The SCK Group had successfully carved a niche in the interior design, furnishing and project renovation industry. The group is also involved in the manufacturing of bricks and wood-based products. However, in 1994, it diversified into construction and civil engineering works via 2 new subsidiaries. At the end of 1995, the group had shareholders' funds of RM28.6 mln and net current assets of RM8.0 mln. However, by Mar 1998, shareholders' funds were a deficit of RM35.8 mln with net current liabilities of RM52.8 mln. What caused this reversal of fortunes? Generally quite similar to last week's example - change in management and majority shareholders. Not surprisingly, the majority of damage occurred between 1996 and 1998.
a) Changes in Management and Significant Shareholders
In Jul 1996, a new management team was formed due to the entry of a new majority shareholder, Simpang Besar S/B with a 15.09% stake. 7 previous directors resigned and were replaced by 5 new ones. Dato Sulaiman Mohd Amin took over from Aminuddin Omar as chairman; Cheng Ho Kuan became the executive director. 2 previous significant shareholders and mainstays of the group, Wong Kok Poh and Tan Lian Cheng, resigned in Jul 1997. With their departures, Yeoh Lam Jit was appointed as the Group's CEO.
b) Changes in Direction and Focus
Diversification Away from Core Business
Under the new management, some significant changes to the direction and focus of the group occurred. First, the group surprisingly diversified away from their core business of interior design, furnishing and project renovation into the telecommunications industry, property investment and development and power plant operations in China.
Business Ventures in Cambodia & Australia
It also ventured aggressively into Cambodia with a series of deals and acquisitions. The group acquired Gamecorp S/B to operate a casino and to carry out gaming activities in Cambodia. The group's wholly owned subsidiary, SCK Construction S/B, was engaged as the turnkey contractor to develop a building complex in Cambodia, with a project value of US$45 mln. Another subsidiary, Rarewood (East Malaysia) S/B, signed a MOU with Cambodia Timber Products Pte Ltd for the extraction of timber in Cambodia. The group also rather surprisingly bought shares of a company listed on the Australian Stock Exchange, costing A$1.0 mln, which was involved in the research and development of a new generation motorcar engine - the investment was written-off in 1998.
Civil War in Cambodia & Slump in Construction and Property Sectors
In July 1997, civil war broke out in Cambodia and as a result, the various projects had to be aborted. The group's subsidiaries had to write-off assets amounting to RM11.2 mln - a rather costly end to its aggressive forays into Cambodia. Probably the management could not envisage a civil uprising in Cambodia but was the management conscious of the country risks involved when they decided to venture abroad in a politically unstable country. The losses incurred were large (37% of net losses in fiscal year 1997), considering that the group's other operations were also affected by the slump in the construction and property sectors. Most of the projects were either deferred or aborted.
A majority of the expansion plans were funded by short-term borrowings, which doubled from RM34.1 mln in 1996 to RM67.9 mln in 1998. Upon the failure of its operations due to the lack of working capital (deficit of RM52.8 mln), further compounded by the withdrawal of support by the financial institutions and creditors, the group's ability to operate as a going concern was severely in jeopardy. The RM35.8 mln deficit in its shareholders' funds in 1998 worsened to RM56.4 mln by 2000.
c) Questionable Dealings, Lack of Accountability and Transparency
Shareholders' Tussle and Change of Management
In 1998, on the back of the RM33.8 mln losses, a much-publicised shareholders' tussle took place, resulting in a change in the board of directors and management.
Questionable Internal Dealings and Transactions
Under the new management, some rather questionable dealings by the previous management were disclosed. Auditors had expressed doubts in the group's accounts due to the inability to satisfy themselves of the valuations of certain assets or liabilities. An example of such questionable dealings was the decision by the previous directors to write-off the RM4.0 mln deposit paid for the RM120 mln acquisition of Keazaman Inovasi Kontraks S/B in Aug 1997, which was made without proper board resolution to authorize the acquisition. Other non-compliances with the Companies Act included the advance of RM3.6 mln to an ex-CEO of the group by a subsidiary, the transfer of 3 units of company motor vehicles worth RM811,546 to 3 previous directors and the payment of RM1.3 mln to an ex-director as a token of the company's appreciation for her services and guidance, which were not approved by members of the company in a general meeting. Some rather dubious transactions had also taken place whereby sales invoices of a subsidiary have the same serial numbers but were made out to different customers with different values. Certain claims relating to a construction contract were also inflated and exaggerated, which caused an additional loss of RM21.3 mln upon omission of the estimated costs. These are examples of improper transactions and the lack of accountability and transparency by the previous management.