SPRING GALLERY BERHAD ( SGB OR THE COMPANY ) AND ITS SUBSIDIARIES ( SGB GROUP ) MANAGING CONTRACTOR AGREEMENT BETWEEN PRINSIP NUSANTARA SDN BHD ( PNSB ) AND PROFIT SUNLAND SDN BHD ( PSSB ), A WHOLLY OWNED SUBSIDIARY OF SGB 1. INTRODUCTION On 18 April 2016, the Board of Directors of SGB ( Board ) wishes to announce that PSSB, a whollyowned subsidiary of SGB, has entered into a Managing Contractor Agreement ( MCA ) with PNSB in which PSSB has been appointed as a Managing Contractor for the development of all that piece of land held under PTD 27883, Mukim of Pulai, District of Johor Bahru, State of Johor, measuring approximately 6.02 acres on which currently the Johor State Tennis Academy is situated ( the Land ). The Land is to be developed into a commercial development in accordance with such development policies of The Government Of The State of Johor Darul Ta zim ( State Government ). The development on the Land includes:- (i) (ii) (iii) To relocate the Johor State Tennis Academy on a piece of land at Taman Nusa Duta, Johor Bahru; To construct a new State Tennis Academy consisting of indoor and outdoor tennis courts together with a shooting range and multipurpose courts at Taman Nusa Duta or such other sporting amenities as required by the State Government ( Tennis Complex ); and To develop the Land into a mixed development project which consists of:- (a) a 3-storey shop office which consists of 18 units; and (b) two blocks of 25-storey medium end apartments with a total of 472 units subdivided into 3 types, consisting of 196 units, 200 units and 76 units respectively. (hereinafter referred to as Mixed Development ). The Tennis Complex and the Mixed Development collectively referred to as the Development Project. 2. INFORMATION ON PSSB PSSB was incorporated as a private limited company in Malaysia on 7 May 2015. As at 11 April 2016, being the last practicable date prior to this announcement ( LPD ), the authorised share capital of PSSB is RM5,000,000 comprising 5,000,000 ordinary shares of RM1.00 each ( PSSB Shares ), of which RM2,000,000 comprising 2,000,000 PSSB Shares have been issued and fully paid up. PSSB is presently engaged in the business of construction. 1
3. INFORMATION ON PNSB PNSB was incorporated as a private limited company in Malaysia on 17 August 2007. As at LPD, the authorised share capital of PNSB is RM5,000,000 comprising 5,000,000 ordinary shares of RM1.00 each ( PNSB Shares ), of which RM3,000,000 comprising 3,000,000 PNSB Shares have been issued and fully paid up. PNSB is principally engaged in the business of property developer. As at the LPD, the directors of PNSB are Dato Soh Kok Hiang, Mohd Najib Bin Johan @ Mohd Johan and Teng Geok Peng. The shareholders of PNSB as at the LPD are as follows: Direct Name Shareholders No. of PNSB Shares % Dato Soh Kok Hiang 1,200,000 40.00 Mohd Najib Bin Johan @ Mohd Johan 1,800,000 60.00 Total 3,000,000 100.00 4. INFORMATION ON THE MCA Pursuant to the MCA, PSSB is appointed as the Managing Contractor to provide professional project management facilities ( Facilities ) for the Development Project and to act as the Managing Contractor for PNSB for the purposes of the Development Project and be responsible for the administration, management, consulting, reporting, communication and co-ordination of construction of the Development Project throughout the management period (hereinafter referred to as Managing Contractor ). Management period shall be from the execution date of the MCA until the expiry of 30 months thereafter and including another 18 months for defect liability period, being 48 months from the execution date of the MCA or such other extended period as may be agreed in writing between the parties ( Management Period ). The managing contractor work shall commence on the execution date of the MCA and to be completed within 30 months from the execution date of the MCA or such other extended period as may be agreed in writing between the parties ( Completion Date ). 2
4. INFORMATION ON THE MCA (CONT D) Details of the Development Project Description of the project Type of development Size and location Contract Value (RM 000) (i) a new State Tennis Academy consisting of indoor and outdoor tennis courts together with a shooting range and multipurpose courts at Taman Nusa Duta; Stated Owned Sport Facilities 8.07 acres at Taman Nusa Duta, Johor Bahru (ii) mixed development which consists of:- (a) a 3-storey shop office which consists of 18 units; and (b) two blocks of 25-storey medium end apartments with a total of 472 units subdivided into 3 types Type A, 1,128 square feet ( sq ft ) - 196 units Type B, 1,383 sq ft - 200 units Type C, 1,606 sq ft - 76 units Mixed Development 6.02 acres at Mukim Pulai, Johor Bahru 176,000 The Development Project which is located at Perling, Johor Bahru has a Gross Development Value of RM260,000,000 and Gross Development Cost of RM176,500,000 (inclusive the contract value awarded to PSSB and the cost of the Land). The development order will be submitted in May 2016 and is expected to be obtained in July 2016. 5. SALIENT TERMS OF THE MCA 5.1 Scope of responsibilities of the Managing Contractor (a) (b) (c) (d) (e) (f) Communicate to the main contractors on the requirements of the Development Project plans. Monitor the progress of the design work and the achievement of function by reference to the Development Project plans. Monitor and regulate programs and progress of the Development Project. Monitor and use its best endeavours to co-ordinate the efforts of all consultants, advisers, contractors and suppliers directly connected with the Development Project. Monitor the cost and ensure financial viability of the Development Project by reference to the Development Project plans. Liaise with architect to ensure that certificate for each stage of completion of the buildings is promptly issued to PNSB for billing purposes. 3
5. SALIENT TERMS OF THE MCA (CONT D) 5.1 Scope of responsibilities of the Managing Contractor (Cont d) (g) (h) (i) (j) The Managing Contractor shall further to the responsibilities specified herein, do and perform all acts and things which are usually done and performed by Managing Contractor, according to the practice of their profession in relation to the Facilities and matter provided herein including the giving of advice on any instances upon which PNSB may from time to time require in the preparing of the Development Project and in carrying out the works relating hereto. The Managing Contractor shall perform and render such duties and professional services inherent in the general scope of responsibilities defined in this clause herein, but not herein specified, so as to carry out the Development Project to a satisfactory and successful completion in accordance with the requirements of PNSB and relevant authorities without any additional fee. The Managing Contractor shall indemnify PNSB and keep PNSB indemnified against any and all claims, liabilities, actions and damages arising from any work related to the Development Project which is solely attributable to the negligence or wilful default on the part of the Managing Contractor, its servants or agents. The Managing Contractor shall exercise all reasonable skill, care and diligence to ensure that the construction works carried out by each member of the Main Contractors is in accordance with the design plan of Development Project and is fit for the purpose specified therein, and shall discharge their obligations under the MCA with good and sound professional practice. 5.2 Contract Value The contract value for the Facilities shall be in the amount of RM176,000,000 (Malaysia Ringgit One Hundred And Seventy Six Million Only) ( Contract Value ). The Contract Value is inclusive of the goods and services tax. The breakdown of the Contract Value is as follows: No. Project Contract Value (RM) 1. Site clearing, demolish of building and earthwork 1,200,000 2. Construction of 18 units of shop office 11,133,000 3. Construction of 2 blocks of apartments (472 units) 128,906,752 4. External work (infrastructure and landscaping) for 18 units of shop office and 2 blocks of apartments 4,704,000 5. Construction of indoor tennis court 6,214,896 6. Construction of outdoor tennis court 5,896,716 7. Construction of shooting range 1,549,633 8. Construction of multipurpose sport center 600,000 9. External work (infrastructure and landscaping) tennis court and sport center 3,738,755 10. Development statutory charges 4,080,000 11. Professional fees 3,809,671 12. Project management fees 2,566,577 13. Misc - contingency and provisional sum 1,600,000 Total 176,000,000 4
5.3 Bond Within 7 days from the execution date of the MCA, the Managing Contractor shall pay an earnest payment of RM8,000,000 as a contract bond to PNSB as security to initiate the MCA and within 14 days from the date the development order being obtained, the Managing Contractor shall pay a performance bond of RM11,000,000 to PNSB as security for the due performance and observance by the Managing Contractor of his obligations under the MCA up to the completion of Management Period. Upon completion of Management Period, PNSB shall refund the contract bond and the performance bond to the Managing Contractor. 5.4 Variation During the subsistence of the MCA, the Managing Contractor must first obtain the approval of PNSB if there are any proposals by architects or any member of the main contractors in regards to variation of the building plans, design plans, scope of work, materials etc based on the MCA. 5.5 Liquidated Ascertained Damages In the event the Managing Contractor fails to complete the Development Project on or before the expiry of the Completion Date, the Managing Contractor shall be liable for and shall pay to PNSB, as liquidated ascertained damages, a sum in Ringgit Malaysia equivalent to RM31,400 for each day of delay from the day following the expiry of the Completion Date until the day of the actual Completion Date in respect of the Development Project, where the delay is due to or contributed by any act, omission and/or default of or by the Managing Contractor. The liquidated ascertained damages derived is in accordance with the PAM 2006 Standard Form of Building Contract for the contract value of RM176,000,000. 6. BASIS OF AND JUSTIFICATION IN ARRIVING AT THE CONTRACT VALUE The Contract Value of RM176,000,000 was arrived on a direct negotiation basis after taking into consideration the scope of work to be done, cost of wages, technical support and supervision required in relation to the Development Project as per the drawings, specifications and documents as provided by PNSB. The Board, after taking into consideration the estimated costs as well as the expectation of a reasonable gross profit margin for the Development Project, is agreeable to the Contract Value of RM176,000,000 and is of the view that the said Contract Value is justifiable. 7. SOURCES OF FUNDING SGB intends to finance its obligations under the MCA via internally generated funds, bank borrowings and/or fund raised from the rights issue of irredeemable convertible preference shares with warrants. The exact mix of funds will be determined by the management of SGB at a later date. 8. LIABILITIES TO BE ASSUMED There are no liabilities, including contingent liabilities and guarantees, to be assumed by SGB arising from the Development Project. 5
9. RATIONALE FOR THE MCA The MCA is in line with the Group s diversification into the construction business to provide another stream of revenue source to reduce the dependence on its existing business in ceramic segment. The Board believes that this Development Project would contribute positively to SGB Group s future earnings and improve the financial position of SGB Group via additional revenue and earnings contribution from the Development Project. The Board believes that the Group has the capacity, capabilities and resources to diversify into property construction business after taking into consideration the competency and experience of Mr. Kuan Poh Huat, an Executive Director of the Company, whom the Board deems to be the main key management personnel and instrumental in the Group s new venture into the property construction industry. He has been involved in the engineering, consultancy, construction and property development industries for over 20 years. He will be supported by other key management personnel, General Manager, Project Engineer and Site Manager as well as external consultants such as the architects, engineers, surveyors, subcontractors and other consultants. 10. RISK FACTORS 10.1 Operational risks The risks associated with the MCA are mainly the operational risks. Notwithstanding this, SGB shall ensure strict compliance to the safety and operational procedures in the execution of the MCA to minimise any risk exposure. 10.2 Financial risks In the event SGB Group funds the Development Project through bank borrowings, any significant fluctuation in interest rates may increase the cost of borrowings. In such an event, SGB Group will monitor closely the fluctuations in interest rate and will negotiate with the relevant financial institution for an attractive and cost effective financing package. 10.3 Non-completion of the MCA In the event the Development Project is delayed, the potential benefits arising there from may not be materialised. In this respect, SGB Group seeks to limit such risk and will take all reasonable steps to comply with the relevant terms and conditions set out in the MCA so as to be able to complete the Development Project. 10.4 Dependency on key management personnel SGB Group s involvement in the construction industry depends largely on the abilities, skills, experience, competency and continued efforts of its main key management personnel namely Mr. Kuan Poh Huat, an Executive Director of the Company and supported by key management personnel for the construction business. The loss of any of the said relevant key management personnel without suitable and timely replacement, or the inability of the SGB Group to attract and retain other qualified personnel, could adversely affect the SGB Group s construction business and consequently, its revenue and profitability. Recognising the importance of having key management personnel, SGB Group will continue to adopt appropriate approaches to retain such key personnel. To avoid over dependence on any key personnel, SGB strives to attract qualified and experienced employees to complement the management team. This will in turn help to ensure continuity and competency of the management team. 6
11. EFFECTS OF THE MCA 11.1 Issued and paid-up share capital The MCA will not have any effect on the issued and paid-up share capital of SGB as well as the shareholdings of its substantial shareholders as it does not involve issuance of new ordinary shares of RM0.50 each in SGB. 11.2 Net assets ( NA ) and gearing The Board envisages that the MCA will improve the NA of the SGB Group over the duration of the MCA. The SGB Group is unable to determine the effect on the gearing of SGB as the breakdown of the sources of financing for the Development Project cannot be determined at this juncture. 11.3 Earnings and Earnings per share ( EPS ) The Board envisages that the MCA is expected to contribute positively to the overall earnings as well as the EPS of the SGB Group for the financial years ending 30 June 2017, 30 June 2018 and 30 June 2019. 12. APPROVALS REQUIRED The MCA is not subject to the approval of the shareholders of SGB or any other relevant authorities. 13. DIRECTORS AND MAJOR SHAREHOLDER S INTERESTS None of the directors and/or major shareholders of SGB and/or persons connected with them has any interest, direct or indirect, in the MCA. 14. DIRECTORS STATEMENT The Board, after having considered all aspects of the MCA, is of the opinion that the MCA is in the best interest of SGB. 15. DOCUMENT FOR INSPECTION Copy of the MCA is available for inspection at the registered office of SGB at 49-B Jalan Melaka Raya 8, Taman Melaka Raya, 75000 Melaka during normal business hours from Mondays to Fridays (except public holidays) for a period of three (3) months from the date of this announcement. This announcement is dated 18 April 2016. 7