notes to the financial statements
Transcription
notes to the financial statements
Annual Report 2006 Southern Steel Contents 02 Corporate Information 03 Corporate Structure 04 Directors Profile 08 Corporate Governance Statement 11 Statement On Internal Control 12 Audit Committee Report 15 Group Financial Highlights 16 Chairmans Statament 21 Reports and Financial Statements 80 Other Information 91 Notice of Annual General Meeting Corporate Information Directors Kwek Leng San Chairman Y Bhg Dato Dr Tan Tat Wai Group Managing Director YA Bhg Tun Dato Seri Dr Lim Chong Eu YM Raja Dato Seri Abdul Aziz bin Raja Salim Yap Peng Leong Koushik Chatterjee Oo Soon Hee (Alternate to Koushik Chatterjee) Registered Office Level 3, 2723 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai, Penang Telephone : 04 390 6540 Facsimile : 04 390 8060 Principal Place of Business 2435 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai, Penang Telephone : 04 390 6540 Facsimile : 04 390 8060 Auditors PricewaterhouseCoopers Chartered Accountants 4th Floor, Wisma Penang Garden 42 Jalan Sultan Ahmad Shah 10050 Penang Registrar AGRITEUM Share Registration Services Sdn Bhd 2nd Floor, Wisma Penang Garden 42 Jalan Sultan Ahmad Shah 10050 Penang Telephone : 04 228 2321 Facsimile : 04 227 2391 Secretary Lim Gim Siok Southern Steel Berhad 5283-X Annual Report 2006 02 Corporate Structure Southern Steel Berhad Subsidiary Companies 100% Southern PC Steel Sdn Bhd 100% Cempaka Raya Sdn Bhd 100% Southern Wire Industries (Malaysia) Sdn Bhd 100% Trend Staples Industry Sdn Bhd 100% Southern Steel Holdings Sdn Bhd 100% Southern Steel Industries Sdn Bhd 100% Southern Steel Trading Sdn Bhd 100% Southern Galvanised Wire Sdn Bhd 100% Southern Coated Wire Sdn Bhd 100% Southern Steel Mesh Sdn Bhd 100% Southern Mesh Sdn Bhd 100% Southern Steel Properties Sdn Bhd 100% E-Tatt Steel Wires Sdn Bhd 100% Danstil Sdn Bhd 100% Southern Steel Solutions Sdn Bhd (formerly known as Southern Precision Casting Sdn Bhd) 100% Southern Steel Management Sdn Bhd 83.7% Southern Pipe Industry (Malaysia) Sdn Bhd 75% 100% Southern Steel Bar Sdn Bhd 100% Asia Seamless Pipes Sdn Bhd Southern Speciality Wire Sdn Bhd Associated Companies Southern NatSteel (Xiamen) Limited* 40% NatSteel Trade International Pte Ltd* 22.6% NatSteelVina Company Limited* 50% Southern Oriental Sdn Bhd 27.5% Steel Industries (Sabah) Sdn Bhd Subsidiary Companies Associated Companies * These associated companies have been disposed of. The disposal was completed on 24 January 2007 subsequent to the balance sheet date as disclosed in note 33 of the Notes to the Financial Statements. Southern Steel Berhad 5283-X 50% Annual Report 2006 03 Directors Profiles Kwek Leng San Chairman, Non-Executive Director/Non-Independent Mr Kwek Leng San, aged 51, a Singaporean, obtained a Bachelor of Science (Engineering) degree from University of London and a Master of Science (Finance) degree from City University, London. He has extensive business experience in various business sectors, including financial services and manufacturing. Presently, he is the Executive Chairman of Malaysian Pacific Industries Berhad, President & Chief Executive Officer of Hong Leong Industries Berhad and Hume Industries (Malaysia) Berhad, Managing Director of Narra Industries Berhad and a Director of Hong Leong Company (Malaysia) Berhad. Mr Kwek was appointed to the Board of the Company on 27 October 1992 and subsequently as the Chairman of the Company on 18 June 2003. He is also a member of the Remuneration Committee of the Company. Mr Kwek attended all the Board meetings held during the financial year ended 31 December 2006. Mr Kwek is a brother of Y Bhg Tan Sri Quek Leng Chan and Mr Quek Leng Chye, both deemed major shareholders of the Company. Mr Kwek has no conflict of interest with the Company and has no conviction for offences within the past ten years. Y Bhg Dato Dr Tan Tat Wai Group Managing Director/Non-Independent Y Bhg Dato Dr Tan Tat Wai, aged 60, a Malaysian, holds a Bachelor of Science degree in Electrical Engineering and Economics from the Massachusetts Institute of Technology and a PhD in Economics from Harvard University. He started his career with Bank Negara Malaysia in 1978 undertaking research in economic policies and subsequently as consultant to Bank Negara, World Bank and the United Nations University for several years. He served as the Secretary and a member on the Council of Malaysian Invisible Trade set up to formulate policies to reduce Malaysias deficit in service trade. He was a member of the Government appointed Malaysian Business Council and a member of Corporate Malaysia Roundtable. Currently, he is a member of the Penang Industrial Council, the Industrial Co-ordination Council (ICC) and the National Committee on Business Competitiveness (NCBC) set up by the Ministry of International Trade and Industry. He represents Malaysia as a member of the APEC Business Advisory Council (ABAC). Y Bhg Dato Dr Tan was appointed to the Board of the Company on 18 May 1984 and assumed the position of Managing Director in September 1990. He is also a member of the Remuneration Committee of the Company. Southern Steel Berhad 5283-X Annual Report 2006 04 His other directorships in public companies are as follows: Director of Shangri-La Hotels (Malaysia) Berhad, a public listed company on Bursa Malaysia Securities Berhad. Director of Titan Chemicals Corp Berhad, a public listed company on Bursa Malaysia Securities Berhad. Director of NatSteel Ltd, a public listed company in Singapore. Y Bhg Dato Dr Tan attended all the Board meetings held during the financial year ended 31 December 2006. He has a direct shareholding of 14,854 ordinary shares and indirect shareholding of 32,980,223 ordinary shares in the Company. Y Bhg Dato Dr Tan has no family relationship with any other Directors of the Company, has no conflict of interest with the Company and has no convictions for offences within the past ten years. Directors Profiles (contd) YA Bhg Tun Dato Seri Dr Lim Chong Eu Non-Executive Director/Independent YA Bhg Tun Dato Seri Dr Lim Chong Eu, aged 87, a Malaysian, is renowned as a leading statesman and holds the distinction of being the former Chief Minister of Penang. He has had a long and illustrious record as a political leader and representative of the people in many fields of national interests. He graduated with a Bachelor of Medicine and Bachelor of Surgery (M.B. Ch B.) from Edinburgh University of Scotland in 1944. YA Bhg Tun Dato Seri Dr Lim was appointed to the Board of the Company on 6 December 1993. He is also the Chairman of the Audit Committee of the Company. His other directorships in public companies are as follows: Chairman of Suiwah Corporation Bhd, a public listed company. Chairman of Chin Well Holdings Berhad, a public listed company. Chairman of Berjaya Vacation Club Berhad, a public company. Director of United Overseas Bank (Malaysia) Berhad, a public company. Of the four (4) meetings of the Company held during the financial year ended 31 December 2006, YA Bhg Tun Dato Seri Dr Lim attended all except for one (1) for which he had extended his apologies. YA Bhg Tun Dato Seri Dr Lim does not hold any shares in the Company and its subsidiary companies nor loan stocks of the Company, has no family relationship with any other Directors or major shareholders of the Company, has no conflict of interest with the Company and has no convictions for offences within the past ten years. YM Raja Dato Seri Abdul Aziz bin Raja Salim Non-Executive Director/Independent YM Raja Dato Seri Abdul Aziz bin Raja Salim, aged 68, a Malaysian, is a Honorary Fellow of The Malaysian Institute of Taxation, Fellow of The Chartered Association of Certified Accountants, United Kingdom, Fellow of The Chartered Institute of Management Accountants (CIMA), United Kingdom and a Chartered Accountant (Malaysia). He served as Director-General of Inland Revenue Malaysia from 1980 to 1990 and Accountant-General Malaysia from 1990 to 1995. YM Raja Dato Seri Abdul Aziz was the President of CIMA, Malaysia from 1976 to 1993 and a Council Member of CIMA, United Kingdom from 1990 to 1996. He was awarded the CIMA Gold Medal in recognition of his outstanding service to the accounting profession. YM Raja Dato Seri Abdul Aziz was appointed to the Board of the Company on 18 June 2003. He is also a member of the Audit Committee and Remuneration Committee of the Company. Annual Report 2006 His other directorships in public companies are as follows: Director of Camerlin Group Berhad Director of Tasek Corporation Berhad Director of Gamuda Berhad Director of Jerneh Asia Bhd Director of PPB Oil Palms Berhad Director of PPB Group Berhad Director of K & N Kenanga Holdings Berhad Director of Kenanga Investment Bank Berhad (formerly known as K & N Kenanga Berhad) Director of Kenanga Unit Trust Berhad 05 Southern Steel Berhad 5283-X YM Raja Dato Seri Abdul Aziz attended all the Board meetings held during the financial year ended 31 December 2006. Directors Profiles (contd) YM Raja Dato Seri Abdul Aziz bin Raja Salim (contd) Director of Jerneh Insurance Bhd Director of Amanah Saham Mara Berhad Director of Panasonic Manufacturing Malaysia Bhd (formerly known as Matsushita Electric Company (M) Berhad) YM Raja Dato Seri Abdul Aziz does not hold any shares in the Company and its subsidiary companies nor loan stocks of the Company. He has no family relationship with any other Directors or major shareholders of the Company, has no conflict of interest with the Company and has no convictions for offences within the past ten years. Yap Peng Leong Non-Executive Director/Non-Independent Yap Peng Leong, aged 52, a Malaysian, obtained a Bachelor of Accountancy and Economics degree from the University of Newcastle Upon Tyne, United Kingdom and is an Associate of the Institute of Chartered Accountants of England and Wales. He had worked in three major international firms of Public Accountants/Chartered Accountants in England, Singapore and Kuala Lumpur. He joined the Hong Leong Group in 1987 and held various positions including Accountant/Manager in Hong Leong Finance Berhad, Group Financial Controller/General Manager in Hume Industries (Malaysia) Berhad, Chief Operating Officer of Hume Industries (Malaysia) Berhad Concrete Division and Hume Cemboard Berhad, Managing Director of Hume Cemboard Industries Sdn Bhd and Executive Director of HLI-HUME Management Sdn Bhd. With effect from 1 December 2005, he assumed the position of Managing Director of MZ Motorrad und Zweiradwerk GmbH. Mr Yap was appointed to the Board of the Company on 27 June 2002. He is also a member of the Audit Committee of the Company. He attended all the Board meetings held during the financial year ended 31 December 2006. Mr Yap does not hold any shares in the Company and its subsidiary companies nor loan stocks of the Company. He has no family relationship with any other Directors or major shareholders of the Company, has no conflict of interest with the Company and has no convictions for offences within the past ten years. Southern Steel Berhad 5283-X Annual Report 2006 06 Directors Profiles (contd) Koushik Chatterjee Non-Executive Director/Non-Independent Koushik Chatterjee, aged 38, an Indian, is an Honours Graduate in Commerce from Calcutta University and a Fellow Member of the Institute of Chartered Accountants of India. Mr Chatterjee began his career as Industrial Trainee in Britannia Industries and worked as an Audit Senior in S B Billimoria & Company before joining Tata Steel Limited (formerly known as The Tata Iron and Steel Company Limited)(Tata Steel) in 1995. In 1999 he was transferred to Tata Sons Limited in the Group Executive Office and was promoted as General Manager Corporate Finance in 2002. He re-joined Tata Steel as Joint Chief Financial Controller (Corporate) on 1 August 2003 and was subsequently designated as Chief Financial Controller (Corporate) with effect from 1 January 2004. With effect from 1 August 2004, Mr Chatterjee has been appointed as Vice President (Finance), Tata Steel. Mr Chatterjee was appointed to the Board of the Company on 30 March 2005. Mr Chatterjee attended all the Board meetings held during the financial year ended 31 December 2006. Mr Chatterjee does not hold any shares in the Company and its subsidiary companies nor loan stocks of the Company. He has no family relationship with any other Directors or major shareholders of the Company, has no conflict of interest with the Company and has no convictions for offences within the past ten years. Oo Soon Hee (Alternate to Koushik Chatterjee) Non-Executive Director/Non-Independent Mr Oo Soon Hee, aged 63, a Singaporean, is President of NatSteel Asia Pte. Ltd. He graduated from the University of Singapore with a Bachelor of Science (Honours) degree in Applied Chemistry and holds a Diploma in Business Administration. After working as a Consultant in an international consulting company between 1971 and 1977, he joined NatSteel Ltd as a Sales Manager in June 1977. Over the years, he had been assigned various positions. Mr Oo was appointed to the Board of the Company as Alternate Director to Mr Koushik Chatterjee on 30 March 2005. Annual Report 2006 07 Southern Steel Berhad 5283-X He does not hold any shares in the Company and its subsidiary companies nor loan stocks of the Company, has no family relationship with any other Directors or major shareholders of the Company, has no conflict of interest with the Company and has no convictions for offences within the past ten years. Corporate Governance Statement The Board of Southern Steel Berhad ("SSB") is pleased to report on the manner in which it has applied the Principles of Good Governance ('Principles') and the extent to which it has complied with the Code of Best Practice ('Code'). Any areas where the Company has not complied with the Code are indicated herein. THE BOARD OF DIRECTORS The Board of Directors comprises six (6) directors, five (5) of whom are non-executive and two (2) of whom are considered independent. A brief profile of each director and their attendance records are provided in the Annual Report. Mr. Kwek Leng San, the Chairman of the Board, is a non-independent non-executive director. The Board considers that the Principles of Good Governance have already been observed by virtue of Mr. Kweks substantial knowledge and experience in business and his non-executive position which is clearly separated from that of the Group Managing Director. Further, the balance of the Board is such that there is adequate countervailing pressure, including those of independent directors, to provide the appropriate "checks and balances". The Board will review its composition and size from time to time to ensure its continued effectiveness. The Chairman of the Audit Committee is the Senior Independent Non-Executive Director identified by the Board to whom concerns may be conveyed. As in previous years, all major investments and other strategic decisions are reserved for the Board, which is also responsible for corporate governance matters, senior executive remuneration and succession planning for top management. Supply of Information Prior to each Board meeting, Directors are sent an agenda and accompanying Board papers for each agenda item to be discussed at the meeting. At each meeting, there is a full financial and business review and discussion. Items reviewed include performance comparison against the annual budget / financial plan previously approved and management proposals that require the approval of the Board. Appointment to the Board The Company does not have a Nomination Committee as all new nominations received are assessed and approved by the entire Board in line with its policy of ensuring nominees are persons of sufficient calibre and experience. Under the Companys Articles of Association, the Board is subject to retirement and re-election at least once in every three (3) years. Southern Steel Berhad 5283-X Annual Report 2006 08 The process of assessing the performance of directors is an on-going responsibility of the entire Board. The Company does not have a formal training programme for new directors. However, familiarisation programme with the operations of the Group is arranged for any new appointee to the Board. All the directors of the Company have completed the Mandatory Accreditation Programme and are supportive of the Continuous Education Programme. Corporate Governance Statement (contd) DIRECTORS' REMUNERATION The Companys Remuneration Committee was established by the Board on 9 May 2005. The members of the Committee are Mr Kwek Leng San, YM Raja Dato Seri Abdul Aziz bin Raja Salim and Dato Dr Tan Tat Wai. The Groups remuneration scheme for executive directors is linked to performance, service seniority, experience and scope of responsibility and is periodically benchmarked to market/industry surveys conducted by human resource consultants. Performance is measured against profits and targets set in the Groups annual business plan and budget. For non-executive directors, the level of remuneration reflects the level of responsibilities undertaken by them. The aggregate remuneration of directors distinguishing between executive and non-executive directors for the financial year ended 31 December 2006 is set out below: Executive Directors Non-Executive Directors Fees (RM) 45,000 320,000 Salaries & Other Emoluments (RM) 1,142,400 0 Total (RM) 1,187,400 320,000 The number of directors distinguishing between executive and non-executive directors whose remuneration falls into the following bands is set out below: Range of remuneration (RM) 50,000 and below 50,001 to 100,000 1,150,000 and above Executive 0 0 1 Non-Executive 1 4 0 Relations with Shareholders The Board acknowledges the need for shareholders to be informed of all material business matters affecting the Group. In addition to various announcements made during the year, the timely release of financial results on a quarterly basis provides shareholders with an overview of the Groups performance and operations. The Annual General Meeting, usually held in May each year, is the principal forum for dialogue with private shareholders. There is also an open question and answer session in which shareholders may ask questions both about the resolutions being proposed at the meeting and also about the business in general. Members of the Board are in attendance to answer questions about matters relating to the Group and Company's business. In presenting the annual financial statements and quarterly announcements to shareholders, the Directors aim to present a balanced and understandable assessment of the Groups position and prospects. This also applies to other price-sensitive public reports and reports to regulators. Annual Report 2006 FINANCIAL REPORTING 09 Southern Steel Berhad 5283-X Information about the Group and the Company such as history, quality achievements, product specifications and manufacturing process etc, are available on www.southsteel.com. Corporate Governance Statement (contd) INTERNAL CONTROL Please refer to the relevant section of the Annual Report on Internal Control Statement. DIRECTORS RESPONSIBILITY STATEMENT The Directors are required by the Companies Act, 1965 (the Act) to prepare financial statements for each financial year which have been made out in accordance with applicable approved accounting standards. The financial statements should give a true and fair view of the state of affairs of the Group and the Company at the end of the financial year and the results and cash flows of the Group and the Company for the financial year. The Directors have considered the audit findings of both the external and internal auditors, and are of the view that appropriate accounting policies have been consistently applied. The basis of the preparation of the annual financial statements is supported by reasonable and prudent judgements and accounting estimations. All applicable approved accounting standards have also been followed for the preparation of the financial statements. Southern Steel Berhad 5283-X Annual Report 2006 10 Statement On Internal Control Responsibility The Board acknowledges its responsibility for the Groups system of internal control and for reviewing its adequacy and integrity. However, such a system is designed to manage rather than eliminate risk of failure to achieve business objectives. Accordingly, such system can provide only reasonable and not absolute assurance against material misstatement or loss. The concept of reasonable assurance also recognises that the cost of control procedures should not exceed the expected benefits. Risk Management Framework The framework and the key elements of the Groups system of internal control are as follows: - A management structure exists with clearly defined delegation of responsibilities to the management of the Groups main operating companies, including authorisation level for all aspects of the business. Each operating company has clear accountabilities for ensuring that appropriate risk management and control procedures are in place. Ongoing monitoring of risks and updating of the enterprise-wide key risk register were carried out by the management of the respective main operating companies within the Group. - The Board has appointed the Group Managing Director as Chief Risk Officer to administer the risk management framework since 2001. Business risk assessment and evaluation is an ongoing exercise undertaken by the Board and management. The Internal Audit Department will submit yearly to the Audit Committee its review report on risk management for each main operating company within the Group. - For associated companies, the Board nominates representatives to sit as directors and takes a proactive stance in assessing the performance of respective associated companies with the goal of safeguarding the investment of the Group. Monthly financial and operating information is submitted for review by the Groups management. These associated companies are subject to review by internal auditors of the respective joint venture partners on a rotational basis. The key elements of the Groups internal control system are described below:- - Monthly monitoring of results against budget, with major variances being followed up and management action taken, where necessary. - Major decisions require the final approval of the Board and are made after appropriate in-depth analysis. - Regular and comprehensive information is provided to management, covering the performance of key financial and operational indicators. - The Internal Audit Department independently reviews the control processes implemented by management and reports its findings and recommendations independently to the Audit Committee. - In addition to the monthly operational meetings, senior management meetings are also held monthly to consider the Groups financial performance, business development, and strategic and corporate issues. - The Audit Committee, with the assistance of the Internal Audit Department assesses the effectiveness of the Groups internal control system, by reviewing the internal audit reports presented to the Audit Committee. All internal control weaknesses identified during the period have all been, or are being, addressed. None of the weaknesses have resulted in any material losses, contingencies or uncertainties that would require mention in the Groups annual report. 11 Annual Report 2006 Detailed budgeting processes where main operating companies prepare budgets, which are approved by the Board, on an annual basis. Southern Steel Berhad 5283-X - Audit Committee Report COMPOSITION AND MEMBERSHIP The Audit Committee was appointed by the Board from amongst its directors and is composed of a minimum of 3 members with a majority of independent directors. No alternate director shall be appointed as a member of the Audit Committee. The Chairman of the Committee shall be an independent non-executive director. At least one member of the Audit Committee must be a member of the Malaysian Institute of Accountants (MIA) or non-member of MIA with a minimum of 3 years working experience and passed the examinations specified in Part I of the 1st Schedule of the Accountants Act 1967 or is a member of one of the associations of accountants specified in Part II of the 1st Schedule of the Accountants Act 1967. The following 3 directors are existing members of the Committee:1 YA Bhg Tun Dato Seri Dr Lim Chong Eu, Chairman 2 YM Raja Dato' Seri Abdul Aziz bin Raja Salim 3 Yap Peng Leong MEETINGS AND MINUTES Meetings shall be held not less than four times a year. The external auditors may request a meeting if they consider that one is necessary. The Group Managing Director, the Group and Corporate Financial Controllers and the Head of Internal Audit shall attend the meetings. A representative of the external auditors is to be in attendance at meetings where matters relating to the audit of the statutory financial statements and / or the external auditors are to be discussed. A quorum shall be 2 members present, a majority of whom must be independent directors. During the financial year ended 31 December 2006, a total of 4 meetings were held. Name YA Bhg Tun Dato Seri Dr Lim Chong Eu (Chairman) YM Raja Dato' Seri Abdul Aziz bin Raja Salim Yap Peng Leong Southern Steel Berhad 5283-X Annual Report 2006 12 Status of directorship Eligible to attend Independent Non-Executive 4 Director Independent Non-Executive 4 Director Non-independent 4 Non-Executive Director Attended 3 4 4 REPORTING PROCEDURES The Company Secretary shall be the secretary of the Committee. Minutes of each meeting shall be circulated to the members of the Committee and all members of the Board. TERMS OF REFERENCE Responsibility Where the Audit Committee is of the view that a matter reported by it to the Board of Directors has not been satisfactorily resolved resulting in a breach of the Listing Requirements of Bursa Malaysia Securities Berhad, the Audit Committee shall promptly report such matter to Bursa Malaysia Securities Berhad. Audit Committee Report (contd) TERMS OF REFERENCE (contd) Authority The Audit Committee is authorised by the Board to review any activity within its terms of reference and shall have full and unrestricted access to any information pertaining to the Group and the management, and all employees of the Group. The Audit Committee is also authorised to obtain independent professional or other advice as and when necessary. Duties The duties of the Committee shall be: 1. To discuss with the external auditors before the audit commences the nature and scope of the audit and ensure co-ordination where more than one audit firm is involved. 2. To review with the external auditors their evaluation of the internal control system. 3. To review the assistance given by the employees of the Group / Company to the external auditors. 4. To review the adequacy of the scope, functions and resources of the internal audit function and that it has the necessary authority to carry out its work, and also to consider the major findings of internal audit investigations and managements response and ensure co-ordination between the internal and external auditors. 5. To review the quarterly and annual financial statements before submission to the Board, focusing particularly on : a. Any changes in accounting policies and practices; b. Major judgemental areas including accounting estimates; c. Significant adjustments resulting from the audit; d. The going concern assumption; e. Compliance with accounting standards; f. Compliance with stock exchange and legal requirements; and g. Significant and unusual events. 6. To review any related party transaction and conflict of interest situation that may arise within the Group including any transaction, procedure or course of conduct that raises questions of management integrity. 9. To consider other topics, as defined. Annual Report 2006 8. To review any appraisal or assessment of the performance, and approve any appointment or termination of the Head of Internal Audit. 13 Southern Steel Berhad 5283-X 7. To consider the appointment of the external auditor and any question of resignation or dismissal and the fixing of audit fees. Audit Committee Report (contd) SUMMARY OF ACTIVITIES In line with the terms of reference, the main activities carried out during the financial year by the Audit Committee in discharging its duties are summarised as follows: 1. review of both the internal and external audit plans of the Group and the Company for the year ended 31 December 2006; 2. review of internal audit reports on internal controls and risk management presented by the Internal Auditors for the Group and the Company; 3. review of unaudited quarterly results before presenting to the Board for approval; 4. review of the related party transactions entered into by the Group and the Company in the quarterly and annual reports of the Company; 5. review of draft audited financial statements of the Group and the Company with the external auditors before presenting to the Board for approval; and 6. consider appointment of external auditors and discuss (without presence of management team) the cooperation rendered by the management to the external auditors. INTERNAL AUDIT FUNCTION The Group has an Internal Audit Department which reports to the Audit Committee and assists the Board in monitoring and managing risks and internal controls. The principal responsibility of the Internal Audit Department is to undertake regular and systematic review of the operations, policies and procedures in order to provide reasonable assurance that internal control and risks are satisfactorily monitored and managed within the Group. Southern Steel Berhad 5283-X Annual Report 2006 14 Group Financial Highlights (RM Million) Turnover 2002 2003 2004 2005 2006 1,460 1,879 2,399 2,430 2,353 Profit/(Loss) Before Taxation 28* 70* 137* (37)* 63 Profit/(Loss) Attributable to Shareholders 14 52 98 (31) 85 1,697 1,753 1,955 1,798 1,779 Shareholders' Funds 359 517 590 540 624 Paid-up Share Capital 282 287 319 362 362 Net Tangible Assets per Share (sen) 104 158 168 135 158 Tangible Assets Employed Earnings/ (Loss) Per Share (sen) 5 15* 23* Dividend - Tax exempt (%) 3 5 10 2.5 5.0 Dividend - Tax exempt (sen per share) 3 5 10 2.5 5.0 (7)* 20 * The effect of adoption of FRS101 and FRS133 are included in 2005 and prior results. 137 200 1,000 (37) 28 100 63 70 2,353 2,430 1,879 2,000 1,460 3,000 Profit/(Loss) Before Taxation 2,399 Turnover 0 02 03 04 05 06 -100 02 03 04 05 06 624 540 590 200 02 03 04 05 06 02 03 04 05 06 Southern Steel Berhad 5283-X 1,600 400 359 1,779 600 1,798 1,753 1,800 1,697 2,000 Shareholders Funds 517 1,955 Tangible Assets Employed Annual Report 2006 15 Chairmans Statement On behalf of the Board of Directors, I am pleased to present the Annual Report and Financial Statements of the Group for the year ended 31 December 2006. FINANCIAL REVIEW At the macro level, 2006 has gone by without any significant impact from the 9th Malaysia Plan (9MP) development expenditure. As the 9MP projects have been slow in taking off, the level of construction activities remained depressed, and in fact, slid further. On the international market, prices recovered somewhat during the year but China turned into a very big exporter, especially of construction steel, giving rise to generally tough trading conditions. Despite this difficult trading scenario, the Group achieved a profit before taxation of RM63.3 million for the year with a slight drop in revenue to RM2.35 billion. This compared favourably with the loss before taxation of RM37.2 million on revenue of RM2.43 billion recorded in 2005. The improvement came about because the upstream operation managed to achieve better margins with cost reductions and focused sales, while the pipe subsidiary which suffered heavy losses in the previous year was profitable. In September, the Group entered into three Conditional Share Sale and Purchase Agreements to dispose its three overseas associated companies 40% owned NatSteel Trade International Pte Ltd, 50% owned Southern NatSteel (Xiamen) Limited and 22.6% owned NatSteelVina Co Ltd to NatSteel Asia Pte Ltd, a major shareholder of the Group and its partner for these three projects for S$29 million. I am pleased to report that all conditions have been met and the disposals were completed on 24 January 2007. REVIEW OF OPERATIONS Southern Steel Berhad Southern Steel Berhad (SSB) continued to be the biggest contributor of the Group, and accounted for more than 80% of the Groups revenue and profit. Despite the absence of the much awaited projects under the 9MP, the Companys 2006 results showed significant improvement over the previous year and maintained its strong market position on the domestic front. In 2007, other than gearing up productivity and volume to capitalize on the expected local construction boom under the 9MP, the Company will also focus on upgrading its facilities to enhance its production of higher grade wire rods. SUBSIDIARY COMPANIES Southern Steel Berhad 5283-X Annual Report 2006 16 (a) Southern Wire Industries (Malaysia) Sdn Bhd (SWI) 2006 was the first year of the implementation of the ASEAN China Free Trade Agreement (ACFTA), and the resultant flood of Chinese steel wire products reduced the margin for wire products sharply. As SWI has been exporting 70% of its products, this generated even greater pressure on its business than in previous years. It was the significant increase in productivity and the reduction in conversion cost through a rigorous, continuous improvement drive that helped to cushion the big contraction in margins. In addition, higher sales volume and a better product mix also contributed towards reducing the losses the company suffered in the previous year. For the year 2007, with a further drop in import duty forthcoming under the ACFTA, the operating environment will be even tougher. However, encouraged by the active involvement and tangible contribution of the workforce in improving productivity in 2006, SWI should further transform its operation to improve on its financial result in 2007. Chairmans Statement (contd) (b) Southern Steel Mesh Sdn Bhd (SSM) With the construction sector registering negative growth and facing intense competition by many new small operators, SSMs financial performance turned into a loss in 2006. The adverse performance was mainly attributed to lower selling prices and higher raw material costs which could not be passed on as a result of intense competition in a shrinking market. For 2007, as a market leader, SSM is expected to benefit most from the revival of the construction sector under the 9MP. Some new strategies have been formulated to ensure the achievement of its business objectives. TQM activities are being stepped up with the aim of transforming the workforce to undertake better manning and better machine utilisation in order to achieve higher productivity and a lowering of conversion cost. (c) Southern Pipe Industry (Malaysia) Sdn Bhd (SPM) SPM turned around and achieved profitability in 2006. This was due mainly to improved selling prices and internal cost down effort. With careful stock planning, SPM was able to pass on the escalating zinc prices to its customers. Efforts to promote in-line galvanised pipes have finally produced significant improvements in sales and a contribution to profits. With the implementation of 9MP projects in 2007, SPM foresees greater demand of construction grade hollow section pipes. Exports to Singapore are also expected to increase in line with the rise in the level of construction activities there. In-line galvanised pipes which gave rise to the major portion of past years losses have shown significant improvements in 2006 and it is expected to become profitable in 2007. ASSOCIATED COMPANY The three overseas associated companies which were disposed of in January 2007 had made an overall loss in 2006, albeit lower than in 2005. The remaining associated company, Steel Industries (Sabah) Sdn Bhd (SIS) continued to make a profit in 2006 because of robust construction activities. For 2007, SIS is likely to benefit from even more construction activities in Sabah. PROSPECTS AND OUTLOOK FOR 2007 On behalf of the Board, I would like to take this opportunity to thank the management and staff for their contribution and commitment to the Group. I would also like to extend my appreciation to the customers, suppliers, shareholders and bankers for their continued support and confidence in the Group. Kwek Leng San Chairman Annual Report 2006 APPRECIATION AND ACKNOWLEDGEMENT 17 Southern Steel Berhad 5283-X It is expected that the bulk of the total expenditure of RM200 billion under the 9MP will be spent over the next three years from the second quarter of 2007. The Group, with its operations spanning various strategic locations throughout the country, is well positioned to capitalise on this favourable development. At the international level, competition is expected to increase in the years ahead, as tariffs in the region fall progressively under the ACFTA. Therefore, the group expects better domestic sales volume but tougher international sales and margin. Overall, with continued efforts at cost improvement, it is expected that the group should perform favourably. Laporan Pengerusi Bagi Pihak Lembaga Pengarah, saya dengan sukacitanya membentangkan Laporan Tahunan dan Penyata Kewangan Kumpulan bagi tahun berakhir 31hb. Disember 2006. ULASAN KEWANGAN Pada paras makro, 2006 telah berlalu tanpa kesan ketara daripada perbelanjaan pembangunan Rancangan Malaysia ke 9 (RMK9). Memandangkan projek dalam RMK9 lewat dilancarkan, aktiviti pembinaan masih tertekan dan lebih merosot. Pada peringkat pasaran antarabangsa, harga telah pulih sepanjang tahun tetapi China telah menukar menjadi pengekspot terbesar terutama sektor keluli pembinaan yang mengakibatkan saingan sengit dalam perdagangan. Walaupun dalam keadaan perdagangan yang sukar, Kumpulan berjaya mencatatkan keuntungan sebelum cukai berjumlah RM63.3 juta untuk tahun 2006 dengan sedikit penurunan dalam perolehan kepada RM2.35 bilion. Pencapaian dalam tahun agak memberangsangkan berbanding kerugian sebelum cukai berjumlah RM37.2 juta dan perolehan RM2.43 bilion tahun sebelumnya. Peningkatan diperolehi kerana aktiviti operasi hiliran teratas berjaya memperolehi margin yang baik melalui pengurangan kos serta fokus terhadap jualan, manakala subsidiari paip yang mengalami kerugian yang besar tahun sebelumnya telah berjaya membuat keuntungan. Pada bulan September, Kumpulan telah memeterai tiga perjanjian jual beli saham bersyarat bagi menjual tiga syarikat bersekutu diluar Negara - 40% dalam NatSteel Trade International Pte Ltd, 50% dalam Southern NatSteel (Xiamen) Limited dan 22.6% dalam NatSteelVina Co Ltd kepada NatSteel Asia Pte Ltd, yang merupakan pemegang saham utama dan rakan kongsi dalam ketiga-tiga projek dengan nilai S$29 juta. Sukacita dimaklumkan bahawa segala syarat-syarat telah diperolehi dan penjualan telah diselesai pada 24hb. Januari 2007. ULASAN OPERASI Southern Steel Berhad Southern Steel Berhad (SSB) terus menjadi penyumbang terbesar kepada Kumpulan, iaitu lebih daripada 80% perolehan dan keuntungan Kumpulan. Walaupun tanpa kemunculan projek dibawah RMK9, syarikat memperolehi keputusan yang memberangsangkan dalam tahun 2006 berbanding tahun sebelumnya dan berjaya memperkukuhkan kedudukan dalam pasaran domestik. Dalam 2007, selain meningkatkan produktiviti dan kuantiti bagi menghadapi jangkaan permintaan dalam sektor pembinaan domestik dibawah RMK9, syarikat juga akan lebih fokus untuk menaikkan taraf kelengkapan bagi memperluaskan produksi wayar rod bergred tinggi. Southern Steel Berhad 5283-X Annual Report 2006 18 Laporan Pengerusi (sambungan) SYARIKAT-SYARIKAT SUBSIDIARI (a) Southern Wire Industries (Malaysia) Sdn Bhd (SWI) 2006 merupakan tahun pertama pelaksanaan Perjanjian Perdagangan Bebas ASEAN - China (PPBAC) dan kesan daripada ini terdapat limpahan produk wayar daripada China yang mengurangkan margin produk wayar dengan ketara. Memandangkan SWI telah mengekspot lebih 70% produknya maka ini akan memberi tekanan yang berat terhadap perniagaannya berbanding tahun sebelumnya. Produktiviti telah meningkat dengan ketara dan kos konversi telah menurun bagi mengimbangi kemerosotan margin. Selain daripada itu, peningkatan jualan dan gabungan produk yang baik telah menyumbang kearah pengurangan kerugian yang dialami tahun sebelumnya. Untuk tahun 2007, dengan pengurangan impot duti di bawah perjanjian PPBAC keadaan operasi akan lebih mencabar. Walau bagaimanapun, dengan sokongan penglibatan yang aktif dan kontribusi daripada tenaga pekerja yang meningkatkan produktiviti 2006, SWI yakin akan berupaya menukarkan operasinya dengan keputusan yang lebih baik pada 2007. (b) Southern Steel Mesh Sdn Bhd (SSM) Dalam tahun kewangan 2006, SSM telah mengalami kerugian memandangkan sektor pembinaan masih mencatatkan pertumbuhan negatif dan menghadapi saingan yang sengit daripada operator-operator kecil yang baru. Keputusan yang kurang memuaskan adalah disebabkan oleh harga jualan yang rendah serta harga bahan mentah yang tinggi yang tidak dapat disalurkan kepada pelanggan kerana saingan yang sengit dalam pasaran yang meruncing. Untuk 2007, sebagai peneraju pasaran, SSM dijangka memperolehi lebih manfaat kesan daripada pemulihan sektor pembinaan dibawah RMK9. Strategi baru telah dirangka bagi memastikan pencapaian dalam objektif perniagaannya. Pengurusan Kualiti Menyeluruh (TQM) dipertingkatkan dengan harapan dapat menukarkan tenaga pekerja menjadi lebih efisien dalam pengendalian mesin bagi mencapai produktiviti yang tinggi dan kos konversi yang rendah. (c) Southern Pipe Industry (Malaysia) Sdn Bhd (SPM) SPM telah berjaya membuat keuntungan dalam tahun 2006 dan sebab utamanya adalah kerana harga jualan yang baik dan usaha dalaman untuk pengurangan kos. Dengan pengendalian stok yang baik, ianya berjaya melepaskan kenaikan harga jualan zinc kepada pelanggannya. Usaha untuk mempromosi galvanasi paip akhirnya berjaya meningkatkan jualan dan menyumbangkan keuntungan. Keseluruhannya tiga syarikat bersekutu yang telah dijual pada Januari 2007 telah mengalami kerugian walaupun kurang daripada 2005. Syarikat bersekutu yang masih ada, Steel Industries (Sabah) Sdn Bhd (SIS) terus membuat keuntungan dalam kerancakan aktiviti pembinaan pada tahun 2006. Untuk 2007, SIS dijangka memperolehi lebih faedah terhadap aktiviti pembinaan di Sabah. Annual Report 2006 SYARIKAT BERSEKUTU 19 Southern Steel Berhad 5283-X Dengan implementasi projek dibawah RMK9 dalam 2007, SPM menjangkakan permintaan yang tinggi untuk gred paip pembinaan berrongga. Ekspot ke Singapura dijangka akan meningkat dengan peningkatan aktiviti pembinaan disana. Galvanasi paip serentak yang telah menyumbang kepada kerugian pada tahun-tahun sebelum ini telah menunjukkan prestasi yang baik dalam 2006 dan dijangkakan memberi keuntungan dalam tahun 2007. Laporan Pengerusi (sambungan) PANDANGAN DAN PROSPEK UNTUK TAHUN 2007 Adalah diharapkan sebahagian besar daripada jumlah perbelanjaan RM200 bilion dibawah RMK9 akan dibelanjakan dalam 3 tahun akan datang mulai suku kedua 2007. Kumpulan dengan operasinya meliputi merata lokasi strategik dalam negara telah bersiap-sedia terhadap pembangunan yang positif ini. Pada peringkat antarabangsa, saingan dijangka sengit pada tahun-tahun akan datang kerana tarif akan berterusan dikurangkan dibawah PPBAC. Oleh itu Kumpulan menjangka akan beroleh volum jualan domestik yang lebih baik tetapi jualan dan margin di peringkat antarabangsa akan lebih mencabar. Keseluruhannya, dengan usaha berterusan bagi memperbaiki kos, Kumpulan dijangka terus beroperasi dengan jayanya. PENGHARGAAN DAN PEMBERITAHUAN Bagi pihak Lembaga, saya ingin mengambil kesempatan ini untuk mengucapkan terima kasih kepada Pengurusan dan kakitangan kerana sumbangan dan komitmen mereka terhadap Kumpulan ini. Saya juga tidak ketinggalan mengucapkan penghargaan terhadap pelanggan-pelanggan, pembekal-pembekal, pemegang-pemegang saham dan bank-bank kerana sokongan yang berterusan dan keyakinan mereka kepada Kumpulan ini. Kwek Leng San Pengerusi Southern Steel Berhad 5283-X Annual Report 2006 20 Reports and Financial Statements 26 Statement by Directors 26 Statutory Declaration 27 Report of the Auditors to the Members 28 Income Statements 29 Balance Sheets 30 Consolidated Statement of Changes in Equity 31 Company Statement of Changes in Equity 32 Cash Flow Statements 34 Notes to the Financial Statements 21 Annual Report 2006 Directors Report Southern Steel Berhad 5283-X 22 DIRECTORS' REPORT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 The Directors present their report to the members together with the audited financial statements of the Group and the Company for the financial year ended 31 December 2006. 1 PRINCIPAL ACTIVITIES The principal activities of the Company are the manufacturing of, sales and trading in billets, steel bars and wire rods. The principal activities of its subsidiary companies and associated companies are described in Notes 13 and 14 to the financial statements respectively. There have been no significant changes in the nature of these activities during the financial year. 2 FINANCIAL RESULTS Profit after taxation for the financial year 3 Group RM000 Company RM000 84,736 88,901 DIVIDENDS No dividend has been declared or paid since 31 December 2005. A first and final tax exempt dividend of 5 sen per share amounting to RM18,122,000, based on the number of ordinary shares in issue at 31 December 2006, has been proposed by the Directors. This proposed first and final dividend is subject to the approval of the shareholders at the forthcoming Annual General Meeting. 4 RESERVES AND PROVISIONS There were no material transfers to or from reserves and provisions during the financial year except for those disclosed in the financial statements. 5 Southern Steel Berhad 5283-X Annual Report 2006 22 SHARE CAPITAL During the financial year, 269,417 new ordinary shares of RM1.00 each with carrying value of RM249,027 were issued by the Company arising from the conversion of 277,500 5.5% 5-year Irredeemable Convertible Unsecured Loan Stocks (ICULS). The newly issued ordinary shares rank pari passu in all respects with the existing ordinary shares of the Company except that the said new shares will not be entitled to any dividend, right, allotment or other distribution where the relevant entitlement date precedes the date of allotment of the new shares. DIRECTORS' REPORT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) 6 DIRECTORS The Directors in office since the date of the last report are: Non-independent Non-Executive Directors Kwek Leng San (Chairman) Yap Peng Leong Koushik Chatterjee Oo Soon Hee (alternate to Koushik Chatterjee) Non-independent Executive Director Y. Bhg Dato' Dr. Tan Tat Wai (Group Managing Director) Independent Non-Executive Directors Y.A. Bhg Tun Dato' Seri Dr. Lim Chong Eu YM Raja Dato' Seri Abdul Aziz bin Raja Salim 7 DIRECTORS' INTERESTS According to the Register of Directors Shareholdings kept by the Company for the purpose of Section 135 of the Companies Act, 1965, the interests of Directors in office at the end of the financial year in shares of the Company during the financial year are as follows: The Company Number of ordinary shares of RM1.00 each Acquired/ At 1.1.2006 Allotted Disposed At 31.12.2006 Y. Bhg Dato Dr. Tan Tat Wai - Direct interest - Deemed interest 14,854 32,980,223 0 0 0 0 14,854 32,980,223 Other than as disclosed above, no other Directors in office at the end of the financial year held any interest in shares in the Company and its related corporations and ICULS of the Company during the financial year. DIRECTORS BENEFITS During and at the end of the financial year, no arrangement subsisted to which the Company is a party, with the object or objects of enabling the Directors of the Company to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other body corporate. 23 Annual Report 2006 Since the end of the previous financial year, no Director has received or become entitled to receive a benefit (other than the fees and other emoluments shown in Note 7 to the financial statements) by reason of a contract made by the Company or a related corporation with the Director or with a firm of which he is a member, or with a company in which he has a substantial financial interest. Southern Steel Berhad 5283-X 8 DIRECTORS' REPORT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) 9 STATUTORY INFORMATION ON THE FINANCIAL STATEMENTS Before the income statements and balance sheets of the Group and the Company were made out, the Directors took reasonable steps: (a) to ascertain that actions have been taken in relation to the writing off of bad debts and the making of allowance for doubtful debts, and have satisfied themselves that all known bad debts have been written off and that adequate allowance has been made for doubtful debts; and (b) to ensure that any current assets, other than debts, which were unlikely to realise in the ordinary course of business their values as shown in the accounting records of the Group and the Company have been written down to an amount which they might be expected so to realise. At the date of this report, the Directors are not aware of any circumstances: (a) which would render the amounts written off for bad debts or the amount of the allowance for doubtful debts in the financial statements of the Group and the Company inadequate to any substantial extent; (b) which would render the values attributed to current assets in the financial statements of the Group and the Company misleading; or (c) which have arisen which render adherence to the existing method of valuation of assets or liabilities of the Group and the Company misleading or inappropriate. No contingent or other liability has become enforceable or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may substantially affect the ability of the Group or the Company to meet their obligations as and when they fall due. At the date of this report, there does not exist: (a) any charge on the assets of the Group and the Company which has arisen since the end of the financial year which secures the liability of any other person; or (b) any contingent liability of the Group and the Company which has arisen since the end of the financial year. Southern Steel Berhad 5283-X Annual Report 2006 24 At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or the financial statements which would render any amount stated in the financial statements misleading. In the opinion of the Directors, (a) the results of the Groups and the Companys operations during the financial year were not substantially affected by any item, transaction or event of a material and unusual nature; and (b) there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely to affect substantially the results of the operations of the Group and the Company for the current financial year in which this report is made except as disclosed in Note 33 to the financial statements. DIRECTORS' REPORT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) 10 AUDITORS The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in office. Signed on behalf of the Board of Directors in accordance with their resolution dated 16 March 2007. Kwek Leng San Chairman Y. Bhg Dato Dr. Tan Tat Wai Group Managing Director Southern Steel Berhad 5283-X Annual Report 2006 25 STATEMENT BY DIRECTORS PURSUANT TO SECTION 169(15) OF THE COMPANIES ACT, 1965 We, the undersigned, being two of the Directors of Southern Steel Berhad, state that in the opinion of the Directors, the accompanying financial statements set out on pages 28 to 79 are drawn up so as to give a true and fair view of the state of affairs of the Group and the Company as at 31 December 2006 and of the results and cash flows of the Group and the Company for the financial year ended on that date in accordance with the provisions of the Companies Act, 1965 and the MASB Approved Accounting Standards in Malaysia for Entities Other Than Private Entities. Signed on behalf of the Board of Directors in accordance with their resolution dated 16 March 2007. Kwek Leng San Chairman Y. Bhg Dato Dr. Tan Tat Wai Group Managing Director STATUTORY DECLARATION PURSUANT TO SECTION 169(16) OF THE COMPANIES ACT, 1965 I, Ang Meng Chuan, being the Group Financial Controller primarily responsible for the financial management of Southern Steel Berhad, do solemnly and sincerely declare that the financial statements set out on pages 28 to 79 are in my opinion, correct and I make this solemn declaration conscientiously believing the same to be true, and by virtue of the provisions of the Statutory Declarations Act, 1960. Southern Steel Berhad 5283-X Annual Report 2006 26 Ang Meng Chuan Subscribed and solemnly declared by the abovenamed Ang Meng Chuan at Georgetown in the State of Penang on 16 March 2007. Before me Huang Peter Commissioner for Oaths (No. P006) REPORT OF THE AUDITORS TO THE MEMBERS OF SOUTHERN STEEL BERHAD We have audited the financial statements set out on pages 28 to 79. These financial statements are the responsibility of the Companys Directors. It is our responsibility to form an independent opinion, based on our audit, on these financial statements and to report our opinion to you, as a body, in accordance with Section 174 of the Companies Act, 1965 and for no other purpose. We do not assume responsibility to any other person for the content of this report. We conducted our audit in accordance with approved auditing standards in Malaysia. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by directors, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion: (a) the financial statements have been prepared in accordance with the provisions of the Companies Act, 1965 and the MASB Approved Accounting Standards in Malaysia for Entities Other Than Private Entities so as to give a true and fair view of: (i) the matters required by Section 169 of the Companies Act, 1965 to be dealt with in the financial statements; and (ii) the state of affairs of the Group and the Company as at 31 December 2006 and of the results and cash flows of the Group and the Company for the financial year ended on that date; and (b) the accounting and other records and the registers required by the Act to be kept by the Company and by the subsidiary companies of which we have acted as auditors have been properly kept in accordance with the provisions of the Act. The names of the subsidiary companies of which we have not acted as auditors are indicated in Note 13 to the financial statements. We have considered the financial statements of these subsidiary companies and the auditors reports thereon. PRICEWATERHOUSECOOPERS (No. AF-1146) Chartered Accountants Penang 16 March 2007 LIM TEONG KEAN (2499/12/07 (J)) Partner of the firm Annual Report 2006 The auditors reports on the financial statements of the subsidiary companies were not subject to any qualification and did not include any comment made under sub-section (3) of Section 174 of the Act. 27 Southern Steel Berhad 5283-X We are satisfied that the financial statements of the subsidiary companies that have been consolidated with the Company's financial statements are in form and content appropriate and proper for the purposes of the preparation of the consolidated financial statements and we have received satisfactory information and explanations required by us for those purposes. INCOME STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 In RM000 unless otherwise stated Note REVENUE COST OF SALES GROSS PROFIT OTHER OPERATING INCOME ADMINISTRATION EXPENSES DISTRIBUTION COSTS OTHER OPERATING EXPENSES OPERATING PROFIT FINANCE COSTS 2005 2005 7 2,430,494 (2,315,216) 115,278 14,060 (49,218) (53,095) (15,824) 11,201 1,923,924 (1,787,383) 136,541 32,375 (26,060) (34,363) (2,255) 106,238 1,971,726 (1,883,063) 88,663 13,743 (23,437) (33,459) (2,943) 42,567 8 (45,740) (43,059) (36,291) (34,693) (1,763) (5,333) 0 0 63,278 (37,191) 69,947 7,874 21,458 84,736 2,322 (34,869) 18,954 88,901 (1,114) 6,760 84,518 218 (30,877) (3,992) 88,901 0 6,760 0 84,736 (34,869) 88,901 6,760 5.0 2.5 9 Attributable to: EQUITY HOLDERS OF THE COMPANY MINORITY INTERESTS PROFIT/(LOSS) FOR THE FINANCIAL YEAR DIVIDENDS PER SHARE (SEN) 10 5.0 2.5 EARNINGS/(LOSS) PER SHARE (SEN) - BASIC AND FULLY DILUTED 11 20.2 (7.4) Annual Report 2006 28 Southern Steel Berhad 5283-X Company 2006 2,353,284 (2,166,724) 186,560 40,731 (52,211) (54,615) (9,684) 110,781 SHARE OF RESULTS OF ASSOCIATED COMPANIES PROFIT/(LOSS) FROM ORDINARY ACTIVITIES BEFORE TAXATION TAXATION PROFIT/(LOSS) AFTER TAXATION Group 2006 The accompanying notes form an integral part of the financial statements. BALANCE SHEETS AS AT 31 DECEMBER 2006 In RM000 unless otherwise stated Non-current assets held for sale CURRENT LIABILITIES Payables Short term borrowings Current tax liabilities Provisions 12 13 14 15 16 871,800 0 13,076 860 48,991 934,727 928,977 0 80,345 860 48,991 1,059,173 665,877 398,659 5,500 708 0 1,070,744 698,227 398,659 52,220 708 0 1,149,814 17 18 584,771 174,407 6,879 0 14,530 50,218 830,805 581,690 150,051 5,494 319 11,538 39,750 788,842 440,897 68,476 3,567 0 12,255 39,758 564,953 459,333 62,863 3,558 0 6,000 32,205 563,959 19 63,941 894,746 0 788,842 46,720 611,673 0 563,959 20 21 228,355 687,563 301 766 916,985 (22,239) 211,436 696,771 1,319 765 910,291 (121,449) 297,193 454,795 0 426 752,414 (140,741) 283,201 483,184 821 563 767,769 (203,810) 180,996 81,111 23,675 285,782 626,706 268,226 102,118 24,588 394,932 542,792 180,996 70,285 9,652 260,933 669,070 268,226 88,745 8,892 365,863 580,141 15 28 28 22 NET CURRENT LIABILITIES NON-CURRENT LIABILITIES Long term borrowings Deferred tax liabilities Provisions 23 24 22 TOTAL NET ASSETS CAPITAL AND RESERVES Share capital ICULS *(equity component) Reserves EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY MINORITY INTERESTS TOTAL EQUITY 2005 29 25 26 27 362,029 46,953 215,161 361,780 47,174 131,493 362,029 46,953 260,088 361,780 47,174 171,187 624,143 2,563 540,447 2,345 669,070 0 580,141 0 626,706 542,792 669,070 580,141 * 5.5% 5-year Irredeemable Convertible Unsecured Loan Stocks 2003/2008 The accompanying notes form an integral part of the financial statements. Annual Report 2006 CURRENT ASSETS Inventories Receivables Tax recoverable Other investments Deposits with licensed banks Cash and bank balances Note Company 2005 2006 Southern Steel Berhad 5283-X NON-CURRENT ASSETS Property, plant and equipment Subsidiary companies Associated companies Other investments Goodwill on consolidation Group 2006 Annual Report 2006 0 0 0 0 0 30,000 0 (58) 0 0 0 72,499 0 0 0 0 0 35,852 0 0 0 (221) 0 46,953 0 0 0 249 0 362,029 The accompanying notes form an integral part of the financial statements. * 5.5% 5-year Irredeemable Convertible Unsecured Loan Stocks 2003/2008 0 30,000 0 72,557 0 35,852 0 47,174 0 361,780 At 1 January 2006 0 0 0 0 0 0 0 30,000 0 0 0 0 0 0 (35,831) 0 43,080 0 0 0 72,557 0 0 0 0 0 0 0 35,852 0 0 0 0 0 0 0 47,174 30,000 72,557 35,852 83,005 0 0 361,780 Exchange differences - associated companies Net loss not recognised in income statement Compulsory acquisition of property, plant and equipment by Government Derecognised upon adoption of FRS 3 Issue of shares arising from conversion of ICULS (Notes 25 and 26) Net profit for the financial year At 31 December 2006 Non-distributable 318,700 Dividends (Note 10) for the financial year ended: - 31 December 2004 - 31 December 2005 At 31 December 2005 At 1 January 2005 Exchange differences - associated companies Net gain not recognised in income statement Issue of shares arising from conversion of ICULS (Notes 25 and 26) Net loss for the financial year Accretion arising from additional shares issued by a subsidiary 30 0 0 0 (3,065) 0 0 0 3,065 0 0 3,065 12 0 0 0 0 3,053 0 0 50 0 0 0 0 50 0 0 50 0 0 0 0 0 50 RevaluaICULS* Capital Reserve on tion Merger Share (equity consoli- redemption Share reserve dation capital component) premium reserve reserve Issued and fully paid ordinary shares of RM1.00 each In RM000 unless otherwise stated Southern Steel Berhad 5283-X 0 0 10,801 0 0 (850) (850) 11,651 0 0 11,651 0 0 0 601 601 11,050 Total 601 601 12 0 0 (850) (850) 28 0 84,518 84,518 65,959 624,143 3,065 58 0 0 (21,682) 540,447 (17,524) (17,524) (9,054) (9,054) (21,682) 540,447 0 7,249 0 (30,877) (30,877) 0 0 35,773 590,040 Retained profits/ Exchange fluctuation (Accumulated losses) reserve Total equity 601 0 1,896 0 0 (850) (850) 28 0 218 84,736 2,563 626,706 0 0 0 0 2,345 542,792 0 (17,524) (9,054) 0 2,345 542,792 1,884 0 7,249 (3,992) (34,869) 601 0 4,453 594,493 Minority interests CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 In RM000 unless otherwise stated Issued and fully paid ordinary shares of RM1.00 each Share capital Distributable Non-distributable ICULS* (equity Share Revaluation Merger compo Retained -nent) premium profits reserve reserve Total 35,852 44,733 33,600 0 0 0 0 0 0 0 0 47,174 0 0 35,852 0 0 44,733 0 0 33,600 (17,524) (17,524) (9,054) (9,054) 57,002 580,141 361,780 47,174 35,852 44,733 33,600 57,002 580,141 249 0 362,029 (221) 0 46,953 0 0 35,852 0 0 44,733 0 0 33,600 0 28 88,901 88,901 145,903 669,070 At 1 January 2005 Issue of shares arising from conversion of ICULS (Notes 25 and 26) Net profit for the financial year Dividends (Note 10) for the financial year ended: - 31 December 2004 - 31 December 2005 At 31 December 2005 318,700 83,005 43,080 0 (35,831) 0 0 0 361,780 At 1 January 2006 Issue of shares arising from conversion of ICULS (Notes 25 and 26) Net profit for the financial year At 31 December 2006 76,820 592,710 0 6,760 7,249 6,760 * 5.5% 5-year Irredeemable Convertible Unsecured Loan Stocks 2003/2008 The accompanying notes form an integral part of the financial statements. Southern Steel Berhad 5283-X Annual Report 2006 31 CASH FLOW STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 In RM000 unless otherwise stated Note Group 2006 2005 Company 2005 2006 CASH FLOWS FROM OPERATING ACTIVITIES Net profit/(loss) for the financial year 84,518 (30,877) 88,901 6,760 1,763 (21,458) 218 (37) 45,740 (621) (22,396) 0 0 7 3,771 (912) 5,333 (2,322) (3,992) 0 43,059 (261) (2,166) 3,795 79 13 1,453 (2,319) 0 (18,954) 0 (582) 36,291 (749) (23,135) 0 0 0 1,027 0 0 1,114 0 (6,175) 34,693 (1,289) (2,166) 0 0 0 263 0 85,148 257 (188) 87,938 1,700 (615) 55,656 33 (44) 55,586 1,664 69 884 2,241 17,512 (618) 1,494 12,021 15,360 (1,045) 884 321 17,256 0 1,494 1,547 13,601 0 (3,997) 2,598 (442) 0 0 2,573 0 2,390 0 1,093 0 0 0 1,040 0 0 (1,841) 0 0 0 166 192,313 0 133,611 0 157,998 0 108,201 (19,103) (27,696) 16,856 162,370 (48,056) (1,952) (1,120) (549) 110,693 33,315 22,026 (5,733) 183,219 (50,681) (3,470) (971) (16) 128,081 (25) (6,400) 13,931 165,504 (38,611) (336) (470) 0 126,087 24,144 5,690 4,236 142,271 (40,967) (249) (251) 0 100,804 Adjustments for: Southern Steel Berhad 5283-X Annual Report 2006 32 Share of results of associated companies Taxation Minority interests Dividend income Interest expense Interest income Net unrealised foreign exchange gain Amortisation of goodwill Goodwill written off Bad debts written off Allowance for doubtful debts Allowance for doubtful debts written back Property, plant and equipment: - depreciation - write off - net (gain)/loss on disposals Inventories: - write off - write down to net realisable value - allowance for inventories obsolescence - write back of allowance for obsolescence - write down to net realisable value no longer required Provision for retirement benefits Gain on disposals of investments Provision for sales tax reassessment Provision for sales tax reassessment written back Unrealised profit on sales to associated companies Changes in working capital: Inventories Receivables Payables Cash generated from operations Interest paid Taxation paid Retirement benefits paid Payment for sales tax reassessment Net operating cash flow The accompanying notes form an integral part of the financial statements. CASH FLOW STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated CASH FLOWS FROM INVESTING ACTIVITIES Dividends received Interest received Property, plant and equipment: - proceeds from disposals - additions Acquisition of additional equity interests in an associated company Acquisition of additional equity interests in a subsidiary company from minority interest holders Acquisition of additional share capital in a subsidiary company Proceeds from disposal of quoted investments Note 2005 550 375 587 593 939 (29,997) 440 (27,810) Net investing cash flow CASH FLOWS FROM FINANCING ACTIVITIES Net repayment of revolving credits Net repayment of foreign currency loans Net proceeds from/(repayments of) bankers acceptance Repayment of long term borrowings (exclude ICULS) Issue of shares to a minority interest holder Dividends paid Net financing cash flow Net change in cash and cash equivalents Cash and cash equivalents at beginning of the financial year Cash and cash equivalents at end of the financial year Group 2006 582 749 44 (22,669) 6,175 1,940 112 (16,344) 0 (2,896) 0 (2,896) 0 (56) 0 0 0 0 0 (5,625) 761 0 0 0 (25,429) (31,085) (21,294) (16,638) (29,705) (3,777) (26,441) (12,185) (27,555) 0 (33,441) 0 (392) (20,597) (13,802) (56,839) (53,769) (39,905) 2,511 (53,769) 1,875 (26,578) 0 0 (84,740) 28 Company 2005 2006 (120,560) 0 0 (101,921) 0 (26,578) (113,726) 524 (23,564) 2,872 (29,560) 34,047 57,611 25,021 54,581 34,571 34,047 27,893 25,021 NON-CASH TRANSACTIONS - ADDITIONS OF PROPERTY, PLANT AND EQUIPMENT (PPE) Analysis of total cash payment for cash flow purposes : In respect of PPE acquired during the financial year ended 31 December 2006 In respect of PPE acquired during the financial year ended 31 December 2005 / 31 December 2004 (included in other payables and accruals) 28,480 (22,477) 26,755 (21,422) 23,339 (17,336) 13,102 (7,769) 6,003 5,333 6,003 5,333 22,477 21,422 17,336 7,769 5,333 8,575 5,333 8,575 27,810 29,997 22,669 16,344 The accompanying notes form an integral part of the financial statements. 33 Annual Report 2006 PPE additions Less: cash payment Balances included in other payables and accruals as at 31 December 2006 2005 Company 2006 2005 Southern Steel Berhad 5283-X Group 2006 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 In RM000 unless otherwise stated 1 GENERAL INFORMATION AND PRINCIPAL ACTIVITIES The Company is a public limited liability company, incorporated and domiciled in Malaysia, and listed on the Main Board of Bursa Malaysia Securities Berhad. The registered office of the Company is located at 2723, Lorong Perusahaan 12, Prai Industrial Estate, 13600 Prai, Penang. The principal place of business of the Company is located at 2435, Lorong Perusahaan 12, Prai Industrial Estate, 13600 Prai, Penang. The principal activities of the Company are the manufacturing of, sales and trading in billets, steel bars and wire rods. The principal activities of its subsidiary companies and associated companies are described in Notes 13 and 14 to the financial statements respectively. There have been no significant changes in the nature of these activities during the financial year. 2 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS The financial statements of the Group and the Company have been prepared under the historical cost convention except as disclosed in the summary of significant accounting policies in Note 3 to the financial statements and in accordance with the provisions of the Companies Act, 1965 and Financial Reporting Standards (FRS), the Malaysian Accounting Standards Board (MASB) Approved Accounting Standards in Malaysia for Entities Other Than Private Entities. The preparation of financial statements in conformity with FRS requires management to exercise its judgement in the process of applying the Groups accounting policies. It also requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the financial year. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates. Critical accounting estimates and assumptions used that are significant to the financial statements, and areas involving a higher degree of judgement or complexity, are disclosed in Note 5. In 2006, the Group and the Company adopted the new or revised FRS that are applicable in the current financial year. The 2006 financial statements have been amended as required, in accordance with the relevant transitional provisions in the respective FRS. The following are the FRS that are relevant to the Group: Southern Steel Berhad 5283-X Annual Report 2006 34 FRS 3 FRS 5 FRS 101 FRS 102 FRS 108 FRS 110 FRS 116 FRS 121 FRS 127 FRS 128 FRS 132 FRS 133 FRS 136 FRS 138 Business Combinations Non-current Assets Held for Sale and Discontinued Operations Presentation of Financial Statements Inventories Accounting Policies, Changes in Accounting Estimates and Errors Events after the Balance Sheet Date Property, Plant and Equipment The Effects of Changes in Foreign Exchange Rates Consolidated and Separate Financial Statements Investments in Associates Financial Instruments: Disclosure and Presentation Earnings per share Impairment of Assets Intangible Assets NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 2 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED) All changes in accounting policies have been made in accordance with the transitional provisions in the respective standards, amendments to published standards and interpretations. All standards, amendments and interpretations adopted by the Group require retrospective application other than: (i) (ii) FRS 3 prospectively for business combinations for which the agreement date is on or after 1 January 2006 FRS 5 prospectively to non-current assets (or disposal groups) that meet the criteria to be classified as held for sale and to operations that meet the criteria to be classified as held for sale and operations that meet the criteria to be classified as discontinued on/after 1 January 2006. The adoption of the above FRS did not result in substantial changes to the Groups accounting policies except as disclosed in Note 4. The new standards, amendments to published standards and interpretations that are mandatory for the Groups financial periods beginning on or after 1 January 2007 or later periods, but which the Group does not opt for early adoption, are as follows: (iii) (iv) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES All significant group accounting policies set out below are consistent with those applied in the previous financial year unless otherwise stated. (a) BASIS OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and all its subsidiary companies, made up to the end of the financial year. A subsidiary company is a company, in which the Group has the power, directly or indirectly to control the financial and operating policies of the company so as to obtain benefits from its activities. All inter-company transactions, balances and the resulting unrealised gains are eliminated on consolidation. Unrealised losses are also eliminated unless cost cannot be recovered. 35 Annual Report 2006 (ii) FRS 117 Leases (effective for accounting periods beginning on or after 1 October 2006). This standard requires the classification of leasehold land as prepaid lease payments. The Group will apply this standard from financial periods beginning on 1 January 2007. FRS 124 Related Party Disclosures (effective for accounting periods beginning on or after 1 October 2006). This standard will affect the identification of related parties and some other related party disclosures. The Group will apply this standard from financial periods beginning on 1 January 2007. Amendment to FRS 1192004 Employee Benefits Actuarial Gains and Losses, Group Plans and Disclosures (effective for accounting periods beginning on or after 1 January 2007). This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment will only impact the format and extent of disclosures presented in the financial statements. The Group will apply this amendment from financial periods beginning on 1 January 2007. FRS 139 Financial Instruments: Recognition and Measurement (effective date has yet to be determined by MASB). This new standard establishes principles for recognition and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. Hedge accounting is permitted only under strict circumstances. The Group will apply this standard when effective. Southern Steel Berhad 5283-X (i) NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) BASIS OF CONSOLIDATION (CONTINUED) The results of all the subsidiary companies are consolidated using the purchase method of accounting except for the consolidation of Southern Steel Holdings Sdn. Bhd. sub-group prior to 1 January 2002 using the merger method of accounting in accordance with Malaysian Accounting Standard No. 2, Accounting for Acquisitions and Mergers, the generally accepted accounting principles prevailing at that time. The Group has applied FRS 3, Business Combinations prospectively. Accordingly, the business combination entered into prior to 1 January 2002 has not been restated to comply with the said FRS. Under the purchase method of accounting, the results of the subsidiary companies acquired or disposed of during the financial year are included in the consolidated income statement from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases. At the date of acquisition, the fair values of the subsidiary companies net assets are determined and these values are reflected in the consolidated financial statements. The excess of the purchase consideration over the fair values of the net assets of the subsidiary companies acquired is reflected in the financial statements as goodwill. However, if the purchase consideration is less than the fair value of the net assets of subsidiary companies acquired, the difference is recognised directly in the income statement as negative goodwill. Goodwill recognised as intangible assets is tested at least annually for impairment and carried at cost less accumulated impairment losses. The accounting policy on the recognition and measurement of impairment losses is disclosed in Note 3(i) to the financial statements. Under the merger method of accounting, the results of the subsidiary companies are presented as if the merger had been effected throughout the current and previous financial years. The assets and liabilities combined are accounted for based on the carrying amount from the perspective of the common control shareholder at the date of transfer. On consolidation, the cost of the merger is cancelled with the value of the shares received. Any resulting credit difference is classified as equity and regarded as a non-distributable merger reserve. Any resulting debit difference is adjusted against any suitable reserve. Any share premium, capital redemption reserve and any other reserves which are attributable to share capital of the merged enterprises, to the extent that they have not been capitalised by a debit difference, are classified and presented as movement in other capital reserves. The gain or loss on disposal of a subsidiary is the difference between net disposal proceeds and the Groups share of its net assets as of the date of disposal including the cumulative amount of any exchange differences that relates to the subsidiary is recognised in the consolidated income statement. Southern Steel Berhad 5283-X Annual Report 2006 36 (b) SUBSIDIARY COMPANIES Investments in subsidiary companies, which are eliminated on consolidation, are stated at cost less accumulated impairment losses in the parent companys separate financial statements. The accounting policy on the recognition and measurement of impairment losses is disclosed in Note 3(i). NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) ASSOCIATED COMPANIES An associated company is a company in which the Group exercises significant influence, but not control, over the financial and operating policies. In the financial statements of the Company, investments in associated companies are stated at cost less accumulated impairment losses. The accounting policy on the recognition and measurement of impairment losses is disclosed in Note 3(i) to the financial statements. The Group equity accounts for its share of the results and reserves of the associated companies from the date that significant influence effectively commences until the date that significant influence effectively ceases or when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated company. Unrealised gains on transactions between the Group and its associated companies are eliminated to the extent of the Groups interest in the associated companies. Unrealised losses on such transactions are also eliminated to the extent of the Groups interest in the associated companies unless cost cannot be recovered. Goodwill on acquisition represents the excess of the purchase consideration over the fair values of the net assets of the associated companies acquired. Goodwill on acquisition is included in the carrying amount of the investments in the associated companies. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses (refer to Note 3 (i)). MINORITY INTERESTS Minority interests represent that portion of the profit or loss and the net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent. It is measured at the minorities share of the fair value of the subsidiaries identifiable assets and liabilities at the acquisition date and the minorities share of changes in the subsidiaries equity since that date. For purchases of a subsidiarys equity shares from minority interests for cash consideration and the purchase price is established at fair value, the accretion of the Groups interests in the subsidiary is treated as purchase of equity interest under the purchase method of accounting. The identifiable assets and liabilities acquired are adjusted to their fair values, with the resulting difference being attributed to goodwill or negative goodwill. Disposals of equity shares to minority interests for cash consideration and at fair value result in gains and losses for the Group and are recorded in the income statement. The gain and loss is the difference between the Groups share of net assets immediately before and immediately after the disposal and a rateable portion of goodwill is realised. For purchases or disposals from or to minority interests for consideration other than cash and not at fair value, the accretion or dilution of the Groups interests is treated as an equity transaction between the subsidiary and its shareholders. The difference between the Groups share of net assets immediately before and immediately after the changes in stake and any consideration received or paid is adjusted to or against the Groups reserves. 37 Annual Report 2006 (d) Southern Steel Berhad 5283-X 3 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) MINORITY INTERESTS (CONTINUED) All other changes in stakes and changes in composition of the Group are treated as equity transactions between the Group and its majority and minority shareholders. The difference between the Groups share of net assets before and after the change, and any consideration received or paid adjusted to or against the Groups reserves. (e) OTHER INVESTMENTS Non-current investments are stated at cost. The investments are only written down when the Directors are of the opinion that there is a decline other than temporary in the value of such investments. Such a decline is recognised as an expense in the period in which the decline is identified. Write down in value of investments previously recognised is reversed when the Directors are of the opinion that the increase in value of investments is other than temporary. Short term investments are carried at the lower of cost and market value, determined on an aggregate portfolio basis by category of investment. Cost is determined using the weighted average basis. Market value is calculated by reference to the stock exchange quoted selling prices at the close of business on the balance sheet date. Reduction in the carrying amount of investments and reversal of such reduction is taken to the income statement. On disposal of an investment, the gain or loss representing the difference between net disposal proceeds and the carrying amount of investment is credited or charged to the income statement. (f) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment except for freehold land are stated at cost or valuation less accumulated depreciation and impairment losses. Subsequent costs are included in the assets carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Southern Steel Berhad 5283-X Annual Report 2006 38 Revaluation of the land and buildings will be conducted at an interval of at least once in every five years with additional revaluation in the intervening years if the carrying value of the revalued land and buildings differ materially from the market values. Increases in the carrying amount arising from revaluation are credited to the revaluation reserve. Decreases that offset previous increases of the same assets are charged against the revaluation reserve. All other decreases are charged to income statement. Freehold land and capital work in progress are not depreciated. Leasehold land is amortised on a straight line basis over the leasehold periods of 60 to 99 years. All other property, plant and equipment are depreciated over their estimated useful lives on a straight line basis at the following principal annual rates: Buildings Plant and machinery Office equipment Motor vehicles 2% -12% 5% - 20% 5% - 50% 20% - 25% NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Residual values and useful life of assets are reviewed and adjusted if appropriate, at each balance sheet date. Gain or loss on disposals of property, plant and equipment are determined by comparing proceeds with carrying amounts of assets and are included in the income statements. On disposal of revalued assets, amounts in revaluation reserve relating to those assets are transferred to retained profits. At the balance sheet date, the Group assesses whether there is any indication of impairment. If such indications exist, an analysis is performed to assess whether the carrying amount of the asset is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. The accounting policy on the recognition and measurement of impairment losses is disclosed in Note 3(i). (g) NON-CURRENT ASSETS HELD FOR SALE Non-current assets are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is recovered principally through a sale transaction rather than through continuing use. RESEARCH AND DEVELOPMENT Research expenditure is recognised as an expense when incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled: (i) it is technically feasible to complete the intangible asset so that it will be available for use or sale; (ii) management intends to complete the intangible asset and use or sell it; (iii) there is an ability to use or sell the intangible asset; (iv) it can be demonstrated how the intangible asset will generate probable future economic benefits; (v) adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and (vi) the expenditure attributable to the intangible asset during its development can be reliably measured. Other development expenditure is recognised as an expense when incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have been capitalised are amortised from the commencement of the commercial production of the products to which they relate on a straight line basis over the period of their expected benefits. The accounting policy on the recognition and measurement of impairment losses in respect of development costs capitalised is disclosed in Note 3(i). 39 Annual Report 2006 (h) Southern Steel Berhad 5283-X 3 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) IMPAIRMENT OF ASSETS Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. The impairment loss is charged to the income statement unless it reverses a previous revaluation in which case it is charged to the revaluation reserve. Impairment losses on goodwill are not reversed. In respect of other assets, any subsequent increase in recoverable amount is recognised in the income statement unless it reverses an impairment loss on a revalued asset in which case it is taken to revaluation reserve. (j) INVENTORIES Inventories are stated at the lower of cost and net realisable value. Cost is determined principally on the weighted average basis. Cost of raw materials comprises all costs of purchases and other costs incurred in bringing the raw materials to their present locations and conditions. Costs of billets (included in raw materials), work in progress and finished goods comprise direct materials, direct labour, other direct costs and an appropriate proportion of production overheads (based on normal operating capacity) but exclude borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. (k) RECEIVABLES Receivables are carried at anticipated realisable value. Known bad debts are written off and allowance is made for debts which are considered doubtful. (l) FOREIGN CURRENCIES Southern Steel Berhad 5283-X Annual Report 2006 40 i) Functional and presentation currency Items included in the financial statements of each of the Groups entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in Ringgit Malaysia, which is the Companys functional and presentation currency. ii) Transactions and balances Transactions in foreign currencies are converted into Ringgit Malaysia at the rates of exchange approximating to those ruling at transaction dates, unless hedged by forward foreign exchange contracts, in which case the rates specified in such forward contracts are used. Monetary assets and liabilities denominated in foreign currencies, are translated into Ringgit Malaysia at rates of exchange approximating to those ruling at the balance sheet date. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) FOREIGN CURRENCIES (CONTINUED) iii) Group companies For inclusion in the consolidated financial statements, assets and liabilities of foreign operations are translated into Ringgit Malaysia at rates of exchange approximating those prevailing at the balance sheet date while income statements of foreign operations are translated at average exchange rates for the financial year. Exchange differences arising from the retranslation of net investment in foreign operations is dealt with through the exchange fluctuation reserve. On disposal of the foreign operations, such exchange differences are recognised in the income statement as part of the gain or loss on disposal. All other exchange differences are dealt with through the income statement. The principal closing rates used in the translation of the currency amounts are as follows: Foreign currency 31.12.2006 RM 31.12.2005 RM 1 US Dollar 1 Singapore Dollar 1 Euro 3.53 2.30 4.65 3.78 2.27 4.47 (m) FINANCIAL INSTRUMENTS (i) Financial instruments recognised on the balance sheet Financial instruments are recognised when the Group and the Company has become a party to the contractual provisions of an instrument. Financial instruments, or their component parts, are classified as assets, liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument classified as a financial liability are reported in the income statement as income or expense. Distributions to holders of financial instruments classified as equity are debited directly to equity. (ii) Other financial instruments Forward foreign exchange contracts are entered into by the Group to hedge the risk exposure to fluctuations in foreign currency exchange rates. Forward foreign exchange contracts and their fair values are not recognised in the financial statements at inception. Gains or losses on foreign exchange relating to forward foreign exchange contracts entered into by the Group as hedges for receivables/payables are recognised in the income statements in the financial year in which the exchange differences on the underlying hedged items are recognised. 41 Annual Report 2006 Financial instruments are offset and the net amount presented in the balance sheet when the Group and the Company has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously. Southern Steel Berhad 5283-X 3 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) FINANCIAL INSTRUMENTS (CONTINUED) (iii) Fair value estimation for disclosure purpose Financial instruments recognised on the balance sheet The face values of financial assets (less any estimated credit adjustments) and financial liabilities with maturity of less than one year or financial liabilities at floating rates are assumed to approximate their fair values. Other financial instruments Fair value of forward foreign exchange contracts is determined using forward foreign exchange market rates obtainable at the balance sheet date for contracts with similar remaining period to maturity. (n) CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash in hand, bank balances, demand deposits, bank overdrafts and short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (o) PROVISIONS Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects a provision to be reimbursed and the reimbursement is virtually certain, the reimbursement is recognised as a separate asset. (p) BORROWINGS AND BORROWING COSTS Borrowings are initially recognised based on the proceeds received, net of transaction cost incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method. Any difference between proceeds (net of transaction cost) and the redemption value is recognised in the income statement over the period of the borrowings. 42 Southern Steel Berhad 5283-X Annual Report 2006 Interest expense on the ICULS is calculated on an effective yield basis by applying the effective interest rate of 8.00% per annum for an equivalent irredeemable non-convertible loan stock to the liability component of the ICULS. Interest expense and other related costs incurred on borrowings are charged to the income statement in the financial year in which the interest expense and other related costs are incurred. (q) INCOME TAXES Current tax expense is determined according to the tax laws of each jurisdiction in which the Group operates and includes all taxes based upon the taxable profits, including withholding taxes payable by foreign subsidiary company or associated company on distributions of retained profits to companies in the Group, and real property gains taxes payable on disposal of properties. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (q) INCOME TAXES (CONTINUED) Deferred tax is recognised in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements unless the temporary differences arise from initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit. Deferred tax is recognised on temporary differences arising from investment in subsidiary companies and associated companies except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the underlying deductible temporary differences or unused tax losses or credits can be utilised. Tax rate enacted or substantively enacted by the balance sheet date are used to determine deferred tax. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred taxes relate to the same tax authority. (r) RECOGNITION OF INCOME Revenue of the Group and the Company represents the invoiced value of goods, net of discounts and returns. Revenue from sales of goods is recognised when the goods have been delivered and significant risks and rewards have been transferred to the buyer. Interest income is recognised on an accrual basis determined by the principal outstanding and rates applicable. Dividend income is recognised when the rights to receive payment is established. Other income is recognised on an accrual basis. EMPLOYEE BENEFITS 43 (i) Short term employee benefits Short term employee benefits are accrued in the financial year in which the associated services are rendered by employees of the Group. (ii) Post-employment benefits Defined contribution plan The Company and its subsidiary companies contribute to a defined contribution plan, the Employees Provident Fund (EPF). The Company and its subsidiary companies contributions to the plan are charged to the income statement in the financial year to which they relate. Once the contributions have been paid, the Company and its subsidiary companies have no further payment obligations. Annual Report 2006 (s) Southern Steel Berhad 5283-X 3 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (s) EMPLOYEE BENEFITS (CONTINUED) (ii) Post-employment benefits (CONTINUED) Defined benefit plans The Company and its subsidiary companies have 4 unfunded plans and a funded plan. Included in the unfunded plans is a plan established pursuant to the Collective Agreement between certain subsidiary companies and The Metal Industry Employees Union for duration of 3 years ending 30 June 2009. The unfunded defined benefits plan obligations are provided for based on actuarial valuations carried out in December 2003, December 2005 and December 2006. The assets of the funded plan are held separately from those of the relevant subsidiary company in an independently administered fund. The most recent actuarial valuation for the funded defined benefit plan was carried out in December 2006. Effective 1 April 2002, the defined benefit plans of all eligible non-unionised employees of the Company and its subsidiary companies were changed to that of higher EPF contributions depending on years of service. The defined benefit obligation in respect of these employees up to 31 March 2002 under the old plans is carried forward as provision for retirement benefits in the financial statements. For other eligible employees, the defined benefit obligation is determined based on years of service of employees up to the balance sheet date. The liability in respect of defined benefit plans is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets, together with adjustments for actuarial gains/losses and past service cost. The defined benefit obligation, calculated using the projected unit credit method, is determined by independent actuaries, considering the estimated future cash outflows using market yields at the balance sheet date of government securities which have currency and terms to maturity approximating the terms of the related liability. The Group determines the present value of defined benefit obligation and the fair value of any plan assets with sufficient regularity such that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the balance sheet date. Southern Steel Berhad 5283-X Annual Report 2006 44 Plan assets in excess of the defined benefit obligation are subject to the limitation on recognition of assets as specified in FRS 1192004, Employee Benefits. Actuarial gains and losses arise from experience adjustments and changes in actuarial assumptions. The amount of net actuarial gains and losses recognised in the income statement is determined by the corridor method in accordance with FRS 1192004 and is charged or credited to income statement over the average remaining service lives of the related employees participating in the defined benefit plans. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (t) SHARE CAPITAL (i) Classification Ordinary shares are classified as equity. (ii) Dividends Dividends on ordinary shares are recognised as liabilities when approved for payment. (u) SEGMENT REPORTING Segment reporting is presented for enhanced assessment of the Groups risks and returns. A business segment is a group of assets and operations engaged in providing products or services that are subject to risk and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those components. Segment revenue, expenses, assets and liabilities are those amounts resulting from the operating activities of a segment that are directly attributable to the segment and the relevant portion that can be allocated on a reasonable basis to the segment. Segment revenue, expense, assets and segment liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties. COMPOUND INSTRUMENT 4 EFFECTS ON FINANCIAL STATEMENTS ON ADOPTION OF NEW OR REVISED FRS The effects on adoption of the new or revised FRS as set out in Note 2 are set out below: (a) RECLASSIFICATION OF PRIOR YEAR COMPARATIVES Set out below are changes in accounting policies that resulted in reclassification of prior years comparatives but do not affect the recognition and measurement of the Group and Companys net assets: 45 Annual Report 2006 On issue of a financial instrument that contains both liability and an equity component, the fair value of the liability portion of a compound financial instrument is determined using the market interest rate for an equivalent financial instrument with no conversion rights; this amount is carried as a liability on an amortised cost basis until extinguished upon conversion or maturity of the instrument. The remainder of the proceeds is allocated to the conversion option, which is recognised and included in shareholders equity; the value of the conversion option allocated at inception is not changed at subsequent periods although its balance is reduced upon conversion of the compound instrument. Southern Steel Berhad 5283-X (v) NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 4 EFFECTS ON FINANCIAL STATEMENTS ON ADOPTION OF NEW OR REVISED FRS (CONTINUED) (a) RECLASSIFICATION OF PRIOR YEAR COMPARATIVES (CONTINUED) (i) FRS 101 Presentation of Financial Statements has affected the presentation of minority interests. In the consolidated balance sheet, minority interests are now presented within equity, separately from the equity holders of the Company. Profit or loss in the consolidated income statement as well as total income and expenses for the year recognised directly in equity are now allocated between minority interests and equity holders of the Company. (ii) Under FRS 101, the Groups share of results of associated companies is now shown net of tax. The effects of the above standards on the Groups financial statements for the current and prior financial years are set out in Note 4(e)(i). (b) FRS 3 BUSINESS COMBINATIONS, FRS 136 IMPAIRMENT OF ASSETS AND FRS 138 INTANGIBLE ASSETS Goodwill Until 31 December 2005, goodwill was amortised on a straight line method over 25 years, or such lesser period as the Directors may determine; and at each balance sheet date, the Group assessed if there was any indication of impairment of the cash-generating-unit to which the goodwill is attached. In accordance with the provisions of FRS 3 with effect from 1 January 2006, the Group ceased amortisation of goodwill, and goodwill is stated at cost less accumulated impairment, and is tested annually for impairment, as well as when there are indications of impairment. Under the transitional provision of FRS 3, the accumulated amortisation as at 31 December 2005 has been eliminated with a corresponding decrease in the cost of goodwill. Until 31 December 2005, negative goodwill was recognised as reserve on consolidation. Under the transitional provision of FRS 3, the Groups carrying amount of negative goodwill that arose from acquisitions prior to that date was derecognised with a corresponding adjustment to retained profits. The effects on the balance sheet as at 31 December 2006 and income statement for the financial year ended 31 December 2006 are set out in Notes 4(e)(ii) and 4(e)(iii) respectively. FRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Annual Report 2006 (c) Previously, non-current assets held for sale were not classified as current assets. There were no differences in the measurement of non-current assets held for sale and those for continuing use. With the adoption of FRS 5, non-current assets are classified as current assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if their carrying amounts are recovered principally through a sale transaction rather than through continuing use. Southern Steel Berhad 5283-X 46 The effects on the balance sheet as at 31 December 2006 and income statement for the financial year ended 31 December 2006 are set out in Notes 4(e)(ii) and 4(e)(iii) respectively. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated EFFECTS ON FINANCIAL STATEMENTS ON ADOPTION OF NEW OR REVISED FRS (CONTINUED) (d) FRS 133 EARNINGS PER SHARE ICULS, a mandatorily convertible instrument, was previously treated as potential ordinary shares in the calculation of diluted earnings per share. With the adoption of FRS 133, ordinary shares that will be issued upon the conversion of mandatorily convertible instrument are to be included in the calculation of basic earnings per share from the date the contract is entered into. The effects on the income statements for the financial year ended 31 December 2005 and 31 December 2006 are set out in Notes 4(e)(i) and 4(e)(iii) respectively. Summary of effects on adoption of new or revised FRS on: (i) Restatement of the Consolidated Income Statement for the financial year ended 31 December 2005 The following table discloses the adjustments that have been made in accordance with the transitional and new provisions of the respective FRS to each of the line items in the Groups income statement for the financial year ended 31 December 2005. Group Share of results of associated companies Loss before taxation Taxation Loss per share (sen) - basic - fully diluted (ii) As previously reported Change in accounting policies FRS 101 FRS 133 As restated Note 4(a) Note 4(d) (8,540) (40,398) 5,529 3,207 3,207 (3,207) 0 0 0 (5,333) (37,191) 2,322 (8.9) (7.2) 0 0 1.5 (0.2) (7.4) (7.4) Effects of changes in accounting policies on the Balance Sheets as at 31 December 2006 The following table discloses the effects of changes in accounting policies that have been made in accordance with the new provisions of the respective FRS to each of the line items in the Group and Companys balance sheets as at 31 December 2006. Balances before changes in accounting policies Group Retained profits Goodwill on consolidation Reserve on consolidation Investment in associated companies Non-current assets held for sale Company Investment in associated companies Non-current assets held for sale 59,099 45,196 3,065 77,017 0 52,220 0 Balances after changes in accounting Change in accounting policies policies FRS 3 FRS 5 Note 4(b) Note 4(c) 6,860 0 65,959 3,795 0 48,991 (3,065) 0 0 0 (63,941) 13,076 0 63,941 63,941 0 0 (46,720) 46,720 5,500 46,720 47 Annual Report 2006 (e) Southern Steel Berhad 5283-X 4 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 4 EFFECTS ON FINANCIAL STATEMENTS ON ADOPTION OF NEW OR REVISED FRS (CONTINUED) (e) Summary of effects on adoption of new or revised FRS on: (continued) (iii) Effects of changes of accounting policies on the Consolidated Income Statement for the financial year ended 31 December 2006 The following table discloses the effects of changes of accounting policies that have been made in accordance with the new provisions of the respective FRS to each of the line items in the Groups income statement for the financial year ended 31 December 2006. Balances before changes in accounting policies Group Other operating expenses Profit after taxation Earnings per share (sen) -basic -fully diluted 5 (13,479) 80,941 Change in accounting policies FRS 3 FRS 133 Note 4(d) Note 4(b) 0 3,795 0 3,795 23.3 20.2 0 0 (3.1) 0 Balances after changes in accounting policies (9,684) 84,736 20.2 20.2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (i) Estimated impairment of goodwill The Group tests goodwill for impairment annually in accordance with the accounting policy stated in Note 3(i). More regular reviews are performed if events indicate that this is necessary. The recoverable amounts of cash-generating units were determined based on value-in-use calculations. These calculations require the use of estimates as set out in Note 16. Southern Steel Berhad 5283-X Annual Report 2006 48 (ii) Income taxes The Group is subject to income taxes whereby significant judgement is required in determining the capital allowances and deductibility of certain expenses during the estimation of the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred income tax provisions in the period in which such determination is made. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group's activities expose it to a variety of financial risks, including foreign currency exchange risk, credit risk, interest rate risk, liquidity risk and cash flow risks. The Group's overall financial risk management objective is to ensure that the Group minimises its exposure to financial downside risks at reasonable costs. The Directors regularly review and assess the financial risk management policies to mitigate potential adverse effects from the unpredictability of financial markets on its financial performance. The Group uses forward foreign exchange contracts to hedge its risk exposures to fluctuations in foreign currency exchange rates. It does not trade in financial instruments. Foreign currency exchange risk The Group is exposed to foreign currency exchange risk which is mainly in US Dollar. The Group, however, monitors development in the government's policy and market conditions to take necessary actions should there be any indication of unfavourable foreign exchange movement. Credit risk The Group seeks to control credit risk by applying due credit control procedures on a regular basis to review and monitor the financial viability of its customers. Sales of products and services are made to customers with an appropriate credit history, and sales are suspended when the outstanding debts exceed the credit period/limit granted. Interest rate, liquidity and cash flow risks Interest risk exposure arises from the Group's borrowings, and is managed through the use of fixed and floating rate debts with the objectives of minimising interest burden whilst maintaining an acceptable debt maturity profile. The Group also seeks to maintain flexibility in funding by maintaining adequate committed credit lines. Annual Report 2006 49 Southern Steel Berhad 5283-X 6 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 7 OPERATING PROFIT Group Company 2005 2006 2006 2005 0 0 99,295 3,795 79 98,604 0 0 55,078 0 0 50,090 228 12 213 12 85 12 71 12 240 158 225 143 155 1,142 105 1,982 140 1,142 90 1,982 0 7 3,771 3 13 1,453 0 0 1,027 0 0 263 884 2,241 17,512 1,494 12,021 15,360 884 321 17,256 1,494 1,547 13,601 85,148 257 24 87,938 1,700 69 55,656 33 0 55,586 1,664 69 266 609 5,974 0 273 507 6,082 2,390 303 139 5,974 0 299 126 6,082 0 Operating profit is stated after charging: Southern Steel Berhad 5283-X Annual Report 2006 50 Amortisation of goodwill Goodwill written off Staff costs * Auditors remuneration: - statutory audit - others Directors remuneration: - Fees - Fees payable to corporations in respect of services provided by certain Directors - Other emoluments * - Other emoluments payable to corporations in respect of services provided by certain Directors Bad debts written off Allowance for doubtful debts Inventories: - write off - write down to net realisable value - allowance for inventory obsolescence Property, plant and equipment: - depreciation - write off - loss on disposals Rental: - land and buildings - equipment and furniture Research and development expenditure Provision for sales tax reassessment * Included in the staff costs and Directors other emoluments are contributions to a defined contribution plan of approximately RM8,378,000 (2005: RM8,567,000) and RM4,596,000 (2005: RM4,439,000) for the Group and the Company respectively. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 7 OPERATING PROFIT (CONTINUED) Group and crediting: Allowance for doubtful debts written back Gross dividends from: - shares quoted in Malaysia - subsidiary company - associated company in Malaysia Interest income Inventories: - write back of allowance for inventory obsolescence - write down to net realisable value no longer required Property, plant and equipment: - gain on disposals Rental income Net foreign exchange gain: - unrealised - realised Provision for sales tax reassessment written back Investments: - gain on disposals Company 2006 2005 2006 2005 912 2,319 0 0 37 0 0 621 0 0 0 261 32 0 550 749 0 5,625 550 1,289 618 1,045 0 0 3,997 0 0 0 212 92 684 87 44 92 0 87 22,396 1,777 2,166 1,379 23,135 2,775 2,166 1,122 1,841 0 0 0 442 0 0 0 Number of employees of the Group and the Company at end of the financial year was 2,706 (2005: 2,825) and 1,197 (2005: 1,259) respectively. FINANCE COSTS Interest expense on: - Borrowings - ICULS - Others (45,134) (501) (105) (45,740) 2005 (41,790) (892) (377) (43,059) Company 2006 2005 (35,704) (501) (86) (36,291) (32,409) (892) (1,392) (34,693) 51 Annual Report 2006 Group 2006 Southern Steel Berhad 5283-X 8 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 9 TAXATION Group 2006 Current tax Deferred tax Real property gains tax Current tax Current financial year Benefits from previously unrecognised tax losses Over provision in prior financial years Deferred tax Origination and reversal of temporary differences (Under)/over provision in prior financial years Effects of changes in tax rate Real property gains tax Over provision in prior financial years Tax credit/(expense) Southern Steel Berhad 5283-X Annual Report 2006 52 2005 Company 2006 2005 396 21,007 21,403 55 21,458 (1,011) 3,233 2,222 100 2,322 439 18,460 18,899 55 18,954 34 (1,248) (1,214) 100 (1,114) (316) (1,233) 0 0 0 712 396 18 204 (1,011) 0 439 439 0 34 34 24,720 3,235 21,436 (1,811) (10,468) 6,755 21,007 21,403 (2) 0 3,233 2,222 (9,682) 6,706 18,460 18,899 563 0 (1,248) (1,214) 55 21,458 100 2,322 55 18,954 100 (1,114) NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated TAXATION (CONTINUED) The explanation of the relationship between income tax credit/(expense) and profit/(loss) from ordinary activities before taxation is as follows: 2005 Company 2005 2006 Profit/(loss) from ordinary activities before taxation 63,278 (37,191) 69,947 7,874 Tax calculated at income tax rate of 28% (2005: 28%): (17,718) 10,413 (19,585) (2,205) (493) 6,816 (1,493) 0 0 6,706 (18) 6,524 (6,085) 429 10,226 6 190 (5,361) 2,264 2,202 0 6,660 (5,144) 261 9,504 26,836 0 26,836 0 2,897 0 2,897 0 (4) (4,413) 0 0 2,558 2 0 18 0 0 0 0 (741) 35 (45) (60) 48,877 (2,018) 250 (3) (35) (8,393) 0 0 0 7 47,727 0 0 0 0 394 712 (10,468) 21,403 204 (2) 2,222 439 (9,682) 18,899 Tax effects of: Share of results of associated companies Change in tax rate* Different tax rates in small & medium industry Income not subject to tax Expenses not deductible for tax purposes Expenses eligible for double deduction Utilisation of reinvestment allowance Future tax benefits arising from allowance for increase in export Utilisation of allowance for increase in export Current financial years tax losses not recognised Benefit from previously unrecognised deductible temporary differences arising from property, plant and equipment Previously unrecognised tax losses Temporary differences not recognised: - property, plant and equipment - accruals - others Others Over/(under)provision in prior financial years: - current tax - deferred tax Tax credit/(expense) 0 0 0 1,729 (3,188) 1,853 0 34 563 (1,214) * As gazetted in the Finance Act 2006, the income tax rate is 27% and 26% for Year of Assessment 2007 and Year of Assessment 2008 onwards respectively (2005: 28%). 53 Annual Report 2006 Group 2006 Southern Steel Berhad 5283-X 9 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 9 TAXATION (CONTINUED) (a) Share of taxation of associated companies Under FRS 101, the Groups share of results of associated companies includes the applicable tax charge. As such, comparative figures of 2005 have been restated as referred to in Notes 4(a)(ii) and 4(e)(i). (b) Unused tax losses and tax credits The Group and the Company have, subject to confirmation by the Inland Revenue Board, the following unused tax losses and tax credits as at 31 December 2006: Group 2006 Tax losses carried forward Unabsorbed capital allowances Unabsorbed reinvestment allowances Unabsorbed investment tax allowances Unabsorbed increase export allowances 10 Annual Report 2006 Southern Steel Berhad 5283-X 192,600 85,564 484,225 1,297 0 763,686 47,715 0 348,262 0 103,214 499,191 100,924 45,439 394,984 0 0 541,347 DIVIDENDS PER SHARE Paid: Interim dividend Proposed: Final dividend 54 144,793 29,184 437,573 1,297 103,214 716,061 Company 2006 2005 2005 Group & Company 2006 2005 Gross Amount of Gross Amount of dividend dividend, dividend per dividend, per share tax exempt share tax exempt sen RM sen RM 0 0 2.5 9,054 5 5 18,122 18,122 0 2.5 0 9,054 A first and final tax exempt dividend of 5 sen per share amounting to a total of RM18,122,000, based on the number of ordinary shares in issue at 31 December 2006, will be proposed at the forthcoming Annual General Meeting. These financial statements do not reflect this dividend, which will be accounted for in shareholders equity as an appropriation of retained profits in the financial year ending 31 December 2007. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated EARNINGS/(LOSS) PER SHARE (a) Basic earnings/(loss) per share The calculation of basic earnings per share for the financial year is based on the net profit attributable to ordinary shareholders of RM84,518,000 and the weighted average number of ordinary shares (after conversion of mandatorily convertible instrument) outstanding during the financial year of 419,417,542. Group 2006 Profit/(loss) attributable to equity holders of the Company (RM000) Weighted average number of ordinary shares in issue during the financial year (000) Adjustment for conversion of ICULS* Weighted average number of ordinary shares Basic earnings/(loss) per share (sen) 2005 84,518 (30,877) 362,258 57,160 419,418 345,721 73,697 419,418 20.2 (7.4) * The adjustment for conversion of ICULS is based on the assumption that all mandatorily convertible instruments such as ICULS are converted into ordinary shares from the date the contract is entered into. Diluted earnings/(loss) per share Diluted earnings/(loss) per share is not calculated as there is no other dilutive event. Conversion of ICULS has already been taken into account in the basic earnings/(loss) per share calculation in accordance with FRS 133. 55 Annual Report 2006 (b) Southern Steel Berhad 5283-X 11 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 12 PROPERTY, PLANT AND EQUIPMENT Financial year ended 31 December 2006 Group Cost/Valuation At valuation Freehold land Long term leasehold land Short term leasehold land Buildings At cost Freehold land Long term leasehold land Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles Capital work in progress At 1.1.2006 Additions Reclassifications Write-offs/ Disposals At 31.12.2006 28,240 63,526 32,152 242,833 0 0 0 0 0 0 0 0 (221) 0 0 0 28,019 63,526 32,152 242,833 323 68 5,290 16,270 1,300,773 30,707 12,751 366 1,733,299 0 0 0 796 25,886 1,294 56 448 28,480 0 0 0 (1) 59 0 0 (58) 0 0 0 0 0 (1,294) (1,032) (572) 0 (3,119) 323 68 5,290 17,065 1,325,424 30,969 12,235 756 1,758,660 Accumulated depreciation Southern Steel Berhad 5283-X Annual Report 2006 56 At valuation Long term leasehold land Short term leasehold land Buildings At cost Long term leasehold land Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles Net book value At 1.1.2006 Charge for the financial year Reclassifications Write-offs/ Disposals At 31.12.2006 5,313 3,036 42,049 1,164 913 11,131 0 0 0 0 0 0 6,477 3,949 53,180 0 141 1,384 716,218 25,521 10,660 804,322 1 130 635 68,200 2,368 606 85,148 0 0 0 0 0 0 0 0 0 0 (1,025) (1,013) (572) (2,610) 1 271 2,019 783,393 26,876 10,694 886,860 928,977 871,800 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Financial year ended 31 December 2005 Group Cost/Valuation At valuation Freehold land Long term leasehold land Short term leasehold land Buildings At cost Freehold land Long term leasehold land Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles Capital work in progress At 1.1.2005 Additions Reclassifications Write-offs/ Disposals At 31.12.2005 28,240 63,526 32,152 242,833 0 0 0 0 0 0 0 0 0 0 0 0 28,240 63,526 32,152 242,833 323 0 5,290 12,576 1,292,292 29,420 11,297 233 1,718,182 0 68 0 3,701 18,860 2,274 1,695 157 26,755 0 0 0 (7) 24 7 0 (24) 0 0 0 0 0 (10,403) (994) (241) 0 (11,638) 323 68 5,290 16,270 1,300,773 30,707 12,751 366 1,733,299 Accumulated depreciation Net book value Charge for the financial year Reclassifications Write-offs/ Disposals At 31.12.2005 4,149 2,123 30,963 1,164 913 11,086 0 0 0 0 0 0 5,313 3,036 42,049 11 826 653,920 23,593 10,413 725,998 130 558 70,777 2,822 488 87,938 0 0 0 0 0 0 0 0 (8,479) (894) (241) (9,614) 141 1,384 716,218 25,521 10,660 804,322 992,184 928,977 57 Annual Report 2006 At valuation Long term leasehold land Short term leasehold land Buildings At cost Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles At 1.1.2005 Southern Steel Berhad 5283-X 12 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 12 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Financial year ended 31 December 2006 Company Cost/Valuation At valuation Freehold land Long term leasehold land Short term leasehold land Buildings At cost Freehold land Long term leasehold land Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles At 1.1.2006 Additions Reclassifications Write-offs/ Disposals At 31.12.2006 11,900 32,741 23,005 164,822 0 0 0 0 0 0 0 0 0 0 0 0 11,900 32,741 23,005 164,822 323 68 5,290 6,333 904,685 16,923 11,532 1,177,622 0 0 0 120 22,741 426 52 23,339 0 0 0 (1) 1 0 0 0 0 0 0 0 (35) (218) (260) (513) 323 68 5,290 6,452 927,392 17,131 11,324 1,200,448 Accumulated depreciation Southern Steel Berhad 5283-X Annual Report 2006 58 At valuation Long term leasehold land Short term leasehold land Buildings At cost Long term leasehold land Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles Net book value At 1.1.2006 Charge for the financial year Reclassifications Write-offs/ Disposals At 31.12.2006 2,606 2,333 30,875 695 621 8,240 0 0 0 0 0 0 3,301 2,954 39,115 0 140 260 419,411 14,227 9,543 479,395 1 130 262 43,874 1,268 565 55,656 0 0 0 0 0 0 0 0 0 0 (16) (204) (260) (480) 1 270 522 463,269 15,291 9,848 534,571 698,227 665,877 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Financial year ended 31 December 2005 Company Cost/Valuation At valuation Freehold land Long term leasehold land Short term leasehold land Buildings At cost Freehold land Long term leasehold land Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles At 1.1.2005 Additions Reclassifications Write-offs/ Disposals At 31.12.2005 11,900 32,741 23,005 164,822 0 0 0 0 0 0 0 0 0 0 0 0 11,900 32,741 23,005 164,822 323 0 5,290 3,293 901,865 16,450 9,990 1,169,679 0 68 0 3,047 7,017 1,339 1,631 13,102 0 0 0 (7) 0 7 0 0 0 0 0 0 (4,197) (873) (89) (5,159) 323 68 5,290 6,333 904,685 16,923 11,532 1,177,622 Accumulated depreciation Net book value Charge for the financial year Reclassifications Write-offs/ Disposals At 31.12.2005 1,911 1,711 22,634 695 622 8,241 0 0 0 0 0 0 2,606 2,333 30,875 11 65 378,176 13,432 9,183 427,123 129 195 43,647 1,608 449 55,586 0 0 0 0 0 0 0 0 (2,412) (813) (89) (3,314) 140 260 419,411 14,227 9,543 479,395 742,556 698,227 59 Annual Report 2006 At valuation Long term leasehold land Short term leasehold land Buildings At cost Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles At 1.1.2005 Southern Steel Berhad 5283-X 12 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 12 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Group 2006 Net book value At valuation Freehold land Long term leasehold land Short term leasehold land Buildings At cost Freehold land Long term leasehold land Short term leasehold land Buildings Plant and machinery Office equipment Motor vehicles Capital work in progress 2005 Company 2006 2005 28,019 57,049 28,203 189,653 28,240 58,213 29,116 200,784 11,900 29,440 20,051 125,707 11,900 30,135 20,672 133,947 323 67 5,019 15,046 542,031 4,093 1,541 756 871,800 323 68 5,149 14,886 584,555 5,186 2,091 366 928,977 323 67 5,020 5,930 464,123 1,840 1,476 0 665,877 323 68 5,150 6,073 485,274 2,696 1,989 0 698,227 The land and buildings of the Group and the Company which are stated at valuation were last revalued based on a valuation exercise carried out in March 2002 and April 2002 by the following independent qualified valuers, who are members of the Institute of Surveyors Malaysia (ISM) and directors of C. H. Williams, Talhar & Wong Sdn. Bhd., on an open market value basis using the comparison method: Lee Eng Kow Khoo Tiang Huat Chong Pah Aung Heng Kiang Hai Danny Yeo Soon Kee Ku Fuziah Ku Hamzah Png Soo Theng Had the revalued properties been stated at historical cost less accumulated depreciation, the net book values would have been as follows: Southern Steel Berhad 5283-X Annual Report 2006 60 At valuation Freehold land Long term leasehold land Short term leasehold land Buildings Group 2006 16,230 52,393 5,600 136,894 211,117 2005 16,390 53,436 6,293 148,473 224,592 Company 2006 2005 7,059 31,108 3,427 96,256 137,850 7,059 31,844 3,540 102,271 144,714 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated SUBSIDIARY COMPANIES Company 2006 2005 Shares in unquoted corporations, at cost Investment in Redeemable Convertible Cumulative Preference Shares (RCCPS) in a subsidiary company 358,659 358,659 40,000 398,659 40,000 398,659 On 6 May 2005, the Company together with its subsidiary company restructured the subsidiarys RM40,000,000 loan into 100,000 redeemable convertible cumulative preference shares ("RCCPS") of RM1.00 each at an issue price of RM400.00 per share for a total consideration of RM40,000,000. The subsidiary companies of the Company, all of which are incorporated in Malaysia are as follows: EQUITY INTEREST 2006 2005 (%) (%) PRINCIPAL ACTIVITIES * * * * Investment holding Providing transportation services Rental of properties Rental of properties Dormant Dormant Dormant 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Dormant Manufacture and sale of all types of fine steel wire Manufacture and marketing of steel wire mesh and concrete wires Manufacture and sale of steel wire, wire ropes, tyre bead wire and welding wire, galvanised wire and strand Manufacture and sale of steel pipes 100 100 75 75 100 100 100 100 83.7 83.7 Southern Steel Holdings Sdn. Bhd. Southern Steel Trading Sdn. Bhd. Southern Steel Properties Sdn. Bhd. Danstil Sdn. Bhd. Southern Coated Wire Sdn. Bhd. Southern Galvanised Wire Sdn. Bhd. * Southern Steel Solutions Sdn. Bhd. (formerly known as Southern Precision Casting Sdn. Bhd.) * Southern Steel Management Sdn. Bhd. Southern Speciality Wire Sdn. Bhd. * Southern Steel Mesh Sdn. Bhd. Southern Wire Industries (Malaysia) Sdn. Bhd. Southern Pipe Industry (Malaysia) Sdn. Bhd. 61 Annual Report 2006 DIRECT SUBSIDIARY COMPANIES Southern Steel Berhad 5283-X 13 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 13 SUBSIDIARY COMPANIES (CONTINUED) EQUITY INTEREST 2006 2005 (%) (%) SUBSIDIARY COMPANIES OF: PRINCIPAL ACTIVITIES SOUTHERN STEEL HOLDINGS SDN. BHD. * Southern Steel Bar Sdn. Bhd. * Southern Steel Industries Sdn. Bhd. Dormant Dormant 100 100 100 100 Supply of contract labour Trading in steel wire mesh and concrete wire 100 100 100 #100 100 100 100 100 100 100 100 #100 SOUTHERN STEEL MESH SDN. BHD. * Southern Mesh Sdn. Bhd. * E-Tatt Steel Wires Sdn. Bhd. SOUTHERN WIRE INDUSTRIES (MALAYSIA) SDN. BHD. Southern PC Steel Sdn. Bhd. Cempaka Raya Sdn. Bhd. * Trend Staples Industry Sdn. Bhd. SOUTHERN PIPE INDUSTRY (MALAYSIA) SDN. BHD. * Asia Seamless Pipes Sdn. Bhd. Manufacture and sale of pre-stressed concrete strands and wires Supply of contract labour Manufacture and sale of staples and related products Dormant * Subsidiary companies not audited by PricewaterhouseCoopers, Malaysia. # Subsidiary companies previously held as direct subsidiary. During the financial year, Asia Seamless Pipes Sdn. Bhd. was transferred to Southern Pipe Industry (Malaysia) Sdn. Bhd. and E-Tatt Steel Wires Sdn. Bhd. was transferred to Southern Steel Mesh Sdn. Bhd. for nominal value of RM 2 each. 14 ASSOCIATED COMPANIES Group 2006 Southern Steel Berhad 5283-X Annual Report 2006 62 Unquoted shares, at cost Accumulated impairment losses Share of post acquisition reserves less losses, amortisation of goodwill and net of translation differences Associated companies classified as non-current assets held for sale (Note 19) Represented by: Share of net assets Goodwill on acquisition, net of amortisation 2005 62,355 0 62,355 62,355 0 62,355 14,662 17,990 (63,941) 13,076 0 80,345 13,076 78,897 0 13,076 1,448 80,345 Company 2006 2005 62,355 (10,135) 52,220 0 (46,720) 5,500 62,355 (10,135) 52,220 0 0 52,220 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 14 ASSOCIATED COMPANIES (CONTINUED) The associated companies of the Group, which are held directly by the Company (unless otherwise indicated) are as follows: EQUITY INTEREST 2006 2005 (%) (%) ASSOCIATED COMPANIES PRINCIPAL ACTIVITIES COUNTRY OF INCORPORATION Southern Oriental Sdn. Bhd. Investment holding Malaysia 50.0 50.0 Steel Industries (Sabah) Sdn. Bhd. Manufacture and sale of steel products Malaysia 27.5 27.5 *NatSteel Trade International Pte. Ltd. Trading in steel and steel related products Singapore 40.0 40.0 *Southern NatSteel (Xiamen) Limited Manufacture and sale of ferrous and metallic products and the related by-products Peoples Republic of China 50.0 50.0 Manufacture and trading of iron and steel products Vietnam 22.6 22.6 *NatSteelVina Company Ltd. * Associated companies classified as non-current assets held for sale OTHER INVESTMENTS Non-current Shares in corporations quoted in Malaysia At cost Allowance for diminution in value Market value Current Shares in a corporation quoted outside Malaysia Carrying amount Market value 6,586 (5,726) 860 2,283 0 0 2005 6,586 (5,726) 860 1,118 319 399 Company 2006 2005 6,434 (5,726) 708 2,181 0 0 6,434 (5,726) 708 1,071 0 0 The market values of the quoted investments at the balance sheet date approximated their fair values. 63 Annual Report 2006 Group 2006 Southern Steel Berhad 5283-X 15 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 16 GOODWILL ON CONSOLIDATION Cost At 1 January Addition during the financial year At 31 December Accumulated amortisation At 1 January Amortisation for the financial year Goodwill written off At 31 December (a) Group 2006 2005 97,558 0 97,558 97,479 79 97,558 (48,567) 0 0 (48,567) 48,991 (44,693) (3,795) (79) (48,567) 48,991 Impairment tests for goodwill The carrying amounts of goodwill allocated to the Groups cash-generating units (CGUs) are as follows: Southern Wire Industries (Malaysia) Sdn. Bhd. Danstil Sdn. Bhd. Southern Steel Mesh Sdn. Bhd. (b) Southern Steel Berhad 5283-X Annual Report 2006 64 2006 2005 28,419 805 19,767 48,991 28,419 805 19,767 48,991 Recoverable amount based on value in use The recoverable amount of cash generating units containing the above goodwill is determined based on value in use calculations. These calculations use pre-tax cash flow projections based on recent financial budgets and projections prepared by the management and approved by the Board of Directors. These projections cover a period of ten years as a going concern, using projected growth rate of 10% for the first five years which is consistent with forecasts included in industry reports. Projected growth rate of 5% is used thereafter. Discount rate of 6% representing estimated weighted average cost of capital is used. The budgeted gross margin used in the budget and projections were based on past experience and expectations of market development. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 17 INVENTORIES Group 2006 Raw materials Work in progress Finished goods General consumables and other stores 364,323 16,134 116,748 87,566 584,771 2005 358,016 15,581 123,535 84,558 581,690 Company 2006 2005 302,799 0 74,572 63,526 440,897 308,059 0 80,567 70,707 459,333 Included in raw materials are goods-in-transit in respect of the Group and the Company amounting to RM61,311,000 (2005: RM57,480,000) and RM56,178,000 (2005: RM55,855,000) respectively. RECEIVABLES Trade receivables Amounts due from: Subsidiary companies Associated companies Other related parties * Other receivables Less: Allowance for doubtful debts Trade receivables Amounts due from: Associated companies Other related parties * Other receivables Deposits Prepayments 2005 Company 2006 2005 166,858 146,016 41,653 39,397 0 1,592 8,516 13,882 190,848 0 2,672 4,342 9,439 162,469 19,326 1,592 8,516 4,321 75,408 17,679 2,672 4,342 3,110 67,200 (16,900) (14,215) (4,828) (4,045) (1,575) (1,748) (1,126) (21,349) 169,499 235 4,673 174,407 (1,575) (1,504) (1,126) (18,420) 144,049 664 5,338 150,051 (1,575) (1,748) (1,126) (9,277) 66,131 113 2,232 68,476 (1,575) (1,504) (1,126) (8,250) 58,950 551 3,362 62,863 * Other related parties are mainly those companies referred to in Note 30. 65 Annual Report 2006 Group 2006 Southern Steel Berhad 5283-X 18 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 18 RECEIVABLES (CONTINUED) The range of credit terms of receivables of the Group and the Company (in days) is as follows: Group 2006 Trade receivables Amounts due from: Subsidiary companies (trade) Associated companies and other related parties (trade) Company 2006 2005 2005 14 120 14 120 14 14 - - 14 14 14 14 14 14 Included in amounts due from subsidiary companies are the following: Company 2006 2005 Trade balances Non-trade balances 15,219 4,107 19,326 13,674 4,005 17,679 Amounts due from associated companies and other related parties are mainly trade in nature. Non-trade amounts due from subsidiary companies are unsecured and with no fixed terms of repayment. Non-trade amounts due from subsidiary companies of approximately RM3,374,000 (2005: RM3,432,000) at the balance sheet date carried an effective interest rate of 6.93% (2005: 4.94%) per annum. The currency exposure profile of receivables (excluding prepayments) is as follows: Group 2006 Southern Steel Berhad 5283-X Annual Report 2006 66 Ringgit Malaysia US Dollar Singapore Dollar Others 136,860 21,544 10,017 1,313 169,734 2005 116,590 22,254 4,703 1,166 144,713 Company 2006 2005 66,224 20 0 0 66,244 52,637 6,864 0 0 59,501 Concentration of credit risk with respect to trade receivables is limited due to the large number of customers of the Group and the Company, which are locally and internationally dispersed, covering a broad spectrum of manufacturing and distribution operations and have a variety of end markets. The historical experience of the Group and the Company in the collection of account receivables falls within the credit period. The Directors believe that there is no additional credit risk beyond the allowance for doubtful debts made. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 19 NON-CURRENT ASSETS HELD FOR SALE On 27 September 2006, the Company entered into three conditional sale and purchase agreements for the proposed disposals of its entire equity interest of 40% in NatSteel Trade International Pte. Ltd., 50% in Southern NatSteel (Xiamen) Limited and 22.6% in NatSteelVina Company Ltd. to NatSteel Asia Pte. Ltd., on a willing-buyer willing-seller basis for a total cash consideration of Singapore Dollars 29 million (Proposed Disposals). The decision to divest these associated companies is to enable the Group to focus all its resources into its Malaysian business operations, and conserving its funds to only invest in venture that the Group has controlling stake to ensure good returns. Based on the share of results of the aforementioned associated companies up to the date of classification as held for sale, there is no impairment loss to be recognised. The Proposed Disposals have been completed subsequent to the balance sheet date as disclosed in Note 33. The carrying amounts of the above associated companies have been presented as non-current assets held for sale. PAYABLES Group 2006 Trade payables Other payables and accruals Amounts due to: Subsidiary companies Associated companies Other related parties * 2005 Company 2005 2006 119,935 71,442 191,377 116,380 57,088 173,468 99,908 57,449 157,357 100,813 42,055 142,868 0 36,978 0 228,355 0 37,968 0 211,436 102,858 36,978 0 297,193 102,365 37,968 0 283,201 * Other related parties are mainly those companies referred to in Note 30 to the financial statements. Credit terms of payables of the Group and the Company range from 5 days to 90 days (2005: 5 days to 90 days). Amounts due to subsidiary companies, which are primarily non-trade balances, are unsecured, interest free and with no fixed terms of repayment. The currency exposure profile of payables is as follows: Group 2006 Ringgit Malaysia US Dollar Euro Others 184,866 42,075 1,234 180 228,355 2005 164,829 43,913 2,009 685 211,436 Company 2006 2005 254,543 41,469 1,006 175 297,193 237,709 43,245 1,884 363 283,201 67 Annual Report 2006 Amounts due to associated companies are mainly trade in nature and relate to purchases of raw materials. Credit terms of amounts due to associated companies and other related parties range from 4 days to 60 days (2005: 4 days to 60 days). Southern Steel Berhad 5283-X 20 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 21 SHORT TERM BORROWINGS Group 2006 Unsecured Bank overdrafts Bankers acceptance Revolving credits Foreign currency loans Long term borrowings due within 12 months (Note 23) 2005 Company 2006 2005 30,177 431,004 156,356 0 17,241 428,493 188,767 3,777 24,120 272,043 88,606 0 13,184 292,640 118,867 0 70,026 687,563 58,493 696,771 70,026 454,795 58,493 483,184 The currency exposure profile of the short term borrowings is as follows: Group 2006 Ringgit Malaysia US Dollar 549,881 137,682 687,563 2005 561,639 135,132 696,771 Company 2006 2005 317,113 137,682 454,795 351,829 131,355 483,184 The effective interest rates of the short term borrowings (other than long term borrowings due within 12 months) of the Group and the Company at the balance sheet date range from 3.37% to 8.00% (2005: 3.06% to 7.50%) and 3.37% to 7.08% (2005: 3.06% to 6.27%) per annum respectively. The effective interest rates of long term borrowings due within 12 months are as disclosed in Note 23. Short term borrowings are held against negative pledge over all the assets of the respective companies within the Group (Note 23). 22 Southern Steel Berhad 5283-X Annual Report 2006 68 PROVISIONS Non-current Retirement benefits Sales tax reassessment Others Current Retirement benefits Group 2006 2005 Company 2006 2005 23,392 0 283 23,675 21,915 2,390 283 24,588 9,652 0 0 9,652 8,892 0 0 8,892 766 24,441 765 25,353 426 10,078 563 9,455 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated PROVISIONS (CONTINUED) Retirement benefits - Defined benefit plan Funded plan Present value of obligations Fair value of plan assets Unrecognised actuarial gain Assets not recognised Unfunded plans Present value of obligations Unrecognised net actuarial gain Current Non-current Group 2006 2005 Company 2006 2005 362 (979) (617) 106 511 0 410 (880) (470) 0 470 0 0 0 0 0 0 0 0 0 0 0 0 0 23,544 614 24,158 24,158 22,680 0 22,680 22,680 10,078 0 10,078 10,078 9,455 0 9,455 9,455 766 23,392 24,158 765 21,915 22,680 426 9,652 10,078 563 8,892 9,455 The plan assets of the Group represent portfolio value of the funds of a subsidiary companys defined benefit plan placed with an investment manager. Movements in provision for retirement benefits during the financial year are as follows: Group 2006 At 1 January Charged to income statement: - current financial year (included in staff costs) Retirement benefits paid At 31 December 2005 Company 2006 2005 22,680 21,078 9,455 8,666 2,598 (1,120) 24,158 2,573 (971) 22,680 1,093 (470) 10,078 1,040 (251) 9,455 The amounts recognised in the income statement are as follows: Current service cost Interest cost Expected return on plan assets Amortisation of transitional liability Adjustment for limit on net assets Actuarial gain Included as staff costs in: Cost of sales Administration expenses 2005 Company 2006 2005 1,276 1,358 (62) 0 41 (15) 2,598 1,147 1,406 (26) 46 0 0 2,573 516 577 0 0 0 0 1,093 496 544 0 0 0 0 1,040 2,248 350 2,598 2,246 327 2,573 988 105 1,093 946 94 1,040 The principal actuarial assumptions used in respect of the defined benefit plans of the Group and Company are as follows: Discount rate Expected rates of salary increases Expected return on plan assets Group 2006 2005 % % 6.00 - 7.00 7.00 5.00 - 6.00 5.00 - 6.00 7.00 7.00 Company 2006 2005 % % 7.00 7.00 6.00 6.00 N/A N/A 69 Annual Report 2006 Group 2006 Southern Steel Berhad 5283-X 22 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 23 LONG TERM BORROWINGS Group 2006 Unsecured - USD85 million Term Loan - Others ICULS (liability component) (Note 26) Less: Amounts due within 12 months (Note 21) - USD85 million Term Loan - Others ICULS (liability component) (Note 26) Repayable: - not later than 1 year - later than 1 year but not later than 5 years Company 2006 2005 2005 225,057 21,182 4,783 251,022 289,170 30,240 7,309 326,719 225,057 21,182 4,783 251,022 289,170 30,240 7,309 326,719 60,015 7,061 2,950 70,026 180,996 48,195 7,560 2,738 58,493 268,226 60,015 7,061 2,950 70,026 180,996 48,195 7,560 2,738 58,493 268,226 70,026 58,493 70,026 58,493 180,996 251,022 268,226 326,719 180,996 251,022 268,226 326,719 The carrying value of the term loans at the balance sheet date approximated their fair values. All the above term loans are repayable by half yearly instalments. On 9 August 2004, the Company entered into a USD85 million Term Loan facility agreement to refinance the outstanding balance of the USD125 million Term Loan facility previously restructured on 8 and 11 March 2002, amounting to USD74 million. The USD85 million Term Loan is repayable in 10 unequal instalments, the amount of which ranges from 5% to 15% of the principal loan amount, commencing from May 2005. Southern Steel Berhad 5283-X Annual Report 2006 70 The effective interest rates of the USD85 million Term Loan facility are based on the USD SIBOR* plus applicable margin for the relevant periods. The applicable margin for the first 12 months from the date of drawdown is at 1.45% per annum and thereafter, ranging from 1.05% to 1.45% per annum, which will be determined annually based on the ratio of total funded debt/profit before taxation, interest, depreciation and amortisation of the Group. Under the USD85 million Term Loan facility agreement, the Company and/or Group undertake to maintain certain prescribed financial value or ratios in respect of Times Interest Cover, Gearing ratios, and Minimum Consolidated Tangible Assets. There is also a negative undertaking whereby certain restrictions are imposed on the amount of dividend that can be paid in any financial year unless the prior consent of the lenders is obtained. The effective interest rates per annum of long term bank borrowings at balance sheet date range from 6.83% to 7.11% (2005: 5.78% to 6.27%). All term loans are held against negative pledge over the assets of the companies. * (SIBOR denotes the Singapore Interbank Offer Rate for USD) NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 23 LONG TERM BORROWINGS (CONTINUED) The currency exposure profile of the total long term borrowings is as follows: Group 2006 Ringgit Malaysia US Dollar 7,309 319,410 326,719 4,783 246,239 251,022 7,309 319,410 326,719 DEFERRED TAX LIABILITIES Deferred tax liabilities - Subject to income tax - Subject to real property gains tax Subject to income tax: Deferred tax assets Unutilised capital allowances Tax losses Allowance for doubtful debts Allowance for inventories obsolescence Accruals Provision for retirement benefits Future tax benefits arising from allowance for increase in export ICULS (liability component) Other deductible temporary differences Deferred tax liabilities Excess of capital allowances over depreciation charge Revaluation reserve Subject to real property gains tax: Deferred tax liability Revaluation reserve 2005 Company 2006 2005 (80,643) (468) (81,111) (101,650) (468) (102,118) (70,043) (242) (70,285) (88,503) (242) (88,745) 99 14,831 3,089 12,822 29,838 3,666 0 12,406 993 12,723 28,259 1,164 880 5,121 4,897 2,300 3,032 4,847 0 3,509 2,620 0 1,728 2,647 26,836 395 0 980 26,836 395 0 980 450 56,598 380 57,865 0 46,759 0 47,501 (119,029) (18,212) (137,241) (80,643) (139,282) (20,233) (159,515) (101,650) (105,257) (11,545) (116,802) (70,043) (122,816) (13,188) (136,004) (88,503) (468) (81,111) (468) (102,118) (242) (70,285) (242) (88,745) 71 Annual Report 2006 Group 2006 Southern Steel Berhad 5283-X 24 4,783 246,239 251,022 2005 Company 2006 2005 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 24 DEFERRED TAX LIABILITIES (CONTINUED) Movements in deferred tax liabilities during the financial year are as follows: Group 2006 At 1 January Credited/(charged) to income statement: Property, plant and equipment Tax losses Allowance for doubtful debts Allowance for inventory obsolescence Accruals Provision for retirement benefits ICULS (liability component) Other temporary differences Future tax benefits arising from allowance for increase in export At 31 December 2005 Company 2006 2005 (102,118) (105,351) (88,745) (87,497) 9,551 (15,007) (577) 5,991 (84) (366) 6,479 (15,853) (171) 2,292 (3) 73 (1,420) 2,089 50 (585) 70 1,502 (1,699) 170 (1,673) (608) 0 1,781 (27) (585) 0 0 (2,158) 221 (1,673) 0 26,836 21,007 (81,111) 0 3,233 (102,118) 26,836 18,460 (70,285) 0 (1,248) (88,745) The amounts of deductible temporary differences and unutilised tax losses (both of which have no expiry date) for which no deferred tax asset is recognised at the balance sheet date are as follows: Group 2006 Deductible temporary differences - accruals - property, plant and equipment - others Tax losses Southern Steel Berhad 5283-X Annual Report 2006 72 4,193 5,709 169 88,408 2005 4,410 9,978 0 86,425 Company 2006 2005 0 0 0 0 0 0 0 0 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 25 SHARE CAPITAL Group and Company 2006 2005 Authorised: Ordinary shares of RM1.00 each Preference shares of RM1.00 each Issued and fully paid: Ordinary shares of RM1.00 each At 1 January Issue of shares arising from conversion of ICULS At 31 December 500,000 2,000 502,000 500,000 2,000 502,000 361,780 318,700 249 362,029 43,080 361,780 During the financial year, 269,417 new ordinary shares of RM1.00 each with a carrying value of RM249,027 were issued by the Company arising from the conversion of 277,500 ICULS. The newly issued ordinary shares rank pari passu in all respects with the existing ordinary shares of the Company except that the said new shares will not be entitled to any dividends, rights, allotments or other distributions where the relevant entitlement date precedes the date of allotment of the new shares. IRREDEEMABLE CONVERTIBLE UNSECURED LOAN STOCKS (ICULS) The Irredeemable Convertible Unsecured Loan Stocks (ICULS) are classified as compound instruments. Upon issuance of the ICULS on 1 August 2003, the total nominal value of the ICULS of RM141,176,000 were segregated as equity and liability components of RM109,264,000 and RM31,912,000 respectively. Group and Company 2006 2005 Equity Liability Equity Liability component component component component Repayable: - not later than 1 year - later than 1 year but not later than 5 years 47,174 7,309 83,005 17,700 (221) 0 0 46,953 (27) (3,000) 501 4,783 (35,831) 0 0 47,174 (7,249) (4,034) 892 7,309 2,950 2,738 1,833 4,783 4,571 7,309 ^ Included in equity component of ICULS converted is tax effect of approximately RM7,000 (2005: RM1,172,000). * Coupon interest payable included in other payables and accruals at the balance sheet date is approximately RM1,346,000 (2005: RM1,351,000). 73 Annual Report 2006 At 1 January Conversion of ICULS into ordinary shares^ Coupon interest paid/payable* Finance costs At 31 December Southern Steel Berhad 5283-X 26 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 26 IRREDEEMABLE CONVERTIBLE UNSECURED LOAN STOCKS (ICULS) (CONTINUED) The principal terms and conditions of ICULS are as follows: The nominal amount of the ICULS issued on 1 August 2003 is RM141,176,500 in denominations and multiples of RM1.00 and constituted by a Trust Deed. The ICULS bear interest at the rate of 5.50% per annum, payable annually in arrears commencing from the date of issue of the ICULS and the last payment shall be made on the maturity date on 31 July 2008. The registered holders of the ICULS have the right to convert the ICULS into new ordinary shares of the Company on any day between Monday and Friday that is not a public holiday during the tenure of the ICULS. The Conversion Price is fixed at RM1.03 for every new ordinary share of the Company and shall be satisfied solely by tender of ICULS by the ICULS holders for cancellation by the Company. The ICULS will not be redeemed for cash except upon occurrence of an event of default as provided in the Trust Deed. At the close of business on the maturity date, all outstanding ICULS will be mandatorily converted into new ordinary shares by the Company. The ICULS shall constitute an unsecured obligation of the Company and shall rank pari passu in all respects without priority amongst itself and ranks pari passu to all other present and future unsecured and unsubordinated obligations of the Company from time to time outstanding. New ordinary shares arising from the conversion of the ICULS shall, upon allotment, rank pari passu in all respects with the then existing ordinary shares of the Company, except that the said new ordinary shares will not be entitled to any dividends, rights, allotments or other distributions where the relevant entitlement date precedes the date of allotment of the new ordinary shares. The carrying amount of the liability component of ICULS at the balance sheet date approximates its fair value. 27 Southern Steel Berhad 5283-X Annual Report 2006 74 RESERVES Non-distributable Share premium Revaluation reserve Merger reserve Reserve on consolidation Capital redemption reserve Exchange fluctuation reserve Retained profits/(accumulated losses) Group 2006 2005 Company 2006 2005 35,852 72,499 30,000 0 50 10,801 149,202 35,852 72,557 30,000 3,065 50 11,651 153,175 35,852 44,733 33,600 0 0 0 114,185 35,852 44,733 33,600 0 0 0 114,185 65,959 215,161 (21,682) 131,493 145,903 260,088 57,002 171,187 Subject to confirmation by the Inland Revenue Board, the Company has sufficient tax exempt income and Section 108 tax credit to frank approximately RM47,602,000 (2005: RM2,760,000) of the retained profits of the Company at the balance sheet date if paid out as dividends. The extent of the retained profits not covered at that date amounted to approximately RM98,301,000 (2005: RM54,242,000). NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 28 CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the cash flow statements comprise the following: Group 2006 Deposits with licensed banks Cash and bank balances Bank overdrafts (Note 21) 14,530 50,218 64,748 (30,177) 34,571 2005 11,538 39,750 51,288 (17,241) 34,047 Company 2006 2005 12,255 39,758 52,013 (24,120) 27,893 6,000 32,205 38,205 (13,184) 25,021 The currency exposure profile of deposits with licensed banks and cash and bank balances is as follows: Group 2006 Ringgit Malaysia US Dollar 49,771 14,977 64,748 2005 25,929 25,359 51,288 Company 2006 2005 37,036 14,977 52,013 12,846 25,359 38,205 The effective interest rates of the deposits with licensed banks of the Group and the Company at the balance sheet date range from 1.50% to 3.20% (2005: 1.50% to 2.75%) per annum. Deposits with licensed banks of the Group and the Company at 31 December 2006 have an average maturity of 1 to 7 days (2005: 3 to 7 days) and 1 day (2005: 3 days) respectively. Bank balances are deposits held at call with banks. CAPITAL COMMITMENTS Capital expenditure not provided for in the financial statements are as follows: 2005 Company 2006 2005 75 15,188 38,516 53,704 14,015 19,518 33,533 12,565 37,586 50,151 12,839 18,585 31,424 Annual Report 2006 Capital expenditure commitments in respect of property, plant and equipment: - approved and contracted for - approved but not contracted for Group 2006 Southern Steel Berhad 5283-X 29 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 30 SIGNIFICANT RELATED PARTY TRANSACTIONS Group Company Sale of goods to: Hong Leong Company (Malaysia) Berhad Group #NatSteel Ltd. Group Annual Report 2006 Southern Steel Berhad 5283-X 2005 Enterprises controlled by the same enterprise which exercises significant influence over the Company 63,724 55,108 44,197 38,614 Enterprises controlled by the same enterprise which exercises significant influence over the Company 0 230 0 0 135,870 98,264 135,870 98,264 0 78,384 0 78,384 69,981 65,002 69,981 65,002 0 1,493 0 1,493 627,921 508,243 627,921 508,243 1,060 2,022 1,060 2,022 Enterprises that has a director in common with the Company* NatSteel Trade International Pte. Ltd. Associated company Steel Industries (Sabah) Sdn. Bhd. Associated company NatSteel Trade International Pte. Ltd. Services obtained from: Su Hock Group Company 2006 2005 2006 Chin Well Holdings Berhad Group Purchase of goods from: # NatSteel Ltd. Group 76 Relationship Enterprises controlled by the same enterprise which exercises significant influence over the Company Associated company Enterprises in which substantial interest is owned indirectly by a director, who is also a substantial shareholder of the Company** * The common director is Y.A. Bhg Tun Dato Seri Dr. Lim Chong Eu **The director and substantial shareholder is Y. Bhg Dato Dr. Tan Tat Wai # NatSteel Ltd ceased to be a major shareholder of the Company with effect from 15th February 2005. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 30 SIGNIFICANT RELATED PARTY TRANSACTIONS (CONTINUED) Company Relationship Dividend income from: Steel Industries (Sabah) Sdn. Bhd. Associated company Group 2005 2006 0 0 Company 2006 2005 550 550 These related party transactions, which were conducted in accordance with the general mandate obtained from shareholders for recurrent related party transactions, were entered into in the normal course of business and have been established based on terms and conditions negotiated between the Group and its related parties. SEGMENTAL REPORTING (a) Primary reporting format - business segments No business segmental reporting has been prepared as the Groups activities involve only one business segment, i.e. the manufacturing and sale of steel products. Secondary reporting format - geographical segments Revenue 2006 ASEAN countries Others Associates Non-current assets held for sale Total assets 2005 2,011,663 2,038,859 341,621 391,635 2,353,284 2,430,494 2006 Capital expenditure 2005 2006 2005 1,752,456 1,767,670 0 0 1,752,456 1,767,670 13,076 80,345 28,480 0 28,480 26,755 0 26,755 63,941 0 1,829,473 1,848,015 In determining the geographical segments of the Group, revenue is based on the geographical areas in which the customers are located. Total assets and capital expenditure are determined based on the locations of assets. 77 Annual Report 2006 (b) Southern Steel Berhad 5283-X 31 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 32 FORWARD FOREIGN EXCHANGE CONTRACTS The details of forward foreign exchange contracts of the Group and the Company which are due for maturity within 1 to 3 months (2005: 1 month) from the balance sheet date are as follows: Currency sold Equivalent RM000 At 31 December 2006 Payables USD RM 144,369 RM3.54 per US dollar Disposal of associated companies RM Singapore Dollar 59,900 RM2.30 per Singapore Dollar Trade receivables RM USD 556 204,825 USD EUR RM RM 21,838 917 22,755 RM3.78 per US Dollar RM4.48 per Euro At 31 December 2006 Payables USD RM 140,760 RM3.54 per US dollar Disposal of associated companies RM Singapore Dollar USD EUR RM RM Hedged items Group At 31 December 2005 Payables Company At 31 December 2005 Payables Southern Steel Berhad 5283-X Annual Report 2006 78 Average contractual rate Currency Bought 59,900 200,660 21,838 917 22,755 RM3.54 per US Dollar RM2.30 per Singapore Dollar RM3.78 per US Dollar RM4.48 per Euro The foreign exchange market rates obtainable by the Group and the Company at the balance sheet date approximated the contractual rates. The unrecognised gains or losses on open contracts which hedge payables are deferred until the related transactions are completed, at which time they are included in the measurement of such transactions. The fair value of the outstanding forward foreign exchange contracts of the Group and the Company as at balance sheet date is an unfavourable net position of RM253,325 (2005: favourable net position of RM1,155) and RM246,325 (2005: favourable net position of RM1,155) respectively. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2006 (contd) In RM000 unless otherwise stated 33 SIGNIFICANT POST BALANCE SHEET EVENT On 24 January 2007, the Company completed the disposal of 40% interest in NatSteel Trade International Pte. Ltd. (incorporated in Singapore), 50% interest in Southern NatSteel (Xiamen) Limited (incorporated in China) and 22.6% in NatSteelVina Co. Ltd. (incorporated in Vietnam) to NatSteel Asia Pte. Ltd. The total gain from disposal of these associated companies in respect of the Group and the Company amounted to RM2,603,000 and RM19,824,000 respectively. APPROVAL OF FINANCIAL STATEMENTS The financial statements have been approved for issue in accordance with a resolution of the Board of Directors dated 16 March 2007. Annual Report 2006 79 Southern Steel Berhad 5283-X 34 Other Information 1. PROPERTIES OWNED BY SOUTHERN STEEL AND ITS SUBSIDIARIES/ HARTANAH MILIK SOUTHERN STEEL DAN SUBSIDIARI Land and Building/Tanah dan Bangunan Location Lokasi Description Keterangan Tenure Pegangan Approximate Area Anggaran Kawasan Approximate Age (Years) Anggaran Jangkamasa (Tahun) State of Penang Southern Steel Berhad 5283-X Annual Report 2006 80 Date of Revaluation/ Acquisition Tarikh Penilaian Semula/ Perolehan Net Book Value As At Nilai Buku pada 31/12/2006 (RM'000) 1 2435 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factories Leasehold expiring on 31-01-2039 50.9 acres 16-24 15-4-2002 58,468 2 No PT 3171 Mukim 1 Seberang Perai Tengah Factories Leasehold expiring on 21-03-2050 4.77716 acres 9-11 15-4-2002 3 No PT 3178 Mukim 1 Seberang Perai Tengah Factories Leasehold expiring on 09-04-2050 2.60451 acres 9 15-4-2002 4 2595 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factories Leasehold expiring on 09-04-2050 2.60451 acres 9 15-4-2002 5 2613 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factories Leasehold expiring on 21-03-2050 5.09674 acres 9 15-4-2002 6 No PT 3831 Mukim 1 Seberang Perai Tengah Factory Leasehold expiring on 21-10-2054 1.31359 acres 11 15-4-2002 7 No PT 3980 Mukim 1 Seberang Perai Tengah Drains Leasehold expiring on 25-01-2059 2.12715 acres - 15-4-2002 8 No PT 4271 (formerly Plot 596) Mukim 1, Seberang Perai Tengah Vacant Land Leasehold expiring on 04-11-2064 0.1187 hectares - 15-4-2002 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 82,955 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 9 2723 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Land Warehouse Office Leasehold expring on 24-06-2046 4.70227 acres 16 15-4-2002 8,576 Other Information (contd) 1. PROPERTIES OWNED BY SOUTHERN STEEL AND ITS SUBSIDIARIES/ HARTANAH MILIK SOUTHERN STEEL DAN SUBSIDIARI Land and Building/Tanah dan Bangunan Tenure Pegangan Approximate Area Anggaran Kawasan 10 11 Jalan Nagasari Taman Nagasari 13600 Prai Double-storey terrace house Freehold 104 sq m 16 15-4-2002 11 11A Jalan Nagasari Taman Nagasari 13600 Prai Double-storey terrace house Freehold 104 sq m 16 15-4-2002 12 15 Jalan Nagasari Taman Nagasari 13600 Prai Double-storey terrace house Freehold 104 sq m 16 15-4-2002 13 17 Jalan Nagasari Taman Nagasari 13600 Prai Double-storey terrace house Freehold 104 sq m 16 15-4-2002 14 19 Jalan Nagasari Taman Nagasari 13600 Prai Double-storey terrace house Freehold 140 sq m 16 15-4-2002 15 No PT 1538 Mukim 1 Seberang Perai Tengah Scrap yard Leasehold expiring on 07-08-2045 6.82957 acres - 15-4-2002 3,318 16 2482 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factory Buildings Leasehold expiring on 23-01-2045 2.96008 acres 18.5 15-4-2002 17 2489 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factories Leasehold expiring on 13-5-2043 1.03294 acres 17 15-4-2002 ) ) ) ) ) ) 7,649 ) ) ) ) ) 18 No PT 1539 Mukim 1 Seberang Perai Tengah Scrap yard Leasehold expiring on 07-08-2045 5.59899 acres - 15-4-2002 19 No PT 1550 Mukim 1 Seberang Perai Tengah Scrap yard Leasehold expiring on 21-05-2046 1.99110 acres - 15-4-2002 ) ) ) ) ) ) ) ) ) ) ) ) ) ) 469 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 3,687 ) ) ) 81 Annual Report 2006 Date of Revaluation/ Acquisition Tarikh Penilaian Semula/ Perolehan Southern Steel Berhad 5283-X Approximate Age (Years) Anggaran Jangkamasa (Tahun) Net Book Value As At Nilai Buku pada 31/12/2006 (RM'000) Description Keterangan Location Lokasi Other Information (contd) 1. PROPERTIES OWNED BY SOUTHERN STEEL AND ITS SUBSIDIARIES/ HARTANAH MILIK SOUTHERN STEEL DAN SUBSIDIARI Land and Building/Tanah dan Bangunan Date of Revaluation/ Acquisition Tarikh Penilaian Semula/ Perolehan Net Book Value As At Nilai Buku pada 31/12/2006 (RM'000) 16 15-4-2002 11,956 4.74672 acres 15 15-4-2002 2,477 Leasehold expiring on 01-03-2059 4.34682 acres - 15-4-2002 1,667 Weighbridge Office building Leasehold expiring on 13-01-2059 1.10710 acres 9 15-4-2002 1,065 24 No.PT 4272 (formerly Plot 597) Mukim 1, Seberang Perai Tengah Vacant Land Leasehold expiring on 04-11-2064 1.1858 hectares - 15-4-2002 1,799 25 Lot 867 Section 10 Georgetown Vacant Land Freehold 63 sq m - 15-4-2002 26 Lot 868 Section 10 Georgetown Vacant Land Freehold 66 sq m - 15-4-2002 27 Lot 869, Section 10 Georgetown Vacant Land Freehold 52 sq m - 15-4-2002 28 Lot 870, Section 10 Georgetown Vacant Land Freehold 37 sq m - 15-4-2002 Description Keterangan Tenure Pegangan Approximate Area Anggaran Kawasan Approximate Age (Years) Anggaran Jangkamasa (Tahun) 20 2590 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factory Vacant land Leasehold expiring on 07-11-2049 & 06-06-2050 7.83140 acres 21 2703 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factory Vacant land Leasehold expiring on 17-12-2045 & 07-11-2045 22 No PT 3983 Mukim 1 Seberang Perai Tengah Existing road 23 No PT 3982 Mukim 1 Seberang Perai Tengah Location Lokasi Southern Steel Berhad 5283-X Annual Report 2006 82 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 500 Other Information (contd) 1. PROPERTIES OWNED BY SOUTHERN STEEL AND ITS SUBSIDIARIES/ HARTANAH MILIK SOUTHERN STEEL DAN SUBSIDIARI Land and Building/Tanah dan Bangunan Date of Revaluation/ Acquisition Tarikh Penilaian Semula/ Perolehan Net Book Value As At Nilai Buku pada 31/12/2006 (RM'000) 14 6-4-2004 6,342 2.52981 acres - 15-4-2002 1,478 Leasehold expiring on 03-10-2042 5.60422 acres 5 15-4-2002 2,803 Factory Freehold 304,210 sq ft 11-43 15-4-2002 10,470 33 4457 Mukim 15, Jalan Chain Ferry 12100 Butterworth Factory Godown Freehold 413,427 sq ft 12-38 15-4-2002 23,165 34 Lot No 2225, Section 4 12100 Butterworth Open yard Freehold 40,382 sq ft - 15-4-2002 750 35 Lot 4808 Jalan Utas 15/7 Shah Alam Industrial Estate 40000 Shah Alam Factories Leasehold expiring on 11-02-2069 & 02-12-2072 634,950 sq ft & 328,800 sq ft 9.5-32 15-4-2002 44,606 36 Rawang Integrated Industrial Park Factory Freehold 497,838 sq ft 10 15-4-2002 15,157 37 5 1/2 Mile, Jalan Kapar 42100 Klang, Selangor Factories Freehold 8.0069 acres 11-26 15-4-2002 18,534 Description Keterangan Tenure Pegangan Approximate Area Anggaran Kawasan Approximate Age (Years) Anggaran Jangkamasa (Tahun) 29 2624 Lorong Perusahaan 12 Prai Industrial Estate 13600 Prai Factory Leasehold expiring on 05-06-2046 9.53048 acres 30 No PT 3057 Mukim 1 Seberang Perai Tengah Factory Leasehold expiring on 21-03-2050 31 2427 Tingkat Perusahaan 6 Prai Industrial Estate 13600 Prai Billet yard 32 3081 Jalan Besar Nibong Tebal Location Lokasi State of Selangor Darul Ehsan Southern Steel Berhad 5283-X Annual Report 2006 83 Other Information (contd) 1. PROPERTIES OWNED BY SOUTHERN STEEL AND ITS SUBSIDIARIES/ HARTANAH MILIK SOUTHERN STEEL DAN SUBSIDIARI Land and Building/Tanah dan Bangunan Date of Revaluation/ Acquisition Tarikh Penilaian Semula/ Perolehan Net Book Value As At Nilai Buku pada 31/12/2006 (RM'000) 25 15-4-2002 15,199 6,669 sq m - 15-4-2002 603 Leasehold expiring on 23-05-2089 1,240 sq ft 11 15-4-2002 48 Single storey terrace house Leasehold expiring on 05-11-2088 1,860 sq ft 11 15-4-2002 52 Single storey terrace house Leasehold expiring on 12-10-2086 960 sq ft 17 15-4-2002 42 43 Lot 2186 Mukim of Pasir Panjang Port Dickson Vacant Land Freehold 0.187 acres - 15-4-2002 44 Lot 2184 Mukim of Pasir Panjang Port Dickson Vacant Land Freehold 0.154 acres Single-storey terrace house Leasehold expiring on 06-05-2082 143.0707 sq m Description Keterangan Tenure Pegangan Approximate Area Anggaran Kawasan 38 Plot 2 Taman Meru Industrial Estate Jelapang, 30020 Ipoh Land Factory Leasehold expiring on 06-09-2043 43,240 sq m 39 No Lot 196802 Mukim Hulu Kinta Vacant land Leasehold expiring on 21-06-2052 40 24 Laluan Taman Jati 10 Taman Meru Jaya 30020 Ipoh Single storey terrace house 41 1297 Jalan Jelapang Taman Meru Jaya 30020 Ipoh 42 58 Laluan Jati 5 Taman Sri Meru 30020 Ipoh Location Lokasi Approximate Age (Years) Anggaran Jangkamasa (Tahun) State of Perak Darul Ridzuan State of Negeri Sembilan Southern Steel Berhad 5283-X Annual Report 2006 84 - 15-4-2002 13.5 15-4-2002 ) ) ) ) ) ) ) ) 270 State of Johor 45 No PTD 64673 Mukim Plentong Johor Bahru 94 Other Information (contd) ANALYSIS OF SHAREHOLDINGS AS AT 20 MARCH 2007 Authorised Capital : 500,000,000 ordinary shares 2,000,000 preference shares Issued and Fully Paid : 362,445,221 ordinary shares of RM1.00 each No of Shareholders : 3,860 Voting Rights On show of hands On poll : : 1 vote 1 vote for each share held DISTRIBUTION SCHEDULE OF SHAREHOLDERS AS AT 20 MARCH 2007 Holdings Less than 100 100 1,000 1,001 10,000 10,001 100,000 100,001 - less than 5% of issued shares 5% and above of issued shares TOTAL No of Holders Total Holdings % 8 1,978 1,480 305 86 3 3,860 271 1,959,211 5,811,327 8,836,518 87,895,203 257,942,691 362,445,221 0.0001 0.5405 1.6034 2.4380 24.2506 71.1674 100.0000 THIRTY LARGEST SHAREHOLDERS According to the Register of Depositors, the 30 largest shareholders of the Company as at 20 March 2007 are as follows: 1 2 3 4 5 6 7 8 9 10 11 Assets Nominees (Tempatan) Sdn Bhd Hume Industries (Malaysia) Berhad NatSteel Asia Pte Ltd Southern Amalgamated Co Sdn Bhd Hwang Enterprises Sdn Bhd Bumiputra-Commerce Nominees (Tempatan) Sdn Bhd Pledged Securities Account for Southern Amalgamated Co Sdn Bhd (28358 PPNG) Southern Properties Sdn Bhd Hong Bee Hardware Company, Sdn Berhad UOBM Nominees (Tempatan) Sdn Bhd Pledged Securities Account for Southern Properties Sdn Bhd (PGB) Malaysia Nominees (Tempatan) Sendirian Berhad Great Eastern Life Assurance (Malaysia) Berhad (Par 1) HSBC Nominees (Tempatan) Sdn Bhd Pledged Securities Account for Hwang Enterprises Sdn Bhd (201-468246-089) Pertubuhan Keselamatan Sosial No. of Shares % 146,461,324 . 89,929,000 21,552,367 13,123,309 10,935,439 40.4092 8,925,399 6,344,309 5,075,000 2.4626 1.7504 1.4002 3,201,800 0.8834 3,000,000 0.8277 2,678,617 0.7390 24.8117 5.9464 3.6208 3.0171 85 Annual Report 2006 Name of Shareholders Southern Steel Berhad 5283-X 2 Other Information (contd) 2 ANALYSIS OF SHAREHOLDINGS AS AT 20 MARCH 2007 (CONTINUED) THIRTY LARGEST SHAREHOLDERS (CONTINUED) Name of Shareholders 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Southern Steel Berhad 5283-X Annual Report 2006 86 Amanah Raya Nominees (Tempatan) Sdn Bhd Skim Amanah Saham Bumiputera AMMB Nominees (Tempatan) Sdn Bhd AmTrustee Berhad for HLG Penny Stock Fund (5/4-3) Lembaga Tabung Haji Seri Pinang Sdn Bhd Malaysia Nominees (Tempatan) Sendirian Berhad Great Eastern Life Assurance (Malaysia) Berhad (DR) Liao York Chng Cheow Lyn HSBC Nominees (Tempatan) Sdn Bhd HSBC (Malaysia) Trustee Berhad for Amanah Saham Sarawak Insotech Sdn Bhd Su Hock Company Sdn Bhd M & A Nominee (Tempatan) Sdn Bhd Titan Express Sdn Bhd Malaysia Nominees (Tempatan) Sendirian Berhad Great Eastern Life Assurance (Malaysia) Berhad (LGF) Citigroup Nominees (Asing) Sdn Bhd CBNY for DFA Emerging Markets Fund HSBC Nominees (Tempatan) Sdn Bhd HSBC (M) Trustee Bhd for Hwang-DBS Dana Izdihar (4207) Mayban Nominees (Tempatan) Sdn Bhd Avenue Invest Berhad for Perusahaan Otomobil Nasional Berhad (E00020-984380) Choong Chew Kheng Choong Cheow Sai Pacific & Orient Insurance Co Berhad Ke-Zan Nominees (Asing) Sdn Bhd Kim Eng Securities Pte Ltd for Exquisite Holdings Limited No. of Shares % 2,400,000 0.6622 1,624,982 0.4483 1,605,600 1,512,200 1,400,000 0.4430 0.4172 0.3863 1,384,427 1,371,509 1,344,000 0.3820 0.3784 0.3708 1,067,761 972,815 902,800 0.2946 0.2684 0.2491 900,000 0.2483 865,300 0.2387 773,800 0.2135 733,000 0.2022 709,388 674,000 649,000 611,000 0.1957 0.1860 0.1791 0.1686 332,728,146 91.8009 Other Information (contd) ANALYSIS OF SHAREHOLDINGS AS AT 20 MARCH 2007 (CONTINUED) SUBSTANTIAL SHAREHOLDERS According to the Register of Substantial Shareholders, the substantial shareholders of the Company as at 20 March 2007 are as follows: Name of shareholders Direct Hume Industries (Malaysia) Berhad Hong Leong Company (Malaysia) Berhad Y Bhg Tan Sri Quek Leng Chan HL Holdings Sdn Bhd Hong Realty (Private) Limited Hong Leong Investment Holdings Pte Ltd Kwek Holdings Pte Ltd Kwek Leng Beng Davos Investment Holdings Private Limited Kwek Leng Kee Quek Leng Chye NatSteel Asia Pte Ltd Tata Steel Limited Southern Amalgamated Co Sdn Bhd Su Hock Company Sdn Bhd Y Bhg Dato' Seri Tan Hoay Eam Y Bhg Dato Dr Tan Tat Wai 2 3 4 40.41 24.81 8.96 0.27 0.00 146,461,324 146,461,324 146,461,324 146,461,324 146,461,324 146,461,324 146,461,324 146,461,324 146,461,324 146,461,324 89,929,000 32,487,806 32,487,806 32,980,223 % 40.41 40.41 40.41 40.41 40.41 40.41 40.41 40.41 40.41 40.41 24.81 8.96 8.96 9.10 1 1 1 1 1 1 1 1 1 1 2 3 3 4 Deemed interest through Hume Industries (Malaysia) Berhad Deemed interest through NatSteel Asia Pte Ltd Deemed interest through Southern Amalgamated Co Sdn Bhd Deemed interest through Southern Amalgamated Co Sdn Bhd, Hock Kheng Industries Sdn Bhd and spouse 87 Annual Report 2006 1 146,461,324 89,929,000 32,487,806 972,815 14,854 No of shares held % Indirect Southern Steel Berhad 5283-X 2 Other Information (contd) 3 ANALYSIS OF IRREDEEMABLE CONVERTIBLE UNSECURED LOAN STOCKS (ICULS) HOLDINGS AS AT 20 MARCH 2007 Nominal value of outstanding ICULS 2003/2008 : RM58,681,490 No of ICULS 2003/2008 Holders : 789 Voting Rights On show of hands On poll : : 1 vote 1 vote for each RM1.00 nominal amount of ICULS held DISTRIBUTION SCHEDULE OF ICULS 2003/2008 HOLDERS AS AT 20 MARCH 2007 Holdings less than 100 100 1,000 1,001 10,000 10,001 100,000 100,001 less than 5% of issued 2003/2008 ICULS 5% and above of issued ICULS 2003/2008 TOTAL No of ICULS 2003/2008 Holders Nominal Value of ICULS 2003/2008 (RM) % 15 470 237 55 10 643 408,500 783,380 1,481,305 3,610,900 0.0011 0.6961 1.3350 2.5243 6.1534 2 789 52,396,762 58,681,490 89.2901 100.0000 THIRTY LARGEST ICULS 2003/2008 HOLDERS According to the Register of Depositors, the 30 largest ICULS 2003/2008 holders of the Company as at 20 March 2007 are as follows: Name of ICULS 2003/2008 Holders Southern Steel Berhad 5283-X Annual Report 2006 88 1 2 3 4 5 6 7 8 9 10 11 Assets Nominees (Tempatan) Sdn Bhd Hume Industries (Malaysia) Berhad NatSteel Asia Pte Ltd Hong Bee Hardware Company, Sdn Berhad Chua Holdings Sdn Bhd Santomi Sdn Bhd Malaysia Nominees (Tempatan) Sendirian Berhad Great Eastern Life Assurance (Malaysia) Berhad (Par 1) Ong Yih Yeong Choong Cheow Sai Ong Seik Seik Ong Huay Siang Leong Kok Tai Nominal Value of ICULS 2003/2008 (RM) % 28,240,262 48.1246 24,156,500 1,058,000 782,500 368,000 259,400 41.1654 1.8030 1.3335 0.6271 0.4420 254,500 216,300 200,000 200,000 170,000 0.4337 0.3686 0.3408 0.3408 0.2897 Other Information (contd) 3 ANALYSIS OF IRREDEEMABLE CONVERTIBLE UNSECURED LOAN STOCKS (ICULS) HOLDINGS AS AT 20 MARCH 2007 (CONTINUED) THIRTY LARGEST ICULS 2003/2008 HOLDERS (CONTINUED) Name of ICULS 2003/2008 Holders 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 % 102,200 100,000 100,000 90,000 61,800 57,000 0.1742 0.1704 0.1704 0.1534 0.1053 0.0971 51,000 50,000 50,000 45,800 0.0869 0.0852 0.0852 0.0780 40,000 34,600 33,500 33,000 32,000 30,000 30,000 29,300 29,000 0.0682 0.0590 0.0571 0.0562 0.0545 0.0511 0.0511 0.0499 0.0494 56,904,662 96.9718 DIRECTORS INTERESTS AS AT 20 MARCH 2007 89 Annual Report 2006 Subsequent to the financial year end, there is no change as at 20 March 2007 to the Directors interests in the ordinary shares and/or irredeemable convertible unsecured loan stocks of the Company and/or its related corporations, appearing in the Directors Report on page 23 as recorded in the Register of Directors Shareholdings kept by the Company under Section 135 of the Companies Act, 1965. Southern Steel Berhad 5283-X 4 Ng Boo Kean @ Ng Beh Kian Seberang Distributors Sdn Bhd Westport Grain Terminals Sdn Bhd Zaidan Bin Hj Othman Boey Kok Wooi Southern Investment Bank Berhad Employees Provident Fund Steel Industries (Sabah) Sdn Bhd Lee Oi Hian Lau Hwee Tiang Malaysia Nominees (Tempatan) Sendirian Berhad Great Eastern Life Assurance (Malaysia) Berhad (Par 2) Yap Koon Chai Lim Chiew Sheah Ooi Guat Li Nar Swee Kim Chee See Giap @ Sin Chien Koay Seng Leong @ Koih Soon Pit Lim Cheng Teik Tan Liew Cheun HLG Nominee (Tempatan) Sdn Bhd Pledged Securities Account for Mohd Khamil Bin Jamil Nominal Value of ICULS 2003/2008 (RM) Other Information (contd) 5. DISCLOSURE REQUIREMENTS Pursuant to the Listing Requirements of Bursa Malaysia Securities Berhad. UTILISATION OF PROCEEDS During the financial year, there were no proceeds raised by the Group and the Company from any corporate proposals. SHARE BUYBACKS During the financial year, there were no share buybacks by the Group and the Company. OPTIONS, WARRANTS OR CONVERTIBLE SECURITIES During the financial year, RM277,500 nominal amount of ICULS were converted into 269,417 ordinary shares of RM1.00 each. AMERICAN DEPOSITORY RECEIPT (ADR) OR GLOBAL DEPOSITORY RECEIPT (GDR) PROGRAMME During the financial year, the Group and the Company did not sponsor any ADR or GDR programme. IMPOSITION OF SANCTIONS/PENALTIES There were no sanctions and/or penalties imposed on the Group and the Company, Directors or Management by the relevant regulatory bodies. NON-AUDIT FEES Non-audit fee of RM1,500 was paid to the external auditors by the Group and the Company for the financial year. PROFIT ESTIMATE, FORECAST OR PROJECTION The Group and the Company did not release any profit estimate, forecast or projection for the financial year. There is no significant variance between the results for the financial year and the unaudited results previously released by the Group. PROFIT GUARANTEES During the financial year, there were no profit guarantees given by the Group and the Company. MATERIAL CONTRACTS INVOLVING DIRECTORS AND MAJOR SHAREHOLDERS INTEREST There were no material contracts involving directors and major shareholders interest except for the following: Three Conditional Sale and Purchase Agreements (SPAs), all dated 27 September 2006, made between Southern Steel Berhad (SSB) and NatSteel Asia Pte Ltd (NSA) for the disposal of the following: (a) (b) Southern Steel Berhad 5283-X Annual Report 2006 90 (c) SSBs entire 50.0% equity interest in NatSteel (Xiamen) Limited (SNSXL) for a cash consideration of SGD19,357,000 (SNSXL Disposal); SSBs entire 22.6% equity interest in NatSteelVina Co Ltd (NSVCL) for a cash consideration of SGD3,105,000; and (NSVCL Disposal); and SSBs entire 40.0% equity interest in NatSteel Trade International Pte Ltd (NSTIPL) for a cash consideration of SGD6,538,000 (NSTIPL Disposal). The SNSXL Disposal, the NSVCL Disposal and the NSTIPL Disposal were completed on 24 January 2007 in accordance with the terms and conditions of the SNSXL Conditional SPA, NSVCL Conditional SPA and NSTIPL Conditional SPA. RELATED PARTY TRANSACTIONS Significant related party transactions of the Group during the financial year are disclosed in Note 30 to the financial statements in accordance with the general mandate obtained from shareholders at the Annual General Meeting held on 19 May 2006 setting out the aggregate value of recurrent transactions conducted during the financial year. REVALUATION OF LANDED PROPERTIES The Group policy is to revalue its landed properties at a 5 year interval with additional revaluation in the intervening years if the carrying value of the revalued landed properties differs materially from the market value. NOTICE OF ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN that the Forty-Fifth Annual General Meeting of Southern Steel Berhad (the Company) will be held at the Level 1 Training Room B, Southern Steel Berhad, 2723 Lorong Perusahaan 12, Prai Industrial Estate, 13600 Prai, Penang on Monday, 14 May 2007 at 3.00 pm in order: 1 To receive the audited financial statements for the year ended 31 December 2006 and the Directors and Auditors Reports thereon; RESOLUTION 1 2 To declare a final dividend of 5% tax exempt for the year ended 31 December 2006; RESOLUTION 2 3 To re-elect the following retiring Director: YM Raja Dato Seri Abdul Aziz bin Raja Salim; 4 RESOLUTION 3 To consider and, if thought fit, pass the following resolution: THAT pursuant to Section 129(6) of the Companies Act, 1965, YA Bhg Tun Dato Seri Dr Lim Chong Eu who has attained the age of 70 be re-appointed as a Director of the Company to hold office as a Director until the conclusion of the next annual general meeting of the Company; RESOLUTION 4 5 To re-appoint Messrs PricewaterhouseCoopers as Auditors of the Company and authorise the Directors to fix their remuneration; RESOLUTION 5 6 To approve the payment of Directors fees of RM365,000.00 for the year ended 31 December 2006, to be divided amongst the Directors in such manner as the Directors may determine. RESOLUTION 6 AS SPECIAL BUSINESS To consider and, if thought fit, pass the following Ordinary and Special Resolutions: Ordinary Resolution: Authority To Issue Shares RESOLUTION 7 91 Annual Report 2006 THAT pursuant to Section 132D of the Companies Act, 1965, the Directors be and are hereby empowered to issue shares in the Company at any time and upon such terms and conditions and for such purposes as the Directors may, in their absolute discretion, deem fit, provided that the aggregate number of shares issued pursuant to this resolution in any one financial year does not exceed 10% of the issued capital of the Company for the time being and that the Directors be and are hereby empowered to obtain the approval for the listing of and quotation for the additional shares so issued on Bursa Malaysia Securities Berhad and that such authority shall continue in force until the conclusion of the next Annual General Meeting of the Company; Southern Steel Berhad 5283-X 7 NOTICE OF ANNUAL GENERAL MEETING (contd) 8 Ordinary Resolution: Proposed Renewal of Shareholders Mandate for Recurrent Related Party Transactions of a revenue or trading nature THAT approval be and is hereby given to the Company and its subsidiaries to enter into the recurrent related party transactions of a revenue or trading nature referred to in Section 2.4 of the Circular to Shareholders dated 20 April 2007 (the Circular) with the parties who fall within the Mandated Related Parties referred to in the Circular, provided that such transactions are undertaken in the ordinary course of business of the Company and its subsidiaries, made at arms length, and are on terms not more favourable to the related parties than those generally available to the public and not to the detriment of the minority shareholders; RESOLUTION 8 AND THAT such approval shall only continue to be in force until:(a) the conclusion of the next Annual General Meeting (AGM) of the Company; (b) the expiration of the period within which the next AGM of the Company after the date it is required to be held pursuant to Section 143(1) of the Companies Act, 1965 (but shall not extend to such extension as may be allowed pursuant to Section 143(2) of the Companies Act, 1965); or (c) revoked or varied by resolution passed by the shareholders in general meeting, whichever is the earlier. AND THAT the aggregate value of the transactions conducted pursuant to this shareholders mandate during the financial year be disclosed in accordance with the Listing Requirements of Bursa Malaysia Securities Berhad in the annual report of the Company. AND THAT the Directors of the Company be and are hereby authorised to complete and do all such acts and things (including executing all such documents as may be required) as they may consider expedient or necessary to give effect to this resolution. 9 Southern Steel Berhad 5283-X Annual Report 2006 92 Special Resolution: Proposed Amendments to the Articles of Association of Southern Steel Berhad That the deletions, alterations, modifications, variations and additions to the Articles of Association of the Company as set out in Appendix I of the Circular to Shareholders of the Company dated 20 April 2007 be and are hereby approved. 10 To consider any other business of which due notice shall have been given. RESOLUTION 9 NOTICE OF ANNUAL GENERAL MEETING (contd) Notice of Dividend Entitlement NOTICE IS ALSO HEREBY GIVEN that a final dividend of 5% tax exempt for the financial year ended 31 December 2006, if approved, will be paid on 15 June 2007 to depositors registered in the Record of Depositors at the close of business on 28 May 2007. A depositor shall qualify for entitlement to the dividend only in respect of: (a) shares transferred into the depositors securities account before 4.00 pm on 28 May 2007 in respect of transfers; and (b) shares bought on Bursa Malaysia Securities Berhad on cum entitlement basis according to the Rules of Bursa Malaysia Securities Berhad. By Order of the Board Lim Gim Siok Secretary Penang 20 April 2007 Southern Steel Berhad 5283-X Annual Report 2006 93 STATEMENTS ACCOMPANYING NOTICE OF ANNUAL GENERAL MEETING (PURSUANT TO PARAGRAPH 8.28(2) OF THE LISTING REQUIREMENTS OF BURSA MALAYSIA SECURITIES BERHAD) A Further details of Directors who are standing for re-election or re-appointment as per Agenda 2 and 3 of the Notice of 45th Annual General Meeting respectively 1. YM Raja Dato Seri Abdul Aziz Bin Raja Salim (Independent Non-Executive Director) Resolution 3 YM Raja Dato Seri Abdul Aziz bin Raja Salim, aged 68, a Malaysian, is a Honorary Fellow of The Malaysian Institute of Taxation, Fellow of The Chartered Association of Certified Accountants, United Kingdom, Fellow of The Chartered Institute of Management Accountants (CIMA), United Kingdom and a Chartered Accountant (Malaysia). He served as Director-General of Inland Revenue Malaysia from 1980 to 1990 and Accountant-General Malaysia from 1990 to 1995. YM Raja Dato Seri Abdul Aziz was the President of CIMA, Malaysia from 1976 to 1993 and a Council Member of CIMA, United Kingdom from 1990 to 1996. He was awarded the CIMA Gold Medal in recognition of his outstanding service to the accounting profession. His other directorships in public companies are as follows: Director of Camerlin Group Berhad Director of Tasek Corporation Berhad Director of Gamuda Berhad Director of Jerneh Asia Bhd Director of PPB Oil Palms Berhad Director of PPB Group Berhad Director of K & N Kenanga Holdings Berhad Director of Kenanga Investment Bank Berhad (formerly known as K & N Kenanga Berhad) Director of Jerneh Insurance Bhd Director of Amanah Saham Mara Berhad Director of Panasonic Manufacturing Malaysia Bhd (formerly known as Matsushita Electric Company (M) Berhad) 2. YA Bhg Tun Dato Seri Dr Lim Chong Eu (Independent Non-Executive Director) Resolution 4 YA Bhg Tun Dato Seri Dr Lim Chong Eu, aged 87, a Malaysian, is renowned as a leading statesman and holds the distinction of being the former Chief Minister of Penang. He has had a long and illustrious record as a political leader and representative of the people in many fields of national interests. He graduated with a Bachelor of Medicine and Bachelor of Surgery (M.B. Ch B.) from Edinburgh University of Scotland in 1944. Southern Steel Berhad 5283-X Annual Report 2006 94 His other directorships in public companies are as follows: Chairman of Suiwah Corporation Bhd, a public listed company. Chairman of Chin Well Holdings Berhad, a public listed company. Chairman of Berjaya Vacation Club Berhad, a public company. Director of United Overseas Bank (Malaysia) Berhad, a public company. Note: Save as disclosed, the above Directors have no family relationship with any Director and/or major shareholder of the Company, have no conflict of interest with the Company and have not been convicted for any offence within the past 10 years. B The above Directors do not have any interests in the securities of the Company as at 30 March 2007. C Details of attendance of Directors at Board of Directors Meetings Please refer to the Board of Directors attendance as set out in the Directors Profile appearing on pages 4 to 7 of the Annual Report 2006. Southern Steel Berhad 5283-X Annual Report 2006 This page is intentionally left blank. 95 Southern Steel Berhad 5283-X Annual Report 2006 This page is intentionally left blank. 96 SOUTHERN STEEL BERHAD 5283-X 2723, Lorong Perusahaan 12, Prai Industrial Estate, 13600 Prai, Penang, Malaysia. Tel Fax : 604-390 6540 : 604-390 8060 www.southsteel.com