ANNOUNCEMENT
PALETTE MULTIMEDIA BERHAD (“PALETTE” OR “COMPANY”)
- PROPOSED ACQUISITION OF THE ENTIRE ISSUED AND PAID-UP SHARE CAPITAL OF QUADTEL ASIA PTE LTD (“QUADTEL”) FOR A PURCHASE CONSIDERATION OF RM1,600,000 (“PROPOSED ACQUISITION”)
- PROPOSED EMPLOYEE SHARE OPTION SCHEME OF UP TO TEN PERCENT (10%) OF THE ISSUED AND PAID-UP SHARE CAPITAL OF PALETTE (“PROPOSED ESOS”)
(COLLECTIVELY REFERRED TO AS “PROPOSALS”)
1.INTRODUCTION
On behalf of the Board of Directors of Palette (“Board”), Affin Merchant Bank Berhad (“Affin Merchant”) is pleased to announce that Palette had on 1 November 2002 entered into the following two (2) conditional agreements for the Proposed Acquisition:-
(i)A Share Sale Agreement (“SSA I”) between Palette and Keane Engineering Pte Ltd (“KEPL”), wherein Palette proposes to acquire approximately 54.22% of the equity interest in Quadtel comprising 931,008 ordinary shares of SGD1.00 each (“Quadtel Shares I”) for a purchase consideration of RM968,277 to be satisfied by the issuance of new ordinary shares of RM0.25 each in Palette (“PaletteShares”); and
(ii)A Share Sale Agreement (“SSA II”) between Palette and Saw Meng Tee (“SMT”), Michael Ang Boon Chye (“MABC”) and Tan Wang Cheow (“TWC”), wherein Palette proposes to acquire approximately 45.78% of the equity interest in Quadtel comprising 785,995 ordinary shares of SGD1.00 each (“Quadtel Shares II”) for a purchase consideration of RM631,723 to be satisfied by the issuance of new Palette Shares.
Additionally, on behalf of the Board, Affin Merchant is pleased to announce that Palette is proposing to implement the Proposed ESOS.
- THE PROPOSED ACQUISITION
2.1Particulars of the Proposed Acquisition
Pursuant to the SSA I and SSA II, Palette is proposing to acquire the entire equity interest in Quadtel comprising 1,717,003 ordinary shares of SGD1.00 each for a total purchase consideration of RM1,600,000 to be satisfied by the issuance of 1,882,353 new Palette Shares on the following basis:-
Vendors / No. of shares in Quadtel / % in Quadtel / Purchase considerationRM / No. of Palette Shares to be issued
SSA I / KEPL / 931,008 / 54.22 / 968,277 / 1,139,150
SSA II / SMT
MABC
TWC / 362,467
211,764
211,764 / 21.11
12.33
12.34 / 291,323
170,200
170,200 / 342,733
200,235
200,235
Total / 1,717,003 / 100.00 / 1,600,000 / 1,882,353
The total purchase consideration of RM1,600,000 for the entire equity interest in Quadtel was arrived at on a “willing-buyer willing-seller” basis after taking into consideration the audited consolidated net tangible assets (“NTA”) of Quadtel as at 31 August 2002 of RM1,553,873, which represents approximately 2.97% premium over the consolidated NTA of Quadtel.
Based on the SSA I and the SSA II, the Quadtel Shares I and Quadtel Shares II will be purchased at RM1.04 and RM0.804 per share, respectively. A higher purchase consideration for the Quadtel Shares I on a per share basis is made for the premium of the controlling stake in Quadtel and to secure David Malcolm Keane (“DMK”), who is the controlling shareholder of KEPL and the key personnel of Quadtel, to enter into a management service agreement with Quadtel for a period of three (3) years.
The issue price of RM0.85 per Palette Share for the 1,882,353 new Palette Shares to be issued to satisfy for the Proposed Acquisition was derived from the five (5)-day weighted average market price of Palette Shares as traded on the Kuala Lumpur Stock Exchange (“KLSE”) up to 31 October 2002, being the last trading day prior to the date of the SSA I and SSA II.
The Quadtel Shares I and Quadtel Shares II will be acquired free from any mortgage, lien, charge, encumbrance or adverse claim or interest of any nature whatsoever with all benefits, rights and entitlements accrued or attaching thereto subject to and upon the terms and conditions contained in the SSA I and SSA II.
The new Palette Shares to be issued pursuant to the Proposed Acquisition shall, upon allotment and issue, rank pari passu in all respects with the existing issued and fully paid-up Palette Shares except that they shall not be entitled to any dividends, rights, allotments and/or other distributions, the entitlement date of which is prior to the date of allotment of the new Palette Shares.
Upon completion of the Proposed Acquisition, Quadtel will become a wholly-owned subsidiary of Palette.
2.2Salient terms of the SSA I and SSA II
The salient terms of the SSA I areas follows:-
(i)KEPL and Palette shall use their respective best endeavours to ensure that the following conditions shall be satisfied by twelve (12) months from the date of the SSA I:-
(a)the passing of a resolution at a general meeting of Palette approving the purchase of the Quadtel Shares I on the terms and conditions set out in the SSA I;
(b)the approvals of the Securities Commission (“SC”), MESDAQ Market of the KLSE and any other relevant authority being obtained by Palette;
(c)a due diligence audit on the necessary books and the accounts of Quadtel has been made by the auditors appointed by Palette and that the report of such audit is satisfactory and acceptable to Palette; and
(d)that a management service agreement be entered into between Quadtel and DMK for a period three years.
(ii)The new Palette Shares to be issued to KEPL shall subject to moratorium of two (2) years from the date of allotment in the following manners:-
(a)2/3 during the 1st year of the moratorium period; and
(b)1/3 during the 2nd year of the moratorium period.
(iii)Three (3) years from the date of the completion of the SSA I, KEPL shall not engage in any of the following in Malaysia, Singapore, Thailand and Indonesia:-
(a)provide broadband solutions or consultancy or any part thereof;
(b)sign and distribute products for Agere Systems Inc., Lucent Technology Inc., Netscreen Technology Inc. and Sitara Networks Inc.;
(c)to set up another company which is in direct competition with any part of business of Palette and its subsidiaries (“Palette Group”); and
(d)use any name bearing the word “Quadtel”.
(iv)if the conditions set out in item (i) above shall not be fulfilled by twelve (12) months from the date of the SSA I or such other date as shall be agreed by Palette, any party may rescind the SSA I by written notice to the other party.
For the SSA II, the salient terms are as follows:-
(i)SMT, MABC, TWC and Palette shall use their respective best endeavours to ensure that the following conditions shall be satisfied by twelve (12) months from the date of the SSA II:-
(a)the passing of a resolution at a general meeting of Palette approving the purchase of the Quadtel Shares II on the terms and conditions set out in the SSA II;
(b)the approval of SC, MESDAQ Market of the KLSE and other relevant authority being obtained by Palette;
(c)a due diligence audit on the necessary books and accounts of Quadtel has been made by the auditors appointed by Palette and that the report of such audit is satisfactory and acceptable to Palette;
(d)the completion of the SSA II.
However, Palette shall have the absolute right to waive any of the above.
(ii)The new Palette Shares to be issued to SMT, MABC and TWC shall subject to moratorium of two (2) years from the date of allotment in the following manners:-
(a)2/3 during the 1st year of the moratorium period; and
(b)1/3 during the 2nd year of the moratorium period.
(iii)Three (3) years from the date of the completion of the SSA II, SMT, MABC and TWC shall not engage in any of the following in Malaysia, Singapore, Thailand and Indonesia:-
(a)provide broadband solutions or consultancy or any part thereof;
(b)sign and distribute products for Agere Systems Inc., Lucent Technology Inc., Netscreen Technology Inc. and Sitara Networks Inc.;
(c)to set up another company which is in direct competition with any part of business of the Palette Group; and
(d)use any name bearing the word “Quadtel”.
(v)if the conditions set out in item (i) above shall not be fulfilled by twelve (12) months from the date of the SSA II or such other date as shall be agreed by Palette, any party may rescind the SSA II by written notice to the other party.
2.3Information on Quadtel
Quadtel was incorporated as a private limited company in Singapore on 18 April 2000. Its current authorised share capital is SGD2,000,000 comprising 2,000,000 ordinary shares of SGD1.00 each, of which 1,717,003 ordinary shares of SGD1.00 each have been issued and fully paid-up.
Quadtel’s headquarters is in Singapore and it has an office in Malaysia and distributors in Australia, Thailand and Indonesia. It is the distributor of many broadband network products such as bandwidth management tools, subscriber management tools, billing systems, RADIUS servers, etc., and it provides consulting services to many telcos and ISPs. Some of its customers include major telcos and ISPs in the Asia Pacific region and Australia.
Quadtel established its presence in Malaysia in year 2001 through the incorporation of Quadtel Malaysia Sdn Bhd (“QMSB”) on 23 April 2001 with a paid-up capital of RM2.00. The principal activities of QMSB are similar to those of Quadtel’s.
The audited historical financial information of Quadtel and QMSB is set out below:-
Quadtel / QMSBFrom 18-04-00 to 31-12-00 / Financial year ended 31-02-01 / From 01-01-02 to 31-08-02 / From 23-04-01 to 31-12-01 / From 01-01-02 to 31-08-02
RM’000*
/ RM’000* / RM’000* / RM’000 / RM’000Turnover / 176 / 4,815 / 1,808 / 8 / 970
Net (loss)/
profit / (717) / (1,268) / (36) / (221) / 191
*Translated from SGD into RM in accordance to the Malaysian Accounting Standard Board No. 6.
Since the date of incorporation, Quadtel and QMSB have not declared any dividend. Any future dividend that may be declared would depend on, inter-alia, their investment policies, profitability and cashflow positions.
3.THE PROPOSED ESOS
The Proposed ESOS will involve the granting of options (“ESOS Options”) to the eligible employees and Executive Directors of the Palette Group to purchase the new Palette Shares who meet the eligibility criteria for participation in the Proposed ESOS as set out in the by-laws containing the terms and conditions of the Proposed ESOS, which shall, inter-alia, stipulate the following salient terms:-
(i)Quantum
The total number of ESOS Options to be offered shall not be more than ten percent (10%) of the issued and paid-up share capital of Palette at any point of time whereby:-
(a)not more than fifty percent (50%) of the ESOS Options shall be allocated, in aggregate, to Executive Directors and senior management of Palette; and
(b)not more than twenty five percent (25%) of the ESOS Options would be allocated to any individual Executive Director or eligible employee.
(ii)Eligibility
Only employees (including the full-time Executive Directors) of the Palette Group are eligible to participate in the Proposed ESOS.
(iii)Duration of the Proposed ESOS
The Proposed ESOS shall be in force for a period of ten (10) years from the date of commencement.
The Company is entitled to terminate the Proposed ESOS prior to the expiry of the ten (10) years period provided that prior to the termination of the Proposed ESOS, the approvals of the SC, MESDAQ Market of the KLSE, the shareholders of Palette and all holders of the unexercised ESOS Options have been obtained.
(iv)Exercise price
The price payable upon the exercise of the ESOS Options shall be the higher of either of the following:-
(a)a discount of not more than ten (10%) from the five (5)-day weighted average market price of the Palette Shares at the time the ESOS Option are granted; or
(b)the par value of the Palette Shares.
(v)Rights attaching to the new Palette Shares
The new Palette Shares to be issued pursuant to the exercise of the ESOS Options shall, upon allotment and issue, rank pari passu in all respects with the existing issued and fully paid-up Palette Shares except that they shall not be entitled to any dividends, rights, allotments and/or other distributions, the entitlement date of which is prior to the date of allotment of the new Palette Shares.
- RATIONALE FOR THE PROPOSALS
The rationale for the Proposed Acquisition are as follows:-
(i)Palette is in the business of developing broadband computing and communication products and applications. The current set of Palette’s product portfolio is centered around the edge network at the customers’ premises. Quadtel’s business focus is on the telecommunication companies (“telcos”) and Internet service providers (“ISPs”). Its product portfolio is centered on the core network of telcos and ISPs or some extend, the large enterprises. With the Proposed Acquisition, Palette-Quadtel will be able to provide a complete range of products and services of broadband from telcos’ end to customers’ premises;
(ii)The Proposed Acquisition will give Palette the expertise of the telco network, which is currently lacking in the Company. In addition, it will give Palette the customer base and business relationships of telcos and ISPs that are important in the deployment of broadband services; and
(iii)With the Proposed Acquisition, Palette will have an immediate presence in Singapore as Quadtel is a Singapore-based company. Palette will also be able to leverage on Quadtel’s distribution channel in Middle East and North Asia.
The Proposed ESOS is intended to reward and retain dedicated and loyal employees whose services have contributed to the continued growth of the business of the Palette Group. The Proposed ESOS would also motivate the employees toward better performance through greater dedication and loyalty with the view to enhance the productivity and long-term profitability of the Palette Group. It is also designed to provide incentive to stimulate greater efforts to the eligible employees to continue contributing towards the continued growth of the Palette Group and at the same time to generate a sense of ownership through the equity participation.
5.EFFECTS OF THE PROPOSALS
5.1Share Capital and Shareholding Structure
The proforma effects of the Proposals on the issued and paid-up share capital of Palette are as follows:-
No. of sharesof RM0.25 each
‘000
Existing as at 26 August 2002 / 96,000
To be issued pursuant to the Proposed Acquisition / 1,882
97,882
Assuming full exercise of the ESOS Options* / 9,600*
Enlarged share capital / 107,482
*Based on ten percent (10%) of the existing share capital of 96,000,000 Palette Shares of RM0.25 each.
5.2NTA
Based on the audited consolidated accounts of Palette as at 31 December 2001, the proforma effects of the Proposals on the NTA of the Palette Group, assuming the Proposals had been implemented on that date, are illustrated as follows:-
I / IIAudited as at
31 December 2001 / After the Proposed Acquisition / After II and full exercise of the ESOS Options(2)
RM’000 / RM’000 / RM’000
Share capital / 24,000 / 24,471 / 26,871
Share premium / 1,771 / 2,900 / 7,844
Retained profits / 443 / 443 / 443
Shareholders’ funds / 26,214 / 27,814 / 35,158
Goodwill/intangible assets / 18,501 / 18,547(1) / 18,547
NTA / 7,713 / 9,267 / 16,611
NTA per share (sen) / 8.03 / 9.47 / 15.45
Notes:-
(1)Including the goodwill of RM46,127 arising from the Proposed Acquisition.
(2)Assuming the ESOS Options are exercised at RM0.765 per Palette Share, after taking into consideration ten percent (10%) discount from the five (5)-day weighted average market price of Palette Shares up to 31 October 2002 of RM0.85.
5.3Earnings
The Proposed Acquisition is not expected to have any material effect on the earnings of the Palette Group for the financial year ending 31 December 2002 as the Proposed Acquisition is only expected to be completed by the 1st half of 2003. However, the Proposed Acquisition is expected to contribute positively to the future earnings of the Palette Group.
The Proposed ESOS is also not expected to have any material impact on the earnings of the Palette Group for the financial year ending 31 December 2002 as the Proposed EOS is only expected to be implemented in the 1st half of 2003. Any potential effect on the earnings of the Palette Group in the future would depend on the number of ESOS Options granted and exercised at any point in time as well as the exercise price of the ESOS Options.
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5.4Substantial shareholders’ shareholdings
The proforma effect of the Proposals on the substantial shareholders’ shareholdings in Palette are as follows:-
Substantial shareholders / Existing as at 26 August 2002 / IAfter the Proposed Acquisition / II
After I and
full exercise of the ESOS Options
Direct / Indirect / Direct / Indirect / Direct / Indirect
No. of shares
‘000 / % / No. of shares
‘000 / % / No. of shares
‘000 / % / No. of shares ‘000 / % / No. of shares
‘000 / % / No. of shares
‘000 / %
Eg Kah Yee / 61,135 / 63.68 / 1,819(1) / 1.90 / 61,135 / 62.46 / 1,819(1) / 1.86 / 61,135(3) / 56.88 / 1,819(1) / 1.69
Lembaga Tabung Haji / 12,000 / 12.50 / - / - / 12,000 / 12.26 / - / - / 12,000 / 11.16 / - / -
Employees Provident Fund Board / 7,149 / 7.45 / - / - / 7,149 / 7.30 / - / - / 7,149 / 6.65 / - / -
Eg Kaa Chee / 587 / 0.61 / 61,135(2) / 63.68 / 587 / 0.60 / 61,135(2) / 62.46 / 587 / 0.55 / 61,135(2) / 56.88
Notes:-
(1)Deemed interested through his substantial shareholding in Digital Season Sdn Bhd, and by virtue of his brother, Eg Kaa Chee’s shareholding.
(2)Deemed interested by virtue of his brother, Eg Kah Yee’s shareholdings.
(3)Has not taking into consideration the ESOS Options that may be granted to and exercised by him.
Based on the foreign shareholding in Palette of 1.18% as at 15 August 2002, upon completion of the Proposed Acquisition but prior to the exercise of any of the ESOS Options, Palette’s foreign shareholding will increase to 3.08%.
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- APPROVALS REQUIRED
The Proposals are conditional upon approvals being obtained from the following:-
(i)the SC;
(ii)the MESDAQ Market of the KLSE;
(iii)the shareholders of Palette at an Extraordinary General Meeting (“EGM”) to be convened, and
(iv)any other relevant authorities
- DIRECTORS’ AND SUBSTANTIAL SHAREHOLDERS’ INTERESTS
None of the Directors or substantial shareholders of Palette and persons connected with them has any interest, direct or indirect, in the Proposed Acquisition.
Eg Kah Yee, the Managing Director of Palette, will be entitled to participate in the Proposed ESOS and therefore is deemed interested in the Proposed ESOS. Accordingly, he will abstain from all deliberations and voting in respect of his proposed allocation of the ESOS Options under the Proposed ESOS at the Board meeting of Palette. He will also abstain from voting in respect of his direct and indirect shareholdings in Palette on the ordinary resolution pertaining to the proposed allocation of the ESOS Options to him under the Proposed ESOS to be tabled at an EGM to be convened.
Save as disclosed above, none of the other Directors or substantial shareholders of Palette and persons connected to them has any interest, direct or indirect, in the Proposed ESOS.
8.INVESTMENT RISK
The Board is of the opinion that the only key investment risk in relation to the Proposed Acquisition is the loss of DMK, who is currently the key personnel of Quadtel and has the relevant skills and experience that are important for the continued success of the business of Quadtel. To mitigate this risk, as one of the conditions in the SSA I, Quadtel will enter into a management service agreement with DMK to ensure continuity of management over a period of three (3) years. During this period, Quadtel will also endeavour to groom more skilled personnel to contribute to the long-term growth of Quadtel.