FAH Aged 42 Malaysian Senior Independent Non-Executive Director Dr Mohd Soib was appointed to the Board on 18 November He graduated with a Bachelor of Science in Colour Vibration Therapy and Complimentary Medicines from the Open International University. Dr Mohd Soib has been a practitioner in complimentary medicines since He was a training officer at the Rubber Industry Smallholders Development Authority (RISDA) from and at Kementerian Pertahanan Malaysia, Bahagian Hal-Ehwal Bekas Perajurit from Mr Sheah was appointed to the Board on 16 November He holds a degree in LLB (Hons) from the University of Malaya and was admitted to the Bar in Mr Sheah is an advocate and solicitor and has been in legal practice since He has been the Partner of Messrs Sheah, Tan and Rahman (formerly known as Messrs Jeffrey Tan & Co. and subsequently as Messrs Ooi, Sheah & Tan) since He has been appointed as a Councillor to Majlis Perbandaran Petaling Jaya for 2 years from Dr Mohd Soib is a member of the Remuneration Committee and Nomination Committee. Mr Sheah is the Chairman of the Audit Committee, Remuneration Committee and Nomination Committee.

8 6 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 profile of directors ENCIK ABD LATIFF BIN AHMAD Aged 49 Malaysian Independent Non-Executive Director Encik Abd Latiff was appointed to the Board on 16 January He holds a degree in LLB (Hons) from the University of Malaya. Encik Abd Latiff is an advocate and solicitor. He started his career in 1981 with the Rubber Industry Smallholders Development Authority (RISDA) and thereafter with Dewan Bahasa dan Pustaka (DBP). In 1988, he held the position of senior legal officer in Employees Provident Fund (EPF) before joining the private practice. Encik Abd Latiff is a member of the Audit Committee, Remuneration Committee and Nomination Committee. None of the Directors have: (a) any family relationship with any Directors and/ or substantial shareholders of the Company; (b) any conflict of interest with the Company; and (c) any conviction for offences (other than traffic offences) within the past 10 years. ENCIK TAHIRRUDDIN BIN AHMAD Aged 53 Malaysian Independent Non-Executive Director Encik Tahirruddin was appointed to the Board on 14 October He is a member of the Malaysian Institute of Accountants and Fellow of Chartered and Certified Accountants of United Kingdom. Encik Tahirruddin has 20 years of experience in financial and accounting matters in the civil service, of which he started as an accountant with Jabatan Akauntan Negara in 1976 and then as Deputy Director of Audit and Accounts in the Cooperative Department of Malaysia. From , he was the State Treasurer with the Selangor State Treasury before he was seconded to RMN Dockyard in Lumut, Perak as its first Finance Manager. In 1983, he joined Perak State Economic Development Corporation in Ipoh as the Head of Finance and Administration. Subsequently, from , he joined Permodalan Perak Berhad as its Managing Director, which was later restructured for Main Board listing as KUB Malaysia. Currently, he is managing his own business. Encik Tahirruddin is a member of the Audit Committee.

9 7 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 EXECUTIVE chairman s STATEMENT DEAR SHAREHOLDERS, ON BEHALF OF THE BOARD OF DIRECTORS, IT IS MY PLEASURE TO PRESENT THE ANNUAL REPORT AND THE AUDITED FINANCIAL STATEMENTS OF MERGE ENERGY BHD. GROUP FOR THE FINANCIAL YEAR ENDED 31 JANUARY FINANCIAL PERFORMANCE The Group registered a revenue of RM90.28 million, a 437% increase over the preceding year of RM16.81 million. The Group has returned to the black with a profit after taxation of RM4.99 million, compared to a loss after taxation of RM1.04 million recorded in the preceding year. On the back of an improved profit, earnings per share rose to 7.45 sen in 2006 compared with a loss per share of 1.55 sen in The Group s assets continue to grow with total net assets valued at RM10.52 million, an increase of 84% from RM5.71 million in The Group s performance for the financial year under review improved in tandem with higher revenue generated from projects secured and implemented. INDUSTRY REVIEW Bank Negara Malaysia reported that the country s gross domestic product (GDP) for 2006 is projected at 6%, which is higher than the previous estimate of 5.5%. The good news from the projections would be for the construction sector, which is expected to grow by 1% in 2006 as a result of more civil works after 2 years of contraction. The Ninth Malaysia Plan (9MP) has provided significantly larger allocations and given priority in areas such as sewerage, water supply, flood mitigation, public transport and rural roads upgrades to ensure adequate and sustainable water supply, water intakes and distribution systems, improve accessibility to less developed areas and encourage Malaysians to use public transportation in order to alleviate traffic congestion. PROSPECTS The Group will continue its focus on the search of new construction projects and participate in suitable tenders. Strategic measures will be pursued for improving the Group s construction margins to ensure that positive contribution to the bottom line will continue to be a key feature in the Group s business stance. The generous allocation can further improve growth in revenue and profit through 2007 and 2008 and we believe our previous track record and specialization will give us opportunity under the 9MP. APPRECIATION On behalf of the Board, I would like to record our appreciation to Mr Hew Thin Chay who resigned during the financial year, for his invaluable services rendered during his tenure of service. I also wish to welcome Encik Tahirruddin bin Ahmad who was appointed on 14 October Our sincere appreciation also goes to our valued shareholders, business associates and financiers for their continuous support and confidence in the Group. I would also like to record the Group s appreciation to the Management and all employees for their commitment and drive in contributing to the growth and achievement of the Group. A special thanks to the members of the Board who continued to guide and encourage the Management and staff to persevere in our efforts to put the Group on a more sound footing to meet the challenges ahead. Dato Muhammad Azaham bin Abdul Wahab Executive Chairman 9 May 2006

10 8 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 financial HIGHLIGHTS AUDITED RM 000 RM 000 RM 000 RM 000 RM 000 RM 000 Revenue 35,815 31,784 12,721 4,918 16,812 90,285 Profit/(Loss) before taxation (20,321) (38,589) (25,921) (5,538) (1,033) 5,584 Net Assets 77,033 38,812 12,289 6,750 5,712 10,524 Net Assets Per Share (RM) REVENUE (RM 000) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 PROFIT/(LOSS) BEFORE TAXATION (RM 000) 10,000 5, ,000-10,000-15,000-20,000-25,000-30,000-35, , NET ASSETS (RM 000) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 NET ASSETS PER SHARE (RM)

11 9 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 corporate STRUCTURE MERGE ENERGY BHD. ( X) CONSTRUCTION REALTY TRADING & MANUFACTURING Mewah Kota Sdn. Bhd. MEB Realty Sdn. Bhd. Merge Trading Sdn. Bhd. Paramount Ventures Sdn. Bhd. Merge Properties Sdn. Bhd. Merge Readymix Sdn. Bhd. Merge Highway Engineering Sdn. Bhd. MEB Development Sdn. Bhd. Merge Concrete Technologies Sdn. Bhd. Merge Environmental Engineering Sdn. Bhd. Merge Properties Management Services Sdn. Bhd. MEB Management Sdn. Bhd. The above companies are all wholly-owned subsidiaries of Merge Energy Bhd.

12 10 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 STATEMENT ON CORPORATE governance THE BOARD OF DIRECTORS recognises the importance of good corporate governance and is committed to ensure that the highest standards of corporate governance are practised throughout the Group, as set out in the Malaysian Code on Corporate Governance ( the Code ). The Board continues to encourage professionalism, integrity and good governance as the corporate culture and way forward for the Group to provide an environment for good performance by its people and to provide better returns to shareholders. The Board is therefore pleased to report on how the Group has applied the principles and best practices for corporate governance mentioned in the Code. DIRECTORS 1. The Board An effective Board leads and controls the Group. The Board is responsible for ensuring that shareholders value and interests are protected and enhanced. The Board is thus responsible for the overall performance of the Group and focuses mainly on strategies, financial and operational performance, critical business issues, resources and standards of conduct. The Directors are professionals from diverse backgrounds with a wide range of experience which enable them to direct and manage the business and affairs of the Group with broader perspectives. 2. Board Balance The Board consists of seven (7) members, comprising two (2) Executive Directors and five (5) Non-Executive Directors. Among the Non-Executive Directors, three (3) are Independent Non-Executive Directors which complies with the Listing Requirements of Bursa Malaysia Securities Berhad. The composition and number of Directors reflect the fair representation of all shareholders interests and investment.

13 11 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 statement on corporate governance 3. Supply of Information 5. Re-election To enable the Board to effectively discharge its duties and responsibilities, the Directors are given full, complete and unrestricted access to timely and accurate information. Prior to the meetings of the Board and Board Committees, the Directors are provided with the agenda together with the relevant reports and papers which are issued in sufficient time. The reports include changes to the Group s corporate strategies, business plans and budgets, operational and financial performance reports and updates on statutory regulations and requirements affecting the Group. In addition, there is a schedule of matters reserved specifically for the Board s decision, including the approval of corporate plans and budgets, material acquisitions and disposals of assets, major corporate exercises and changes to the control structure of the Group. Article 105 of the Company s Articles of Association provides that one-third of the Directors shall retire from office at each Annual General Meeting and all Directors shall retire from office at least once in every three (3) years but may offer themselves for re-election. Article 112 of the Company s Articles of Association provides that any person appointed as an additional Director shall hold office only until the next following Annual General Meeting and shall then be eligible for re-election. The Directors who retire every year shall be those who have been longest in office since their last election or appointment, but as between persons who became Directors on the same day, those to retire shall be determined by lot unless they otherwise agree among themselves. Where necessary, the Directors may obtain independent professional advice whether as a full Board or in their individual capacity, in furtherance of their duties, at the Company s expense. All Directors have access to the advice and services of the Company Secretary, who regularly updates them on the latest developments in the legislations and regulatory framework affecting the Group as well as the implementation of good corporate governance and compliance practices in the Group. 6. Directors Training In the year 2005, the Directors attended various seminars and conferences on relevant areas to further enhance their skills and knowledge and to keep abreast with the latest developments on laws and regulations under the Continuing Education Programme (CEP) organised by Bursa Malaysia Securities Berhad and other organisations/professional associations, of which the seminars and conferences are also accredited by Bursa Malaysia Securities Berhad. 4. Appointments to the Board The identification and appointment of new Directors undergo a process led by the Nomination Committee which reviews the required mix of skills, experience and other qualities of the Directors to ensure that the Board is functioning effectively and efficiently. With the exception of Encik Tahirruddin bin Ahmad who was appointed on 14 October 2005, all the other Directors had attended the CEP and obtained the minimum 48 points or 72 points by 31 December 2005, which is a requirement by Bursa Malaysia Securities Berhad. Encik Tahirruddin bin Ahmad had attended the Mandatory Accreditation Programme prescribed by Bursa Malaysia Securities Berhad.

14 12 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 statement on corporate governance 7. Board Meetings The Board holds at least four (4) regularly scheduled meetings annually, with additional meetings convened when important matters demand immediate attention. Senior Management staff as well as professional advisers may be invited to attend the Board Meetings to provide the Board with their views and clarifications on issues raised by the Directors. During the financial year ended 31 January 2006, four (4) Board Meetings were held at the Board Room of the Company at No. 2 Jalan Apollo U5/190, Bandar Pinggiran Subang, Seksyen U5, Shah Alam, Selangor Darul Ehsan and one (1) Board Meeting on 28 June 2005, was held at Putri Room, 1st Floor Kelab Golf Sultan Abdul Aziz Shah, No. 1 Rumah Kelab, Jalan Kelab Golf 13/6, Shah Alam, Selangor Darul Ehsan after the Eighth Annual General Meeting, which was also held on that day. The details of the meetings and attendance of each Director are set out below: Date and Time of Board Meetings Friday Monday Tuesday Tuesday Thursday Name of Director 5.30 p.m p.m p.m p.m p.m. % Dato Muhammad Azaham bin Abdul Wahab X 80 Yusof Badawi 100 Maseri bin Basirah 100 Dr Mohd Soib bin Mustakim 100 Sheah Kok Fah 100 Hew Thin Chay N/A* N/A* 100 Abd Latiff bin Ahmad 100 Tahirruddin bin Ahmad N/A** N/A** N/A** N/A** 100 Notes: : Present X : Absent with apologies * : Not applicable, as Mr Hew Thin Chay resigned on 8 July 2005 ** : Not applicable, as Encik Tahirruddin bin Ahmad was appointed on 14 October 2005 In between Board Meetings, approvals on matters requiring the sanction of the Board are sought by way of circular resolutions enclosing all relevant information to enable the Board to make informed decisions.

15 13 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 statement on corporate governance 8. Committees The Board has delegated certain responsibilities and duties to the following Committees to assist the Board in the efficient and effective discharge of its duties. These Committees exercise transparency and full disclosure in their proceedings. (a) Audit Committee Established on 16 April 1999, the Audit Committee comprises three (3) Independent Non-Executive Directors and one (1) Executive Director. The Audit Committee Report is set out on pages 17 to 21 of this Annual Report. (b) Remuneration Committee Established on 27 September 2001, the responsibilities of the Remuneration Committee are: to recommend to the Board, the remuneration of each Director in all its form, with the respective Directors abstain from deliberating their own remuneration; and to establish and review the remuneration packages of each individual Executive Director such that the levels of remuneration are sufficient to attract and retain the Directors needed to run the Group successfully. (c) Nomination Committee Established on 27 September 2001, the Nomination Committee is entrusted with the following responsibilities: recommend to the Board, candidates for all directorships to be filled by the shareholders or the Board; consider, in making recommendations, candidates for directorships proposed by the Executive Chairman or by any other senior executive or any Director or shareholder; recommend to the Board, Directors to fill the seats on Board Committees; and assess the effectiveness and balance of the Board as a whole and the Committees of the Board. During the financial year ended 31 January 2006, the Nomination Committee convened two (2) meetings to propose: the re-election of Directors retiring in accordance with the Company s Articles of Association at the Eighth Annual General Meeting held on 28 June 2005; and the appointment of Encik Tahirruddin bin Ahmad as a new member to the Board and Audit Committee in place of Mr Hew Thin Chay. (d) Executive Committee The Executive Committee, which was established on 19 December 2003, met ten (10) times during the financial year ended 31 January Minutes of meetings and resolutions passed by the Executive Committee were tabled at the Board Meeting for notation. The objectives of the Executive Committee are: to attend and expedite all operational matters of the Group to ensure speedy processing of any issue which require immediate decisions; to improve business performance and decision making; to provide assistance to the Board in fulfilling its fiduciary responsibilities in the areas relating to the Group s accounting and management controls, financial reporting, operational issues, human resources policies and company secretarial matters and in safeguarding shareholders investment and the Group s assets; to review and formulate policies and guidelines for the approval of the Board in order to ensure smooth management and administration of the Group and thereafter to implement the policies and guidelines accordingly; and to evaluate and recommend investment opportunities for the approval of the Board.

16 14 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 statement on corporate governance DIRECTORS REMUNERATION 1. Level and Make-up of Remuneration The Group s policy on Directors remuneration is to ensure that the Directors are adequately remunerated for the services they render. Non-Executive Directors are paid annual fees, which will be approved by the shareholders, and attendance allowances to board and board committee meetings. 2. Procedures The Remuneration Committee will deliberate and submit its recommendation to the Board for endorsement. The Directors play no part in deciding their own remuneration and shall abstain from discussing or voting on their own remuneration. Directors fees are approved by the shareholders at Annual General Meetings. 3. Disclosure The details of remuneration of the Directors during the financial year ended 31 January 2006 are as follows: Non- Types of Executive Executive Remuneration Directors Directors RM RM Non- Bands of Executive Executive Remuneration Directors Directors RM50,000 and below 6 RM150,001-RM200,000 1 RM200,001-RM250,000 1 The remuneration package of the Executive Directors is structured to commensurate with corporate and individual performance, experience and scope of responsibility. SHAREHOLDERS 1. Dialogue between the Company and Investors The Board acknowledges the need for shareholders to be informed of all material business and developments concerning the Group. In addition to various announcements made during the year, the timely release of financial results on a quarterly basis provides shareholders with an overview of the Group s performance and operations. The Annual Reports, announcements, circulars to shareholders and financial results are pivotal means of communication with shareholders. The Annual General Meetings and Extraordinary General Meetings provide the opportunities for interaction among Directors and shareholders. Issues pertaining to the Annual Reports, circulars to shareholders and performance and progress of the Group could be raised and explained in these meetings. Fees 56,758 Salaries, allowances and bonus 368,675 Defined contribution plans 27,742 and other employee benefits Total 396,417 56,758

17 15 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 statement on corporate governance 2. Annual General Meeting 2. Internal Control At least twenty-one (21) days prior to the Annual General Meeting, the Annual Report will be sent to the shareholders to inform them of the financial performance and other corporate information relating to the Group. Each item of special business included in the notice of the Annual General Meeting will be accompanied by a full explanation of the effects of a proposed resolution to facilitate full understanding and evaluation of the issues involved. During the Annual General Meeting, the Board presents the financial performance of the Group. Shareholders are given the opportunity to seek and clarify any pertinent and relevant issues raised in the meeting in relation to the operations and performance of the Group and to exchange views with the Board. The Board acknowledges its responsibility for establishing a sound system of internal control to safeguard shareholders investment and the Group s assets. While the internal control system is devised to cater for particular needs of the Group and the risks to which it is exposed, such controls by their nature can only provide reasonable assurance and not absolute assurance against material misstatement, loss or fraud. The Board recognizes that risks cannot be fully eliminated. As such, the systems, processes and procedures being put in place are aimed at minimizing and managing them. Ongoing reviews are continuously carried out to ensure the effectiveness, adequacy and integrity of the system of internal control. 3. Relationship with the Auditors ACCOUNTABILITY AND AUDIT 1. Financial Reporting The Group s performance and prospects in the Annual Report and financial results on a quarterly basis, prepared based on appropriate accounting standards and policies, will be reviewed and deliberated by the Audit Committee prior to recommendation for adoption by the Board. The Board takes responsibility in ensuring that the financial statements reflect a true and fair view of the state of affairs of the Company and the Group in accordance with the Companies Act 1965, the applicable approved accounting standards in Malaysia and the Listing Requirements of Bursa Malaysia Securities Berhad. Through the Audit Committee, the Group has established a transparent and appropriate relationship with its external auditors in seeking their professional advice towards ensuring compliance with the accounting standards. The external auditors are invited to attend the Audit Committee Meetings to brief the Audit Committee on specific issues. During the Audit Committee Meetings, they highlight observations made during the course of audit to the Audit Committee members. COMPLIANCE WITH THE CODE The Group has complied with all the best practices of corporate governance set out in Part 2 of the Code.

18 16 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 DIRECTORS responsibility STATEMENT THE FINANCIAL STATEMENTS of the Company and the Group have been drawn up in accordance with the applicable approved accounting standards in Malaysia and the provisions of the Companies Act, 1965 so as to give a true and fair presentation of the state of affairs of the Company and the Group as at the end of the financial year and of the results and cash flows for the year then ended. In preparing these financial statements, the Directors have: adopted appropriate accounting policies and consistently applied and supported the policies by reasonable and prudent judgements and estimates; ensured that applicable accounting standards have been complied with; and prepared the financial statements on the going concern basis as the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors are responsible for ensuring that the Company and the Group keep proper accounting records for accurate disclosure of the financial position. The Directors also have the overall responsibilities to take all steps as are reasonably open to them to safeguard the assets of the Group to prevent and detect fraud and other irregularities.

19 17 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 audit COMMITTEE REPORT COMPOSITION Chairman Mr Sheah Kok Fah Senior Independent Non-Executive Director Members Encik Yusof Badawi Executive Director/Chief Executive Officer Encik Abd Latiff bin Ahmad Independent Non-Executive Director Encik Tahirruddin bin Ahmad Independent Non-Executive Director MEETINGS All Audit Committee members are provided with an agenda together with relevant reports and papers which are issued in sufficient time prior to the Audit Committee Meeting to enable the members to review the reports and papers as well as to obtain further information or explanation. Minutes of Audit Committee Meetings were tabled during Board Meetings for the Board s notation and endorsement. At each Board Meeting, the Chairman of the Audit Committee reports and highlights to the Board, all findings discussed by the Audit Committee. During the financial year ended 31 January 2006, five (5) Audit Committee Meetings were held. Details of attendance of each Audit Committee member are as follows: Date and Time of Audit Committee Meetings Friday Monday Tuesday Tuesday Thursday Name of Audit Committee Member 3.00 p.m p.m a.m p.m p.m. % Sheah Kok Fah 100 Yusof Badawi 100 Hew Thin Chay N/A* N/A* 100 Abd Latiff bin Ahmad 100 Tahirruddin bin Ahmad N/A** N/A** N/A** N/A** 100 Notes: : Present * : Not applicable, as Mr Hew Thin Chay resigned on 8 July 2005 ** : Not applicable, as Encik Tahirruddin bin Ahmad was appointed on 14 October 2005

20 18 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 audit committee report TERMS OF REFERENCE Meetings Composition The Audit Committee shall be appointed by the Board from among their number and shall consist of not less than three (3) members. The Audit Committee shall meet at least four (4) times a year and such additional meetings as the Chairman shall decide in order to fulfill its duties. The quorum for a meeting shall be two (2) members and the majority of members present must be Independent Directors. The majority of the Audit Committee members must be Independent Directors and at least one of the members must be a qualified accountant as prescribed by Bursa Malaysia Securities Berhad Listing Requirements. The Chairman of the Committee shall be appointed by the Board and shall be an Independent Director. In the event of any vacancy in the Audit Committee resulting in the non-compliance of the above requirements, the vacancy shall be filled within three (3) months. The Head of Finance and Accounts, the Head of Internal Audit and representative(s) of the external auditors shall normally attend meetings. At least once a year the Audit Committee shall meet with the external auditors. The Company Secretary shall be the Secretary of the Audit Committee. Minutes of meetings shall be distributed to the Board. The Chairman shall report on each meeting to the Board. All members of the Audit Committee, including the Chairman, shall hold office only so long as they serve as Directors of the Company. Should any member of the Audit Committee cease to be a Director of the Company, his membership in the Audit Committee would cease forthwith. Authority The Audit Committee is authorised by the Board to investigate any activity within its terms of reference. It is authorised to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Audit Committee. In addition, it shall have unrestricted access to both the internal and external auditors and to the Senior Management of the Group. The Audit Committee is also authorised by the Board to obtain legal or other professional advice where they consider it necessary to carry out their duties.

21 19 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 audit committee report Duties and Responsibilities (3) To do the following in respect of internal audit functions: (1) To review the quarterly results and year end financial statements, prior to the approval by the Board, focusing particularly on: (i) changes in or implementation of major accounting policy changes; (ii) significant and unusual events; (iii) the going concern assumption; (iv) significant adjustments arising from the audit; and (v) compliance with accounting standards and other legal requirements. (i) (ii) (iii) review the adequacy of the scope, functions and resources of the Internal Audit Department and that it has the necessary authority to carry out its work; review the internal audit programme, processes, the results of the internal audit programme, processes or investigation undertaken and whether or not appropriate action is taken on the recommendations of the Internal Audit Department; and consider the findings of internal investigations and Management s response. (2) To review with the external auditors, the following: (i) the audit plan; (ii) the audit report; (iii) their evaluation of the system of internal controls; (iv) problems and reservations arising from their interim and final audits, and any matter the external auditors may wish to discuss (in the absence of Management where necessary); (v) the assistance given by the Company s officers to the external auditors; and (vi) the external auditors management letter and Management s response. (4) To consider any related party transaction and conflict of interest situation that may arise within the Company or the Group including any transaction, procedure or course of conduct that raises questions of management integrity. (5) To review: (i) any letter of resignation from the external auditors of the Company; (ii) whether there is a reason (supported by grounds) to believe that the Company s external auditors are not suitable for re-appointment; (iii) any recommendation on the nomination of a person or persons as external auditors. (6) To carry out other functions as may be agreed by the Audit Committee and the Board.

22 20 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 audit committee report ACTIVITIES During the financial year ended 31 January 2006, the Audit Committee carried out the following activities: 1. Reviewed the audit plan of the external auditors on the scope of their audit including audit procedures, significant accounting and auditing issues, impact of new or proposed changes in accounting standards and regulatory requirements on the financial statements; 8. Followed up on corrective actions taken by the Management on audit issues raised by the external auditors and the internal auditor; 9. Reviewed the Statement on Internal Control and the Audit Committee Report before tabling to the Board for approval to be published in the Annual Report; 10. Reviewed the proposed amendments to the Terms of Reference of the Audit Committee; 2. Reviewed the unaudited quarterly financial reports before tabling to the Board for approval and release to Bursa Malaysia Securities Berhad and the Securities Commission; 11. Reported all pertinent issues to the Board. INTERNAL AUDIT FUNCTION 3. Reviewed the audited financial statements of the Group together with the external auditors prior to submission to the Board for their consideration and approval; 4. Reviewed the audit findings by the external auditors; The Group has established the Internal Audit Department to support the Audit Committee and the Board in reviewing the Group s system of internal control and governance process so as to provide assurance that such systems continue to operate satisfactorily and effectively. 5. Assessed the external auditors performance and audit fees prior to submission to the Board for their approval; During the financial year ended 31 January 2006, the activities of the Internal Audit Department included: 6. Reviewed the annual audit plan presented by the internal auditor; 1. Prepared the annual audit plan based on risk approach method for deliberation by the Audit Committee; 7. Reviewed the internal audit reports which highlighted the audit issues, recommendation and the Management responses and directed actions to be taken by the Management to improve the system of internal control; 2. Carried out audit work in liaison with the Management for optimisation of resources; 3. Made recommendations to improve the operations in the Group;

23 21 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 audit committee report 4. Ascertained the extent of compliance with the Group s plans, policies, procedures and statutory requirements; 5. Ascertained the adequacy of controls for safeguarding the Group s assets from losses of all kinds; 6. Reviewing and appraising the soundness, adequacy and application of financial and other controls to promote effective control in the Group. The Internal Audit Department undertakes internal audit functions based on the audit plan that is reviewed and approved by the Audit Committee. The reports of the audit undertaken were presented to the Audit Committee and forwarded to the Management for attention and necessary action. EMPLOYEE SHARE OPTION SCHEME The Company did not have any Employee Share Option Scheme during the financial year.

24 22 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 statement ON INTERNAL CONTROL RESPONSIBILITY Internal Audit Department The Board acknowledges its responsibilities and is committed to maintain a sound system of internal control and ensure its adequacy and integrity so as to safeguard shareholders investments and the Group s assets. The Board and Management have implemented an internal control system designed to identify and manage, rather than eliminate the risks facing the Group in pursuit of its business objectives. This internal control system, by its nature, can only provide reasonable and not absolute assurance against material misstatement, loss or fraud. INTERNAL CONTROL SYSTEM The key elements of the Group s internal control system and assurance processes are described below. The Internal Audit Department serves as a corporate resource in support of the Audit Committee to fulfill its responsibilities. It independently reviews the control processes implemented by the Management and reports the findings and recommendations to the Audit Committee. Risk Management The Board has approved the adoption of Risk Management Policy and Framework to ensure the effective implementation of the risk management system. There is an ongoing process during the year for identifying, assessing and reviewing key risks areas by the Management for communication to the Board. Approval of Major Decisions Independent Audit Committee The Audit Committee comprises a majority of Non- Executive Directors, who are also independent of the Management. It has an overall responsibility to assist the Board in fulfilling its responsibilities for the financial reporting process, the system of internal control, the audit process and the Group s process for monitoring compliance with laws and regulations. All major decisions require the final approval of the Board and are only made after appropriate in-depth studies have been conducted. Matters that require the Board s approval include business plans, awards of major contracts, major investments and financial decisions.

25 23 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 statement on internal control OTHER KEY ELEMENTS OF THE GROUP S INTERNAL CONTROL SYSTEM The other key elements of the Group s internal control system are: A management structure with clear defined lines of responsibility and appropriate levels of delegation. Internal policies and control procedures are in place to regulate financial and operating activities. The provision of regular and comprehensive information to the Board covering the Group s financial performance, key business indicators, business development issues and progress of projects. CONCLUSION This Statement on Internal Control has been prepared in accordance with the Guidance for Directors of Public Listed Companies and the Listing Requirements of Bursa Malaysia Securities Berhad. The Board is of the view that the system of internal control of the Group that has been put in place is adequate and effective. The Board will continue to further improve and enhance its system of internal control and the work processes so that the Group s objectives can be met. This statement is made in accordance with the resolution of the Board of Directors dated 9 May The provision of quarterly management accounts and reports to the Board for their review and approval. The reporting and review of operational, financial and compliance matters for all the businesses of the Group are discussed regularly at the Executive Committee (EXCO) Meetings which are attended by all Executive Directors and Senior Management of the Group. In addition, the EXCO also convenes, at the request of its members to discuss and approve matters that required immediate decisions.

26 24 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 OTHER compliance INFORMATION 1. Utilisation of Proceeds 7. Variation in Results The proceeds of RM1,000,000 from the disposal of two (2) properties held under Lot , Geran No and Lot , Geran No in Bandar Alor Setar, Daerah Kota Setar, Kedah Darul Aman on 3 October 2005 were utilised for working capital. 2. Share Buybacks The Company did not undertake any share buyback exercise during the financial year. 3. Options, Warrants or Convertible Securities The Company has not issued any options, warrants or convertible securities in the financial year. The Group s audited results for the financial year ended 31 January 2006 did not vary by 10% or more from the unaudited results which were announced to Bursa Malaysia Securities Berhad on 29 March Profit Guarantee The Company did not make any arrangement which required profit guarantee during the financial year. 9. Material Contracts or Loans There were no material contracts or loans entered into by the Group during the financial year that involve Directors or major shareholders interests. 4. American Depository Receipt ( ADR ) or Global Depository Receipt ( GDR ) Programme The Company did not sponsor any ADR or GDR programme during the financial year. 5. Sanctions and/or Penalties There were no sanctions and/or penalties imposed on the Company and its subsidiaries, Directors or Management by the relevant regulatory bodies. 10. Revaluation Policy on Landed Properties The Group has not adopted a policy of regular revaluation on property, plant and equipment. 11. Recurrent Related Party Transactions The Company did not enter into any significant recurrent related party transactions which require shareholders mandate during the financial year. 6. Non-Audit Fees For the financial year, the following non-audit fees will be payable to BDO Binder, the external auditors and their affiliated companies: (i) Reviewing the Statement on Internal Control RM5,000 (ii) Tax advisory services RM15,300.

27 financial statements Directors Report 26 Statement By Directors 31 Statutory Declaration 31 Report of the Auditors 32 Balance Sheets 33 Income Statements 35 Statements of Changes in Equity 36 Cash Flow Statements 37 Notes to the Financial Statements 39

28 26 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 directors REPORT The Directors hereby submit their report together with the audited financial statements of the Group and of the Company for the financial year ended 31 January PRINCIPAL ACTIVITIES The Company is principally engaged in investment holding. The principal activities of the subsidiary companies are set out in Note 7 to the financial statements. There have been no significant changes in the nature of these activities during the financial year. RESULTS Group RM Company RM Net profit/(loss) for the financial year 4,989,795 (5,640,314) DIVIDENDS No dividend has been paid or declared by the Company since the end of the previous financial year. The Directors do not recommend any payment of dividend in respect of the financial year ended 31 January RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the financial statements. ISSUE OF SHARES AND DEBENTURES The Company has not issued any new shares or debentures during the financial year.

29 27 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 directors report DIRECTORS The Directors who held office since the date of the last report are: Dato Muhammad Azaham Bin Abdul Wahab Yusof Badawi Maseri Bin Basirah Dr Mohd Soib Bin Mustakim Sheah Kok Fah Abd Latiff Bin Ahmad Tahirruddin Bin Ahmad (Appointed on 14 October 2005) Hew Thin Chay (Resigned on 8 July 2005) In accordance with Article 105 of the Company s Articles of Association, Dato Muhammad Azaham Bin Abdul Wahab and Abd Latiff Bin Ahmad retire from the Board by rotation at the forthcoming Annual General Meeting and, being eligible, offer themselves for reelection. In accordance with Article 112 of the Company s Articles of Association, Tahirruddin Bin Ahmad retires from the Board at the forthcoming Annual General Meeting and, being eligible, offers himself for re-election. DIRECTORS INTERESTS The Directors holding office at the end of the financial year and their beneficial interests in the ordinary shares of the Company and its related corporations during the financial year ended 31 January 2006 as recorded in the Register of Directors Shareholdings kept by the Company under Section 134 of the Companies Act, 1965 were as follows: Number of ordinary shares of RM1.00 each Balance Balance as at as at Shares in the Company Bought Sold Direct interests: Maseri Bin Basirah 10,000, ,000,000 Dr Mohd Soib Bin Mustakim 8,000, ,000,000 Indirect interests: Dato Muhammad Azaham Bin Abdul Wahab 8,000,000 5,000,000-13,000,000 Yusof Badawi 8,000,000 5,000,000-13,000,000

30 28 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2006 directors report DIRECTORS INTERESTS (CONT D) By virtue of Section 6A of the Companies Act, 1965, Dato Muhammad Azaham Bin Abdul Wahab and Yusof Badawi are deemed to have an interest in the shares of the subsidiary companies to the extend of the Company having an interest. Other than as disclosed above, none of the other Directors who held office at the end of the financial year held any interest in the shares of the Company and its related corporations. DIRECTORS BENEFITS Since the end of the previous financial year, none of the Directors have received or become entitled to receive any benefits (other than benefits included in the aggregate amount of emoluments received or due and receivable by the Directors shown in the financial statements) by reason of a contract made by the Company or a related corporation with the Director, or with a firm of which the Director is a member, or with a company in which the Director has a substantial financial interest other than remuneration received by certain Director as director of the subsidiary company. There were no arrangements during and at the end of the financial year, to which the Company is a party, which had the object of enabling Directors of the Company to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other body corporate. OTHER STATUTORY INFORMATION REGARDING THE GROUP AND THE COMPANY: (I) AS AT THE END OF THE FINANCIAL YEAR (a) Before the income statements and balance sheets of the Group and of the Company were made out, the Directors took reasonable steps: (i) to ascertain that proper action had been taken in relation to the writing off of bad debts and the making of provision for doubtful debts and have satisfied themselves that all known bad debts had been written off and that adequate provision had been made for doubtful debts; and (ii) to ensure that any current assets which were unlikely to realise their book values in the ordinary course of business had been written down to their estimated realisable values. (b) In the opinion of the Directors, the results of the operations of the Group and of the Company during the financial year have not been substantially affected by any item, transaction or event of a material and unusual nature.