Notes to the quarterly Interim Financial Report – 31 March 2005

PART A: EXPLANATORY NOTES AS PER MASB 26

A1.	Basis of preparation 

The interim financial report is unaudited and prepared in compliance with the Malaysian Accounting Standards Board (MASB) Standard No. 26 “Interim Financial Reporting” and paragraph 9.22 of the Bursa Malaysia Listing Requirements and should be read in conjunction with the Company’s audited annual financial statements for the year ended 31 December 2004.

The accounting policies and methods of computation adopted for the interim financial report are consistent with those adopted for the last annual audited financial statements.

A2.	Qualification of annual financial statements

There were no audit qualifications on the annual financial statements of the Company for the year ended 31 December 2004.

A3.	Seasonal and cyclical factors

The Group’s business operation results were not materially affected by any major seasonal or cyclical factors.

A4.	Unusual nature and amount of items affecting assets, liabilities, equity, net income or cash flows

There were no unusual nature and amount of items affecting assets, liabilities, equity, net income or cash flows for the current quarter and financial year to date. 

A5.	Material changes in estimates

There were no material changes in estimates of amount reported in the current quarter. 

A6.	Issuances and repayment of debt and equity securities	

There were no issuance, cancellation, repurchase, resale and repayment of debt and equity securities for the current financial year to date other than stated below:

	RM’000	
MUNIF Issued/ Rolled Over	130,000	
MUNIF Repaid	(14,000)	
Amount of MUNIF outstanding as at 31 March 2005	116,000	

As at 31 March 2005, the amount outstanding for Murabahah Underwritten Note Issuance Facility (“MUNIF”) /Islamic Medium Term Notes (“IMTN”) was RM116.0 million out of the limit of RM150.0 million which mainly for repayment of bank borrowings and working capital. The entire RM150.0 million MUNIF/IMTN facility is fully underwritten by Amanah Short Deposits Berhad and has a tenure of 7-years from the date of issuance.
 
Options relating to 15,127,200 ordinary shares of RM0.50 each were granted to eligible employees at an option price of RM1.63 per share with expiry date of 24 August 2009 pursuant to the Company’s Employees’ Share Option Scheme (ESOS). 

At the date of this report, 2,329,100 share were allotted. After taking into account these new shares, the issued and paid up capital of the Company was increased to 147,529,100.

Total number of unexercised share option as at date of report was 12,798,100.

A7.	Dividend Paid	

No dividend was declared or paid during the quarter under review. 

A8.	Segment information

Segmental analysis of the revenue and result :-
Business Segment:	Revenue
3 months ended
31.3.2005	Operating Profit
3 months ended
31.3.2004	
	RM’000	RM’000	
Process equipment	70,320	11,624	
Terminal, refineries and process plant	
519	
93	
Steel structural system	137	29	
Process maintenance	417	160	
	71,393	11,906	

A9.	Valuation of property, plant and equipment

Property, plant and equipment of the Group is stated at cost/valuation less accumulated depreciation and accumulated impairment losses where applicable.

There is no revaluation of property, plant and equipment during the period under review.

A10.	Material events subsequent to the end of the interim period

There was no material event subsequent to the end of the reporting period and up to the date of issuance of this report. 

A11.	Changes in the composition of the Group

There were no changes in the composition of the Group for the current quarter and financial year to date other than those disclosed under the Note B8.

A12.	Changes in contingent liabilities

There were no material contingent liabilities for the Group as at the date of this announcement.

A13.	Capital commitments

 	 Approved and   
 contracted for
       RM’000		Approved but not  
  contracted for
          RM’000	

Property, plant and equipment	
15,109		
65,655	
Investment	-		10,000	
	15,109		75,655	

      A14.	Related party transactions

Significant related party transactions for the financial year to date are as follows:

	RM ‘000	
Inter Merger Sdn Bhd, *		
- Rental expense payable	302	
		
*a company in which Dato’ Abdul Rani Bin Mohd Razalli, 
  Mr.Lee Swee Eng and Gan Siew Liat are directors		
		
I.M.Bina Sdn Bhd,**		
-Contract billings payable	1,340	
-Manpower supply payable	-	
		
Inter Merger Trading Sdn Bhd,**		
-Purchase of materials	37	
		
**a company in which Inter Merger Sdn Bhd is a holding company		
		
KNM-DP Fabricators Sdn Bhd, an associated company		
- Contracts billings payable	911	
- Reimbursement of site and maintenance expenses	(120)	

PART B: 	ADDITIONAL INFORMATION REQUIRED BY THE BURSA MALAYSIA LISTING REQUIREMENTS

B1.	Review of performance 
	
The Group achieved revenue of RM71.39 million and profit before tax of RM12.41 million for the current quarter ended 31 March 2005.

Compared to the corresponding period of previous financial year, the revenue increased substantially mainly due to increase in revenue recognised in line with the increase in manufacturing capacity.

B2.	Variation of results against preceding quarter 

	The Group’s revenue of RM71.39 million and profit before taxation of RM12.41 million for the first quarter ended 31 March 2005 were higher by 43% and 3,661% compared to the last year fourth quarter’s revenue of RM50.08 million and profit before taxation of RM0.33 million respectively. 

	The substantial increase in net profit before tax was mainly due to increase in revenue recognised in line with the increase in manufacturing capacity.
	
B3.	Current year prospects 

The Board expects the Group’s operations to improve in the remaining period to the end of financial year 2005.

B4.	Profit forecast

Not applicable as no profit forecast was published.

B5.	Tax expense 
 							                                    				          
	3 months	3 months	
	ended 31.3.2005	ended 31.3.2004	
	RM’000	RM’000	
Income Tax expense :-			
			
Current	3,526	1,576	
	3,526	1,576	
					  				
The Group’s effective tax rate is marginally higher than the statutory tax rate mainly due to non-availability of group tax relief where tax on profits of certain subsidiaries cannot be set-off against losses of other subsidiaries for tax purposes.

B6.	Unquoted investments and properties 

The Group has not made or disposed any investments in any unquoted investments and properties for the current quarter and financial year to date.

B7.	Quoted and marketable investments 

There were no investments or disposals in quoted and marketable securities during the current quarter and financial year to date.

B8.	Status of corporate proposals announced 

(1)	As reported in the previous quarter’s interim financial report, there is no change of  status on the proposed transfer of listing of and quotation for the entire issued and paid-up share capital of KNM from the Second Board to the Main Board of Bursa Malaysia Securities Berhad which was put on hold.

(2)	The utilisation of IPO proceeds was made as follows:

	Total Proceeds	Utilised	Unutilised	
	RM’000	RM’000	RM’000	
Repayment of term loan	11,077	(10,874)	203	
Capital expenditure  	8,190	(7,099)	1,091	
Listing expenses	1,500	(1,864)	(364)	
Working capital	298	(298)	-	
				
Total	21,065	(20,135)	930	

(3)	Private Placement

The Private Placement of 4,400,000 new ordinary shares of RM1.00 each of the Company was issued on 19 August 2004 and granted listing and quotation on the Second Board of the Bursa Malaysia with effect from 24 August 2004.

The status of utilisation of the proceeds raised from the Private Placement exercise is as follows:

	Total Proceeds	Utilised	Unutilised	
	RM’000	RM’000	RM’000	
Purchase of raw material for manufactured of process equipment	
10,780	
           (10,780)	
-	
General working capital requirement	
3,920	
(4,504)	
(584)	
Estimated expenses for proposal	700	(116)	584	
				
Total	15,400	(15,400)	-	

(4)	Proposed acquisition by KNM Process Systems Sdn Bhd (KNMPS) of the entire issued and paid-up share capital of Sumber Amantech Sdn Bhd (Sumber) and the proposed acquisition by Sumber of the entire issued and paid-up share capital of MKE Engineering Sdn Bhd (MKE) for a cash consideration of RM5,800,000.

KNMPS, a wholly-owned subsidiary of KNM, entered into a conditional Sale and Purchase of Shares Agreement with the shareholders of Sumber on 29 November 2004 (Sumber SPA) to acquire the entire issued and paid-up share capital of Sumber, comprising 2 ordinary shares of RM1.00 each, for a cash consideration of RM2.00.  Sumber simultaneously entered into a conditional Sale and Purchase of Shares Agreement with the shareholders of MKE (MKE SPA) to acquire the entire issued and paid-up share capital of MKE, comprising 9,000,000 shares of RM1.00 each for a cash consideration of RM5,800,000. With the completion of the Sumber SPA, Sumber shall become a wholly owned subsidiary of KNMPS, and KNMPS will complete the MKE SPA through Sumber.

The last of the conditions precedent applicable to the Sumber SPA and the MKE SPA were obtained on 16 February 2005, and the MKE SPA were completed on 9 March 2005.

(5)	On 26 April 2005, KNMPS, a wholly-owned subsidiary of KNM had acquired the entire issued and paid-up shares in the following companies for a cash consideration of RM2.00 each:-

(i)	KNM Technical Services Sdn Bhd (KNMTS)

KNMTS was incorporated in Malaysia on 24 March 2005 and has not commenced operation since its date of incorporation. KNMTS has an authorized share capital of RM100,000.00 divided into 100,000 shares of RM1.00 each, of which 2 ordinary shares are issued and fully paid up. KNMPT is intended to be involved principally in the provision of engineering, design, technical services and other associated services related to the oil, gas and petrochemical industries.

(ii)	KNM Plant (Melaka) Sdn Bhd, formerly known as Tipex Industries Sdn Bhd (KNMPM)

KNMPM was incorporated in Malaysia on 10 March 2005 and has not commenced operations since its date of incorporation. KNMPM has an authorized share capital of RM100,000.00 divided into 100,000 shares of RM1.00 each, of which 2 ordinary shares are issued and fully paid up. KNMPM is intended to operate from the Company’s plant in Bukit Rambai, Melaka, and be involved principally in the manufacture, assembly, commissioning and maintenance of process equipment, pressure vessels, heat exchangers, skid mounted assemblies, process pipe systems, storage tanks, specialised structural assemblies, for the oil, gas and petrochemical industries.

(iii)	KNM Plant (Gebeng) Sdn Bhd, formerly known as Tank Maintenance Services (Malaysia) Sdn Bhd (KNMPG)

KNMPG was incorporated in Malaysia on 10 July 1995 and has not commenced operations since its date of incorporation.KNMPG has an authorized share capital of RM100,000.00 divided into 100,000 shares of RM1.00 each, of which 2 ordinary shares are issued and fully paid up. KNMPG shares were held equally by YBhg Dato’ Abdul Rani bin Mohd Razalli and Lee Swee Eng, the Executive Chairman and Managing Director of the Company, from 10 July 1995 to 21 April 2005. KNMPG is intended to operate from the Company’s plant in Gebeng, Pahang, and be involved principally in the manufacture, assembly, commissioning and maintenance of process equipment, pressure vessels, heat exchangers, skid mounted assemblies, process pipe systems, storage tanks, specialised structural assemblies and module assemblies, for the oil, gas and petrochemical industries.

(iv)	KNM Plant (Bintulu) Sdn Bhd, formerly known as Incobeta Sdn Bhd (KNMPB)

KNMPB was incorporated in Malaysia on 16 February 2005 and has not commenced operations since its date of incorporation. KNMPB has an authorized share capital of RM100,000.00 divided into 100,000 shares of RM1.00 each, of which 2 ordinary shares are issued and fully paid up. KNMPB is intended to operate from the Company’s plant in Bintulu, Sarawak, and be involved principally in the manufacture, assembly, commissioning and maintenance of process equipment, pressure vessels, heat exchangers, skid mounted assemblies, process pipe systems, storage tanks, specialised structural assemblies and module assemblies, for the oil, gas and petrochemical industries.

(6)	As announced on 24 May 2005, KNM Overseas (China) Sdn Bhd (KNMOC), an indirect wholly-owned subsidiary of the Company entered into a Memorandum of Understanding (MOU) on 24 May 2005 with the Changshu Administrative Committee of Economic Development Zone of Jiangsu Province, People’s Republic of China (CEDZ) to increase its investment in KNM Special Process Equipment (Changshu) Co Ltd, of Xinghua Gangqu, Changshu City, 215513, Jiangshu Province, People’s Republic of China (KNMSPEC), a wholly-owned subsidiary of KNMOC, by acquiring a piece of land measuring approximately 8 acres (Phase 2) to cater to the expansion in the operations of KNMSPEC. The approval from Bank Negara Malaysia is pending.

B9.	Group borrowings and debt securities
The Group’s borrowings as at the end of the reporting period were as follows:

	RM ‘000		
Short term:
Borrowings (secured)	
12,012		
Bank Overdraft	487		
Bill Payable	6,117		
Hire purchase liabilities	100		
	18,716		

Long term :
Borrowings (secured)	
28,380		
MUNIF 	116,000		
Hire purchases liabilities	63		
	144,443		

The above inclusive of borrowing in foreign currency of RMB50.19 million.

The Exchange rates used  is 1 RMB = RM 0.459. 

B10.	Off balance sheet financial instrument 

There was no material financial instrument with off balance sheet risk as at the end of the period under review other than the following.

Forward foreign exchange contracts expiring within one (1) year :-

Currency	Contract Amount
’000	Equivalent Amount in RM’000	
USD	65,695	249,223	
GBP	111	804	
SGD	65	150	
EURO	6,880	34,381	
JPY	32,734	1,175	
		285,733	

As forward foreign exchange contracts are entered into to hedge the Group’s purchases in foreign currencies, the contracted rates would be used to convert the foreign currency amounts into Ringgit Malaysia. This method of hedging mitigates the Group from currency risks such that the values of the underlying liabilities or assets are preserved. 

There are no significant credit and market risks posed by the above off balance sheet financial instruments.

B11.	Changes in material litigation 

As at the date of this announcement, there were no changes in material litigation since the last annual balance sheet date.

B12. 	Dividend payable

There was no dividend declared or recommended during quarter under review.

The proposed first and final dividend of 3 sen or 6% per ordinary share of RM0.50 each less income tax of 28% in respect of the previous financial year ended 31 December 2004 which is subject to approval of the Company’s shareholders at the Third Annual General Meeting to be held on 9 June 2005.

The entitlement to dividend is determined based on the record of depositors on 8 July 2005 and date payable is 10 August 2005.

B13.      Earnings per share
			
	Individual Quarter	Cumulative Quarter		
	31 March 2005	31 March 2004	31 March 2005	31 March 2004	
(a) Basic earnings per   share					
Net Profit after taxation before negative goodwill (RM’000)	
8,260	
3,077	
8,260	
3,077	
Consolidated profit after taxation after negative goodwill (RM’000)	

8,883	

3,077	

8,883	

3,077	
Number of shares at the beginning of the period (‘000)	

145,912	

44,000	

145,912	

44,000	
Effects of share split (‘000)	
-	
48,400	
-	
48,400	
Effects of bonus issue (‘000)	
-	
48,400	
-	
48,400	
Effect of  ESOS (‘000)	1,170	-	1,170	-	
Weighted average number of shares (‘000)	
147,082	
140,800	
147,082	
140,800	
Basic earnings per share (sen)	
6.04	
2.19	
6.04	
2.19	

	Individual Quarter	Cumulative Quarter	
	31 March 2005	31 March  
2004	31 March 2005	31 March  
2004	
(b) Diluted earnings per share					
Net Profit attributable to shareholders (RM’000)	

8,883	

3,077	

8,883	

3,077	
Weighted average number of shares as per above (‘000)	

147,082	

140,800	

147,082	

140,800	
Number of shares under ESOS (‘000)	
12,879	
-	
12,879	
-	
Number of shares would have been issued at fair value(‘000)	

(9,586)

-

(9,586)

-
	
Weighted average number of shares - diluted (‘000)	

150,375	

140,800	

150,375	

140,800	
Fully diluted earnings per share (sen)	
5.91	
2.19	
5.91	
2.19	

The comparative basic and diluted earnings per share have been restated to take into account the effects of bonus issue and share split.

B14. 	Authorisation for issue

The interim financial report was authorised for issue by the Board of Directors in accordance with a Directors resolution on 25 May 2005.