hexza corporation a/r-8hexza corporation berhad(8705-k) (incorporated in malaysia) annual report...

HEXZA CORPORATION BERHAD (8705-K)( I n c o r p o r a t e d i n M a l a y s i a )

C O N T E N T S

COVER

Frontal view of new office block housing Head Office staff and staff of Chemical Industries (Malaya) Sdn. Bhd.

Notice of Annual General Meeting 2

Statement Accompanying Notice of Annual General Meeting 4

Corporate Information 5

Corporate Structure 6

Chairman’s Statement 7

Directors’ Profile 10

Audit Committee Report 12

Corporate Governance Statement 15

Statement on Internal Control 20

Directors’ Report 22

Report of the Auditors 27

Income Statements 28

Balance Sheets 29

Statements of Changes in Equity 31

Cash Flow Statements 32

Notes to the Financial Statements 35

Statement by Directors 63

Declaration by the Officer Primarily Responsible for the Financial Management of the Company 63

Statement of Shareholdings 64

Properties owned by Hexza Corporation Berhad & its Subsidiaries 66

Proxy Form

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H e x z a C o r p o r a t i o n B e r h a d ( 8 7 0 5 - K )

( I n c o r p o r a t e d i n M a l a y s i a )

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N o t i c e o f A n n u a l G e n e r a l M e e t i n g

AGENDA

1. To receive and adopt the Audited Financial Statements for the year ended 31st January 2004 and the Reports of the Directors and Auditors thereon.

2. To approve the payment of a First and Final Dividend of 1% less income tax plus1% tax-exempt in respect of the financial year ended 31st January 2004.

3. To approve the payment of Directors’ fees of RM130,000 for the financial year ended31st January 2004.

4. To re-elect the following Directors who retire pursuant to Article 78 of the Company’sArticles of Association:

(a) Dr. Foong Weng Sum(b) Mr. Leong Keng Yuen(c) Tuan Haji Mohd. Jali @ Mohd. Jalil Bin Sany

5. To pass the following resolution pursuant to Section 129(6) of the CompaniesAct, 1965:

“That pursuant to Section 129(6) of the Companies Act, 1965, Dr. Foong WengCheong be and is hereby re-appointed a director of the Company to hold office untilthe next Annual General Meeting.”

6. To re-appoint Messrs. Deloitte & Touche as Auditors and to authorise the Directorsto fix their remuneration.

7. As Special Business, to consider and, if thought fit, to pass the following OrdinaryResolution:

Authority to issue shares pursuant to Section 132D of the Companies Act, 1965

“THAT pursuant to Section 132D of the Companies Act, 1965, the Directors be andare hereby empowered to issue shares of the Company at any time until theconclusion of the next Annual General Meeting of the Company upon such terms andconditions and for such purposes as the Directors may, in their absolute discretion, deemfit, provided that the aggregate number of shares issued pursuant to this resolutiondoes not exceed 10% of the issued capital of the Company for the time being and thatthe Directors are also empowered to obtain the approval for the listing of and quotationfor the additional shares so issued on Bursa Malaysia Securities Berhad.”

8. To transact any other business of which due notice shall have been given.

(Resolution 1)

(Resolution 2)

(Resolution 3)

(Resolution 4)(Resolution 5)

(Resolution 6)

(Resolution 7)

(Resolution 8)

(Resolution 9)

NOTICE IS HEREBY GIVEN that the Thirty-fifth Annual General Meeting of Hexza Corporation Berhad will

be held at Crystal 1, Ground Floor, Casuarina Ipoh, 18 Jalan Gopeng, 30250 Ipoh, Perak Darul Ridzuan on

Tuesday, 22nd June 2004 at 3.30 pm for the following purposes:-



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A depositor shall qualify for entitlement to the dividend only in respect of:

a) Shares deposited into the Depositor’s Securities Account before 12.30 p.m. on 21st July 2004 (in respectof shares which are exempted from mandatory deposit);

b) Shares transferred into the Depositor’s Securities Account before 4.00 p.m. on 23rd July 2004 in respectof ordinary transfers; and

c) Shares bought on Bursa Malaysia Securities Berhad on a cum entitlement basis according to the Rulesof Bursa Malaysia Securities Berhad.

By Order of the Board

CHONG YOKE SENGCompany Secretary

Ipoh28th May 2004

NOTES:

1. A proxy need not be a member of the Company.

2. An instrument appointing a proxy, in the case of an individual, shall be signed by the appointor or his attorney dulyauthorised in writing or in the case of a corporation, shall be either under its Common Seal or signed on its behalfby an attorney or officer of the corporation so authorised.

3. In order for the proxy to be valid, it must be lodged together with the power of attorney or other authority, if any, underwhich it is signed, or a notary certified copy of that power or authority at the registered office of the Company notless than forty-eight (48) hours before the time for holding the meeting or any adjournment thereof.

4. Explanatory Notes on Special Business

The Ordinary Resolution 9, if passed, will empower the Directors of the Company to issue shares in the Companyup to an amount not exceeding in total 10% of the issued share capital of the Company for the time being for suchpurposes as the Directors consider would be in the interests of the Company. This would avoid any delay and costsin convening a general meeting to specifically approve such an issue of shares. This authority, unless revoked orvaried at a general meeting, will expire at the next Annual General Meeting of the Company.

N o t i c e o f D i v i d e n d E n t i t l e m e n t a n d P a y m e n t

NOTICE IS ALSO HEREBY GIVEN that subject to the approval of the shareholders at the Thirty-fifth

Annual General Meeting, the First and Final Dividend of 1% less income tax plus 1% tax-exempt in respect

of the financial year ended 31st January 2004 will be paid on 20th August 2004 to members whose names appear

in the Record of Depositors on 23rd July 2004.

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S t a t e m e n t A c c o m p a n y i n g

1. Names of the Directors who are standing for re-election/re-appointment

(a) Pursuant to Article 78 of the Company’s Articles of Association:

• Dr. Foong Weng Sum• Mr. Leong Keng Yuen• Tuan Haji Mohd. Jali @ Mohd. Jalil Bin Sany

(b) Pursuant to Section 129(6) of the Companies Act, 1965:

• Dr. Foong Weng Cheong

2. Details of attendance of Directors at Board Meetings

There were five (5) Board Meetings held during the financial year ended 31st January 2004:

• 25-03-2003• 20-06-2003• 22-09-2003• 31-12-2003• 12-01-2004

Details of the attendance of Directors at the Board Meetings are as follows:

Name No. of Meetings Attended

Dr. Foong Weng Sum 5/5

Dr. Foong Weng Cheong 5/5

Dato’ Richard Ong Guan Seng 5/5

Mr. Leong Keng Yuen 5/5

Tuan Haji Mohd. Jali @ Mohd. Jalil Bin Sany 5/5

3. Further details of Directors who are standing for re-election/re-appointment

Details of Dr. Foong Weng Sum, Dr. Foong Weng Cheong, Mr. Leong Keng Yuen and Tuan Haji Mohd.Jali @ Mohd. Jalil Bin Sany who are standing for re-election/re-appointment are disclosed in theDirectors’ Profile and the details of their shareholdings are disclosed in the Directors’ Report.

4. Thirty-Fifth Annual General Meeting

The Thirty-fifth Annual General Meeting of the Company will be held at Crystal 1, Ground Floor,Casuarina Ipoh, 18 Jalan Gopeng, 30250 Ipoh, Perak Darul Ridzuan on Tuesday, 22nd June 2004 at3.30 pm.

N o t i c e o f A n n u a l G e n e r a l M e e t i n g



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C o r p o r a t e I n f o r m a t i o n

BOARD OF DIRECTORS

Dr. Foong Weng SumChairman & Group Chief Executive

Dr. Foong Weng CheongNon-Independent Non-Executive Director

Tuan Haji Mohd. Jali @ Mohd. Jalil Bin SanyNon-Independent Executive Director

Dato’ Richard Ong Guan SengIndependent Non-Executive Director

Mr. Leong Keng YuenIndependent Non-Executive Director

AUDIT COMMITTEE

Dato’ Richard Ong Guan SengChairman

Dr. Foong Weng SumMr. Leong Keng Yuen

REMUNERATION COMMITTEE

Mr. Leong Keng YuenChairman

Dr. Foong Weng SumDr. Foong Weng CheongDato’ Richard Ong Guan Seng

NOMINATING COMMITTEE

Dato’ Richard Ong Guan SengChairman

Dr. Foong Weng CheongMr. Leong Keng Yuen

COMPANY SECRETARYMs. Chong Yoke Seng (MIA 3672)

REGISTERED OFFICELot 6 & 20, Persiaran Tasek, Kawasan Perindustrian Tasek, 31400 Ipoh,Perak Darul Ridzuan.Tel : 05-2917823Fax : 05-2918546

REGISTRARSSignet Share Registration Services Sdn. Bhd.No. 35 Jalan Hussein,30250 Ipoh,Perak Darul Ridzuan.Tel : 05-2415633Fax : 05-2415578

AUDITORSDeloitte & Touche Chartered Accountants 87, Jalan Sultan Abdul Jalil,30450 Ipoh,Perak Darul Ridzuan.

SOLICITORSChan & AssociatesFoong & PartnersGeraldine Yeoh, Arjunan & AssociatesShook Lin & BokVincent Hooi & ChanW.Y. Chan & Roy

PRINCIPAL BANKERSAmBank BerhadHong Leong Bank BerhadHSBC Bank Malaysia BerhadMalayan Banking BerhadRHB Bank Berhad

STOCK EXCHANGE LISTINGBursa Malaysia Securities Berhad (Main Board)

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C o r p o r a t e S t r u c t u r e

A s A t 3 1 s t J a n u a r y 2 0 0 4



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C h a i r m a n ’s S t a t e m e n t

On behalf of the Board of Directors, I am pleased to present to you the Annual Report and AuditedFinancial Statements of the Company and the Group for the financial year ended 31st January, 2004.

The year under review was a challenging one. The surging economy of China created an unprecedenteddemand for raw materials and commodities with resultant significantly higher prices. China has nowovertaken Japan in its usage of crude-oil and the consequential jump in crude-oil and natural gas prices,from which the major raw materials of our core division are derived, have severely impacted ouroperating margins.

Under these circumstances, I am pleased to report that the Group operated profitably, albeit with a lowerprofit.

On an increased turnover of RM117.49 million (RM98.43 million in 2003) the Group made a profit beforetax of RM6.23 million (RM7.37 million in 2003). The lower profit on the back of an increase in turnoverof RM19.06 million vividly illustrates the severe pressure on operating margins. The Group incurredtaxes of RM1.03 million (RM2.75 million in 2003) resulting in a profit after tax of RM5.20 million (RM4.62million in 2003). The net profit for the year after minority interests amounted to RM4.81 million comparedto RM3.69 million in the previous year.

At the Company level, Hexza Corporation Berhad recorded a profit after tax of RM3.83 million. Thisshows an increase of 62%, compared to the previous year.

In September, 2003, all Head Office staff had shifted to a new office building located inside the gatedcompound of Chemical Industries (Malaya) Sdn. Bhd. This move has enhanced the security of our staff,especially for those who work late.

During the year under review, the Group, in a decision to streamline and integrate its businessprocesses to address current and future growth and to enhance competitive effectiveness, has signed apartnership agreement with SL Information Systems Sdn. Bhd. Under the agreement, Hexza CorporationBerhad has selected the PRONTO Enterprise Business Management System from SL InformationSystems Sdn. Bhd. to centralise the flow of data in multiple sites across its manufacturing and salesoperations.

The performance of the operating subsidiaries and an associated company are summarised as follows:-

The Adhesives Division

This division is the Group’s core business with manufacturing facilities located in Port Klang, Selangorand Kuching, Sarawak.

The General Manager of Norsechem Resins Sdn. Bhd., located in Port Klang resigned in April, 2003. Anexecutive search company assisted us in the recruitment of a replacement who joined us in July, 2003.The new General Manager has considerable experience in sales and marketing and the Board isconfident that, under his leadership, Norsechem Resins Sdn. Bhd. will return to profitability during thecurrent year.

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C h a i r m a n ’s S t a t e m e n t (continued)

The Kuching plant operated profitably, albeit with a substantially lower profit for reasons which werestated earlier in this statement. Competitive pressures, aggravated by over-capacity of adhesivemanufacturers, constrained pricing power to pass on the substantially higher costs caused mainly byhighly inflated raw material prices.

As stated in my statement of the previous year, overseas buyers of timber panels are imposingincreasingly stringent standards on formaldehyde emission arising from the resins used in themanufacture of these panels. We are committed to providing our customers with the latest andsophisticated resins for wood products manufacturers. To achieve this creditable objective, we areorganising and managing in two complementary strategies.

1) At considerable capital expenditure the Adhesives Division has set up a Centralised Laboratorylocated in Port Klang to research and develop resins with low formaldehyde emission compatiblewith the wood species found in Malaysia and adjoining countries.

2) Hexzachem Sarawak Sdn. Bhd. and Norsechem Resins Sdn. Bhd. signed an agreement with OricaAustralia Pty. Ltd. for technology licensing in the wood adhesives and resins applications. TheAgreement allows the transfer of technology from Orica, a leading multinational adhesives andresins manufacturer headquartered in Melbourne, Australia, to Hexzachem Sarawak andNorsechem Resins. The technology involves the manufacture and application of low emission resinsfor the production of particle boards, medium density fibre boards and plywood panels. OricaAdhesives and Resins prides itself on its strong technology base in formaldehyde resins which hasbeen gained over 50 years in the resins industry.

The Board of Directors believes that the above strategies will lead to the future growth of this coredivision, both in terms of market share and profit.

Chemical Industries (Malaya) Sdn. Bhd.

This subsidiary turned in a higher profit compared to last year through stringent cost control.

Hexza-Mather Sdn. Bhd.

Hexza-Mather’s operations resulted in a loss, bigger than the previous year. More competitors haveentered with similar competitive products.

Bio-Acetic Products Sdn. Bhd.

This subsidiary operated profitably with a slight improvement.

Summit Development Corporation Sdn. Bhd.

The construction of the 24 shophouses in Simpang Pulai which form the final units of the scheme isprogressing towards completion and we are cautiously confident that we shall be able to sell a numberof the completed units, thereby recovering some of our sunk costs.



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C h a i r m a n ’s S t a t e m e n t

Summit Imaging Technologies Sdn. Bhd.

This 49% owned joint venture company managed by the majority shareholder, Fujicopian Co. Ltd. ofOsaka, contributed a profit close to the previous year. It is hoped that a resurgent Japanese economywill produce a higher profit.

Dividends

The Board of Directors is recommending a first and final dividend for the current financial year of 1% perordinary share of 50 sen each less 28% tax plus 1% per ordinary share of 50 sen each, tax-exempt,same as last year.

Prospects

We are still facing uncertain times. Geo-political and terrorism issues abound. Rising crude-oil pricesand a Devaluing U.S. Dollar is bad for us as most of our raw materials are imported and the MalaysianRinggit is pegged against the U.S. Dollar.

Provided the above adverse factors are not in the extreme, the Group is expected to continue to operateprofitably.

Acknowledgments

On behalf of the Board of Directors, I would like to express our heartfelt appreciation to all ourcustomers, partners and suppliers for all their guidance and loyal support.

The support of our shareholders has been a source of encouragement, for which I wish to express ourappreciation.

We also wish to thank the management and staff of the Group for their dedication and diligence.

Finally, on behalf of the Group, I would like to extend its gratitude to my fellow Directors for spendingvaluable time to deliberate and guide us through the year. Their sagacity and experience are muchappreciated.

DR. FOONG WENG SUMChairman & Group Chief Executive

May 12, 2004

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D i r e c t o r s ’ P r o f i l e

Dr. Foong Weng SumChairman & Group Chief Executive

Dr. Foong Weng Sum, aged 64, was appointed to the Board on 7th May 1982 as Vice Chairman. On 23rdOctober 1986, he assumed the position of Group Chief Executive. He took over as Chairman of the Boardon 1st December 2000. He is also a member of the Audit Committee, Remuneration Committee and ESOSCommittee.

Dr. Foong Weng Sum is a graduate in medicine from the University of London. He has considerable businessexperience in various business sectors, including manufacturing, property development, financialmanagement and investment.

Dr. Foong Weng CheongNon-Independent Non-Executive Director

Dr. Foong Weng Cheong, aged 71, was appointed to the Board on 7th May 1982. He is also a member ofthe Remuneration Committee and Nominating Committee.

Dr. Foong Weng Cheong is a graduate in medicine from the University of Melbourne, Australia and is a Fellowof the Royal College of Surgeons of Edinburgh and also a Fellow of the Royal College of Surgeons ofEngland. He was appointed Senior Lecturer (1971-1972), Associate Professor (1973-1980) and Professor &Head of Department of Surgery (1981-1988) at the National University of Singapore and Chief of UniversityDepartment of Surgery at Singapore General Hospital and National University Hospital until he retired in1988. Since 1988 he is a Consultant Surgeon at Mount Elizabeth Medical Centre, Singapore.

Dato’ Richard Ong Guan SengIndependent Non-Executive Director

Dato’ Richard Ong, aged 65, was appointed to the Board on 25th March 1994. He is also the Chairman of theAudit Committee, Nominating Committee and ESOS Committee and a member of the RemunerationCommittee.

Dato’ Richard Ong is a member of the Malaysian Institute of Accountants, the Malaysian Institute of CertifiedPublic Accountants, the Institute of Chartered Accountants in Australia and the Institute of CharteredSecretaries and Administrators. He became a Partner of Peat Marwick (now known as KPMG), Malaysia in1971 and was appointed Deputy Senior Partner in 1989 until he retired in 1993. He is also a Non-ExecutiveDirector of Ladang Perbadanan-Fima Berhad, Malaysian Mosaics Berhad and Rock Chemical Industries (M)Berhad, companies listed on the Main Board of Bursa Malaysia.



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Mr. Leong Keng YuenIndependent Non-Executive Director

Mr. Leong Keng Yuen, aged 53, was appointed to the Board on 15th September 2000. He is also the Chairmanof the Remuneration Committee and a member of the Audit Committee and Nominating Committee.

Mr. Leong Keng Yuen is a partner of Ernst & Young Malaysia. He has over 20 years involvement in theaccounting profession and is well versed in Company Law and Secretarial Practice. He is a member of theMalaysian Institute of Accountants and a Fellow of the Association of Chartered Certified Accountants. Healso holds a Master of Science in Management from the Massachusetts Institute of Technology U.S.A. and aBachelor of Engineering (First Class Honours) from University of Queensland, Australia. He is also a Non-Executive Director of Choo Bee Metal Industries Berhad, a company listed on the Main Board of BursaMalaysia and company secretary for a number of public listed companies.

Tuan Haji Mohd. Jali @ Mohd. Jalil Bin SanyNon-Independent Executive Director

Tuan Haji Mohd. Jalil Sany, aged 57, was appointed to the Board on 20th November 2000. He is also amember of the ESOS Committee.

Tuan Haji Mohd. Jalil Sany is a member of the Malaysian Institute of Accountants, Fellow of the Associationof Chartered Certified Accountants and the British Institute of Management. He has over 30 years of workingexperience in diversified industries which includes unit trust and investment holdings, properties and hotels,banking and insurance, plantation, film distribution and exhibition, commercial agriculture and animalhusbandry. He has more than 20 years exposure in Sarawak and Sabah business operations. He is currentlythe General Manager/Director of Hexzachem Sarawak Sdn. Bhd., an 80% owned subsidiary of the Company.

Other Information

• NationalityAll the Directors are Malaysian

• Family relationship with any Director and/or substantial shareholderDr. Foong Weng Cheong and Dr. Foong Weng Sum are brothers. Apart from this, none of the Directorshas any family relationship with the other Directors or substantial shareholders of the Company.

• Conflict of interestSave as disclosed in Note 21 under Notes to the Financial Statements, none of the Directors has anyconflict of interest with the Company.

• Convictions for offencesNone of the Directors has been convicted of any offence within the past ten years.

D i r e c t o r s ’ P r o f i l e

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A u d i t C o m m i t t e e R e p o r t

The Audit Committee comprises the following members:

Dato’ Richard Ong Guan Seng(Chairman, Independent Non-Executive Director)

Dr. Foong Weng Sum(Member, Chairman & Group Chief Executive)

Mr. Leong Keng Yuen(Member, Independent Non-Executive Director)

Constitution

The Audit Committee (“the Committee”) was established on 6th April 1994 to serve as a Committee of theBoard.

The terms of reference are as follows:

Composition

(a) The Committee shall be appointed by the Board from amongst the Directors of the Company and shall consistof not less than three members of whom the majority shall be independent directors. At least one member ofthe Committee must be a member of the Malaysian Institute of Accountants or eligible for membership.

(b) The members of the Committee shall select a Chairman from among their numbers who shall be anindependent director.

(c) The term of office and performance of the Committee and each of its members should be reviewed bythe Board at least once every three years to determine whether such audit committee and members havecarried out their duties in accordance with their terms of reference.

Authority

The Audit Committee shall, in accordance with a procedure to be determined by the Board of Directors andat the cost of the Company:

(a) have authority to investigate any matter within its terms of reference;

(b) have the resources which are required to perform its duties;

(c) have full and unrestricted access to any information pertaining to the Company;

(d) have direct communication channels with the external auditors and the person(s) carrying out the internalaudit function or activity;

(e) be able to obtain independent professional or other advice; and

(f) be able to convene meetings with the external auditors, excluding the attendance of the executivemembers of the committee, whenever deemed necessary.



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Responsibilities and duties

The functions of the Audit Committee shall be to:-

(a) review with the external auditors, their audit plans;

(b) review with the external auditors, their evaluation of the system of internal controls;

(c) review with the external auditors, their audit reports;

(d) review the assistance given by the Company’s employees to the external auditors;

(e) review the adequacy of the scope, functions and resources of the internal audit functions and that it hasthe necessary authority to carry out its work;

(f) review the scope and results of the internal audit procedures;

(g) review the quarterly results and year end financial statements, prior to the approval by the Board ofDirectors, focusing particularly on:

(i) changes in or implementation of major accounting policy changes;

(ii) significant and unusual events; and

(iii) compliance with accounting standards and other legal requirements.

(h) review any related party transactions that may arise within the Company or group;

(i) recommend the appointment of external auditors, audit fee and any question of resignation or dismissal;

(j) undertake such other functions as may be agreed to by the Audit Committee and Board of Directors; and

(k) report its findings to the Board of Directors.

Meetings

(a) The Audit Committee shall meet not less than four (4) times a year.

(b) In order to form a quorum in respect of a meeting of an audit committee, the majority of members presentmust be independent directors.

(c) The Secretary to the Committee shall be the Company Secretary.

Reporting Procedures

The Secretary shall circulate the minutes of meetings of the Committee to all members of the Board.

Audit Committee Meeting

During the financial year ended 31st January 2004, four (4) Audit Committee meetings were held andattended by all members of the Audit Committee.

A u d i t C o m m i t t e e R e p o r t

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A u d i t C o m m i t t e e R e p o r t (continued)

Summary of activities during the financial year

The activities undertaken by the Audit Committee in accordance with the Terms of Reference were as follows:

(i) Reviewed the audit planning memorandum for the year 2003/2004 with the external auditors.

(ii) Reviewed the Group’s quarterly results announcements and recommend the same for the Board ofDirectors’ approval.

(iii) Reviewed the audited financial statements of the Company and of the Group with the external auditorsto ensure compliance with the provisions of the Companies Act, 1965 and the applicable standardsapproved by the Malaysian Accounting Standards Board.

(iv) Discussed the external auditors’ management letter to ensure corrective actions have been undertakensatisfactorily by the management to address any weakness in the internal control.

(v) Reviewed and deliberated on the reports on the findings from the internal auditors on the results of theirrisk based internal audit review.

(vi) Reviewed and deliberated on the quarterly risk assessment reports from the operating companies withinthe Group.

(vii) Reported to the Board on significant issues discussed during the Audit Committee’s meeting andconveyed the Audit Committee’s recommendations, if any, to the Board. The minutes of the AuditCommittee meetings were distributed to all Board members.

(viii) Met with the external auditors of the Company without the presence of the Executive Director.

(ix) Review the allocation of options granted pursuant to the Executive Share Option Scheme.

In addition to the above, the Audit Committee had also convened a separate meeting during the year with thechief operating heads and members of the risk management units of all operating subsidiaries to obtainfeedback from the management on the effectiveness of the risk management process.

Internal Audit Function

As in the previous year, the Group continued to outsource its internal audit function to KPMG for a second yearto review the adequacy and integrity of the internal control system of Hexza and its operating subsidiaries.

The internal auditors performed two cycles of risk based internal audit on all operating companies within the Groupduring the financial year under review. The internal audit plan was reviewed by the Audit Committee prior to thecommencement of audit. Two reports were issued based on the audit and presented to the Audit Committee fordeliberation and review. The recommendations of the internal auditors together with the comments of the AuditCommittee were forwarded to the management concerned for attention and necessary actions. The internalauditors also carried out follow-up review on action taken by management during their subsequent visits.

An internal audit unit was set up in this financial year to undertake independent, regular and systematicreviews of key processes, emphasizing on high risk areas and assessing the effectiveness of internal controlso as to provide reasonable assurance that such systems continue to operate effectively and satisfactorily.The internal audit unit also assisted the Audit Committee to oversee the implementation of the riskmanagement framework of the Group. The internal audit unit reports to the Audit Committee.



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The Board of Directors (“the Board”) of Hexza Corporation Berhad is pleased to report as follows on theapplication of the principles and best practices of the Malaysian Code on Corporate Governance (“Code”) andextent of compliance with the Code as required under the Listing Requirements of Bursa Malaysia SecuritiesBerhad (BMSB).

A. DIRECTORS

The Board

The Board is responsible for the corporate governance practices of the Group. It guides and monitors theaffairs of the Group on behalf of the shareholders and retains full and effective control over the Group.The key responsibilities include the primary responsibilities prescribed under the Code. These cover areview of the strategic direction for the Group, overseeing the business operations of the Group, andevaluating whether these are being properly and effectively managed. The Directors with their differentbackgrounds and specializations, collectively bring with them a wide range of experience and expertiseto enable the Board to lead and control the Company effectively.

Board Balance

The Group is led and controlled by an effective Board, which consists of five (5) members including two (2)independent non-executive directors, one (1) non-independent non-executive director and two (2) executivedirectors. Therefore, the Board’s composition complies with the BMSB Listing Requirements that one thirdof its Board consists of Independent Directors. The Independent Directors are professionals of credibilityand repute who demonstrate independence of judgment and objectivity in the Board’s deliberations.

The Board is of the view that its composition fairly reflects the composition of its shareholders. There is abalance of executive, non-executive and independent non-executive Directors. The Board is satisfied thatthe current Board composition fairly reflects the investment of minority shareholders in the Company.

The executive Directors in particular are responsible for implementing the policies and decisions of theBoard, overseeing the operations as well as coordinating the development and implementation ofbusiness and corporate strategies. The independent non-executive Directors bring to bear objective andindependent judgment to the decision making of the Board and provide a capable check and balance forthe executive directors. The non-executive directors contribute significantly in areas such as policy andstrategy, performance monitoring, allocation of resources as well as improving governance and controls.Together with executive Directors who have an intimate knowledge of the business, the Board isconstituted of individuals who are committed to business integrity and professionalism in all its activities.

Dato’ Richard Ong is the senior independent non-executive director to whom concerns relating to theaffairs of the Group should be directed to.

Board and Board Committee Meetings

The Board ordinarily meets at least four (4) times a year at quarterly intervals, with additional meetingsconvened as necessary. The Board has also established the following Committees to assist the Board inthe execution of its duties:

• Audit Committee• Nominating Committee• Remuneration Committee• ESOS Committee

C o r p o r a t e G o v e r n a n c e S t a t e m e n t

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C o r p o r a t e G o v e r n a n c e S t a t e m e n t (continued)

Supply of Information

The Directors have unrestricted access to timely and accurate information, necessary in the furtheranceof their duties. The Chairman ensures that all relevant issues are on the agenda and senior managementis invited to the Board meetings to present the relevant issues. Board papers are distributed in advanceof Board meetings to allow Directors sufficient time to review the Board papers for effective deliberationat the meeting proper. All directors have access to the advice and services of the Company Secretarywho ensures compliance with current laws, rules and regulations.

The Chairman ensures that all Directors have full and timely access to information. Prior to the meetingsof the Board, Board papers, which include reports on group performance and major operational, financial,strategic and regulatory matters, are circulated to all the directors. These Board papers are issued atleast three (3) days prior to the meeting.

Independent Professional Advice

There is a formal procedure sanctioned by the Board of Directors, whether as a full board or in theirindividual capacity, to take independent professional advice at the Group’s expense, where necessaryand in furtherance of their duties.

Appointment to the Board

The Nominating Committee is responsible for establishing a formal and transparent selection processfor the appointment of new directors to the Board. The Committee will review the required mix of skillsand experience of the Directors of the Board, and determine the appropriate Board balance and size ofNon-executive directors. The Committee has established the procedures and processes towards anannual assessment of the effectiveness of the Board as a whole, the committees of the Board and forassessing the contribution of each individual director. The Board is satisfied that the current compositionof the Board brings the required mix of skills and experience required for the Board to function effectively.

Directors’ training

All the directors have attended and successfully completed the Mandatory Accreditation Programme(MAP) conducted by the Research Institute of Investment Analysts Malaysia (RIIAM). The directors willcontinue to attend the Continuing Education Programmes prescribed by Bursa Malaysia SecuritiesBerhad from time to time.

Re-election

In accordance with the Company’s Articles of Association, all newly appointed directors are subject toretirement and are entitled for re-election at the first annual general meeting after their appointment. Theother directors are subject to retire on a rotational basis once every three years and are entitled to offerthemselves for re-election at the Company’s annual general meeting. Directors over seventy years oldare required to submit themselves for re-appointment annually in accordance to Section 129(6),Companies Act, 1965.



A n n u a l R e p o r t 2 0 0 4

17

B. DIRECTORS’ REMUNERATION

The Remuneration Committee is responsible for recommending the remuneration package for allDirectors. The individual Directors play no part in deciding their own remuneration.

The policy practised on Directors’ remuneration by the Remuneration Committee is to provide theremuneration packages according to the skills, experience and performance of the Directors in order toattract, retain and motivate Directors of the quality required to manage the business of the Company.

The details of the Directors’ remuneration for the financial year ended 31st January 2004 are as follows:

Executive Non-ExecutiveDirectors Directors TotalRM’000 RM’000 RM’000

Fees 74 88 162Salaries & other emoluments 699 23 722Estimated monetary value of

benefits-in-kind 4 - 4

The number of Directors whose remuneration fall into the following bands are as follows:

Band Executives Non-ExecutivesRM50,000 and below - 3RM300,001 to RM350,000 1 -RM400,001 to RM450,000 1 -

There are no contracts of service between any Director and the Company or its subsidiaries having anunexpired term of more than one year other than the contract of employment of an executive director witha subsidiary company, which will expire in 2004, but subject to further renewal by mutual agreement.

C. SHAREHOLDERS

The Annual General Meeting

All shareholders are welcome to attend the Company’s Annual General Meeting and to activelyparticipate in the proceedings. They are encouraged to give their views and suggestions for the benefitof the Company. Every opportunity is given to shareholders to ask questions and seek clarification on thebusiness and performance of the Company.

Shareholders communication and investors relationship policy

The annual reports and the quarterly announcements are the primary modes of communication to reporton the Group’s business, activities and financial performance to all its shareholders. The key element ofthe Company’s dialogue with its shareholders is the opportunity to gather views of, and answer questionsfrom, both private and institutional shareholders on all issues relevant to the Company at the AGM. Atthe AGM, the shareholders are encouraged to ask questions both about the resolutions being proposedor about the Group’s operations in general. Where it is not possible to provide immediate answers, theChairman will undertake to furnish the shareholder with a written answer after the AGM.


18



A n n u a l R e p o r t 2 0 0 4

C o r p o r a t e G o v e r n a n c e S t a t e m e n t (continued)

D. ACCOUNTABILITY AND AUDIT

Financial Reporting

The Board aims to present a balanced and meaningful assessment of the Group’s financial performanceand prospects at the end of the financial year, primarily through the annual financial statements andquarterly announcement of results to shareholders as well as the Chairman’s statement and review ofoperations in the annual report. The Board is assisted by the Audit Committee to oversee the Group’sfinancial reporting processes and the quality of its financial reporting.

Relationship with the Auditors

The Company has established a transparent and appropriate relationship with the Group’s internal andexternal auditors through the Audit Committee.

The role of the Audit Committee in relation to the External Auditors is described in the Audit CommitteeReport.

Internal Control

The Statement on Internal Control is presented with this Corporate Governance Statement.

E. COMPLIANCE WITH THE BEST PRACTICES

The Group has taken various steps to ensure compliance with the Best Practices of the Code during thefinancial year save as follows:

Division of Responsibilities

The roles of the Chairman and the CEO are combined and are currently held by Dr. Foong Weng Sum.The Board is mindful of the combined roles but is of the view that independent directors who are wellqualified professionals provide an element of objectivity, independent judgment and the necessary checkand balance on the Board.

F. DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors are responsible for the preparation of the Annual Audited Financial Statements and theBoard always ensures that proper accounting records are kept and the accounts and other financialreports of the Group are prepared in accordance with the applicable approved standards set by theMalaysian Accounting Standards Board and complied with the provisions of the Companies Act, 1965.

The Directors also have a general responsibility for taking such steps as are reasonably open to them tocontrol and safeguard the assets of the Group and to prevent and detect fraud and other irregularities.In the opinion of the directors, the Group has applied the appropriate accounting policies and standardsconsistently in the preparation of the financial statements for the financial year ended 31st January 2004.



A n n u a l R e p o r t 2 0 0 4

19

G. OTHER INFORMATION

Utilisation of Proceeds

No proceeds were raised by the Company from any corporate exercise during the financial year.

Share Buy-Backs

There were no share buy-backs during the financial year.

Options, Warrants or Convertible Securities

Apart from the options granted and exercise of options pursuant to the Executive Share Option Schemementioned in the Directors’ Report, there were no other issue or exercise of options, warrants orconvertible securities during the financial year.

American Depository Receipt (ADR) /Global Depository Receipt (GDR) Programmes

The Company did not sponsor any ADR or GDR programmes during the financial year.

Imposition of Sanctions / Penalties

There were no sanctions and/or penalties imposed on the Company and its subsidiaries, directors ormanagement by the regulatory bodies during the financial year.

Profit Estimate, Forecast or Projection

The Company did not release any profit estimate, forecast or projection for the financial year.

Profit Guarantee

The Company did not make any arrangement during the financial year which requires profit guarantee.

Material Contracts and Contracts Relating to Loans

There are no material contracts and contracts relating to loans entered into by the Company and itssubsidiaries which involve the Directors and substantial shareholders entered into since the previousfinancial year.

Recurrent Related Party Transactions of Revenue Nature

Recurrent related party transactions of revenue nature during the year totalled less than RM1.0 millionand hence shareholders’ mandate is not required. The details of related party transactions are stated inNote 21 to the Financial Statements.

Revaluation Policy on Landed Properties

The Group does not adopt a policy on regular revaluation of its landed properties.


20



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S t a t e m e n t o n I n t e r n a l C o n t r o l

Statement on Internal Control

The Board of Hexza Corporation Bhd is pleased to provide the following statement about the state of internalcontrol of the Group during the year in accordance with Paragraph 15.27(b) of the Listing Requirements ofBursa Malaysia Securities Berhad.

Responsibility

The Board recognizes its responsibility for the Group’s system of internal controls which includes not onlyfinancial controls but also operational and compliance controls as well as risk management. The internalcontrol systems are designed to meet the Group’s particular needs and to manage the risks to which it isexposed. Due to the limitations that are inherent in any system of internal control, it is important to note thatthis system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives.The system can only provide reasonable, and not absolute assurance against material misstatement or loss.

The role of Management is to implement the Board’s policies, procedures and guidelines on risk and controlby identifying and evaluating the risks faced and implement action plans to manage the risks identified.

Enterprise Risk Management Framework

The Board is committed to maintaining a sound system of internal control to safeguard shareholders’investment and the company’s assets. The Group has successfully implemented the enterprise riskmanagement framework since the previous financial year.

The Group has been applying the methodologies in accordance with the enterprise risk managementframework which has been endorsed by the Board in the identification and monitoring and managing of risksidentified. All the operating companies within the Group have a copy of the manual on the Group’s RiskManagement Policy and Procedures. The operating companies are required to maintain a risk register withdetailed information on individual risk profiles to be updated periodically.

During the financial year under review, the Risk Management Units of the operating companies within theGroup continued to evaluate and manage their risks with the formulation of action plans to mitigate those risksidentified. The Risk Management Committee had meetings to discuss the risks identified and the action plansinvolved. Risk assessment reports are submitted on a quarterly basis by the various operating companieswithin the Group to the Audit Committee for review and deliberation.

Internal Audit Function

The Group continued to outsource the internal audit function to KPMG during the financial year. In addition,an internal audit unit was set up during the financial year. This provides the Board with the assurance itrequires regarding the adequacy and integrity of the system of internal control.

During the financial year under review, the internal auditors performed two cycles of risk based internal audit on alloperating companies within the Group. The audit plan was reviewed and approved by the Audit Committee prior tothe commencement of audit. Audit reports on the findings of the internal auditors together with theirrecommendations were submitted to the Audit Committee for review and deliberation. All the operating units were



A n n u a l R e p o r t 2 0 0 4

21

S t a t e m e n t o n I n t e r n a l C o n t r o l

given a copy of the internal audit report together with the relevant comments by the Audit Committee for their followup. The Audit Committee closely monitors the implementation progress of the audit recommendations to ensure thatmajor risk and control concerns have been duly addressed by the management. The internal auditors were requiredto report on their follow-up review on actions taken by management since the previous visit.

Other Key controls processes

Apart from the above, the other key controls processes of the Group’s internal control include the following:

• Proper organizational structures with well defined lines of responsibility and authority.

• Standard operational procedures and guidelines are documented in the Group Manual.

• Management meetings are conducted regularly to review financial and operational performance and riskmanagement issues by the operating units.

• Annual business plan and budget are prepared by the operating units and submitted to the Board forapproval.

• Clear reporting system on monthly performance against budgets and the previous year. In addition, theChief Operating Officer of the respective units is required to prepare a monthly operation report forsubmission to the Chief Executive Officer.

• The Board is updated on the performance of the operating units together with any major issues at BoardMeetings, which are held regularly.

The Board confirms that the system of internal controls with the key control processes highlighted above isin place during the financial year. The Board will continue to take measures to improve the policies andprocesses to strengthen the key elements of internal control.

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A n n u a l R e p o r t 2 0 0 4

D i r e c t o r s ’ R e p o r t

The directors of HEXZA CORPORATION BERHAD have pleasure in submitting their report and the auditedfinancial statements of the Group and of the Company for the financial year ended January 31, 2004.

PRINCIPAL ACTIVITIES

The principal activity of the Company is that of investment holding.

The principal activities of the subsidiary companies are disclosed in Note 13 to the Financial Statements.

There have been no significant changes in the nature of the activities of the Company and its subsidiarycompanies during the financial year other than the commencement of business activity of Norsechem MarketingSdn. Bhd. in the marketing and distribution of consumer products and industrial chemicals.

RESULTS OF OPERATIONS

The results of operations of the Group and of the Company for the financial year are as follows:

The Group The CompanyRM RM

Profit before tax 6,225,503 5,069,766Income tax expense (1,029,411) (1,237,000)

Profit after tax 5,196,092 3,832,766Minority interests (386,324) -

Net profit for the year 4,809,768 3,832,766

In the opinion of the directors, the results of operations of the Group and of the Company during the financialyear have not been substantially affected by any item, transaction or event of a material and unusual nature otherthan the change in accounting policy as mentioned in Note 32 to the Financial Statements.

DIVIDENDS

A first and final dividend of 1%, less 28% tax, and 1%, tax-exempt, amounting to RM462,498 and RM642,359respectively proposed in respect of ordinary shares in the previous financial year and dealt with in the previousdirectors’ report was paid by the Company during the financial year.

The directors proposed a first and final dividend of 1%, less 28% tax, and 1%, tax-exempt, amounting toRM462,563 and RM642,448 respectively in respect of the current financial year. These dividends are subject toapproval by the shareholders at the forthcoming Annual General Meeting of the Company and have not beenincluded as a liability in the financial statements.

RESERVES AND PROVISIONS

There were no material transfers to or from reserves or provisions during the financial year other than thosedisclosed in the financial statements.

ISSUE OF SHARES AND DEBENTURES

During the financial year, the issued and paid-up ordinary share capital of the Company was increased fromRM64,235,845 to RM64,244,845 through the issue of 18,000 ordinary shares of RM0.50 each at the option pricepursuant to the exercise of options granted under the Company’s Executive Share Option Scheme.



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23


ISSUE OF SHARES AND DEBENTURES

The resultant premium of RM900 arising from the above share issues has been credited to the share premiumaccount.

The new ordinary shares issued rank pari passu with the then existing ordinary shares of the Company.

There was no issue of debentures during the financial year.

EXECUTIVE SHARE OPTION SCHEME

Under the Company’s Executive Share Option Scheme (ESOS) approved by shareholders at an ExtraordinaryGeneral Meeting held on January 4, 1999 which became effective on February 19, 1999, options were grantedto eligible executives and full-time executive directors of the Company and its subsidiary companies.

During the financial year, the Company amended its ESOS Bye-Laws which were approved by the shareholderson June 21, 2003.

The salient features of the ESOS are as follows:

(a) Eligible employees including Executive Directors are those who have been confirmed as a full timeemployee in a company not being a dormant company within the Group;

(b) At any one time during the duration of the ESOS, the number of shares to be offered under the ESOS shallnot exceed 10% of the issued and paid-up share capital of the Company;

(c) The ESOS shall be in force for a period of ten (10) years from February 19, 1999;

(d) The option price shall be based on the five (5) day weighted average market price of the shares of theCompany at the date of offer with a discount of not more than 10% if deemed appropriate or at the par valueof the shares, whichever is the higher;

(e) The maximum allowable allotment shall be determined at the discretion of the committee as follows:

(i) not more than 50% of the shares under the options are to be allocated in aggregate to ExecutiveDirectors and senior management of the Group; and

(ii) not more than 10% of the shares under the options are to be allocated to any individual ExecutiveDirector or employee who, either singly or collectively through his/her associates, hold 20% or more inthe issued and paid-up capital of the Company; and

(f) The new shares to be allotted upon any exercise of an option will upon issue and allotment rank pari passuin all respect with the then existing issued ordinary shares of the Company.

The movements in the options to take up unissued ordinary shares of RM0.50 each at the option price of RM0.55each during the financial year are as follows:

No. of optionsAs of February 1, 2003 5,142,000Granted and accepted during the financial year 2,113,000

7,255,000Lapsed (577,000)Exercised (18,000)

As of January 31, 2004 6,660,000

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A n n u a l R e p o r t 2 0 0 4


EXECUTIVE SHARE OPTION SCHEME (continued)

During the year, the persons who were granted 100,000 new options and above are as follows:

Number of options

Jimmy Leu Moh Sing 350,000

Teh Sok Hong 250,000

Lee Yan Phing 250,000

Wong Kai Ting 220,000

Lim Wee Yen 180,000

Chin Kit Ping 180,000

Wendy Teh Suet Leng 150,000

Chin Kok Keong 120,000

Kerosmi Binti Sepawi 100,000

The options granted to these option holders expire on February 18, 2009.

The Company has been granted exemption from the Companies Commission of Malaysia from having todisclose the list of option holders and their holdings to take up unissued shares below 100,000.

OTHER FINANCIAL INFORMATION

Before the income statements and the balance sheets of the Group and of the Company were made out, thedirectors took reasonable steps:

(a) to ascertain that proper action had been taken in relation to the writing off of bad debts and the making ofallowance for doubtful debts and have satisfied themselves that all known bad debts have been written offand that adequate allowance has been made for doubtful debts; and

(b) to ensure that any current assets which were unlikely to realise their book values in the ordinary course ofbusiness have been written down to their estimated realisable values.

At the date of this report, the directors are not aware of any circumstances:

(a) which would render the amount written off as bad debts or the allowance for doubtful debts in the financialstatements of the Group and of the Company inadequate to any substantial extent; or

(b) which would render the values attributed to current assets in the financial statements of the Group and ofthe Company misleading; or

(c) which have arisen which render adherence to the existing method of valuation of assets or liabilities of theGroup and of the Company misleading or inappropriate; or

(d) not otherwise dealt with in this report or financial statements which would render any amount stated in thefinancial statements of the Group and of the Company misleading.

At the date of this report, there does not exist:

(a) any charge on the assets of the Group and of the Company which has arisen since the end of the financialyear and secures the liability of any other person; or

(b) any contingent liability of the Group and of the Company which has arisen since the end of the financial year.



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25


OTHER FINANCIAL INFORMATION

No contingent or other liability has become enforceable, or is likely to become enforceable within the period oftwelve months after the end of the financial year which, in the opinion of the directors, will or may substantiallyaffect the ability of the Group and of the Company to meet their obligations as and when they fall due.

In the opinion of the directors, no item, transaction or event of a material and unusual nature has arisen in theinterval between the end of the financial year and the date of this report which is likely to affect substantially theresults of operations of the Group and of the Company for the succeeding financial year.

DIRECTORS

The following directors served on the Board of the Company since the date of the last report:

Dr. Foong Weng SumDr. Foong Weng CheongDato’ Richard Ong Guan Seng Mr. Leong Keng Yuen Tuan Haji Mohd. Jali @ Mohd. Jalil Bin Sany

In accordance with Article 78 of the Company’s Articles of Association, Dr. Foong Weng Sum, Mr. Leong KengYuen and Tuan Haji Mohd. Jali @ Mohd. Jalil Bin Sany retire by rotation and, being eligible, offer themselves forre-election.

In accordance with Section 129 (6) of the Companies Act, 1965, Dr. Foong Weng Cheong retires at theforthcoming Annual General Meeting and, being eligible, offers himself for re-appointment.

DIRECTORS’ INTERESTS

The shareholdings in the Company of those who were directors at the end of the financial year, as recorded inthe Register of Directors’ Shareholdings kept by the Company under Section 134 of the Companies Act, 1965,are as follows:

No. of ordinary shares of RM0.50 each Balance as of Balance as of

1.2.2003 Bought Sold 31.1.2004Shares in the Company

Registered in the name of directors

Dr. Foong Weng Sum 1,822,152 - (1,700,000) 122,152

Dr. Foong Weng Cheong 1,775,000 - - 1,775,000

Dato’ Richard Ong Guan Seng 10,000 - - 10,000

Mr. Leong Keng Yuen 10,000 50,000 - 60,000

Tuan Haji Mohd. Jali @Mohd. Jalil Bin Sany 360,000 - (203,000) 157,000

Indirect interest by virtue of sharesheld by a company in which thedirectors have interest

Dr. Foong Weng Sum 29,085,505 3,067,800 - 32,153,305

Dr. Foong Weng Cheong 29,085,505 3,067,800 - 32,153,305

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DIRECTORS’ INTERESTS (Continued)

No. of option over ordinary shares of RM0.50 each Balance as of Balance as of

1.2.2003 Bought Sold 31.1.2004

Dr. Foong Weng Sum 500,000 - - 500,000Tuan Haji Mohd. Jali @

Mohd. Jalil Bin Sany 90,000 - - 90,000

By virtue of their interests in the Company, Dr. Foong Weng Sum and Dr. Foong Weng Cheong are also deemedto have an interest in the shares of all the subsidiary companies to the extent that the Company has interest.

DIRECTORS’ BENEFITS

Since the end of the previous financial year, none of the directors of the Company has received or becomeentitled to receive any benefit (other than the benefit included in the aggregate amount of emoluments receivedor due and receivable by directors as disclosed in the financial statements or the fixed salary of a full-timeemployee of the Company) by reason of a contract made by the Company or a related corporation with thedirector or with a firm of which he is a member, or with a company in which he has a substantial financial interestexcept for any benefit which may be deemed to have arisen by virtue of the transactions between the Companyand certain companies in which certain directors of the Company are also directors and/or shareholders asdisclosed in Notes 21, 23 and 24 to the Financial Statements.

During and at the end of the financial year, no arrangement subsisted to which the Company was a partywhereby directors of the Company might acquire benefits by means of the acquisition of shares in, or debenturesof, the Company or any other body corporate except for options granted to certain directors pursuant to theCompany’s ESOS as disclosed.

AUDITORS

The auditors, Messrs. Deloitte & Touche, have indicated their willingness to continue in office.

Signed on behalf of the Boardin accordance with a resolution of the Directors,

DR. FOONG WENG SUM

DATO’ RICHARD ONG GUAN SENG

Ipoh,May 12, 2004



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27

Repo r t o f t h e Aud i t o rs

t o t h e M e m b e r s o f H e x z a C o r p o r a t i o n B e r h a d

We have audited the accompanying balance sheets as of January 31, 2004 and the related statements ofincome, changes in equity and cash flows for the year then ended. These financial statements are theresponsibility of the Company’s directors. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted our audit in accordance with approved standards on auditing in Malaysia. These standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by the directors, as well as evaluating the overall financialstatements presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion:

(a) the abovementioned financial statements are properly drawn up in accordance with the provisions of theCompanies Act, 1965 and the applicable approved accounting standards in Malaysia so as to give a trueand fair view of:

(i) the state of affairs of the Group and of the Company as of January 31, 2004 and of the results and thecash flows of the Group and of the Company for the year ended on that date; and

(ii) the matters required by Section 169 of the Act to be dealt with in the financial statements andconsolidated financial statements; and

(b) the accounting and other records and the registers required by the Act to be kept by the Company and bythe subsidiary companies have been properly kept in accordance with the provisions of the Act.

We are satisfied that the financial statements of the subsidiary companies that have been consolidated with thefinancial statements of the Company are in form and content appropriate and proper for the purposes of thepreparation of the consolidated financial statements, and we have received satisfactory information andexplanations as required by us for these purposes.

The auditors’ reports on the financial statements of the subsidiary companies were not subject to anyqualification and did not include any comment made under Sub-section (3) of Section 174 of the Act.

DELOITTE & TOUCHE AF 0834Chartered Accountants

WONG GUANG SENG 787/3/05(J/PH) Partner

May 12, 2004

28



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I n c o m e S t a t e m e n t s

f o r t h e y e a r e n d e d J a n u a r y 3 1 , 2 0 0 4

The Group The Company2004 2003 2004 2003

Note RM RM RM RM

Revenue 4 117,486,660 98,433,346 4,496,864 7,946,188

Other operating income 110,737 241,879 33,779 142,465Changes in inventories of finished

goods and work-in-progress 411,263 (74,387) - -Finished goods purchased (64,218) (197,981) - -Raw materials and

consumables used (85,282,006) (61,489,649) - -Directors’ remuneration 6 (883,540) (850,919) (150,500) (156,000)Staff costs (7,152,398) (6,708,518) (111,432) (74,775)Depreciation of property,

plant and equipment 12 (4,962,049) (4,753,612) (30,895) (31,333)Amortisation of goodwill

on consolidation 17 (179,398) (106,162) - -Other operating expenses (16,482,378) (17,532,088) (444,333) (224,017)

Profit from operations 7 3,002,673 6,961,909 3,793,483 7,602,528Finance costs 8 (35,247) (433,013) - -Income from other investments 9 441,951 550,540 554,907 522,049Share of profit in

associated company 1,642,750 1,599,070 - -Allowance for diminution

in value of other investmentsno longer required 15 1,173,376 - 1,173,376 -

Allowance for diminution in value of subsidiary companies 13 - - (452,000) (4,423,392)

Allowance for diminutionin value of other investments - (824,000) - (824,000)

Goodwill written off 17 - (480,295) - -

Profit before tax 6,225,503 7,374,211 5,069,766 2,877,185Income tax expense 10 (1,029,411) (2,751,994) (1,237,000) (1,415,504)

Profit after tax 5,196,092 4,622,217 3,832,766 1,461,681Minority interests (386,324) (934,947) - -

Profit attributable toshareholders 4,809,768 3,687,270 3,832,766 1,461,681

Earnings per ordinary shareof RM0.50 each

Basic (sen) 11 3.7 2.9

Diluted (sen) 11 3.7 2.9

The accompanying Notes form an integral part of the Financial Statements.



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29

B a l a n c e S h e e t s

A s o f J a n u a r y 3 1 , 2 0 0 4


Note(s) RM RM RM RM

ASSETS

Property, plant andequipment 12 72,010,910 72,014,688 2,053,331 2,069,601

Investment in subsidiary companies 13 - - 59,718,663 60,170,663

Investment in associated company 14 11,662,693 10,876,947 3,394,936 3,394,936

Other investments 15 14,377,755 6,773,608 14,400,993 6,796,846Property development

projects 16 2,380,406 3,135,305 - -Goodwill arising on

consolidation 17 2,478,963 2,658,361 - -Deferred tax assets 29 641,000 159,000 - -

Current AssetsInventories 18 10,501,665 11,068,239 - -Property development projects

- current portion 16 3,134,162 1,908,398 - -Trade receivables 19 21,507,299 19,469,942 - -Other receivables, deposits

and prepaid expenses 20&21 1,352,352 2,256,067 24,073 24,672Amount owing by

subsidiary companies 23 - - 6,744,204 6,327,333Amount owing by

associated company 24 1,500 - 1,500 -Tax recoverable 22 2,880,025 2,156,551 2,102,085 2,081,434Cash, cash equivalents

and bank balances 25 19,448,251 23,957,229 10,078,559 14,826,924

58,825,254 60,816,426 18,950,421 23,260,363

Current LiabilitiesTrade payables 26 13,987,150 11,600,466 - -Other payables and

accrued expenses 21&26 3,545,253 3,407,361 285,731 196,829Amount owing to

subsidiary company 23 - - 85,944 86,616Tax liability 15,600 442,708 - -

17,548,003 15,450,535 371,675 283,445

Net Current Assets 41,277,251 45,365,891 18,578,746 22,976,918

30



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B a l a n c e S h e e t s

A s o f J a n u a r y 3 1 , 2 0 0 4 (continued)


Note RM RM RM RM

Long-term and Deferred Liabilities

Gratuity and retirement benefits 28 945,652 804,901 - -

Deferred tax liability 29 11,135,506 10,948,910 - -

(12,081,158) (11,753,811) - -Minority interests (7,252,128) (7,449,004) - -

Net Assets 125,495,692 121,780,985 98,146,669 95,408,964

EQUITY

Issued capital 30 64,244,845 64,235,845 64,244,845 64,235,845

Reserves 31 61,250,847 57,545,140 33,901,824 31,173,119

Shareholders’ Equity 125,495,692 121,780,985 98,146,669 95,408,964

Net tangible assets perordinary share of RM0.50 each 0.96 0.93




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S t a t e m e n t O f C h a n g e s I n E q u i t y


Non-distributable DistributableReserves Reserve

TotalIssued Share Revaluation Reserve on Unappropriated Shareholders’

The Group Capital Premium Reserve Consolidation Profit Equity Note RM RM RM RM RM RM

Balance as of February 1, 2002As previously stated 63,773,845 14,986,445 369,548 790,506 38,766,403 118,686,747Prior year adjustments 32 - - (369,548) - 372,597 3,049

Restated balance 63,773,845 14,986,445 - 790,506 39,139,000 118,689,796Issue of shares 30 462,000 46,200 - - - 508,200Gain and loss not recognised

in the income statementsShare issue expenses - (585) - - - (585)

Net profit for the yearAs previously stated - - - - 4,197,766 4,197,766Prior year adjustments 32 - - - - (510,496) (510,496)

Restated balance - - - - 3,687,270 3,687,270Dividends 33 - - - - (1,103,696) (1,103,696)

Balance as of January 31, 2003As previously stated 64,235,845 15,032,060 369,548 790,506 41,860,473 122,288,432Prior year adjustments 32 - - (369,548) - (137,899) (507,447)

Restated balance 64,235,845 15,032,060 - 790,506 41,722,574 121,780,985Issue of shares 30 9,000 900 - - - 9,900Gain and loss not recognised

in the income statementsShare issue expenses - (104) - - - (104)

Net profit for the year - - - - 4,809,768 4,809,768Dividends 33 - - - - (1,104,857) (1,104,857)

Balance as ofJanuary 31, 2004 64,244,845 15,032,856 - 790,506 45,427,485 125,495,692

Non-distributable DistributableReserve Reserve Total

Issued Share Unappropriated Shareholders’The Company Capital Premium Profit Equity

Note RM RM RM RMBalance as of

February 1, 2002 63,773,845 14,986,445 15,783,074 94,543,364Issue of shares 30 462,000 46,200 - 508,200Gain and loss not recognised

in the income statementsShare issue expenses - (585) - (585)

Net profit for the year - - 1,461,681 1,461,681Dividends 33 - - (1,103,696) (1,103,696)

Balance as of January 31, 2003 64,235,845 15,032,060 16,141,059 95,408,964

Issue of shares 30 9,000 900 - 9,900Gain and loss not recognised

in the income statementsShare issue expenses - (104) - (104)

Net profit for the year - - 3,832,766 3,832,766Dividends 33 - - (1,104,857) (1,104,857)

Balance as of January 31, 2004 64,244,845 15,032,856 18,868,968 98,146,669


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C a s h F l o w S t a t e m e n t


The Group2004 2003

Note RM RM

CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIESProfit before tax 6,225,503 7,374,211Adjustments for:

Depreciation of property, plant and equipment 12 4,962,049 4,753,612Allowance for doubtful debts 896,118 3,101,254Inventories written off 377,443 289,078Amortisation of goodwill arising on consolidation 179,398 106,162Provision for gratuity and retirement benefits 163,873 101,104Finance costs 35,247 433,013Property, plant and equipment written off 29,080 22,892Share of profit in associated company (1,642,750) (1,599,070)Allowance for diminution in value of other investments

no longer required (1,173,376) -Dividend income (719,340) (656,188)Interest income (472,640) (620,348)Allowance for doubtful debts no longer required (27,500) (63,580)Rental income (10,850) (10,350)Gain on disposal of property, plant and equipment (2,631) (42,050)Allowance for diminution in value of other investments - 824,000Goodwill written off - 480,295

Operating Profit Before Working Capital Changes 8,819,624 14,494,035(Increase)/Decrease in:

Property development projects (470,865) 123,559Inventories 189,131 (1,150,662)Trade receivables (2,905,975) (2,121,366)Other receivables, deposits and prepaid expenses 903,878 (561,267)

Increase/(Decrease) in:Trade payables 2,386,684 2,473,468Other payables and accrued expenses 137,892 160,777

Cash From Operations 9,060,369 13,418,544Interest received 472,477 617,247Dividends received from other investments 995,853 531,216Rental received 10,850 10,350Interest paid (35,247) (23,487)Income tax paid (1,894,906) (2,119,714)Gratuity and retirement benefits paid 28 (23,122) (33,100)

Net Cash From Operating Activities 8,586,274 12,401,056



A n n u a l R e p o r t 2 0 0 4

33



The Group2004 2003

Note RM RM

CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIESProceeds from disposal of property, plant

and equipment 4,000 42,720Purchase of other investments (6,430,771) (83,400)Purchase of property, plant and equipment 12 (4,988,720) (3,834,757)(Advances to)/Repayment of advances by

associated company (1,500) 1,740,796Proceeds from capital distribution of other investments - 1,656

Net Cash Used In Investing Activities (11,416,991) (2,132,985)

CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIESProceeds from issuance of shares 9,900 508,200Share issue expenses (104) (585)Dividend paid on share capital (1,104,857) (1,103,696)Dividend paid to minority interests (583,200) (1,539,000)Repayment of long-term loans - (6,966,566)Repayment of long-term loans interest - (409,526)

Net Cash Used In Financing Activities (1,678,261) (9,511,173)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (4,508,978) 756,898

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,957,229 23,200,331

CASH AND CASH EQUIVALENTS AT END OF YEAR 25 19,448,251 23,957,229


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f o r t h e y e a r e n d e d J a n u a r y 3 1 , 2 0 0 4 (continued)

The Company2004 2003

Note RM RM

CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIESProfit before tax 5,069,766 2,877,185Adjustments for:

Allowance for diminution in value of subsidiary companies 452,000 4,423,392Depreciation of property, plant and equipment 12 30,895 31,333Dividend income 4 (4,496,864) (7,946,188)Allowance for diminution in value of other investments

no longer required (1,173,376) -Interest income (560,186) (525,120)Allowance for diminution in value of other investments - 824,000Allowance for doubtful debts no longer required - (95,000)Rental income - (12,000)

Operating Loss Before Working Capital Changes (677,765) (422,398)Decrease in other receivables, deposits and prepaid expenses 762 34,987Increase/(Decrease) in other payables and accrued expenses 88,902 (7,817)

Cash Used In Operations (588,101) (395,228)Dividends received from subsidiary companies 2,403,360 6,156,000Dividends received from other investments 556,329 531,216Dividends received from associated company 439,524 -Interest received 516,514 630,909Income tax paid (160,000) (171,025)

Net Cash From Operating Activities 3,167,626 6,751,872

CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIESRepayment of loan by/(Loans to) subsidiary companies 1,667,671 (2,376,983)Purchase of other investments (6,430,771) (83,400)(Advances to)/Repayment of advances by subsidiary companies (2,041,033) 4,344,993Purchase of property, plant and equipment (14,625) -(Advances to)/Repayment of advances by associated company (1,500) 1,740,796Proceeds from capital distribution of other investments - 1,656

Net Cash From/(Used In) Investing Activities (6,820,258) 3,627,062

CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIESProceeds from issuance of shares 9,900 508,200Share issue expenses (104) (585)Dividend paid on share capital (1,104,857) (1,103,696)Repayment of advances to a subsidiary company (672) (5,173)

Net Cash Used In Financing Activities (1,095,733) (601,254)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (4,748,365) 9,777,680

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,826,924 5,049,244

CASH AND CASH EQUIVALENTS AT END OF YEAR 25 10,078,559 14,826,924





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35

N o t e s To T h e F i n a n c i a l S t a t e m e n t s

1. GENERAL INFORMATION

The Company is a public limited company, incorporated and domiciled in Malaysia and listed on the MainBoard of Bursa Malaysia Securities Berhad.

The principal activity of the Company is that of investment holding.

The principal activities of the subsidiary companies are disclosed in Note 13.

There have been no significant changes in the nature of the activities of the Company and its subsidiarycompanies during the financial year other than the commencement of business activity of NorsechemMarketing Sdn. Bhd. in the marketing and distribution of consumer products and industrial chemicals.

The total number of employees of the Group and of the Company as of January 31, 2004 were 233 (2003:225) and 3 (2003: 3) respectively.

The registered office and principal place of business of the Company is located at Lot 6 & 20, PersiaranTasek, Kawasan Perindustrian Tasek, 31400 Ipoh, Perak Darul Ridzuan.

The financial statements of the Group and of the Company have been approved by the Board of Directorsfor issuance on May 12, 2004.

2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

The financial statements of the Group and of the Company have been prepared in accordance with theprovisions of the Companies Act, 1965 and the applicable approved accounting standards of the MalaysianAccounting Standards Board (MASB).

3. SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The financial statements of the Group and of the Company have been prepared under the historical costconvention, unless stated otherwise, modified to include the revaluation of land under long-term lease,buildings and improvements.

Income Recognition

Dividend income represents gross dividends from subsidiary companies and from quoted and unquotedinvestments and is recognised when the shareholders’ right to receive payment is established.

Sales of goods are recognised upon delivery of products and when the risks and rewards of ownership havepassed. Sales represent gross invoiced value of goods sold net of sales tax, trade discounts and allowances.

Sales relating to property development projects are accounted for based on the percentage of completionmethod as determined by the proportion of development costs incurred todate against the total estimatedcosts of projects where the outcome of the projects can be reliably estimated. All anticipated losses onproperty development projects are fully provided.

Rental income is accrued on a time basis, by reference to the agreement entered.

Interest income is accrued on a time basis, by reference to the principal outstanding and interest rateapplicable.

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Foreign Currency Conversion

Transactions in foreign currencies are converted into Ringgit Malaysia at exchange rates prevailing at thetransaction dates or, where settlement has not yet been made at the end of the financial year, at approximateexchange rates prevailing at that date. All foreign exchange gains or losses are taken up in the income statements.

Deferred Taxation

In previous financial years, the tax effects of transactions were recognised, using the “liability” method, whensuch transactions entered into the determination of net income, regardless of when they were recognisedfor tax purposes. However, where timing differences would give rise to net deferred tax assets, the taxeffects were recognised generally on actual realisation.

During the current financial year, the Group changed its accounting policy for the recognition of deferred taxassets/liabilities in compliance with MASB Standard No. 25, Income Taxes, which became operative forannual financial statements covering periods beginning on or after July 1, 2002.

With the adoption of MASB 25, deferred tax liabilities are recognised for all taxable temporary differences anddeferred tax assets are recognised for deductible temporary differences to the extent that it is probable thattaxable profits will be available against which deductible temporary differences can be utilised. Such assetsand liabilities are not recognised if the temporary differences arise from goodwill or negative goodwill, or fromthe initial recognition of other assets and liabilities in a transaction, other than in a business combination, thataffects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to theextent that it is no longer probable that sufficient taxable profits will be available to allow all or part of theassets to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settledor the asset is realised. Deferred tax is charged or credited to the income statements, except when it relatesto items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxationauthority and the Group intends to settle its current tax assets and liabilities on a net basis.

This change in accounting policy has also been applied retrospectively, and the effects on prior financialyears have been taken up as prior year adjustments in the financial statements, as disclosed in Note 32.

Impairment of Assets

The carrying values of assets are reviewed for impairment when there is an indication that the assets mightbe impaired. Impairment is measured by comparing the carrying values of the assets with their recoverableamounts. The recoverable amount is the higher of an asset’s net selling price and its value in use, which ismeasured by reference to discounted future cash flows. Recoverable amounts are estimated for individualassets, or if it is not possible, for the cash-generating unit.

An impairment loss is charged to the income statements immediately, unless the asset is carried at revaluedamount. Any impairment loss of a revalued asset is treated as a revaluation decrease to the extent ofpreviously recognised revaluation surplus for the same asset.

Subsequent increase in the recoverable amount of an asset is treated as reversal of the previous impairmentloss and is recognised to the extent of the carrying amount of the asset that would have been determined(net of amortisation and depreciation) had no impairment loss been recognised. The reversal is recognisedin the income statement immediately, unless the asset is carried at revalued amount. A reversal of animpairment loss on a revalued asset is credited directly to revaluation surplus. However, to the extent thatan impairment loss on the same revalued asset was previously recognised as an expense in the incomestatement, a reversal of that impairment loss is recognised as income in the income statement.



A n n u a l R e p o r t 2 0 0 4

37


Property, Plant and Equipment

Property, plant and equipment are stated at cost or valuation less accumulated depreciation and impairmentlosses.

Gain or loss arising from the disposal of an asset is determined as the difference between the net disposalproceeds and the carrying amount of the asset, and is recognised in the income statements. On disposal ofrevalued assets, the amounts in revaluation reserve account relating to the assets disposed are transferredto unappropriated profit account.

Land under long-term lease is amortised evenly over the related lease periods ranging from 58 1/2 to 95 yearswhile freehold land and capital work-in-progress are not depreciated. Other property, plant and equipmentare depreciated on the straight-line method at the rates based on the estimated useful lives of the variousassets.

The annual depreciation rates are as follows:

Buildings and improvements 2%Plant, machinery and equipment 5% to 25%Furniture, fixtures and office equipment 10%Motor vehicles and forklifts 15% to 20%

The Group does not have a policy on revaluation of property, plant and equipment at regular intervals. Theland under long-term lease and buildings of the Group have not been revalued since they were first revaluedin 1988 based on a revaluation carried out in 1985 by a firm of professional valuers. As permitted under thetransitional provisions of International Accounting Standard (IAS) 16 (Revised): Property, Plant andEquipment adopted by the Malaysian Accounting Standards Board before the coming into effect of MASB15: Property, Plant and Equipment, these assets continue to be stated at their 1988 valuation lessaccumulated depreciation.

Basis of Consolidation

The consolidated financial statements incorporate the financial statements of the Company and of thesubsidiary companies controlled by the Company made up to January 31, 2004.

A subsidiary company is a company in which the Group or the Company has the power to govern thefinancial and operating policies of the company so as to obtain benefits from its activities.

Subsidiary companies are consolidated using the acquisition method of accounting. On acquisition, theassets and liabilities of the relevant subsidiary companies are measured at their fair values at the date ofacquisition. The interest of minority shareholders is stated at the minority’s proportion of the fair values ofthe assets and liabilities recognised.

All significant intercompany transactions and balances are eliminated on consolidation.

Goodwill arising from consolidation represents the excess of the purchase consideration over the sum of thefair values of the identifiable net assets of the subsidiary company acquired as at the date of acquisition andis amortised over its economic useful life of 25 years.

Reserve on consolidation represents the excess of the fair values of the identifiable net assets of thesubsidiary companies over the purchase consideration at the date of acquisition and is realised in incomestatements upon disposal of the subsidiary companies.

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Investments

Investment in subsidiary companies, which are eliminated on consolidation, and investment in an associatedcompany are stated at cost in the Company’s financial statements. Where there is an indication ofimpairment in the value of the assets, the carrying amount of the investment is assessed and written downimmediately to its recoverable amount.

Other investment in quoted shares are stated at the lower of cost and market value on an aggregate basis.

Other investment in unquoted shares are stated at cost less allowance for diminution in value of investmentto recognise any decline, other than a temporary decline, in the value of the investments.

Associated Company

An associated company is a non-subsidiary company in which the Group or the Company holds as long-term investment not less than 20% of the equity voting rights and in which the Group or the Company is ina position to exercise significant influence in its management.

The Group’s investment in associated company is accounted for by the equity method of accounting basedon the management financial statements of the associated company made up to January 31, 2004. Underthis method of accounting, the Group’s interest in the post-acquisition profit of the associated company isincluded in the consolidated results while dividend received is reflected as a reduction of the investment inthe consolidated balance sheet. The carrying amount of such investment is reduced to recognise anydecline, other than a temporary decline, in the value of individual investments.

Inventories

Inventories are valued at the lower of cost and net realisable value. Cost is determined on the weightedaverage method. The cost of raw materials comprises the original purchase price plus cost incurred inbringing the inventories to their present location. The cost of finished goods comprises the cost of rawmaterials, direct labour and a proportion of the production overheads. The cost of completed houses andshoplots for sale comprises the attributable cost of land and the related development expenditure.

Net realisable value represents the estimated selling price in the ordinary course of business less selling anddistribution costs and all other estimated costs to completion.

In arriving at net realisable value, due allowance is made for obsolete and slow moving inventories.

Property Development Projects

Property development projects consist of leasehold land held for development, development expenditureand the portion of profit attributable to development work performed todate, less applicable progress billingsand allowance for foreseeable loss. Leasehold land and development expenditure which comprisesconstruction and other related development costs, are stated at cost.

Allowance for foreseeable loss is made based on losses estimated to arise upon the completion of propertydevelopment projects which are already in progress.

Profits on property development projects are recognised, using the percentage-of-completion method basedon cost, in respect of sales where agreements have been finalised by the end of the financial year.

Borrowing Costs

Borrowing costs incurred on the construction of assets and development properties which require asubstantial period of time to get them ready for their intended use and sale respectively are capitalised andincluded as part of the cost of the related assets. Capitalisation of borrowing costs will cease when theassets are ready for their intended use.



A n n u a l R e p o r t 2 0 0 4

39


Receivables

Trade and other receivables are stated at nominal value as reduced by the appropriate allowances forestimated irrecoverable amounts. Allowance for doubtful debts is made based on estimates of possiblelosses which may arise from non-collection of certain receivable accounts.

Employee Benefits

Short-term benefits

All short-term employee benefits, including accumulated compensated absences, are recognised in theincome statements in the period in which the employees render their services to the Group.

Defined contribution plans

As required by law, companies in Malaysia make contributions to the state pension scheme, the EmployeesProvident Fund (“EPF”). Such contributions are recognised as an expense in the income statements of theGroup as incurred.

Retirement benefits

One of the subsidiary companies is obliged to pay gratuity and retirement benefits under the collectivebargaining agreement to certain employees who retire or leave the Company’s employment after fulfillingcertain conditions. Full provision for the unfunded and non-contributory gratuity and retirement benefits ismade for employees who have served for ten years and above based on the length of service and aproportion of the basic salary of the employees in each particular year of service.

The provisions are charged to the income statements on a systematic basis over the expected remainingworking lives of the employees covered by the retirement benefits scheme. Should an employee leave aftercompleting the qualifying period of service but before attaining the retirement age, the provision made forthe employee is written back. No actuarial valuation has been conducted on the retirement benefitsprovision, as the amount is insignificant to the Group.

Employee equity compensation benefits

The Company has an Executive Share Option Scheme whereby options to subscribe for ordinary shares inthe Company were granted to eligible executives, including full time executive directors of the Company andits subsidiary companies. No compensation cost is recognised upon granting or the exercise of the options.When the options are exercised, the proceeds received net of any transaction costs are credited to sharecapital and share premium accordingly.

Provisions

Provisions are made when the Group has a present legal or constructive obligation as a result of pastevents, when it is probable that an outflow of resources will be recognised to settle the obligation, and whena reliable estimate of the amount can be made.

Cash Flow Statements

The Group and the Company adopt the indirect method in the preparation of the cash flow statements.

Cash equivalents are short-term, highly liquid investments with maturities of three months or less from thedate of acquisition and are readily convertible to cash with insignificant risks of changes in value.

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4. REVENUE


RM RM RM RM

Dividend income:Subsidiary companies - - 3,338,000 7,290,000Associated company - - 439,524 -Shares quoted in Malaysia 136,272 72,563 136,272 72,563Shares quoted outside Malaysia 948 1,505 948 1,505Unquoted shares 582,120 582,120 582,120 582,120

Manufacturing and trading 116,767,320 97,777,158 - -

117,486,660 98,433,346 4,496,864 7,946,188

5. SEGMENT REPORTING

Business Segments

The Group is organised into the following operating divisions:- Investment holding- Manufacture and sales of formaldehyde based adhesives and resins for timber related industries, ethyl

alcohol, natural vinegar, cooler, liquefied carbon dioxide and kaoliang wine.- Others (Trading, property development, dormant and pre-operating companies)

InvestmentThe Group holding Manufacturing Others Eliminations Consolidated2004 RM RM RM RM RM

RevenueExternal sales 719,340 114,091,634 2,675,686 - 117,486,660Inter-segment sales 3,777,524 1,960,036 3,264 (5,740,824) -

4,496,864 116,051,670 2,678,950 (5,740,824) 117,486,660

ResultsSegment result 6,157,609 3,608,760 151,179 (4,098,749) 5,818,799

Finance costs (35,247)Income from other investments 441,951

Profit before tax 6,225,503Income tax expense (1,029,411)

Profit after tax 5,196,092



A n n u a l R e p o r t 2 0 0 4

41


5. SEGMENT REPORTING (continued)


Other informationCapital additions 14,625 4,937,487 36,608 - 4,988,720Depreciation and amortisation 30,895 5,075,808 34,744 - 5,141,447Non-cash expenses other

than depreciation - 1,462,361 4,153 - 1,466,514

Consolidated Balance Sheet

AssetsSegment assets 38,505,821 112,203,897 8,146,238 - 158,855,956Unallocated corporate assets 3,521,025

Consolidated total assets 162,376,981

LiabilitiesSegment liabilities 285,731 17,677,120 515,204 - 18,478,055Unallocated corporate liabilities 11,151,106

Consolidated total liabilities 29,629,161

The Group2003

RevenueExternal sales 656,188 95,037,854 2,739,304 - 98,433,346Inter-segment sales 7,290,000 1,940,747 - (9,230,747) -

7,946,188 96,978,601 2,739,304 (9,230,747) 98,433,346

ResultsSegment result 3,954,206 7,459,683 (422,372) (3,734,833) 7,256,684

Finance costs (433,013)Income from other investments 550,540

Profit before tax 7,374,211Income tax expense (2,751,994)

Profit after tax 4,622,217

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5. SEGMENT REPORTING (continued)


Other informationCapital additions - 3,830,348 4,409 - 3,834,757Depreciation and amortisation 31,333 4,778,479 49,962 - 4,859,774Non-cash expenses other

than depreciation 824,000 3,225,250 - - 4,049,250

Consolidated Balance Sheet

AssetsSegment assets 34,881,165 112,366,300 6,871,319 - 154,118,784Unallocated corporate assets 2,315,551

Consolidated total assets 156,434,335

LiabilitiesSegment liabilities 196,829 15,266,750 349,149 - 15,812,728Unallocated corporate liabilities 11,391,618

Consolidated total liabilities 27,204,346

Information on the Group’s operations by geographical segment has not been provided as the Group operatespredominantly in Malaysia.

The directors are of the opinion that all inter-segment transactions have been entered into in the normal course ofbusiness and have been established on terms and conditions that are not materially different from that obtainable intransactions with unrelated parties.

Certain comparative information have been restated to reflect the effects of the change in accounting policy as mentioned in Note 32.

6. DIRECTORS’ REMUNERATION


RM RM RM RM

Executive directors:Fees 74,000 73,750 55,000 55,000Other emoluments 699,040 660,529 - -

773,040 734,279 55,000 55,000Non-executive directors:

Fees 87,750 88,390 75,000 75,000Other emoluments 22,750 28,250 20,500 26,000

110,500 116,640 95,500 101,000

883,540 850,919 150,500 156,000

The estimated monetary value of benefits-in-kind received and receivable by a director otherwise than in cash from theGroup amounted to RM4,000 (2003: RM4,000).



A n n u a l R e p o r t 2 0 0 4

43


7. PROFIT FROM OPERATIONS

Profit from operations is arrived at after crediting/(charging):


RM RM RM RM

Allowance for doubtful debts no longer required 27,500 63,580 - 95,000Interest received on:

Overdue accounts 24,355 63,048 - -Staff loan 1,055 3,689 - -Others 5,279 3,071 5,279 3,071

Rental income 10,850 10,350 - 12,000Realised gain/(loss) on foreign exchange (1,178) 12,608 - -Gain on disposal of property,

plant and equipment 2,631 42,050 - -Allowance for doubtful debts (896,118) (3,101,254) - -Inventories written off (377,443) (289,078) - -Provision for gratuity and retirement benefits (163,873) (101,104) - -Auditors’ remuneration:

Statutory: Current year (65,800) (63,700) (15,000) (15,000)Previous year - (2,300) - (3,000)Others (9,000) (6,000) (9,000) (6,000)

Property, plant and equipment written off (29,080) (22,892) - -Rental of premises (14,700) (6,000) - -

8. FINANCE COSTS

The Group2004 2003

RM RM

Interest on:Bank overdrafts and other borrowings 35,247 23,488Term loans - 409,525

35,247 433,013

9. INCOME FROM OTHER INVESTMENTS


RM RM RM RM

Interest received from:Fixed and short-term deposits 309,217 501,531 221,581 241,057Investment fund 132,734 38,097 132,734 38,097Associated company - 10,912 - 10,912Subsidiary companies - - 200,592 231,983

441,951 550,540 554,907 522,049

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10. INCOME TAX EXPENSEThe Group The Company

2004 2003 2004 2003RM RM RM RM

Estimated Malaysian income tax payable:Current year 1,069,360 2,901,000 1,237,000 1,392,000Prior year (162,025) (51,082) - 23,504

907,335 2,849,918 1,237,000 1,415,504

Deferred tax (Note 29) (295,404) (546,764) - -Share of income tax

expense of an associated company 417,480 448,840 - -

1,029,411 2,751,994 1,237,000 1,415,504

During the year, the threshold for chargeable income with income tax rate of 20% was increased from RM100,000 toRM500,000 for certain subsidiary companies. For chargeable income in excess of RM500,000, the normal income tax rate of28% is still applicable.

As of January 31, 2004, certain subsidiary companies have tax-exempt accounts arising from its claim for ReinvestmentIncentives under Schedule 7A of the Income Tax Act, 1967 and a special tax-exempt account arising from waiver of chargeableincome for the Year of Assessment 2000 (Preceding Year Basis) of approximately RM6,142,000 (2003: RM9,523,000).

As of January 31, 2004, one of the subsidiary companies has unutilised reinvestment allowance amounting toRM7,319,000 (2003: RM7,319,000) which is available for set-off against future taxable income.

These tax-exempt accounts and balance of reinvestment allowance are subject to approval by the tax authorities.

A numerical reconciliation between income tax expense and accounting profit multiplied by the applicable tax rate, are as follows:


RM RM RM RM

Accounting profit 6,225,503 7,374,211 5,069,766 2,877,185

Tax at the applicable tax rate of 20% / 28% 1,624,285 1,776,090 1,419,000 805,000Tax effects of:

Expenses that are not deductible in determining taxable profit 460,991 1,830,545 308,000 1,590,000

Reduction in opening deferred tax resulting from reduction in tax rate - 67,000 - -

Tax-exempt dividends received (162,000) (966,000) (162,000) (966,000)Income that are not taxable in determining

taxable profit (328,000) (37,000) (328,000) (37,000)Utilisation of reinvestment allowances claimed (187,287) (201,500) - -Differences in opening deferred tax

recognised in current year (53,033) (72,899) - -Deferred tax asset recognised (497,000) - - -Utilisation of tax losses previously not recognised (84,000) (42,000) - -Share of tax of an associated company 417,480 448,840 - -

1,191,436 2,803,076 1,237,000 1,392,000Income tax - prior year (162,025) (51,082) - 23,504

Income tax expense 1,029,411 2,751,994 1,237,000 1,415,504



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11. EARNINGS PER ORDINARY SHARE OF RM0.50 EACH - GROUP

The basic and diluted earnings per ordinary share of RM0.50 each are calculated as follows:

2004 2003Basic

Net profit attributable to ordinary shareholders RM 4,809,768 RM 3,687,270

Number of ordinary shares in issue as of February 1 128,471,691 127,547,691Effect of exercise of ESOS 7,167 739,417

Weighted average number of ordinary shares of RM0.50 each in issue 128,478,858 128,287,108

Basic earnings per ordinary share ofRM0.50 each (sen) 3.7 2.9

Fully diluted

Net profit attributable to ordinary shareholders RM 4,809,768 RM 3,687,270

Weighted average number of ordinary sharesof RM0.50 each in issue 128,478,858 128,287,108

ESOS:Number of unissued shares 5,228,500 5,390,583Number of shares that would have been issued

at fair value (4,915,684) (4,561,263)

312,816 829,320

Adjusted weighted average number of ordinaryshares for calculating diluted earnings perordinary share of RM0.50 each 128,791,674 129,116,428

Diluted earnings per ordinary share of RM0.50 each (sen) 3.7 2.9

The basic and diluted earnings per ordinary share for the Group in 2003 has been restated from 3.3 sen and 3.2sen to 2.9 sen and 2.9 sen respectively to reflect the effect of prior period adjustments as mentioned in Note 32.

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12. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment in 2004 consist of the following:

Cost (Unless otherwise stated) The Group At

beginning Write off/ At endof year Additions Reclassification Disposals of year

RM RM RM RM RM

Freehold land 15,385 - - - 15,385Land under long-term lease

At 1988 valuation 3,267,001 - - - 3,267,001At cost 4,307,275 - - - 4,307,275

Buildings and improvementsAt 1988 valuation 1,342,653 - - - 1,342,653At cost 19,388,352 166,731 2,518,419 - 22,073,502

Plant, machinery and equipment 78,265,729 1,403,767 1,853,197 (15,208) 81,507,485

Furniture, fixtures and office equipment 2,809,921 429,911 311,794 (70,249) 3,481,377

Motor vehicles and forklifts 1,865,600 1 - (117,000) 1,748,601Capital work-in-progress 2,317,959 2,988,310 (4,683,410) - 622,859

Total 113,579,875 4,988,720 - (202,457) 118,366,138

Accumulated Depreciation Net Book Value The Group At

beginning Charge for Write off/ At endof year the year Disposals of year 2004 2003

RM RM RM RM RM RM

Freehold land - - - - 15,385 15,385Land under long-term lease

At 1988 valuation 757,914 42,106 - 800,020 2,466,981 2,509,087At cost 524,032 53,357 - 577,389 3,729,886 3,783,243

Buildings and improvementsAt 1988 valuation 618,434 23,176 - 641,610 701,043 724,219At cost 4,085,675 473,418 - 4,559,093 17,514,409 15,302,677

Plant, machinery and equipment 32,356,256 3,934,500 (15,208) 36,275,548 45,231,937 45,909,473

Furniture, fixtures andoffice equipment 1,844,264 233,477 (39,800) 2,037,941 1,443,436 965,657

Motor vehicles andforklifts 1,378,612 202,015 (117,000) 1,463,627 284,974 486,988

Capital work-in-progress - - - - 622,859 2,317,959

Total 41,565,187 4,962,049 (172,008) 46,355,228 72,010,910 72,014,688



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12. PROPERTY, PLANT AND EQUIPMENT (continued)

CostThe Company At

beginning At endof year Additions Disposals of year

RM RM RM RM

Land under long-term lease 1,762,690 - - 1,762,690Building and improvements 495,984 - - 495,984Furniture, fixtures and office equipment 48,044 7,650 - 55,694Capital work-in-progress - 6,975 - 6,975

Total 2,306,718 14,625 - 2,321,343

Accumulated Depreciation Net Book Value The Company At

beginning Charge for Write off/ At endof year the year Disposals of year 2004 2003

RM RM RM RM RM RM

Land under long-term lease 61,721 19,350 - 81,071 1,681,619 1,700,969Building and improvements 128,956 9,920 - 138,876 357,108 367,028Furniture, fixtures

and office equipment 46,440 1,625 - 48,065 7,629 1,604Capital work-in-progress - - - - 6,975 -

Total 237,117 30,895 - 268,012 2,053,331 2,069,601

The land under long-term lease and buildings of the Group were revalued by the directors in 1988 based ona valuation carried out in 1985 by a firm of professional valuers. The revalued amounts were based on openmarket values.

The historical costs and carrying values of the revalued land under long-term lease and buildings are as follows:

The Group2004 2003

RM RM

CostLand under long-term lease 320,711 320,711Buildings 696,395 696,395

Total 1,017,106 1,017,106

Accumulated DepreciationLand under long-term lease (131,770) (128,530)Buildings (449,228) (435,300)

Net book value at end of year 436,108 453,276

Included in property, plant and equipment of the Group and of the Company are fully depreciated assetswhich are still in use, with a cost of approximately RM6,542,000 (2003: RM6,360,000) and RM45,284 (2003:RM26,920) respectively.

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13. INVESTMENT IN SUBSIDIARY COMPANIES


RM RM

Unquoted shares - at cost 79,014,446 79,014,446Allowance for diminution in value (19,295,783) (18,843,783)

59,718,663 60,170,663

The subsidiary companies, all of which are incorporated in Malaysia are as follows:

EffectiveEquity Interest

2004 2003Name of Company % % Principal Activities

Bio-Acetic Products Sdn. Bhd. #99.87 #99.87 Manufacture of natural vinegar.

Chemical Industries (Malaya)Sdn. Bhd. 99.87 99.87 Manufacture and sale of ethyl alcohol,

liquefied carbon dioxide and kaoliang wine.

Hexza-Mather Sdn. Bhd. 100.00 100.00 Manufacture of alcoholic and non-alcoholic beverages.

Hexzachem Sarawak Sdn. Bhd. 80.00 80.00 Manufacture and sale of formaldehyde and formaldehyde based adhesive and resins for timber related industries.

Hexza Marketing Services Sdn. Bhd. 100.00 100.00 Marketing and distribution of consumerproducts.

Norsechem Marketing Sdn. Bhd. 100.00 100.00 Marketing and distribution of consumerproducts and industrial chemicals.

Norsechem Resins Sdn. Bhd. 100.00 100.00 Manufacture and sale of formaldehyde and formaldehyde based adhesive and resins for timber related industries.

Summit Development CorporationSdn. Bhd. 100.00 100.00 Property development.

Synthetic Bakelites (Malaysia)Sdn. Bhd. 96.92 96.92 Dormant.

Trizenith Sdn. Bhd. 100.00 100.00 Dormant.

Hexza World Trade Sdn. Bhd. 70.00 70.00 Dormant.



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13. INVESTMENT IN SUBSIDIARY COMPANIES (continued)

EffectiveEquity Interest

2004 2003Name of Company % % Principal Activities

NC Management ServicesSdn. Bhd. 100.00 100.00 Pre-operating.

Norsechem Alkali Sdn. Bhd. 100.00 100.00 Pre-operating.

Norse-Med Devices Sdn. Bhd. 100.00 100.00 Pre-operating.

Norsechem Polymer Sdn. Bhd. 100.00 100.00 Pre-operating.

Norsechem Laminates Sdn. Bhd. 100.00 100.00 Pre-operating.

# Indirect investment via investment in Chemical Industries (Malaya) Sdn. Bhd.

14. INVESTMENT IN ASSOCIATED COMPANY


RM RM RM RM

Unquoted shares - at cost 3,394,936 3,394,936 3,394,936 3,394,936Share of post acquisition results,

net of dividends received and tax 8,267,757 7,482,011 - -

11,662,693 10,876,947 3,394,936 3,394,936

The Group’s interest in the associated company is analysed as follows:2004 2003

RM RM

Share of net tangible assets 11,662,693 10,876,947

The associated company is Summit Imaging Technologies Sdn. Bhd., a company incorporated in Malaysia,in which the Company has an equity interest of 49.00% (2003: 49.00%). The financial year end of theassociated company is October 31.

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15. OTHER INVESTMENTS


RM RM RM RMAt cost:Shares quoted in Malaysia 10,657,557 4,226,896 10,680,795 4,250,134Warrants, loan stocks, bonds quoted

in Malaysia 362,297 362,187 362,297 362,187Shares quoted outside Malaysia 4,725 4,725 4,725 4,725

11,024,579 4,593,808 11,047,817 4,617,046Allowance for diminution in value (527,624) (1,701,000) (527,624) (1,701,000)

Net 10,496,955 2,892,808 10,520,193 2,916,046

Unquoted shares, at cost 3,880,800 3,880,800 3,880,800 3,880,800

14,377,755 6,773,608 14,400,993 6,796,846

Market value of quoted investments: Within Malaysia 10,494,160 2,881,776 10,494,160 2,881,776Outside Malaysia 26,033 16,894 26,033 16,894

10,520,193 2,898,670 10,520,193 2,898,670

16. PROPERTY DEVELOPMENT PROJECTS

The Group2004 2003

RM RMAt cost:

Long-term leasehold land 1,826,168 1,826,168Development expenditure 3,688,400 3,217,535

5,514,568 5,043,703Non-current portion (2,380,406) (3,135,305)

Current portion 3,134,162 1,908,398

The Group considers as current assets that portion of property projects on which development work hascommenced and is expected to be completed within the normal operating cycle of one to two years.



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17. GOODWILL ARISING ON CONSOLIDATIONThe Group

2004 2003RM RM

Goodwill:At beginning of year 10,290,219 11,412,186Amount written off - (1,121,967)

At end of year 10,290,219 10,290,219

Cumulative amortisation:At beginning of year 7,631,858 8,167,368Charge for the year 179,398 106,162Amount written off - (641,672)

At end of year (7,811,256) (7,631,858)

2,478,963 2,658,361

18. INVENTORIESThe Group

2004 2003RM RM

At cost:Raw materials and consumables 6,081,794 8,125,671Finished goods 2,602,755 2,189,562Completed shoplots for sale 736,218 736,218Work-in-progress 14,858 16,788Goods-in-transit 1,066,040 -

10,501,665 11,068,239

19. TRADE RECEIVABLESThe Group

2004 2003RM RM

Trade receivables 27,000,850 26,598,083Less: Allowance for doubtful debts (5,493,551) (7,128,141)

21,507,299 19,469,942

Trade receivables comprise amounts receivable for sales of goods. The credit period granted on sales of goodsranges from 15 to 90 days (2003: 15 to 90 days). An allowance has been made for estimated irrecoverableamounts from the sales of goods. This allowance has been determined by reference to past default experience.

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20. OTHER RECEIVABLES, DEPOSITS AND PREPAID EXPENSES


RM RM RM RM

Other receivables 473,510 502,048 10,524 11,701Refundable deposits 113,984 107,724 4,780 4,780Prepaid expenses 848,117 1,706,377 8,769 8,191

1,435,611 2,316,149 24,073 24,672Less: Allowance for doubtful debts (83,259) (60,082) - -

1,352,352 2,256,067 24,073 24,672

Amount receivable from related parties are disclosed in Note 21.

21. RELATED PARTY TRANSACTIONS

Other than as disclosed in Notes 23 and 24, the related parties and their relationship with the Company andits subsidiary companies are as follows:

Names of related parties Relationship

Summit Holdings Sdn. Bhd. ) Companies in which Dr. Foong Weng Sum and Dr. Foong Weng ) Cheong, directors of the Company, have substantial financial

SPK Insurance Brokers Sdn. Bhd. ) interests.

During the financial year, the related party transactions excluding transactions disclosed in Notes 23 and 24are as follows:


RM RM RM RM

Insurance premium paidSPK Insurance Brokers Sdn. Bhd. 560,346 417,992 3,905 1,646

Rental paidSummit Holdings Sdn. Bhd. 7,200 6,000 - -

Directors’ remuneration are as disclosed in Note 6 and in the Corporate Governance Statement.

The directors of the Company are of the opinion that the above transactions have been entered into in thenormal course of business and have been established under terms that are no less favourable than thosearranged with independent third parties.



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21. RELATED PARTY TRANSACTIONS (continued)

Outstanding balances arising from the above transactions at end of the financial year are as follows:

The Group2004 2003

RM RM

ReceivablesOther receivables - 1,565Refundable deposits 1,000 1,000Prepaid expenses 575 382

1,575 2,947

PayablesOther payables 4,647 4,254

22. TAX RECOVERABLE

During the financial year, the Company obtained a tax discharge of RM1,618,431 for Years of Assessment1993 to 1999 from the Inland Revenue Board.

23. AMOUNT OWING BY/(TO) SUBSIDIARY COMPANIESThe Company

2004 2003RM RM

Amount owing by subsidiary companies:Current account 14,423,903 11,797,870Dividend receivable 105,000 690,000Loan account 5,207,138 6,831,300

19,736,041 19,319,170Allowance for doubtful debts (12,991,837) (12,991,837)

6,744,204 6,327,333

Amount owing to a subsidiary company:Current account 85,944 86,616

The amount owing by/(to) subsidiary companies under current account arose mainly from expenses paid onbehalf which are unsecured, interest-free and have no fixed terms of repayment.

The amount owing by subsidiary companies under loan account bears interest rate at 6.4% (2003: 3.20%to 6.40%) per annum.

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23. AMOUNT OWING BY/(TO) SUBSIDIARY COMPANIES (continued)

During the financial year, significant transactions undertaken by the Company with its subsidiary companiesare as follows:


RM RM

Dividends (gross) received/receivable 3,338,000 7,290,000Interest received 200,592 231,983Professional services rendered 15,000 21,000Rental received - 12,000

The directors are of the opinion that the above transactions have been entered into in the normal course ofbusiness and have been established under terms that are no less favourable than those arranged withindependent third party.

24. AMOUNT OWING BY ASSOCIATED COMPANY

The amount owing by associated company relates to professional services rendered.

During the financial year, transactions between the Company and its associated company are as follows:


RM RM RM RM

Dividends (gross) received - - 439,524 -Professional services rendered 9,000 9,000 9,000 9,000Interest received - 10,912 - 10,912

The directors are of the opinion that the above transactions have been entered into in the normal course ofbusiness and have been established under terms that are no less favourable than those arranged withindependent third party.

25. CASH, CASH EQUIVALENTS AND BANK BALANCES


RM RM RM RM

Investment fund 1,990,730 6,399,075 1,990,730 6,399,075Fixed deposits with licensed banks 9,019,048 14,333,119 7,019,048 8,330,397Cash and bank balances 8,438,473 3,225,035 1,068,781 97,452

19,448,251 23,957,229 10,078,559 114,826,924

The above balances also represent cash and cash equivalents of the Group and of the Company.



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25. CASH, CASH EQUIVALENTS AND BANK BALANCES (continued)

The interest rates are as follows:


% % % %

Fixed deposits 2.75 - 3.00 2.65 - 3.20 2.75 - 3.00 2.65 - 3.20Investment fund 1.70 - 3.10 1.76 - 3.06 1.70 - 3.10 1.76 - 3.06

Deposits of the Group and of the Company have an average maturity of 30 days (2003: 30 days).

26. TRADE PAYABLES, OTHER PAYABLES AND ACCRUED EXPENSES

Trade and other payables comprise amounts outstanding for trade purchases and ongoing costs. The creditperiod granted to the Group for trade purchases ranges from 30 to 90 days (2003: 30 to 90 days).

Other payables and accrued expenses consist of:


RM RM RM RM

Other payables 1,910,268 1,942,335 128,634 24,685Accrued expenses 1,634,985 1,465,026 157,097 172,144

3,545,253 3,407,361 285,731 196,829

Amount payable to related parties are disclosed in Note 21.

27. CREDIT FACILITIES

Certain subsidiary companies have bank overdraft and other credit facilities obtained from licensed banksto the extent of RM21,061,000 (2003: RM21,061,000). These facilities are secured by first fixed legal chargeover the leasehold land and building of the subsidiary company and is guaranteed by the Company.However, the credit facilities is unutilised as of January 31, 2004. The credit facilities bear interest ratesranging from 7.00% to 7.50% (2003: 7.40%) per annum.

28. GRATUITY AND RETIREMENT BENEFITSThe Group

2004 2003RM RM

Provision:At beginning of year 804,901 736,897Additions 163,873 101,104Paid during the year (23,122) (33,100)

At end of year 945,652 804,901

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28. GRATUITY AND RETIREMENT BENEFITS (continued)

One of the subsidiary companies is obliged to pay gratuity and retirement benefits under the collectivebargaining agreement to certain employees who retire or leave the Company’s employment after fulfillingcertain conditions. Full provision for the unfunded and non-contributory gratuity and retirement benefits ismade for employees who have served for ten years and above based on the length of service and aproportion of the basic salary of the employees in each particular year of service.

The principal assumptions used in computing the estimated contributions are as follows:

The Group 2004 2003

RM RM

Discount rate at January 31 4.0% 4.0%Future salary increases RM40-RM70 RM40-RM70

29. DEFERRED TAX The Group

2004 2003RM RM

At beginning of year (10,789,910) (11,336,674)Transfer to income statements (Note 10) 295,404 546,764

At end of year (10,494,506) (10,789,910)

The deferred tax is presented after appropriate offsetting as follows:The Group

2004 2003RM RM

Deferred tax assets 641,000 159,000Deferred tax liabilities (11,135,506) (10,948,910)

(10,494,506) (10,789,910)

The amounts of the deferred tax income and expense recognised in the income statements for each type oftemporary differences prior to offsetting are as follows:

The Group2004 2003

RM RM

Differences between tax capital allowances andbook depreciation of property, plant and equipment (278,744) 46,000

Surplus on revaluation of property, plant and equipment 13,264 13,264Unabsorbed tax capital allowances and unutilised tax losses 729,000 (290,700)Provision for retirement benefits 39,884 -Allowance for doubtful debts (219,000) 762,000Prepaid license fee 11,000 16,200

Net deferred tax expense 295,404 546,764



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29. DEFERRED TAX (continued)

The components of deferred tax liabilities and assets during the financial year prior to offsetting are asfollows:

The Group2004 2003

RM RM

Deferred Tax Liabilities

The deferred tax liabilities are in respect of tax effects of temporary differences arising from the following:Tax capital allowances and book depreciation of

property, plant and equipment (13,254,962) (12,986,218)Surplus on revaluation of property, plant and equipment (780,428) (793,692)Prepaid license fee (48,000) (59,000)

(14,083,390) (13,838,910)

Deferred Tax Assets

The deferred tax assets are in respect of tax effects of temporary differences arising from the following:Unabsorbed tax capital allowances and unutilised tax losses 2,800,000 2,081,000Provision for retirement benefits 245,884 206,000Allowance for doubtful debts 543,000 762,000

3,588,884 3,049,000

As mentioned in Note 3, the effects of temporary differences which would give rise to net deferred tax assetsare recognised to the extent that it is probable that taxable profits will be available against which deductibletemporary differences can be utilised. As of January 31, 2004, the deferred tax asset which is not recognisedin the financial statements, is as follows:

2004 2003RM RM

Unabsorbed tax capital allowances and unutilised tax losses 5,553,000 6,175,000

The unabsorbed tax capital allowances and unutilised tax losses are subject to agreement by the taxauthorities.

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30. SHARE CAPITAL

The Group and The Group andThe Company The Company

2004 2003 2004 2003No. of No. of RM RM

shares shares

Authorised:Ordinary shares of RM0.50 each 400,000,000 400,000,000 200,000,000 200,000,000

Issued and fully paid:Ordinary shares of RM0.50 each:

At beginning of year 128,471,691 127,547,691 64,235,845 63,773,845Issued pursuant tothe Executive Share Option Scheme 18,000 924,000 9,000 462,000

At end of year 128,489,691 128,471,691 64,244,845 64,235,845

The salient features and movements of the ESOS are as disclosed in the directors’ report.

Share Option Plan

The Group offers vested share options, without payment, to eligible employees. Eligible employees,including Executive Directors, are confirmed full time employees in a company within the Group. Movementsin the number of share options held by employees are as follows:

2004 2003

Outstanding at February 1 5,142,000 6,395,000Granted 2,113,000 -Lapsed (577,000) (329,000)Exercised (18,000) (924,000)

Outstanding at January 31 6,660,000 5,142,000

Details of share options granted during the period:

Expiry date 18.2.2009 18.2.2004

Exercise price per share (RM) 0.55 0.55

Aggregate proceeds if shares are issued (RM) 3,663,000 2,828,100

Details of share options exercised during the period:

Expiry date 18.2.2009 18.2.2004

Exercise price per share (RM) 0.55 0.55

Aggregate issue proceeds (RM) 9,900 508,200



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30. SHARE CAPITAL (continued)

Details of share options held by the Company’s directors and the Group’s key management personnel duringthe year are as follows:

2004 2003

At February 1 2,515,000 2,955,000Granted during the year 85,000 -Exercised during the year - (440,000)Lapsed during the year (334,000) -

At January 31 2,266,000 2,515,000

31. RESERVES


RM RM RM RM

Non-distributable reserves: Share premium 15,032,856 15,032,060 15,032,856 15,032,060Reserve on consolidation 790,506 790,506 - -

15,823,362 15,822,566 15,032,856 15,032,060Distributable reserve:

Unappropriated profit 45,427,485 41,722,574 18,868,968 16,141,059

61,250,847 57,545,140 33,901,824 31,173,119

Share premium

Share premium represents the excess of issue prices over the par value of the ordinary shares of theCompany at the dates of allotment.

Unappropriated profit

As of January 31, 2004, subject to agreement with the Inland Revenue Board, the Company has tax-exemptaccounts and Section 108 tax credit as follows:


RM RM

Tax-exempt accounts 27,152,000 28,325,000

Section 108 tax credit 16,223,000 15,185,000

Based on the prevailing tax rate applicable to dividend and the estimated tax credit and the exempt accountbalance available, the unappropriated profit of the Company, as of January 31, 2004 is available fordistribution by way of cash dividends without additional tax liabilities being incurred.

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32. PRIOR YEAR ADJUSTMENTS

During the financial year, the Group adopted the provision of MASB 25, Income Taxes, which becameoperative for annual financial statements covering periods beginning on or after July 1, 2002. The effects ofthe adoption of MASB 25 have been applied retrospectively, and the effects on prior financial years havebeen taken up as prior year adjustments in the financial statements. Accordingly, the following accounts inprior years have been restated to reflect the effects of the accounting changes:

As previouslyreported Adjustments As restated

The Group RM RM RM

For the financial year endedJanuary 31, 2003

Income tax expense 2,241,418 510,576 2,751,994Minority interest 935,027 (80) 934,947Net profit for the year (4,197,766) 510,496 (3,687,270)

As of January 31, 2003Deferred tax liability (10,155,218) (793,692) (10,948,910)Revaluation reserve (369,548) 369,548 -Minority interest (7,449,829) 825 (7,449,004)Unappropriated profit (41,860,473) 137,899 (41,722,574)Deferred tax asset - 159,000 159,000Investment in associated company 10,750,527 126,420 10,876,947

As of January 31, 2002Deferred tax liability (10,763,718) (806,956) (11,570,674)Revaluation reserve (369,548) 369,548 -Minority interest (8,053,802) 745 (8,053,057)Unappropriated profit (38,766,403) (372,597) (39,139,000)Deferred tax asset - 234,000 234,000Investment in associated company 9,151,457 575,260 9,726,717

The change in accounting policy also reduced the income tax expense of the Group for the current financialyear by RM83,665.

The comparative net tangible assets per share as reported in the balance sheet of the Group has also beenrestated to take into account the effect of the change in accounting policy as mentioned above.

33. DIVIDENDS The Group andThe Company

2004 2003RM RM

First and final dividend paid:1%, (2002: 1%) less 28% tax 462,498 462,0121%, (2002: 1%) tax-exempt 642,359 641,684

1,104,857 1,103,696



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33. DIVIDENDS (continued)

The directors proposed a first and final dividend of 1%, less 28% tax, and 1%, tax-exempt, amounting toRM462,563 and RM642,448 respectively in respect of the current financial year. These dividends aresubject to approval by the shareholders at the forthcoming Annual General Meeting of the Company andhave not been included as a liability in the financial statements. Dividend per share is 0.86 sen (2003:0.86 sen).

34. COMPARATIVE DISCLOSURE

Guarantees granted to licensed banks for facilities extended to the subsidiary companies are no longerdisclosed as contingent liability to the Company because the Company considers the possibility of anoutflow of resources for settlement of present obligations as remote.

35. MATERIAL LITIGATION

(a) There is an on-going court proceedings in respect of the Company’s claim for alleged misrepresentationand negligence by a former executive.

(b) A subsidiary company had filed a claim against a trade receivable for the principal sum of RM1,679,892and all interest accruing thereon being balance of purchase price for goods sold and delivered.

36. CAPITAL COMMITMENTSThe Group

2004 2003RM RM

Capital expenditure:Contracted but not provided for 338,000 2,251,000

37. FINANCIAL INSTRUMENTS

Financial Risk Management Objectives and Policies

The operations of the Group is subject to a variety of financial risks, including foreign exchange risk, marketrisk, liquidity risk and cash flow risk. The Group has formulated a financial risk management frameworkwhose principal objective is to minimise the Group’s exposure to risks and/or costs associated with thefinancing, investing and operating activities of the Group.

Various risk management policies are made and approved by the Board for observation in the day-to-dayoperations for the controlling and management of the risks associated with financial instruments. The Groupalso utilises foreign exchange contracts to hedge certain risk exposure; it does not utilise these foreignexchange contracts for trading or other speculative purposes.

Foreign exchange risk

The Group enters into foreign exchange contracts in the normal course of business to manage its exposureagainst foreign exchange fluctuations on purchases and capital goods transactions denominated in foreigncurrencies. There were no outstanding contract amounts as at year end.

Market risk

The Group has in place policies to manage the Group’s exposure in fluctuation in the prices of the key rawmaterials used in the operations. For marketable securities, the Group uses an investment committee tomonitor fluctuations in market prices and to establish suitable cut loss procedures.

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37. FINANCIAL INSTRUMENTS (continued)

Credit risk

The Group is exposed to credit risk mainly from trade receivables. The Group extends credit to its customersbased upon careful evaluation of the customer’s financial condition and credit history. The Group alsoensures a large number of customers so as to limit high credit concentration in a customer or customersfrom a particular market. The directors are of the opinion that the risk of incurring material losses related toits credit risk is remote.

Liquidity risk

The Group practises prudent liquidity risk management to minimise the mismatch of financial assets andliabilities and to maintain sufficient credit facilities for contingent funding requirement of working capital.

Cash flow risk

The Group reviews its cash flow position regularly to manage its exposure to fluctuations in future cash flowsassociated with its monetary financial instruments.

Financial Assets

The Group’s principal financial assets are fixed deposits, cash and bank balances, trade and otherreceivables, amount owing by associated company and equity investments.

The accounting policies applicable to the major financial assets are as disclosed in Note 3.

Financial Liabilities and Equity Instruments

Significant financial liabilities include trade and other payables.

Fair Values

The carrying amounts and the estimated fair values of the Group’s and the Company’s financial instrumentsas of January 31, 2004 are as follows:

The Group The CompanyCarrying Fair Carrying FairAmount Value Amount Value

Note RM RM RM RM

Other investments- unquoted shares * 15 3,880,800 - 3,880,800 -- quoted shares 15 10,496,955 10,520,193 10,520,193 10,520,193

The market value of quoted shares as of balance sheet date approximates the fair values.

* It is not practical to estimate the fair value of unquoted investments. As at year end, based on themanagement financial statements, the Group’s and the Company’s share of the net tangible assets ofthe unquoted investments amounted to RM4,907,000.

The carrying amounts of the short-term financial assets and liabilities such as cash and cash equivalents,trade and other receivables, inter-company indebtedness, trade and other payables, with the exception ofunsecured advances included in inter-company indebtedness, approximate their fair values due to the short-term maturity of these instruments.

It is not practical to determine the fair values of unsecured advances included in inter-companyindebtedness with sufficient reliability given that these balances have no fixed terms of repayment.



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S t a t e m e n t B y D i r e c t o r s

The directors of HEXZA CORPORATION BERHAD state that, in their opinion, the accompanying balance sheetsand statements of income, changes in equity and cash flows are drawn up in accordance with the provisions ofthe Companies Act, 1965 and the applicable approved accounting standards in Malaysia so as to give a true andfair view of the state of affairs of the Group and of the Company as of January 31, 2004 and of the results of theirbusinesses and the cash flows of the Group and of the Company for the year ended on that date.

Signed in accordance with a resolution of the Directors,

DR. FOONG WENG SUM

DATO’ RICHARD ONG GUAN SENGIpoh,May 12, 2004

D e c l a r a t i o n B y T h e O f f i c e r P R I M A R I LY R E S P O N S I B L E F O R T H E F I N A N C I A L M A N A G E M E N T O F T H E C O M PA N Y

I, CHONG YOKE SENG, the officer primarily responsible for the financial management of HEXZACORPORATION BERHAD, do solemnly and sincerely declare that the accompanying balance sheets andstatements of income, changes in equity and cash flows are, in my opinion, correct and I make this solemndeclaration conscientiously believing the same to be true, and by virtue of the provisions of the StatutoryDeclarations Act, 1960.

CHONG YOKE SENG

Subscribed and solemnly declared by the abovenamedCHONG YOKE SENG at IPOH this 12th day of May, 2004.

Before me,

CHOW MIN YEECOMMISSIONER FOR OATHSIpoh

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S t a t e m e n t o f S h a r e h o l d i n g s

1. Authorised Capital : RM200,000,000Issued and Fully Paid-Up Capital : RM64,244,845.50Class of Shares : Ordinary Shares of 50 sen each fully paidVoting Rights : One vote per Ordinary Share

2. Distribution of Shareholdings

No. of % of No. of 50 sen % of IssuedRange of Shareholdings Holders Holders Shares Capital

Less than 100 58 0.41 2,030 0.00100 -1,000 3,894 27.87 3,687,521 2.871,001-10,000 8,453 60.50 36,330,690 28.2810,001-100,000 1,498 10.72 40,464,403 31.49100,001-6,424,483 69 0.49 15,851,742 12.346,424,484 and above 1 0.01 32,153,305 25.02

TOTAL 13,973 100.00 128,489,691 100.00

3. Substantial Shareholders As Per the Register of Substantial Shareholders

Direct Interest Deemed InterestNo. of % of Issued No. of % of Issued

Substantial Shareholders Shares Held Capital Shares Held Capital

Summit Holdings Sdn. Bhd. 32,153,305 25.02 - -Dr. Foong Weng Cheong 1,775,000 1.38 32,153,305 25.02Dr. Foong Weng Sum 122,152 0.10 32,153,305 25.02

4. Directors’ Shareholdings As Per the Register of Directors’ Shareholdings

Direct Interest Deemed InterestNo. of % of Issued No. of % of Issued

Directors Shares Held Capital Shares Held Capital

Dr. Foong Weng Sum 122,152 0.10 32,153,305 25.02Dr. Foong Weng Cheong 1,775,000 1.38 32,153,305 25.02Dato’ Richard Ong Guan Seng 10,000 0.01 - -Mr. Leong Keng Yuen 60,000 0.05 - -Tuan Haji Mohd. Jali @ Mohd. Jalil 398,000 0.31 - -

Bin Sany

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65

5. Thirty Largest Shareholders As Per the Record of Depositors

No. of % of IssuedShareholders Shares Capital

1. Summit Holdings Sdn. Bhd. 32,153,305 25.022. Dr. Foong Weng Cheong 1,775,000 1.383. Lim Shiu Ho 1,000,000 0.784. Menteri Kewangan Malaysia 630,242 0.495. Khoo Seng Miau 626,000 0.496. Lim Seng Chee 495,000 0.397. Yap Shing @ Yap Sue Kim 402,000 0.318. HDM Nominees (Asing) Sdn. Bhd.

Kim Eng Ong Asia Securities Pte. Ltd. for Mardjuki Widjaja 370,000 0.299. Lew Yuen Kee @ Lew Ah Kee 370,000 0.2910. Eng Nominees (Asing) Sdn. Bhd.

Kim Eng Securities Pte. Ltd. for Tan Ban Kau 350,000 0.2711. BBMB Securities Nominees (Tempatan) Sdn. Bhd.

Petroleum Research Fund 329,000 0.2612. Mohd. Jali @ Mohd. Jalil bin Sany 320,000 0.2513. TCL Nominees (Asing) Sdn. Bhd.

OCBC Securities Pte. Ltd. for Lim Hsu Hsien 318,000 0.2514. Minister of Finance

Akaun Jaminan Pinjaman Kerajaan Persekutuan 300,000 0.2315. Seshan Lim Tee Heng 300,000 0.2316. Sing Kong Wey 294,000 0.2317. Sing Kong Hum 277,000 0.2218. Tan Chee Kian 250,500 0.1919. MIDF Sisma Holdings Sdn. Bhd. 225,000 0.1820. Citicorp Nominees (Tempatan) Sdn. Bhd.

Pledged Securities Account for Khor Keng Saw @ Khaw Ah Soay 220,000 0.1721. Leow Hong Yen 220,000 0.1722. Ooi Say Hup 202,500 0.1623. HDM Nominees (Asing) Sdn. Bhd.

Phillip Securities Pte. Ltd. for Koh Chiew Hui 200,000 0.1624. HLG Nominee (Asing) Sdn. Bhd.

Pledged Securities Account for Priscilla Lim Lan Eng 200,000 0.1625. Mayban Nominees (Asing) Sdn. Bhd.

Pledged Securities Account for Lim Ai Ling 200,000 0.1626. OSK Nominees (Tempatan) Sdn. Bhd.

Pledged Securities Account for Tan Gaik Suan 199,800 0.1627. Chin Yoke Lan 195,002 0.1528. Abdullah bin Ibrahim 190,000 0.1529. Chai Beng Hwa 190,000 0.1530. Pang Piu Fong 190,000 0.15

S t a t e m e n t o f S h a r e h o l d i n g s

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P r o p e r t i e s O w n e d b y H e x z a C o r p o r a t i o n B e r h a d

& i t s S u b s i d i a r i e s a s a t 3 1 s t J a n u a r y 2 0 0 4

Year ofAcquisition(A)/

Approximate Approximate Net Book Completion(C)/Area in Age of Value Last Existing

Location Lot No. Tenure sq. ft. Buildings 31.1.2004 Revaluation Usage- Years RM’000 (R)

Leasehold land at 6 Leasehold 304,920 44 4,334 R: 1998 FactoryTasek Industrial Estate, Expiry 2062Tasek Drive, Ipoh, 1 2,575 C: 2004 OfficePerak Darul Ridzuan.

Leasehold land at 20 Leasehold 130,680 – 744 R: 1988 FactoryTasek Industrial Estate, Expiry 2064Tasek Drive, Ipoh, Perak Darul Ridzuan.

Leasehold land at 5 Leasehold 302,306 10 7,200 A: 1987 FactoryNorth Klang Straits Industrial Expiry 2086Area, Port Klang, Selangor Darul Ehsan.

Leasehold land at 127049- Leasehold 2,750 17 372 A: 1994 Vacant16 -18, Dataran Perajurit 7, 127050 Expiry 2083Taman Kemuncak, Ipoh, Perak Darul Ridzuan.

Leasehold land at 799 Leasehold 429,000 10 7,598 A: 1992 FactoryBlock 7, Sejingkat Industrial Expiry 2052Estate, Muara Tebas Land District, Kuching, Sarawak.

Leasehold land at 181630- Leasehold 363,562 - 1,590 A: 1993 VacantIGB International Industrial 181631 Expiry 2089Park, Jalan Kuala Kangsar, 181641-Ipoh, Perak Darul Ridzuan. 181642

P r o x y F o r m

H E X Z A C O R P O R A T I O N B E R H A D ( 8 7 0 5 - K )( I n c o r p o r a t e d i n M a l a y s i a )

I/We ................................................................................................................................................(Full Name in Block Capitals)

NRIC No. ....................................................................of .................................................................

being a member/members of HEXZA CORPORATION BERHAD, hereby appoint..........................

.............................................of........................................................................................................

or failing him ...................................................................................................................................

of.....................................................................................................................................................

or failing him, the CHAIRMAN OF THE MEETING as my/our proxy to vote for me/us on my/our behalf at

the Thirty-fifth Annual General Meeting of the Company to be held at Crystal 1, Ground Floor, Casuarina

Ipoh, 18 Jalan Gopeng, 30250 Ipoh, Perak Darul Ridzuan on Tuesday, 22nd June 2004 at 3.30 pm and

at any adjournment thereof. My/Our proxy is to vote as indicated below:

For Against

Resolution 1

Resolution 2

Resolution 3

Resolution 4

Resolution 5

Resolution 6

Resolution 7

Resolution 8

Resolution 9

(Please indicate with an ‘X’ in the spaces provided how you wish your vote to be cast. In the absence

of specific directions, your proxy will vote or abstain from voting at his discretion.)

Date:...................................................................................

Signature/Seal.........................................................................

NOTES:

1. A proxy need not be a member of the Company.

2. An instrument appointing a proxy, in the case of an individual, shall be signed by the appointor or his attorney duly authorised inwriting or in the case of a corporation, shall be either under its Common Seal or signed on its behalf by an attorney orofficer of the corporation so authorised.

3. In order for the proxy to be valid, it must be lodged together with the power of attorney or other authority, if any, under which it is signed,or a notary certified copy of that power or authority at the registered office of the Company not less than forty-eight (48) hours beforethe time for holding the meeting or any adjournment thereof.

No. ofShares held

THE COMPANY SECRETARY

HEXZA CORPORATION BERHAD

LOT 6 & 20, PERSIARAN TASEK

KAWASAN PERINDUSTRIAN TASEK

31400 IPOH

PERAK DARUL RIDZUAN

MALAYSIA

STAMP

hexza corporation a/r-8hexza corporation berhad(8705-k) (incorporated in malaysia) annual report...

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