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GRAND-FLO SOLUTION BERHAD (“GRAND-FLO” or “COMPANY”) (i) PROPOSED BONUS ISSUE OF UP TO 56,804,000 NEW ORDINARY SHARES OF RM0.10 EACH IN GRAND-FLO (“GRAND-FLO SHARES” OR “SHARES”) TO BE ISSUED AND CREDITED AS FULLY PAID-UP TO THE SHAREHOLDERS OF GRAND-FLO ON THE BASIS OF ONE (1) NEW SHARE FOR EVERY ONE (1) EXISTING SHARE HELD; (ii) PROPOSED ACQUISITION OF 100% EQUITY INTEREST IN SPRITVEST SDN BHD AND DATA CENTRIX SDN BHD FOR A TOTAL PURCHASE CONSIDERATION OF RM14,000,000, RM7,000,000 TO BE SATISFIED BY THE ISSUANCE OF NEW GRAND-FLO SHARES AND RM7,000,000 TO BE SATISFIED BY CASH CONSIDERATION; AND (iii) PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL. (COLLECTIVELY KNOWN AS “PROPOSALS”)

GRAND-FLO SOLUTION BERHAD

Type

Announcement
SubjectGRAND-FLO SOLUTION BERHAD (“GRAND-FLO” or “COMPANY”)

(i) PROPOSED BONUS ISSUE OF UP TO 56,804,000 NEW ORDINARY SHARES OF RM0.10 EACH IN GRAND-FLO (“GRAND-FLO SHARES” OR “SHARES”) TO BE ISSUED AND CREDITED AS FULLY PAID-UP TO THE SHAREHOLDERS OF GRAND-FLO ON THE BASIS OF ONE (1) NEW SHARE FOR EVERY ONE (1) EXISTING SHARE HELD;

(ii) PROPOSED ACQUISITION OF 100% EQUITY INTEREST IN SPRITVEST SDN BHD AND DATA CENTRIX SDN BHD FOR A TOTAL PURCHASE CONSIDERATION OF RM14,000,000, RM7,000,000 TO BE SATISFIED BY THE ISSUANCE OF NEW GRAND-FLO SHARES AND RM7,000,000 TO BE SATISFIED BY CASH CONSIDERATION; AND

(iii) PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL.

(COLLECTIVELY KNOWN AS “PROPOSALS”)

Contents :

1. INTRODUCTION

      On behalf of the Board of Directors of Grand-Flo ("Board"), K & N Kenanga Bhd ("Kenanga") is pleased to announce that:-

      (i) the Company proposes to implement a bonus issue of up to 56,804,000 new Shares ("Bonus Shares") to be credited as fully paid-up to the shareholders of Grand-Flo on the basis of one (1) new Share for every one (1) existing Share held in Grand-Flo ("Proposed Bonus Issue");

      (ii) on 22 March 2006, the Company entered into a conditional sale and purchase agreement ("SPA") to acquire the entire equity interest in both Spritvest Sdn Bhd ("Spritvest") and Data Centrix Sdn Bhd ("DCB") (collectively known as the "Acquiree Companies") from Cheng Ping Liong and Othman Bin Bakri (collectively referred to as "Vendors") for a total purchase consideration ("Purchase Consideration") of RM14,000,000 ("Proposed Acquisitions"). RM7,000,000 of the Purchase Consideration is to be satisfied by the issuance of new Grand-Flo Shares ("Consideration Shares") and the remaining RM7,000,000 will be satisfied by cash consideration ("Cash Consideration").
          The proposed issue price for the Consideration Shares was determined based on the 5-day weighted average market price (“5-day WAMP”) of Grand-Flo as at 20 March 2006 of RM1.05 per Share. As the Proposed Bonus Issue is expected to be completed before the Proposed Acquisitions, the issue price of the Consideration Shares will be RM0.525, being the 5-day WAMP of Grand-Flo as at 20 March 2006, adjusted for the Proposed Bonus Issue . Accordingly, 13,333,333 Consideration Shares will be issued to satisfy RM7,000,000 of the Purchase Consideration.

      In conjunction with the expected increase in the share capital of the Company arising from the issue of the Bonus Shares and the Consideration Shares, the Company also proposes to increase its authorised share capital from RM10,000,000 comprising 100,000,000 Grand-Flo Shares to RM25,000,000 comprising 250,000,000 Grand-Flo Shares (“Proposed Increase In Authorised Share Capital”).

2. DETAILS OF THE PROPOSALS

      2.1 Details of the Proposed Bonus Issue
          The Company proposes to implement a bonus issue of up to 56,804,000 new Shares to be credited as fully paid-up on the basis of one (1) new Share for every one (1) existing Share held to the registered shareholders of the Company whose names appear in the Record of Depositors of the Company at the close of business on an entitlement date for the Proposed Bonus Issue (“Entitlement Date”) to be determined and announced later.

          The Company proposes to capitalise its share premium reserves and/or retained profits as at 31 December 2005 for the Proposed Bonus Issue. Based on the latest unaudited quarterly results of the Company for the financial year ended (“FYE”) 31 December 2005, Grand-Flo’s share premium reserves and retained profits at company level are RM5,044,998 and RM932,766 respectively. In connection with this, the auditors of the Company have confirmed that the Company has sufficient share premium reserves and retained profits for the capitalization of the Proposed Bonus Issue.

          The exact number of new Shares to be issued pursuant to the Proposed Bonus Issue is dependent on the number of Shares issued as at the Entitlement Date of the Proposed Bonus Issue, taking into account any new Shares to be issued prior/on the Entitlement Date arising from:-
(i) the exercise of the options under the Employee Share Option Scheme (“ESOS”) of the Company; and
          (ii) proposed private placement of up to 10% of the issued and paid-up share capital of Grand-Flo as announced by the Company on 15 March 2006 (“Proposed Private Placement”)

          The Bonus Shares to be issued pursuant to the Proposed Bonus Issue shall, upon allotment and issue, rank pari passu in all respects with the existing ordinary shares of the Company save and except that they will 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 said Bonus Shares.
      2.2 Details of the Proposed Acquisitions
          The Company proposes to acquire the entire equity interest in both Spritvest and DCB from the Vendors for a total purchase consideration of RM14,000,000 to be satisfied by:-

          (i) the issuance of 13,333,333 new Grand-Flo Shares at an issue price of RM0.525 per Share (which is the 5-day WAMP of Grand-Flo Shares up to 20 March 2006 of RM1.05, adjusted for the Proposed Bonus Issue); and

          (ii) RM7,000,000 in cash consideration .

          A summary of the terms of payment for the Proposed Acquisitions are stipulated below:-

          Timimg of PaymentTerms of Payment
          (a)Upon execution of the SPA RM500,000 to be paid in cash to the Vendors’ solicitors as a refundable and forfeitable deposit.
          (b)On the date of completion of the Proposed Acquisitions.RM750,000 to be paid in cash to the Vendors and RM7,000,000 to be settled by way of issuance of the Consideration Shares to the Vendors in equal proportions.
          (c)On or before thirty (30) calendar days after the audited accounts of the Acquiree Companies for the financial year ending 31 December 2006 having been adoptedRM2,875,000 to be paid in cash to the Vendors in equal proportions upon achievement of the first year Profit Guarantee of RM2,000,000, in the manner and subject to such adjustments, as set out in Section 4(a) of Appendix I.
          (d)On or before thirty (30) calendar days after the audited accounts of the Acquiree Companies for the financial year ending 31 December 2007 having been adoptedRM2,875,000 to be paid in cash to the Vendors in equal proportions upon achievement of the second year Profit Guarantee of RM2,500,000, in the manner and subject to such adjustments, as set out in Section 4(b) of Appendix I.
Please refer to Section 1 of Appendix I for full details on the terms of payment.
          In respect of the above, the Vendors have agreed to sell and/or procure the sale of the entire issued and paid up share capital of the Acquiree Companies to Grand-Flo.

          2.2.1 Background information on Acquiree Companies

          (a) Spritvest
                  Spritvest was incorporated on 26 June 1995 in Malaysia under the Companies Act, 1965 as a private limited company. The authorised and issued and paid-up share capital of Spritvest are RM1,000,000 comprising 1,000,000 ordinary shares of RM1.00 each (“Spritvest Shares”). Spritvest does not have any subsidiary or associated companies.
                  Spritvest is principally engaged in the design, development and implementation of automatic data capture and mobile data systems (“Enterprise Data Capture” or “EDC” solutions) for various industries including fast moving consumer goods (“FMCG”), healthcare, government, retail, logistics and security sectors. The shareholders and directors of Spritvest and their respective shareholdings in the company are set out in Table 1.
                  Based on the latest management accounts of Spritvest for the financial year ended (“FYE”) 31 December 2005, the net assets and profit after tax ("PAT") of Spritvest amounted to RM2,964,000 and RM430,000 respectively.


              (b) DCB
                  DCB was incorporated on 13 May 2005 in Malaysia under the Companies Act, 1965 as a public limited company under the name of Data Centrix Bhd. On 15 March 2006, DCB was converted to a private limited company and assumed its present name. The authorised share capital of DCB is RM2,500,000 comprising 25,000,000 ordinary shares of RM0.10 each, of which 500,000 shares of RM0.10 each (“DCB Shares”) have been issued and fully paid-up.
                  DCB is principally engaged in the research and development of EDC Solutions. DCB obtained its Multimedia Super Corridor (“MSC”) status on 15 June 2005. The shareholders and directors of DCB and their respective shareholdings in the company are set out in Table 2.

                  Based on the management accounts of DCB for the FYE 31 December 2005, the net assets and PAT of DCB amounted to RM409,000 and RM960,000 respectively.
          2.2.2 Basis of arriving at the Purchase Consideration and mode of satisfaction

              The Purchase Consideration for the Proposed Acquisitions was arrived at between Grand-Flo and the Vendors on a willing-buyer willing-seller basis after taking into consideration the following:-
          (i) earnings potential of the Acquiree Companies; and
              (ii) the profit guarantee of the Vendors whereby they warrant that the Acquiree Companies shall achieve an aggregate PAT of at least RM2,000,000 and RM2,500,000 (after eliminating all transactions entered into between Spritvest and DCB and all profits arising therefrom (“Intercompany Elimination”)) for the FYE 31 December 2006 and 2007 respectively (“Profit Guarantee”). Please refer to Section 3 of Appendix I.
    The Vendors have also warranted a combined net tangible assets (“NTA”) of the Acquiree Companies of RM3,000,000 including cash and bank balances of at least RM500,000 as at 31 December 2005 as mentioned in section 2(j) of Appendix I .
                The Consideration Shares will rank pari passu in all respects with the existing Grand-Flo Shares in issue at the date of allotment except that they will not be entitled to any dividends, rights, allotments and/or distributions the entitlement date of which is prior to the date of allotment of the Consideration Shares. For the avoidance of doubt, the Consideration Shares will not be entitled to the Proposed Bonus Issue.
        2.2.3 Basis of arriving at the proposed issue price of the Consideration Shares
                The proposed issue price for the Consideration Shares was determined based on the 5-day WAMP of Grand-Flo to 20 March 2006 of RM1.05 per share. As the Proposed Bonus Issue is expected to be completed before the Proposed Acquisitions, the issue price will be RM0.525, which is based on the 5-day WAMP of Grand-Flo as at 20 March 2006, adjusted for the Proposed Bonus Issue.
    2.2.4 Source of funding for the Cash Consideration
                The Cash Consideration is expected to be funded from Grand-Flo group's internally generated funds and/or bank borrowings.
        2.2.5 Liabilities to be assumed
                There are no other liabilities to be assumed by Grand-Flo pursuant to the Proposed Acquisitions other than those liabilities incurred by Acquiree Companies in the ordinary course of their business operations.
        2.2.6 Original cost of investment and date of investment
                The original cost and dates of investment in the Acquiree Companies by the Vendors are set in Table 3 and 4 respectively.
        2.2.7 Salient terms of the SPA
              A summary of the salient terms of the SPA is set out in Appendix I.

      2.2.8 Financial information on Spritvest and DCB
                  The key financial information of Spritvest and DCB is set out in Table 5 and 6 respectively.
          2.2.9 Background information on the Vendors
                  Cheng Ping Liong, aged 41, a Malaysian, is one of the founders of Spritvest and is a director of the Acquiree Companies. He graduated with a Bachelor of Business Administration from the University of Iowa, USA in 1989. He also has more than 15 years of experience in the development of EDC Solutions.

                  Othman Bakri, aged 42, a Malaysian, is one of the founders of Spritvest and is a director of the Acquiree Companies. He graduated with a Bachelor of Science Degree in Mining Engineering from the University of Nevada-Reno, USA in 1987. He has more than 18 years of experience specialising in Auto-ID and Enterprise Data Management technologies as well as sales and marketing.
          2.2.10 Contingent Payment in the event that the Profit Guarantee is exceeded
                  In the event that the Acquiree Companies (on an aggregate basis and after Intercompany Elimination) shall achieve an audited consolidated PAT for FYE 31 December 2007 which exceeds RM2,500,000, the Purchase Consideration shall be automatically increased by an aggregate sum equivalent to thirty per cent (30%) of the quantum of the excess PAT.


          2.3 Proposed Increase In Authorised Share Capital
              To facilitate the issue of the Bonus Shares and the Consideration Shares, Grand-Flo proposes to increase its authorised share capital from the existing RM10,000,000 comprising 100,000,000 Grand-Flo Shares to RM25,000,000 comprising 250,000,000 Grand-Flo Shares.

      3. RATIONALE FOR THE PROPOSALS

          3.1 Rationale for the Proposed Bonus Issue
              The Proposed Bonus Issue will provide shareholders with greater participation in the equity of Grand-Flo in terms of the number of shares held. It is expected to enhance the liquidity in the trading of Grand-Flo Shares so that a wider spread of investors can participate in the growth of Grand-Flo. The Proposed Bonus Issue will also reward existing shareholders for their support of the Company.
      3.2 Rationale for the Proposed Acquisitions
              Since its listing in November 2004, Grand-Flo has aspired to become a leading player regionally in South East Asia for the Enterprise Data Collection and Collation System (“EDCCS”) industry. To realise this vision, the Group has embraced an acquisition strategy to boost growth in revenues, profits and market share. As part of the strategy, Grand-Flo had on 1 April 2005, acquired a 49% equity interest in Simat Mobile Computer Co. Ltd (“Simat”) to strengthen its presence in Thailand.

              The Proposed Acquisitions of the Acquiree Companies, which are major players in the domestic EDCCS industry, will further enhance the market strength and market position of Grand-Flo in the industry.

              In addition, the Proposed Acquisitions are expected to provide various synergistic benefits to the enlarged Grand-Flo group, as the businesses of the Grand-Flo Group and the Acquiree Companies are complementary in nature. Grand-Flo’s core strengths lie in the provision of EDCCS to the manufacturing and electronic sectors whilst the Acquiree Companies are strong in the FMCG, government and healthcare sectors. Together, the Grand-Flo group and the Acquiree Companies group will be able to provide better value propositions to their customers in terms of a wider range of product offerings and solutions. Grand-Flo will be able to promote Spritvest's products to its network of sales offices in regions which were previously untapped by Spritvest. This includes the northern and southern regions of Peninsular Malaysia, Thailand, Singapore and also via the Company's reseller in the Philippines.

              The enlarged Grand-Flo group will also be able to combine technical, management, marketing and development resources to derive economies of scale in its operations and to take advantage of cross selling opportunities, going forward.

      3.3 Rationale for the Proposed Increase In Authorised Share Capital
              The Proposed Increase In Authorised Share Capital is to accommodate the increase in the issued and paid-up share capital of the Company pursuant to the Proposed Bonus Issue and Proposed Acquisitions as well as any new Shares to be issued by Grand-Flo arising from any future corporate exercises.

      4. PROSPECTS AND RISK FACTORS RELATING TO THE PROPOSED ACQUISITIONS

      4.1 Prospects of IT Industry in Malaysia

              Association of the Computer and Multimedia Industry, Malaysia (“PIKOM”) forecasts that the information and communications technology (“ICT”) industry to experience about 12% growth in 2006 as compared to 10% in 2005. PIKOM is bullish on the 2006 outlook. The economic indicators point to a higher overall growth for the national economy in 2006. This augurs well for the ICT industry.
          (Source: Article entitled PIKOM'S ICT Outlook For 2006, www.pikom.org.my)
              In view of the positive ICT outlook above, the Company believes that with the increased market share after the Proposed Acquisitions, it is poised to achieve significant growth in revenue and earnings.

          4.2 Risk Factors

              As the operations of the Acquiree Companies will be largely similar to the existing operations of Grand-Flo, they are exposed to certain inherent risks similar to those of Grand-Flo. The following is a summary of specific risks (which may not be exhaustive) that may have a significant impact on the Proposed Acquisitions:-

          (i) General business risks
                  The Acquiree Companies’ revenue and operating results are exposed to general business risks as well as certain risks inherent in the EDCCS industry. These may include, amongst others, intensity of competition, continuity of business agreements with existing customers/suppliers, changes in general economic, business and credit conditions and material defects liability. Material defects would potentially expose the Company to risks of loss of clients.

                  As the operations of the Acquiree Companies will be largely similar to the existing operations of Grand-Flo, the Board believes that these risks can be mitigated by Grand-Flo's expertise and familiarity with the nature of the Acquiree Companies operations as well as the industry in which the Acquiree Companies operate.

          (ii) Merger risks
                  The Company proposes to acquire the Acquiree Companies as part of its growth strategy to achieve its vision to become a leading player in the EDCCS industry in the SEA region. The success of this strategy will depend significantly on the ability of the Company to combine their operations with that of the Acquiree Companies to gain the synergies from the integration process. However, due to the difference in corporate cultures as well as management and operational systems, there is no assurance that both the Companies and the Acquiree Companies will be able to implement the integration process without encountering difficulties such as operational disruptions and the loss of clientele and key employees.

          (iii) Dependence on key personnel
                  The success of the Acquiree Companies particularly Spritvest’s operations is dependent to a certain extent on the key management personnel. Accordingly, the loss of any key personnel may to a certain extent have an adverse effect on their operations.

                  However, Grand-Flo expects to retain the current key management staff of the Acquiree Companies, after the completion of the Proposed Acquisitions. In addition, Grand-Flo will also continue to promote loyalty not only the key staff but to all employees of the Acquiree Companies and to inculcate a conducive working environment for the continual growth of the enlarged entity. The above are expected to reduce the risk of loss of key personnel of the Acquiree Companies.


          (iv) Investment Risks
                  There can be no assurance that the anticipated benefits of the Proposed Acqusitions will be realised, or that Grand-Flo will be able to generate sufficient revenues from the Proposed Acquisitions to offset associated investment costs, or that Grand-Flo will be able to maintain uniform standards of quality and service, controls, policies and procedures.

                  In order to mitigate the investment risks, the Proposed Acquisitions were entered into after taking into account the Profit Guarantee as described in Section 3 of Appendix I of this announcement.
                  Going forward, the Proposed Acquisitions are expected to augur well for the Group as it will form a stronger footing for the Group to take advantage of new opportunities for further development in the EDCCS industry.

      5. FINANCIAL EFFECTS OF THE PROPOSALS
          5.1 Share Capital
              The effects of the Proposals on the authorised, issued and paid-up share capital of the Company are set out in Table 7 and 8 respectively.

      5.2 Net Assets

              Based on the latest unaudited quarterly results of the Company for the FYE 31 December 2005, the proforma effects of the Proposed Bonus Issue and Proposed Acquisitions on the net assets and net assets per share of Grand-Flo are set out in Table 9.

      5.3 Earnings

              The Proposed Bonus Issue is not expected to have any effect on the earnings of Grand-Flo for the FYE 31 December 2006. However, the future earnings per share of Grand-Flo will correspondingly be reduced as a result of the increase in the issued and paid-up share capital of the Company upon completion of the Proposed Bonus Issue.

              Going forward, the Proposed Acquisitions are expected to contribute significantly to the future earnings of the Group in view of the expected earnings enhancement and synergistic benefits that are expected to be generated by the combination of the business operations of Grand-Flo and the Acquiree Companies.
          5.4 Dividends
              The Company did not declare any dividend for the FYE 31 December 2005. Any declaration of future dividends will be dependent upon the retained profits, cashflow position and the funding requirements of the Company.

      5.5 Substantial shareholders' shareholdings
              The effects of the Proposed Bonus Issue and Proposed Acquisitions on the shareholdings of the substantial shareholders of the Company are set out in Table 10.

      6. APPROVALS REQUIRED

          The Proposals are conditional upon approvals being obtained from the following:-
          (i) Bursa Securities for the listing of and quotation for the Bonus Shares and Consideration Shares to be issued arising from the Proposed Bonus Issue and Proposed Acquisitions respectively on the MESDAQ Market of Bursa Securities;

          (ii) the SC for the Proposed Acquisitions;
      (iii) the FIC (via the SC) for the Proposed Acquisitions;
          (iv) the shareholders of Grand-Flo at an EGM to be convened for the Proposals; and

          (v) any other relevant authorities.

      7. DIRECTORS' AND MAJOR SHAREHOLDERS' INTERESTS

          None of the Directors or substantial shareholders of the Company or persons connected to them has any interest, direct or indirect, in the Proposals other than their respective entitlements as shareholders of the Company in relation to the Proposed Bonus Issue.
        8. DIRECTORS' RECOMMENDATION

            Having considered all aspects of the Proposals, the Board is of the opinion that the Proposals are in the best interest of the Company.
          9. MAIN ADVISER
              Kenanga has been appointed as the Adviser for the Proposals.

          10. SPONSOR
          Kenanga is currently the sponsor of the Company.


          11. ESTIMATED TIME FRAME FOR SUBMISSION AND COMPLETION

              An application to the relevant authorities is expected to be submitted within four (4) months from the date of this announcement. Barring any unforeseen circumstances, the above Proposals are expected to be completed within nine (9) months from the date of this announcement.


          12. DEPARTURE FROM SC GUIDELINES

              The directors of Grand-Flo are not aware of any departure from the Policies and Guidelines on Issue/Offer of Securities issued by the SC arising from the Proposals.

          13. DOCUMENTS FOR INSPECTION

              A copy of the agreement pertaining to the SPA will be available for inspection at the registered office of Grand-Flo, following the date of the announcement for a period of one (1) month from Monday to Friday (except public holidays) during normal business hours.


          This announcement is dated 22 March 2006.
          Table (22.03.06).docAppendix I.doc

          Attachments

          Appendix I.doc
          49 KB

          Table (22.03.06).doc
          107 KB



          Announcement Info

          Company NameGRAND-FLO SOLUTION BERHAD (MESDAQ Market) 
          Stock Name GRANFLO    
          Date Announced22 Mar 2006  
          CategoryGeneral Announcement
          Reference NoO&-060321-84283



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