Bursa Malaysia Securities Publicly Reprimands Carotech Berhad And Hovid Berhad And Fines Five Directors A Total Of RM400,000

Bursa Malaysia Securities Berhad (Bursa Malaysia Securities) has publicly reprimanded Carotech Berhad (CAROTEC), its holding company, Hovid Berhad (HOVID) and their respective directors for breaching the listing requirements of Bursa Malaysia Securities. In addition, five directors of CAROTEC and/or HOVID were fined a total of RM400,000.

CAROTEC and HOVID were publicly reprimanded for failing to ensure their announcements dated 30 August 2010 on the fourth quarterly report for the financial year ended (FYE) 30 June 2010 (4^th QR 2010) took into account the adjustments as stated in the announcements dated 29 October 2010 resulting in a significant deviation between the companies’ unaudited and audited results.

The failure to take into account the adjustments were in contravention of Rule 9.16(1)(a) of the Bursa Malaysia Securities ACE Market Listing Requirements (ACE LR) and paragraph 9.16(1)(a) of the Bursa Malaysia Securities Main Market Listing Requirements (Main LR) where a listed company must ensure that each announcement is factual, clear, unambiguous, accurate, succinct and contains sufficient information to enable investors to make informed investment decisions.

HOVID is also required to carry out a limited review of its quarterly report submissions. The limited review must be performed by external auditors for four quarterly reports commencing from the quarterly report for the financial period ended 31 March 2013. In addition, HOVID must ensure all its directors and relevant personnel attend a training programme on compliance with the Main LR pertaining to financial statements.

Notwithstanding that CAROTEC was de-listed on 11 May 2012, the breach had been committed while CAROTEC was listed on the Official List of Bursa Malaysia.

The following directors of CAROTEC and/or HOVID at the material time were found to have breached Rule 16.13(b) of the ACE LR and/or paragraph 16.13(b) of the Main LR for permitting knowingly, or where they had reasonable means of obtaining such knowledge, CAROTEC and/or HOVID to commit the above breach. The penalties imposed are as follows:

The finding of breach and imposition of the above penalties on CAROTEC, HOVID and their respective directors were made pursuant to Rule 16.19 of the ACE LR / paragraph 16.19 of the Main LR upon completion of due process and after taking into consideration all facts and circumstances of the matter including factors giving rise to and materiality of the deviation, the impact of the breach and in relation to the directors, their respective roles and responsibilities in the company, particularly pertaining to financial management, preparation and review of financial statements and their conduct.

Bursa Malaysia Securities views the contravention seriously as listed companies are required to submit financial statements that are factual, clear, unambiguous, accurate, succinct and contains sufficient information to enable investors to make informed investment decisions.

BACKGROUND

(I) PUBLIC REPRIMAND ON CAROTEC AND HOVID

On 30 August 2010, CAROTEC reported an unaudited net profit of RM4.863 million in its 4^th QR 2010. However, on 29 October 2010, CAROTEC announced an audited net loss of RM92.48 million in its annual audited accounts for the FYE 30 June 2010. The difference of RM97.343 million between CAROTEC’s unaudited and audited results for the FYE 30 June 2010 represented a variance of 2000%.

Arising from the adjustments in CAROTEC’s audited results, the holding company, HOVID had also reported a deviation from an unaudited net profit of RM17.416 million in the 4^th QR 2010 to an audited net loss of RM53.952 million in its annual audited accounts for the FYE 30 June 2010. The difference of RM71.368 million between HOVID’s unaudited and audited results for the FYE 30 June 2010 represented a variance of 409%.

The variance was mainly due to the provision for slow moving inventories of RM97.738 million and impairment of plant and equipment of RM12.753 million in CAROTEC. The circumstances which gave rise to these adjustments were essentially due to CAROTEC’s cash flow and funding constraints and/or lack of working capital resulting in uncertainties on the ability of CAROTEC to dispose all its stocks within a reasonable time and for the plant to be put into operations in the near future. However, these circumstances were not ‘new’, had existed and were / should be known by CAROTEC and HOVID at the material time prior to the date of the issuance / announcement of CAROTEC’s and HOVID’s 4^th QR 2010 on 30 August 2010. Hence, it was not acceptable and unreasonable that CAROTEC and HOVID failed to consider and take into account these adjustments, did not make any provision for slow moving inventories in the 4^th QR 2010 of CAROTEC and subsequently justified the adjustments in the audited results of the companies on the basis that the board had adopted a prudent approach in impairing the lower concentration stocks in the audited results.

As a result of the adjustments which were announced on 29 October 2010 together with the audited results, CAROTEC had on the same day announced that it has triggered the criteria in Guidance Note 3 (GN3) and that it was an Affected Listed Company pursuant to GN3. It was further noted that there was a significant decrease of 29% in CAROTEC’s share price from RM0.07 on 29 October 2010 to RM0.05 on 1 November 2010.

(II) PUBLIC REPRIMAND AND A TOTAL FINE OF RM400,000 IMPOSED ON FIVE DIRECTORS

The directors had failed to discharge their duties to undertake reasonable assessment and enquiries in approving CAROTEC’s and HOVID’s 4^th QR 2010 to ensure the 4^th QR 2010 took into account the adjustments particularly in the light of them being informed of the audit issues / concerns giving rise to the adjustments prior to approving the 4^th QR 2010 and notwithstanding that they knew / should have known of the cash flow / funding constraints and/or lack of working capital and weak market demand for its nutrients which would have a material impact on the financial results of CAROTEC with regard to its inventories and HOVID in view that CAROTEC was its subsidiary.

In particular, it is noted that the major working capital facility provider (Facility Provider) had informed CAROTEC on 30 July 2010 that there shall be no further drawdown and the Facility Provider would cap the exposure at the current level outstanding (i.e. RM6 million as opposed to the original ceiling of RM35 million). In view of the materiality of this issue towards the financial results and the impending issuance of the 4^th QR 2010, it was not acceptable that CAROTEC and the directors failed to take reasonable action / effort to ascertain the significant issue with and procure the necessary confirmation from the Facility Provider. Further, CAROTEC could have disclosed in the 4^th QR 2010 of the status of the major working capital facility as informed to CAROTEC on 30 July 2010 and that in the event the freeze takes place, the material impact to the financial results of CAROTEC particularly in respect of provision for slow-moving inventories and impairment of assets to enable / facilitate informed investment decisions by shareholders and investors.

The representation that HOVID was entitled to accept the position taken by CAROTEC being itself a listed company and regulated entity and the punishment meted out on HOVID and its directors would lead to an instance of ‘double jeopardy’ were unacceptable as :-

• HOVID has the responsibility to ensure its financial statements were prepared to give a true and fair view of the state of affairs of the group (i.e. itself and all its subsidiaries); and
• Both HOVID and CAROTEC were separate listed companies and accountable to their respective shareholders / investors with regards to their financial results issued / announced.