Corporate Announcements

General Announcement
Reference No FC-061012-55016
Stock Name : FRONTKN
Date Announced : 12/10/2006
Type : Announcement
Subject : FRONTKEN CORPORATION BERHAD
("FRONTKEN" or "COMPANY")
PROPOSED ACQUISITION OF 300,000 ORDINARY 
SHARES, REPRESENTING THE ENTIRE ISSUED
AND PAID-UP SHARE CAPITAL OF METALL-TREAT
INDUSTRIES PTE LTD ("METALL-TREAT"), BY
FRONTKEN (SINGAPORE) PTE. LTD. ("FSPL"), A
WHOLLY-OWNED SUBSIDIARY OF FRONTKEN
                             
Contents :
1. INTRODUCTION

      The Board of Directors ("Board") of Frontken is pleased to announce that FSPL has agreed to terms and entered into a conditional Share Purchase Agreement ("SPA") today with Tay Yan Lim, Tan Ser Hean, Goh Leng Tse, and Pung Tong Seng (hereinafter collectively referred to as the "Vendors") for the acquisition of the entire issued and paid-up capital of Metall-Treat, comprising 300,000 ordinary shares ("Metall-Treat Shares"), for a cash consideration of SGD3,500,000, which is equivalent to RM8,137,500 based on the exchange rate of RM2.325 : SGD1.00 ("Proposed Acquisition").

2. DETAILS OF THE PROPOSED ACQUISITION

      On 12 October 2006, FSPL entered into a conditional SPA with the Vendors to acquire 300,000 Metall-Treat Shares, representing the entire equity interest in Metall-Treat, for a cash consideration of SGD3,500,000 (equivalent to RM8,137,500 based on the exchange rate of RM2.325 : SGD1.00).

      The Metall-Treat Shares shall be acquired free from all encumbrances, together with all the rights and benefits attaching thereto, subject to the terms and conditions of the SPA.

2.1 Basis for the Purchase Consideration

      The purchase consideration was arrived at based on a "willing-buyer willing-seller" basis after taking into consideration the future earning potential and net assets of Metall-Treat.


2.2 Salient terms of the SPA
      The salient terms of the SPA are as follows:

      (i) The purchase consideration for the Proposed Acquisition shall be paid in the manner and on the dates as set out in Table 1.

      (ii) The SPA is conditional upon the fulfillment of, inter-alia, the following conditions on or prior to 16 October 2006 or such other date as Frontken and the Vendors may agree in writing ("Closing Date"):
          (a) The results of such due diligence investigations and financial audits on Metall-Treat being satisfactory to Frontken in its absolute discretion;

          (b) The Vendors shall procure that each of the key employees (namely Tay Yan Lim and Ang Guek Hoon) shall have entered into their respective employment agreements with Frontken; and
(c) Metall-Treat shall have obtained the consent of the landlord for the leasehold property to the sale and purchase of the Metall-Treat Shares.

      (iii) Each of the key employees shall not (and shall procure that none of the key employees' affiliates shall) except with the prior written consent of Frontken during the term of the SPA and for a period of three (3) years thereafter:
          (a) carry on or be engaged in any other business in competition (whether directly or indirectly) with the business of Metall-Treat now or hereinafter conducted except through Frontken;

          (b) solicit or entice away from Metall-Treat, or deal in any way with, any person who have been a customer, client, agent or correspondent of Metall-Treat or have dealt with Metall-Treat at any time within the five (5)-year period preceding the completion of the sale and purchase of the Metall-Treat Shares; and
          (c) solicit or entice away from Metall-Treat, or deal with, any person who is a key employee or necessary to the operation of the business of Metall-Treat;

      (iv) Completion of the sale and purchase of the Metall-Treat Shares shall take place on the Closing Date.

      (v) If any of the Vendors breaches his obligations under the SPA, Frontken shall be entitled to, in addition to and without prejudice to all other rights and remedies available to it, including the right to claim damages, to:
          (a) elect to terminate the SPA;

          (b) effect the completion of the sale and purchase of the Metall-Treat Shares as far as practicable, having regard to the defaults which have occurred and subject to any terms and conditions which the parties may agree in writing; or

          (c) fix a new date for completion of the sale and purchase of the Metall-Treat Shares (not being 30 days after the Closing Date).

2.3 Information on Metall-Treat

      Metall-Treat was incorporated in Singapore on 1 December 1990 under the Companies Act, Cap 50 of the Republic of Singapore as a private limited company. As at the date of SPA, Metall-Treat has an authorised share capital of SGD300,000 comprising 300,000 Metall-Treat Shares, all of which have been issued and fully paid-up . Metall-Treat is principally involved in electroplating and plating of metals and formed products.
      The directors and shareholders of Metall-Treat, and their respective shareholdings in the company are set out in Table 2.

      The audited net assets of Metall-Treat as at 31 December 2005 is approximately SGD2.4 million and unaudited net assets as at 30 September 2006 is approximately SGD2,20 million (after adjusting for a net dividend payment of SGD1.0 million to the Vendors for the financial year ended 31 December 2005). The audited profit after tax for the financial year ended 31 December 2005 and unaudited profit after tax for the nine (9)-month period ended 30 September 2006 of Metall-Treat are approximately SGD417,000 and SGD826,000 respectively.


2.4 Information on the Vendors

      Tay Yan Lim is currently a Director and controlling shareholder of Metall-Treat. Pursuant to an employment agreement with Frontken, Tay Yan Lim will be the Managing Director of Metall-Treat from the Closing Date.

      Goh Leng Tse and Tan Ser Hean are currently Directors of Metall-Treat. Together with Pung Tong Seng, they became shareholders of Metall-Treat in March 2006.
2.5 Source of Funds

      The Proposed Acquisition will be funded by internally generated funds and/or bank borrowings.
2.6 Liabilities to be Assumed

      There are no liabilities to be assumed by Frontken arising from the Proposed Acquisition.
2.7 Original Cost and Date of Investment

      The Vendors acquired the Metall-Treat Shares over a period from 1990 to 2006 at an aggregate cost of SGD1,860,000.


3. RATIONALE

      Metall-Treat is principally involved in electroplating and plating of metals and formed products and specialises in industrial phosphating selective electroplating and surface treatment services, which complement and value-add to the existing core business of Frontken and its subsidiaries ("Frontken Group" or "Group"). Metall-Treat, which started operations in 1990, provides an array of niche services in surface treatment and has, over the years, built an established pool of customers in the oil and gas and aerospace industries.

      The Proposed Acquisition allows the Frontken Group to expand its product offerings and enhances its value proposition, with a more comprehensive range of services, to an enlarged customer base. It also provides an opportunity for the Group to leverage on the existing infrastructure and technology of Metall-Treat, and enables cross-selling of the Group's services to the existing customers of Metall-Treat, some of which are also customers of the Frontken Group.

      The Proposed Acquisition effectively paves the way for the creation of an integrated surface metamorphosis solutions provider by combining the competencies of the Frontken Group and Metall-Treat, and is consistent with the Group's strategy to be a leading advanced material and surface metamorphosis technology solutions provider in Southeast Asia. The Group is expected to be well-positioned to take advantage of business opportunities and continued growth as a result of synergistic benefits arising from the Proposed Acquisition.


4. FINANCIAL EFFECTS

      The effects of the Proposed Acquisition are as follows:

4.1 Share Capital and Substantial Shareholders' Shareholdings

      The Proposed Acquisition will not have any effect on the issued and paid-up share capital and substantial shareholders' shareholdings of Frontken as it will be satisfied by cash and/or bank borrowings.

4.2 Net Assets

      The Proposed Acquisition will not have any effect on the pro-forma consolidated net assets of Frontken as at 31 December 2005.

4.3 Earnings

      The Proposed Acquisition is not expected to have any material effect on the earnings of the Group for the financial year ending 31 December 2006 as it is only expected to be completed by October 2006. However, the Proposed Acquisition is expected to enhance the future earnings of the Group.

5. PROSPECTS
      The Singapore economy grew strongly by 9.4% in the first half of 2006. This came on the back of robust external demand as the global economy remained resilient in the face of rising interest rates and higher oil prices. Forward-looking indicators, such as the composite leading index, point to healthy growth prospects in the few quarter ahead. Given the strong growth in the first half of 2006 and barring any economic shock, the Ministry of Trade and Industry has revised the 2006 Gross Domestic Product growth forecast from between 5% and 7% to between 6.5% and 7.5% (2005: 6.4%). (Source: "Performance of the Singapore Economy in Second Quarter 2006 and Outlook for 2006" by the Ministry of Trade and Industry, Singapore)

      According to the BP Statistical Review of World Energy 2006, Asia accounted for nearly half of the increase in global demand in the last four (4) years. Against this backdrop, significant opportunities exist for Singapore across the entire spectrum of the energy sector – starting with oil, an industry that has been associated with Singapore for well over a century. Singapore has flourished as Asia's oil hub. Its refineries have been operating at full capacities and its logistics throughput reached more than 137 million tons of oil and oil products last year. Beyond building on the oil refining, logistics and trading industry, Singapore is also developing new strengths in other energy areas such as gas and alternative energy. (Source: Speech by the Minister of State for Trade and Industry at the 22nd Asia-Pacific Petroleum Conference, 5 September 2006)

      Aerospace is one of Singapore's fastest growing industries, with 2005 registering a record output of SGD5.2 billion, a 17% increase over 2004. A remarkable 90% of the total output came from maintenance repair and overhaul ("MRO") services. In line with Singapore's goal to deepen the technological capability of the local MRO industry, a number of companies are increasing their presence in Singapore to offer a comprehensive range of services. As a leading global aviation hub in the region, Singapore is well positioned to capitalise on these growth opportunities. (Source: "Singapore Investment News, April 2006" by the Singapore Economic Development Board)

      The above outlook in the oil and gas and aerospace sectors bodes well for the continued growth of Metall-Treat, which derives a majority of its revenue from the said industries. Backed by strong economic growth, the Directors of Frontken believe that Metall-Treat's existing business operations will continue to grow briskly in the next few years. Record orders of building of oil rigs and replacements of new oil-related equipment inclusive but not limiting to replacement of new oil risers, exploration equipment and others and sustainable crude oil price have amplified the robust growth of oil and gas sector in years to come (Source: Enterprise Today: January/February 2006, a publication of Spring Singapore). Together with Metall-Treat, the Frontken Group is poised to take advantage of the growth opportunities in the above industries.

6. RISK FACTORS

      The risk factors associated with the Proposed Acquisition, which may be non-exhaustive, are summarised below:

6.1 Political, Economic and Regulatory Considerations

      Metall-Treat carries out its business operations predominantly in Singapore. As such, any adverse development in political, economic and regulatory conditions in Singapore, such as risk of war, riots, unfavourable change in government policy and regulations, changes to methods of taxation, and fluctuations in foreign currency rates, could materially and adversely affect the financial and business prospects of the company and the markets it serves. No assurance can be given that these factors will not have a material adverse effect on the enlarged Group's business.

6.2 Key Personnel

      The future success of Metall-Treat will depend, to a certain extent, upon the ability and efforts of its new directors and senior management. Two (2) key employees, namely Tay Yan Lim and Ang Guek Hoon will continue to be employed until 31 December 2007, after which their employment may be extended subject to the terms of their employment letter. The Group believes that the tenure of their employment provides sufficient time for a smooth transfer of technology.
6.3 Foreign Exchange Risk

      Currently, the revenue of Metall-Treat is denominated in Singapore Dollar (SGD) and as such the earning contribution from Metall-Treat would be subjected to the performance of the SGD relative to Ringgit. However, the exposure to the fluctuation in SGD is mitigated through matching SGD-denominated sales and purchases by Metall-Treat. Foreign exchange differences are taken to the foreign exchange reserves in the Group's shareholders' equity. There can be no assurance that the fluctuations of the exchange rate will not adversely affect the financial position of the Group.
6.4 Competition Risk

      Metall-Treat faces competition from local, global and/or new players. These players compete on the basis of quality of services, pricing, technical expertise and range of services. The increased competition may reduce the operating margin of the company. The Group believes that the company would be able to mitigate the competition risk by continuously providing quality service exceeding customers' expectation and a one-stop service centre for customers with established protection of customers' intellectual property and technologies. To remain competitive, the Group intends to further enhance Metall-Treat's technical competencies with the Group's in-house research and development team.


7. APPROVAL REQUIRED

      The Proposed Acquisition is not subject to the approval of shareholders of Frontken and any relevant government authority.

8. INTEREST OF DIRECTORS, SUBSTANTIAL SHAREHOLDERS AND / OR PERSONS CONNECTED TO THEM

      None of the directors and substantial shareholders of Frontken and/or any persons connected to them has any interest, direct or indirect, in the Proposed Acquisition.


9. DIRECTORS' STATEMENT

      The Board of Frontken, after careful deliberation, is of the opinion that the Proposed Acquisition is in the best interest of Frontken and its shareholders.

10. DEPARTURE FROM GUIDELINES

      The Proposed Acquisition has not departed from the Securities Commission's Guidelines for MESDAQ Market.

11. DOCUMENTS FOR INSPECTION

      The SPA is available for inspection at the registered office of Frontken at Suite 1603, 16th Floor, Wisma Lim Foo Yong, 86, Jalan Raja Chulan, 50200, Kuala Lumpur from Mondays to Fridays (except public holidays) during business hours from 9.00 a.m. to 5.00 p.m. for a period of three (3) months from the date of this announcement.

This announcement is dated 12 October 2006.

Table 1 – Payment of Purchase Consideration


Vendors No of Metall-Treat Shares Held  % Purchase Price First Payment on closing date Final Payment on 30 Nov 2006
      SGD'000 SGD'000 SGD'000
Tay Yan Lim 153,000 51 1,785 35 1,750
Tan Ser Hean 30,000 10 350 350 -
Goh Len Tse 90,000 30 1,050 1,050 -
Pung Tong Seng 27,000 9 315 315 -
  300,000 100 3,500 1,750 1,750


Table 2 – Directors and Shareholders of Metall-Treat

Name Designation No. of Metall-Treat Shares Held %
Tay Yan Lim Director 153,000 51
Tan Ser Hean Director 30,000 10
Goh Leng Tse - 90,000 30
Pung Tong Se Director 27,000 9
    300,000 100