Business Overview

4. INFORMATION ON THE GROUP 4. INFORMATION ON THE GROUP 4.1 BACKGROUND 4.1.1 Incorporation and Commencement of Business Elsoft was incorporated in Malaysia under the Companies Act, 1965 on 4 June 2003 as a private limited company under the name of Elsoft Research Sdn Bhd. Subsequently. on , 0 August 2004 it was converted to a public limited company and since then assumed its present name. On 31 December 2003, Elsoft was granted MSC status from MOe, It commenced operations in January 2004,
4.1.2 Share Capital And Changes In Share Capital The present authorised share capital of Elsoft Is RM25,OOO,000 comprising 250,000,000 ordinary shares of RMO.10 each. The issued and paid-up share capital of Elsoft is RM14,825,OOO comprising 148,250,000 ordinary shares of RMO, 10 each. Details of the changes in the issued and paid-up share capital of the Company since its incorporation are as follows: 4.1.3 No. Of  Total Issued  Ordinary  And Paid.up  Date of  Shares  Par  Share  Allotment  Allotted  Value  Consideration  Capital  RM  RM  04.062003  2  1.00  Subscribers’ shares  2  02.07.2003  99,998  1.00  Cash  100,000  16.05.2005  6,125.000  1.00  Bonus Issue  6.225,000  17.05.2005  8,600,000  100  Acquisition of STSB  14,825,000  18,05.2005  0.10  Sub-division  14,825,000  ,  i
Listing Scheme In conjunction with, and as an integral part of the listing of and quotation for the entire enlarged issued and paid-up share capital of Elsoft on the MESDAQ Market Board of Bursa Securities, the Company undertook a listing scheme which involved the following:· (a) Bonus Issue Elsort has undertaken a bonus issue of 6,125,000 new ordinary shares of RM1.00 each to the existing shareholders of Etsort on the basis of 61.25 new ordinary shares of RM1.00 each for every 1 existing ordinary share of RM1.00 each held in Elsoft. All the bonus issue shares rank pari passu in all respects with the existing ordinary shares of Elsort. The Bonus Issue was completed on 16 May 2005. With the completion of the Bonus Issue, the issued and paid-Up share capital of Elsort was increased from 100,000 ordinary shares of RM1.00 each to 6,225,000 ordinary shares of RM1 ,00 each, 4. INFORMATION ON THE GROUP (Cont’d) (b) (i) Acquisition of STSB Elsoft had on 6 September 2004 entered into a share sale agreement with Tan Cheik Eaik, Tan Ai Jiew, Koay Kim Chiew, Tan Ah lek. Tan Cheik Kooi, Chan Hong Heng. Tay Cheng Koon and Ooi Seang Jin to acquire the entire issued and paid-up share capital of STSB compnsing 500,000 ordinary shares of RM1.00 each for a purchase consideration of RMB,600,OOO satisfied by the issuance of B.600,000 new ordinary shares of RM1.00 each in Elsoft at an issue price of RM1.00 per share. The purchase consideration for STSB was based on the audited NTA as at 30 June 2004 of RMB,600,OOO. The vendors’ shareholdings in Elsolt alter the acquisition of STSB are as follows:­No. of  No. of  Elsoft  Ordinary  Ordinary  Shares of  Shares of  RM1.00  RM1.00  Each in  Purchase  Each  Shareholders  STSB  Interest  Consideration  Issued  %  RM  Tan Chelk Eaik  160,000  32.00  2,752,000  2,752,000  Tan Ai Jiew  90,000  18.00  1,548,000  1,548,000  Koay Kim Chiew  75,000  15.00  1,290,000  1,290,000  Tan Ah Lek  62,500  12.50  1,075,000  1,075,000  Tan Cheik Kooi  45,000  9.00  774,000  774.000  Chan Hong  30,000  6.00  516.000  516,000  Heng  Tay Cheng Koon  30,000  6.00  516,000  516,000  Ooi Seang Jin  7,500  1.50  129,000  129,000  Total  500,000  100.00  8,600,000  8,600,000
(ii) Acquisition of AGS Elsoft had on 18 May 2005 entered into a share sale agreement with STSB to acquire sixty percent (60%) of the issued and paid-up share capital of AGS comprising 300,000 ordinary shares of RM1.00 each for a purchase consideration of RM464,845 based on the audited NTA value as at 30 June 2004. The purchase consideration was satisfied wholly by cash of RM464,B45. No. of Shareholders  Ordinary Shares of RM1.00 each in AGS  Interest %  Purchase Consideration RM  Cash Consideration RM  5T5B  300,000  60.00  464,845  464,845  Total  300,000  60.00  464,845  464,845
4. INFORMATION ON THE GROUP (Cont’d) The Acquisition of STSB and AGS were completed on 17 May 2005 and 18 May 2005 respectively. The Acquisitions resulted in the issued and paid·up share capital of Elsoft being increased from 6,225,000 ordinary shares of RM1.00 each to 14,825,000 ordinary shares of RM1.00 each. (c) Sub-division
Upon completion of the Acquisitions, the eXisting par value of RM1.00 per ordinary share of Elsoft was subdivided into ten (10) ordinary shares of RMO.10 each. Consequently, the number of issued and paid-up share capital of Elsoft was increased from 14,825,000 ordinary shares of RM1.00 each to 148,250,000 ordinary shares of RMO.10 each. The Sub-division was completed on 18 May 2005.
(d) Public Issue

The Public Issue of 31,750,000 new ordinary shares at an issue price of RMO.60 are payable in full on application upon such terms and conditions as set out in this Prospectus and will be allocated and allotted in the following manner:­(i) Public
2,500,000 Public Issue Shares representing approXimately 1.39% of the enlarged issued and paid-Up share capital will be made available for application by Public.
(ii) Eligible Employees, Directors and/or Business Associates of the Group

7,500,000 Public Issue Shares representing approximately 4.17% of the enlarged issued and paid-up share capital will be reserved for the eligible Directors, employees and business associates (which include the suppliers, sales agents and customers) of the Group. The shares have been allocated to eligible Directors, eligible employees and business associates of the Group based on the following criteria as approved by the Company’s Board of Directors:­(a) At least eighteen (18) years old:
(b) Job position;
(c) Length of service;
(d) Confirmed emptoyees; and
(e) Business associates who have contributed to the success of the Group.

THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) Details of the Pink Form Shares allocation to the eligible Directors, employees and business associates of Elsoft Group are as follows:­Directors Name of Directors  Desionation  Pink Form Shares Allocation  Tan Cheik Eaik  Executive Chairman! Chief  800,000  Executive Officer  Koay Kim Chiew  Executive Director  500,000  Tan Ah Lek  Executive Director  400,000  Tan Ai Jiew  Non-Independent Non·  100.000  Executive Director  Data’ Dr Chong Eng  Independent Non-Executive  100,000  Keat @ Teoh Eng  Director  Keat  Ong Eng Chaon  Independent Non-Executive  100,000  Director  Total  2,000,000
Employees and Business Associates Cateoorv  Number  Pink Form Shares Allocations  Management Engineering! R&D Production! QA Sales, Finance and Administration  2 20 22 8  500,000 1,500,000 600,000 400,000  Total eliaible emolovees  52  3,000,000  Business associates  65  2,500,000  Total eligible employees and business associates  117  5,500,000
The above Pink Form Shares allocation is subject to the eligible Directors, employees and business associates subscribing to their respective allocations. (iii) Placees 21,750,000 Public Issue Shares representing approximately 12.06% 01 the enlarged issued and paid-up share capital are reserved for private placement to selected investors, which have been identified who are deemed public. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK

4. INFORMATION ON THE GROUP (Cont’d) (e) Summary In summary, the Public Issue Shares will be allocated in the following manner:­Public Issue  Shares  Public  2,500,000  Eligible Directors, employees and business  7,500.000  associates of the Group  Placees  21,750,000  Total  31,750,000
All the Public Issue Shares available for application by the Public and the eligible Directors, employees and business associates of the Group have been fully underwritten. The Public Issue Shares available for application by identified placees are not underwritten. The Placement Agent has received irrevocable undertakings from the identified placees to take up the Public Issue Shares available for application under the private placement. In the event of an under-subscription of the Public Issue Shares by the Public, the unsubscribed Public Issue Shares will be made available to identified placees. Any Public Issue Share which are not taken up by the eligible Directors, employees and business associates of the Group will be made available for application by the Public andlor identified placees via private placement. (f) ESOS In conjunction with its proposed listing, Elsoft proposes to implement an ESOS involving up to fifteen percent (15%} of the Company’s issued and paid-up share capital at any time during the existence of the ESOS, to be issued pursuant to the Options to be granted under the ESOS to the Directors and eligible employees of the Group, On the date of listing of Elsofl on the MESDAQ Market, the Directors of the Company propose to grant up to 27,000,000 Options to the Directors and eligible employees of the Group (“‘nitial Grant”). The exercise price of the Options which are the SUbject matter of the Initial Grant is the Issue Price of the Shares. In addition to the Initial Grant. the Board shall, within the duration of the ESOS, make offers to grant Options to the Directors and eligible employees of the Group in accordance with the ESOS Bye-Laws adopted by the shareholders of the Company. Each such Option which is not part of the Initial Grant shall be exercisable at a price which is the weighted average market price of the Company’s Shares for the five (5) Market Days immediately preceding the date on which the Option is granted less, if the Directors of the Company shall decide at their discretion from time to time, a discount of not more than ten percent (10%). 4. INFORMATION ON THE GROUP (Cont’d) The ESOS shall be in force for a duration of five (5) years. However. the ESOS may be extended for up 10 five (5) years at the discretion of the Board upon the recommendation of the ESOS Committee. The new Shares to be allotted upon any exercise of the Option will upon allotment and issue rank pari passu in all respect with the then existing issued Shares of the Company except that the new Shares so issued shall NOT be entitled for any dividend. rights. allotment and/or other distribution declared, made or paid to shareholders unless the new Shares so allotted have been credited into the relevant securities accounts of the shareholders maintained by Bursa Depository before the entrtlement date and will be subject to all provisions of the Articles of Association of the Company relating to transfer. transmission and otherwise. The Bye·Laws of the ESOS are set out in Section 13 of this Prospectus. (g) Listing Upon completion of the abovementioned Bonus Issue. Acquisitions, Sub-division and Public Issue, Elsoft will seek a listing of and quotation for its entire enlarged issued and paid-up share capital comprising 180,000,000 Shares and the new Shares to be issued pursuant to the exercise of the ESOS Options of up to fifteen percent (15%) of the Issued and paid-up share capital of Elsoft at any point in time during the duration of the ESOS on the MESDAQ Market of Bursa Securities. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d)
4.2 BUSINESS 4.2.1 Group Structure An overview of the Group’s structure is set out below:­
!100% STSB .0. Electronic Devices/ Modules Assembly, Test and Burn-In System Integration and Customised Manufacturing Solutions
The details of the Elsoft Group are as follows:­AGS .0.
Design and Production of Specialised Machinery and Equipment Corporation  OateJPlace of Incorporation  Issued and Paid­up Share Capital RM  Effective Equity Interest ‘/.  Principal Activities  Elsoft  04.06.2003/ Malaysia  14,825,000  Research, design and development of test and bum-in systems and application specific embedded  systems.  Subsidiaries of Elsoft
STSB  07.05.19961  500,000  100.00  Electronic  devices/  Malaysia  modules  assembly,  test  and  burn-in  system integration and  customised  manufacturing  solutions.  AGS  03.11.1999/  500,000  60.00  Desi9n and production  Malaysia  of  specialised  machinery  and  equipment  namely  material  handling  equipment and robotic  factory  automation  equipment.
4. INFORMATION ON THE GROUP (Cont’d)
4.2.2 Types of Products and/or Services The Group’s business activities can be divided into four (4) main divisions:­(a) Test and Burn-In System Development Division;
(b) Embedded Peripherals Division;
(c) Electronic Devices/ Modules Assembly Division; and
(d) Automation Equipment! System Division.
(a) Test and Burn-In System Development Division

ATE, or tester, Is used in the process of testing the electrical characteristics and performance of electronic devices. The ATE varies Widely, depending on the types of products it tests. In general, however, it consists of an elaborate PC controller or MicroP-based system that control boards or modules which supply electrical excitation 10 the device under test and measure the electrical characteristics and behaviour of the device under test in response to the applied excitation. Additional paraphernalia such as family boards and device under test boards are attached to the tester to configure it to the specific needs of the device under test as the tester is often designed to be as generic as possible. The test and burn-in system development involves multiple disciplines of advanced engineering capabilities, covering both hardware and software aspects of the semiconductor and optoelectronic application solutions. Shrinking time-to-market and short product life raise the level of competition as it reduces the need of design cycle time for test program developments. Functional verification and highly accelerated stress screening (also known as “Burn-In”) are two of the major components of the product design cycle time. Present advanced technology products of importance in the marketplace are demanding short development cycle with high performance test solutions to meet today’s stringent specifications. Extended environmental testing is also performed to ensure the product will continue to function properly over its entire service life. The biggest challenge in designing this type of test system is dealing with the high number of channels the system must monitor and the surroundings of the test system. The rapid advancement of technological breakthrough enhances the Group’s prospects in several diverse and futuristic fields such as massive computing power, wireless components, devices and instruments, global personal communication devices and high-resolution devices. This has stretched the traditional test and burn-in approaches to new limits. 4. INFORMATION ON THE GROUP (Cant’d) The test and burn-in system development involves cross-disciplines, dealing with metrology, materials, electrical and electronics design, mechanical engineering, software engineering, IC design, automation design, manufacturability of ICs and many other relevant fields. The challenge in producing high quality performance products iies in developing the products at a competitive cost. As a test and burn-in solution provider, in-house developers of the Group can improve an existing test system or design new test solutions to meet a specified test strategy required by its customers. The switching trend of the industry’s evolution from high cost test and burn-in solutions towards cost effective test and burn-in solutions has bridged the Group to the stage of the global ATE arena. Elsort offers its customers a new paradigm of alternative test solutions which aims to provide high performance and cost effective application solutions. The Group leverages on over eight (8) years of technology innovation and customer knowledge in the design, development, manufacture and support of functional test and diagnostic systems. This enables its customers to increase their engineering and manufacturing efficiency and lowering their cost of test and Ourn-in. The Group delivers high standard of design diagnostic and test engineering services oy applying its highly skilled resources at critical steps in the test and ourn-in development cycle. The solutions offered oy the Group include engineering design expertise in the field of advance analog, high speed digital, mixed signal and embedded systems architecture with electrical measurement accuracy of +1­0.03%. These advanced electronic disciplines provide a wide range of innovative solution development potential to meet the customers’ requirements. The Group’s customers include IC manufacturers, optoelectronics components manufacturers, EMS companies, lest houses and foundries. The Group’s cross boundaries support network enable it to deliver value-added products and services that meet customers’ key design and engineering challenges at all times. The Group is also moving towards the upper end digital test development. The design engineering team plays an important role in the customers’ product development stage by participating in the design of new applications to either increase its testability, efficiency or to develop new ways of test solutions. In addition, the new generation test development which migrates towards higher test speed and performance will increase the value added component of the Group’s solutions. By working closely with its customers, the Group is able to provide innovative customised design solutions to maintain its competitiveness with the current market players. The Group’s aoilities range from design to test, applying specific test and enhancement of previous test solution. These lead to minimal switching cost for its potential customers. The Group’s test developments are completed using its ISO 9001 :2000 compliance process. The test developers start with a provided test specification or study the product and generate a specification. 4. INFORMATION ON THE GROUP (Cont’d) (b)
(c)

Competition in this industry arises mainly from ATE companies in the developed countries such as Germany and USA. However. the Group believes that it will be able to compete effectively with its unique technology innovation, close relationship with customers and proven track records. Embedded Peripherals Division The embedded peripherals division offer its customers a wide range of PC based embedded products range such as I/O products, motion control card and motor drivers. The Elsoft Group is committed in applying innovative I/O technologies and customer knowledge in the design, deVelopment, manufacture and support of I/O Cards to enable their customers increase their engineering and manufacturing efficiency as well as lowering their cost of development. Its customers include IC manufacturers, automation house, equipment manufacturers and foundries. The in-house capabilities in developing embedded peripherals also provide the Group with competitive advantage and differentiation from other competitors in the indUStry. This is due to its ability to design and customise customers’ needs with a high level of fiexibility at competitive cost. Electronic Devices/ Modules Assembly Division The Eisoft Group has achieved a remarkable production system with strict quality control, maximisation of productivity and fiexible production facilities. Subsequent to the Group restructuring exercise, STSB is currently specialising in electronic devices/modules assembly, test and burn-in system integration and customised manufacturing solutions to semiconductor, optoelectronic and automation industries. STSB is mainly positioned to provide in-house assembly and system integration support to the Group as well as serving customers in the prototype development, new product introduction and high mix low volume segment. The Group offers a series of customised valued added manufacturing services, induding material management, electronic devices/modules assembly, mechanical assembly and box build and system integration. The Group’s system assembly and integration facilities provides a high level of fiexibility and fast turnaround which is suitable for building prototype pre-production builds. configure to order and high complexity system integration. With the Group’s years of involvement in the assembly and integration operation, its customers will be able to benefit from a combined eight (8) years of experience available through a highly trained and skilled operation resources. Quality assurance is fully monitored and inspected through its ISO 9001 :2000 Quality Management System. 4. INFORMATION ON THE GROUP (Cont’d) 4.2.3 (d) Automation Equipment! System Division Since AGS’s incorporation in 1999, the automation division has been designing innovative and advanced machineries for the handling of electronic components, namely the test handling system and robotic factory automation system. Combining both technical excellence in mechanical and electronic engineering encompassing robotic design, pneumatic mechanisation and electronic circuitry design for smart control applications, the division positions to provide high standard of design and engineering solution to meet the customers’ automation requirements. Mass production electrical testing can be made possible by attaching a test handler to an ATE. A test handler refers to the equipment used in presenting the unit to be tested to the test site of the ATE, allowing the ATE to test the unit. After testing, the handler puts the unit to the appropriate output location based on the ATE test results. The test handler varies widely in configuration. Certain handlers use gravity to bring the device under test to the test site and to reload them back into tubes while others use special electromechanical or pick­and-place systems to accomplish this. Some handlers can only be assigned to one tester, yet some can be allocated to eight or more testers. A typical test handler is equipped with a loading or input stage, a test site, a sort shuttle, an unloading or output stage, various sensors and interfaces to the tester. For gravity-fed handlers, the input stage usually consists of input tracks in which the input tubes containing the units to be tested are inserted. The units slide down the input track into the test site for testing. After testing, the unit is then transported by the sort shuttle to the appropriate output track based on the condition of the unit. Pick-and­place handlers usually pick the units for testing from a tray and present them to the test site for testing. After testing. the pick-and-place system takes the unit and puts it into the appropriate output tray. With the synergistic support from other diviSions, it provides the Group with the competitive advantage to compete in the backend automation industry and position it to be a leading player in the design, development, manufacture and sale of semiconductor test handling equipment. Technology Capabllities The Elsoft Group is equipped with modern technology in its development facilities to ensure implementation of design standards. The Group has a strong development team whose talents and skills have contributed towards the design and development of various test solutions such as Optoelectronic/Semiconductor Parametric Test, Advance Electronics System Design, Photometric, Radiometric and Colorimetric Test, Burn-in Systems and Reliability Thermal Stressors, Specific Integrated Parametric and Optical Test. etc. As a result, the Elsoft Group is able to offer comprehensive lest solutions which include the Group’s proprietary software and hardware. 4. INFORMATION ON THE GROUP (Cont’d) 4.2.4
The Group applies CAD software technologies in its product design and daily development process. The Group’s design team consists of technical staff who are highly trained with years of expertise in the design softwares such as C Language. Visual C++. Visual Basic, Embedded Real Time Assembly Language  (Machine  Language},  Algorithm  development  and  In-house  development proprietary test programs.  The  Elsoft  Group’s design capabilities  include  competencies  in  advance
analog, digital test, mixed signal, embedded systems, MicroP and MicroC applications and design of High Speed PCB design. The test systems are designed to cater for high speed and high performance testing with output above 10,000 units per hour, electrical measurement accuracy of +/-0.03% and test capability to measure from range of nano-amp to amp scales. Besides, the Group’s unique and self-developed proprietary, SMU, conforms to the high industry standard in the market it serves. Through the Group’s SMU platform, the customers are able to cut down on the costs of development, thus reducing the test costs significantly, The Group has also developed and possessed technologies in the area of optoelectronic metrologies and spectroscopy development, optic design, illumination, image acquisition and analysis. These capabilities position the Group in a strong position to become the test solution partner of choice of its customers, With the rapid changes and evolution in the development of new technology. the Group always spearheads its efforts to be one of the first to roll-out improved test solutions based on its cutting edge technology development. The level of technology in automated products is determined by the advancement of the software technology, Hence, software is a vital component in an automated system, As a dynamic and versatile integrated test and burn-in solution provider, the Group’s ability to offer both hardware and software solution to its potential customers puts the Group at the top of the customers’ selection list. Approvals. Major Licences and Permits Obtained The major licences and permits obtained by the Group are as follows:­8T8B Authority MITI  Description Manufacturing Licence  Date of Issuancel Expiry 21,07,2004/ Not Applicable  Major Conditions Imposed (a) The site of manufacturing is subject to the approval from the State Authority and Environment Department  Status of Compliance Complied  (b) (c)  STSB shall notify MITI of any sale of shares of the company, STSB shall train Malaysian citizens to enable the transfer of technology and expertIse at all levels of employment.  Complied Complied  , I I
4. INFORMATION ON THE GROUP (Cont’d) Authority  Description  Date of Issuance/ Exni~  Major Conditions Imposed  Status of Compliance  (d)  STSB is required to execute the projects in accordance to all the abovementioned conditions and to comply with the laws and other regulations in Malaysia.  Complied
AGS Authority  Description  Date of Issuancel EYn;~  Major Conditions Imposed  Status of Compliance  Majlis Perbandaran Pulau Pinang  Trading Licence  20.04.2004/ 31.122005  Nil  Not applicable
4.2.5 Brand Names, Patents, Trade Marks, Licences, Technical Assistance Agreements, Franchises and Other Intellectual Property Rights The Elsoft Group does not presently hold any brand names, patents. trade marks. technical assistance agreements. franchises and other intellectual property rights. However, the Group has submitted its application to the Registrar of Trade Marks to register the following trade marks:­Trade Mark  Class  Status  _ElSUh  7 and 9  Pending Approval  DB  7 and 9  Pending Approval  ~  7 and 9  Pending Approval  ~  7 and 9  Pending Approval
The successful registration of the trade marks will prevent unauthorised third party exploitation of these trade marks, which may have an adverse effect on the Group’s business. 4.2.6 Dependency on Licences and Registration The Elsoft Group currently holds various licences and registrations under its operating subsidiaries. Details of the licences and registration are set out in Section 4.2.4 of this Prospectus.
4. INFORMATION ON THE GROUP (Cont’d) 4.2.7 Operation Process Flow (a) Test and Bum-In System Development : :-=-::~’:~~-“~;In410u~iq-~~h~~~._ j ~U8er ReqU1re~-:~;;~ , .~nt Tecltri-oro-gl..,l,,”, .’: “Oevelopment •• :”Engagement Review” :. r. Review . :~t;: Capabilities . “, ..
4. INFORMATION ON THE GROUP (Cont’d) Under the test and burn-in system development division, the Group receives from the customers the technical and design specification engagement request of a product or the physical object. The programme manager will then engage together the designing and R&D team to analyse each application requirements from mUltiple design parameters. This process involves examination of the availability of the resource and the technology requirements, followed by matching of the Group’s in-house capabilities and resources to fill up any gaps. The Group has a systematic developed engagement protocol which consists of the appropriate tools. processes and communication schemes to be compatible with the customers’ needs. This would facilitate correct and timely decisions. leading to successful project execution. Most product development projects require cross-disciplinary expertise which encompasses electronic design, electrical design, mechanical design, software design. PCB design and system integration design elements. A project plan designed to carry out a product development will result in a list of tasks and linked resources often described by a Project Gantt Chart. The Gantt chart shows the order of tasks. the critical paths and relationships of the product deveiopment. Upon approval from customers of the prototype. the approved system specification will be sent for production ptanning. A dedicated programme coordinator will oversee the order processing and technical support coordination with customers. Component and resource planning will be sourced from designated suppliers both locally and abroad. The status of the production will be monitored and tracked closely by the programme coordinator to ensure compliance with the pre-established quality and characteristic specifications. Ongoing supervision and inspection of the system will be carried out throughout the entire production process to undertake any corrective actions, if necessary. to eradicate causes of deviation from their sources. The completed systems will then go through a final QA inspection to ensure that the product quality and consistency is maintained before shipping the completed system to customers at the specified date. Besides having its own internal quality audit regularly, the Group’s quality management system is also subject to reviews by customers audits in compliance with the criteria set under ISO 9001 :2000 certification. ICompany No: 617504-K I 4. INFORMATION ON THE GROUP (Cant’d) (b) Embedded Peripherals

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4. INFORMATION ON THE GROUP (Cant’d) (c) Electronic Devicesl Modules Assembly Descriptions
Job order specification with full instructions received by production planner Production planner arranges any training or briefing on any new methods Raw materials received and goods received note issued for incoming inspection Job order worksheets are allocated to assemblers The soldering process is to solder the components on the boards, systems or devices as specified Visual inspections are carried out 100% on ail units Finished units are then tested for their functionality Outgoing inspection for tested units The components and peripherals are then sent for further assembly process The systems are then tested for their functionality using In-house developed test program Final visual inspections are carried out 100% on all systems Approved systems are then packed together with the accessories for shipment Packed systems are arranged for shipment
4. INFORMATION ON THE GROUP (Cont’d) (d) Automation Equipment/System
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4. INFORMATION ON THE GROUP (Cont’d) 4.2.8 (i) Mechanical Engineeringl Control Sottware Development
Upon the acceptance of an engagement from the customers, the mechanical team will conduct a user requirement evaluation and discussion to study the customer’s requirement and specification and prepare the project resource planning. If the proposal is accepted, design work will commence with the mechanical team responsible for the designing of the machine. The machine control wiring design will be delegated to the control and instrumentation section,
(ii) Testing and Calibration

When the machine assembly is completed. the machine will go through a series of testing and calibration process across all parameters. The testings include functional testing on both mechanical and wiring. (iii) Software and Metrologies Engineering The machine control software design and vision software design will be undertaken by the software engineering and metrologies development teams respectively. The software team is responsible for the development of automation software based on the customer’s specification. System integration will be developed to meet the users manufacturing process to minimise the level of modification work of the users current process. Installation of automation system and programme, and machine sequence testing will commence after the metrologies set-up has been completed. The machine sequence testing refers to test on the programming logic and synchronisation of the entire system mechanical movements. All systems constructed will go through a series of test and evaluation together with the end-users. All products will be tested in compliance with the Elsoft Group’s quality control process. Estimated Market Coverage, Position and Share To the best knowledge of the Promoters, the Elsoft Group does not have any major competition from any Malaysian-owned companies in the test and burn-in system development. There is no published industry statistics on the ATE market in Malaysia. Elsoft’s claim is based on observations of the marketplace and the Promoters’ extensive knowledge and more than ten (10) years experience in the industry. The Group is riding on its extensive and reliable business track record to consolidate its market position. With the long established business track record in test solution providers in the ATE segment, the Group is currently pursuing other target markets to further enhance its business and customer base. 4. INFORMATION ON THE GROUP (Cont’d) 4.2.9 Significant New or Proposed ProductslServices Competing with other ATE companies, the Elsoft Group embraces the growing demand for thorough, accurate and reliable test solutions at every stage of the development process. The Group has strategically developed an advanced portfolio of debug, validation, characterisation and production test solutions specialising in the optoelectronic applications. These solutions are designed to provide customers with critical information about actual device performance at component level, which significantly accelerate product introduction and reduce the overall test costs. With continuous R&D, Elsoft Group’s product portfOlio encompasses Advance Electronics System Design, Optoelectronic and Semiconductor Parametric Test, Photometric, Radiometric and Colorimetric Test. Application Specific Integrated Parametric and Optical Test, Burn-In Systems and Reliability Thermal Stressors, Application Specific Embedded Systems (MicroP and MicroC Applications), System Software Engineering and Algorithm Development. Today, the Elsoft Group believes it is among the few ATE companies in the optoelectronic industry to offer the complete one-stop solution platform from design to test portfolio that helps accelerates time to volume production while lowering total test costs. The Group also offers automated test manufacturing process development namely test handlers development. The Group expects to retain its market share in the optoelectronic and semiconductor industries by continuously seeking new customers, increasing its range of test solution development and penetrating new segments of the industry. Recently, the Group has formulated new marketing strategies for business expansion:­(a) Tapping into EXisting Customer Base Having established a good working relationship with its existing customers and earned the recognition of timely delivery of quality services, the Group is eager to cement the business partnership with its customers and further grow its business by exploring other types of services which the Group can provide to these customers. (b) Diversification or Migration into New Industry or Application Segments With the increasing trend of new application in optoelectronic industry, besides expanding the range of services provided to its existing customer base, the Group is also looking for diversification into other new industry or application segments. Specifically, the Group is looking at venturing into the automotive lighting industry where high customisation test development are the key elements for mass production in such industry. 4. INFORMATION ON THE GROUP (Cont’d) 4.2.10 (c) Strategic Alliance with Distributors The Group will continue to identify key players around the world and establish strategic service hub through its distributors’ network at the intended areas to ensure effective penetration and also timely response. Established local presence will provide an easier and faster access to the market while minimising costs. Currently. the Group has representatives/distributors providing marketing support in Taiwan and China. It is the Group’s plan to further strengthen this relationship and explore the potential of setting up a service support centre in the intended market. In the near future. the Elsoft Group plans to explore the potential of developing into the area of high-end SOC. mixed-signal. RF. fiash and automotive test systems, with a full suite of debug, validation and characterisation solutions development. Principal Markets for Products Currently, the Elsoft Group products and services cover various industries such as semiconductor. electrical and electronics, optoelectronic. automation and automotive electronics within the manufacturing sector. Its customer base comprises MNCs with manufacturing facilities in Malaysia. China, Taiwan. Thailand and Korea. The Group’s sales are deemed to be export sales as these MNCs which predominantly operate from free trade zone areas or are licensed manufacturing warehouses in Malaysia will ultimately export their products to globally reputable brand owners in computer and computer peripherals, semiconductor and mobile phone industries. Export sales contributed approximately 89.0% of the Group’s total revenue for the financial year ended 31 December 2004 and the remaining 11.0% was contributed by local sales. For the medium to long term, the Elsoft Group plans to expand its business via two approaches:­(a) Penetrating New Geographical Territories
The Elsoft Group is planning to increase its market share by penetrating into high growth countries such as the People’s RepUblic of China, Korea and Thailand. Thus. it is important to maintain a strong marketing channel and supporting network to ensure effective expansion to these regions. The Group will be actively establishing and supporting the distributor network to proVide a better support and customer service to the customers in those region.
(b) Penetrating New Related Technologies Application Solutions

The Elsoft Group will continue to maintain good relationship with its existing customers who are mainly MNCs. Such close ties have established mutual benefits in the technological development. With its past experiences, the Group plans to expand its current range of solutions and customer base. In addition. the Group will leverage on its competitive advantage on the proven track record with current key customers to extend the products and services beyond the current engagement by offering a “one-stop solution provider” approach. 57 4. INFORMATION ON THE GROUP (Cont’d) 4.2.11 Types, Sources and Availability of Raw Materials/Inputs The main raw materials for each of the principal business activity of the Elsoft Group are as listed below:­Business activity  Main raw materials  Test and Burn-In Development Electronics Devices! Assembly  System Modules  PCB boards, IC components, computer peripherals, electronics devices, wire and metal chassis. PCB boards, Ie components. solder and consumable tools.  Automation Equipmentl System and Embedded Pedpherals  Alloy, standard parts, driller, steel, aluminium, carbide and consumable tools, wire, automation drivers, I/O Boards, motion control components, electronics peripherals, computer peripherals and metrologies components.
The raw materials are mainly sourced from designated local and overseas suppliers namely from Taiwan, Singapore, Japan, USA and those materials are readily available. Thus, the Group is not overly dependent on any single supplier. For the financial year ended 31 December 2004, approximately 55.0% of Elsoft Group’s purchases were imported from overseas while the remaining 45.0% were sourced locally. 4,2.12 Quality Control Procedures The Elosft Group adopts a stringent internal quality management policy to ensure that its products and services are of high quality and meet its customers’ specifications and stringent requirements. The Directors believe the Group’s ability to continue consistently produce high quality products and services to its MNCs customers will further enhance the Group’s position as a preferred vendor specialising in ATE solutions to its eXisting MNCs customers as well as attracting new customers. The Elsoft Group is thus, committed to maintaining a high standard of quality control throughout the entire design and production process. The Elsoft Group conducts 100% inspection control checks at various stages of the production process to facilitate corrective actions in order to eradicate any cause of deviation at their sources. Technological advanced inspection instruments and highly trained technical staffs are also in place to ensure that the accuracy and reliability of every system are at the predetermined quality standards. As an approved vendor of MNCs, the Group is also subject to periodic external audits by its customers to ensure compliance with the high quality production and environmental standards demanded by the MNCs. The Group is also SUbject to regular external audits by Ihe quaiity accreditation bodies for re-certification of its ISO and quality service standards. The Group’s strong emphasis on quality is endorsed by an independent quality certification as shown in the table below:­Company  Quality Award  Date Obtained  Accreditation Bodv  STSB  ISO 9001:2000  10 March 2004  BM Trada Certification, Ltd
4. INFORMATION ON THE GROUP (Cont’d) 4.2.13 R&D To remain resilient in the competitive environment, the Elsoft Group continues to invest in its R&D activities to ensure belter performance. improvement in quality and reduction in the development cycle time. (a) Policy on R&D The Group’s R&D objectives are to create and sustain competitive advantages through:­(i) Launching cost competitive solutions to the marketplace on a timely basis; and
(ii) Challenging the status quo to maintain the Group’s leading edge position.

The Group has outlined a R&D master policy based on the Group’s aspirations and anticipated developments within the industry. In its R&D master policy, the Group has identified certain projects which will form the thrust of the Group’s R&D pursuits for the next five (5) years including structural improvements to facilitate the Group’s R&D efforts. The structural improvements include development of the R&D staff force, leverage on information technology to boost its R&D capabilities and investment in the state-of-the-art infrastructure. (b) R&D Facilities and Personnel The Group’s R&D team, headed by Tan Cheik Eaik and Koay Kim Chiew, currently comprises of twenty (20) design engineers, with an average of more than eight (8) years working experience in R&D and related technical fields of MNCs. The Group intends to expand the expertise of the R&D team by including two (2) specialist design engineers by 2005 and another two (2) specialist software automation engineers in the next two years. As at to date, the Group has invested approximately RM5.08 million in its R&D expenses over the last three (3) years. To ensure that the Group is able to maintain its leading edge in the industry, the Group plans to invest at least RM1.50 million in R&D related activities. The R&D plan will focus on test technologies and product development where the design facilities will be enhanced and the internal capabilities will be addressed to improve productivity and reduce costs. This is necessary for the Group to remain competitive with those developed countries especially in the current knowledge-based economy. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) (c} Existing and/or Ongoing R&D Projects The Group’s R&D team has undertaken the following R&D project developments:­(i) LEO Test System Development In 1996, the Elsoft Group began its path-finding exploration on test metrologies and embedded peripherals in the optoelectronic industry. The Group started the prototype on the input and output board and other automation drivers. The prototype gained market acceptance for its competitive pricing which was dominated by foreign companies then. With the fundamental platform developed. the subsequent development on a modular to system level progressed at an encouraged speed. The development soon evolved from an Input and Output Card and drivers to a full system of High Speed Tester, namely Model EL45oo. This development was the result of cumulative years of technical development with investment of over 100,000 engineering hours spent. Even today, the Group continues to carry out product development to further enhance and explore new technologies on the LED test solution. Presently, the Group’s LED test solution is able to perform high speed test at above 10,000 units per hour, electrical measurement at tolerance ievel of +/-0.03% and colour measurement at +/-0.5 nanometer. (ii} Optic Sensors Functional Test System Development The Group believes that good R&D initiatives will bring great potential to the product development in the long term. The Group’s R&D team explored and developed the test solution for optic sensors functional testing. This has presented the Group with a huge opportunity in the subsequent growth of the optoelectronic industry. The Group’s opportunity arrived when the breakthrough of the optic sensor supported the development of optic sensor test solution for the pilot prototype of its customer. Leveraging on the Group’s internal development in the electrical test and together with the customer’s development team, it was a synergistic match for both Elsoft and the customer on the test development of the optic sensor functional test system. In 2000, Elsoft eventually developed the first prototype of optic sensors functional tester and was successfUlly qualified by the customer for mass production. (iii} Image Sensor Test System Development Being a technology company, accepting and adapting to changes in technology are crucial for the Group’s success. As part of the management initiative in the new millennium. the Group focuses in expanding its development in the optoelectronic industry. 4. INFORMATION ON THE GROUP (Cant’d) (d) The increasingly complex IC products with new materials and dramatically shrinking geometries in the development bring new advances in a myriad of applications especially in the recent mDbile phDne industry. Image sensor device manufacturers require suppliers that can provide imaging technDlogy excellence, produce millions of units per mDnth and deliver global technical suppDrt. As the image sensor technology enters into the market, the Group’s development team wDrk clDsely with the industry tD develDp the test solution fDr its application. Today, the Elsort Group offers a range of test solutiDn for camera module functional test. GDing forward, the Group will continue to initiate and explore technolDgical innovations that will provide the Group with cDmpetitive advantage in the long run. Based on the Group’s R&D direction. the R&D focus can be divided into three distinguished areas namely test and burn-in system development, embedded peripherals design and autDmation system development. Under Ihe test and burn-in syslem division, resources will be dedicated for the exploratiDn and path finding on the digital test technology areas. Improvement and development of hardware and software design will be carried out with priority focus on high speed functional tests and thermo-control areas. The embedded peripherals divisiDn will be focusing in the area of I/O design, remote I/O design, controller drivers and other automation peripherals applicatiDns while the automation equipmenUsystem division will be emphasising on the imprDvement Df output performance and Dther application handler systems. Achievements in R&D Over the years, the GrDup has established itself as one of the majDr vendors fDr test and burn-in system development to many of its MNCs clientele. The proven success of the Group’s sDlutions adopted by the MNCs in the industry is a live testimony Df the Group’s technology superiority and commitment. The Group is proud to be recDgnised by customers and the Industry fDr providing superiDr value and innovative solutions tD meet the stringent technical challenges. The Group has approximately eight (8) years of business relatiDnship with world class MNCs custDmers. Leveraging Dn the cDmpany’s clientele prDfile, the Group has successfully expanded its solutions to Dther leading Industry custDmers. Over the years, the GrDup has grown the business content with these clienteles as the company evolves from a small electrical services company to today’s one-stop ATE solutiDn provider. 4. INFORMATION ON THE GROUP (Cont’d) (e) Future Plans and Timeline for Implementation
As part of the Group’s ongoing efforts to maintain technological advantage over its competitors, the Group has allocated RM4.79 million of the proceeds raised for the development of new hardware and software design and exploration and path finding of test technology areas over the next 36 months. Focus will be placed on the test development of embedded peripherals and image sensor, which are priority areas for the Group in view of the launching of new optoelectronics applications and successful introduction of camera module into the market.
(f) R&D Expenditure

The amount of R&D expenditure spent for the last four (4) financial years ended 31 December 2001 to 2004 were as follows:­”,”anClal Year E;nOeO 31 DecemDer  2001  2002  2003  ZUU4  Total R&D Expenses (RM’OOO) Total R&D Expenses as a proportion of the Group’s total revenue (%)  710 8.93  1,160 9.35  1,721 9.32  2,198 8.11

4.2.14 Interruptions in Business for the Past Twelve (12) Months The Group has not experienced any business interruption in the form of trade disputes or major operational breakdown occurring within and outside the Group that may significantly impair the Group’s business performance during the past 12 months. 4.2,15 Employees The Group has a flat organisational structure that enables all levels of employees to be actively involved in projects undertaken. This will facilitate the Group in meeting the dynamic needs of the industry. As of 31 May 2005, the Group has a total of 55 employees. The Group does not have any contractual or temporary empioyees. The employees of the Elsoft Group can be categorised as follows:­Category  No, Of Employees  Average Years Of Service  Management  5  8  Engineering! R&D  20  6  Production! QA  19  5  QAlQC  3  5  Finance and Administration  6  3  Sales and Marketing  2  2  TOTAL  55
The Group recognises the imporlance of its employees and updates them on the latest developments in the industry as and when the need arises. 62 4. INFORMATION ON THE GROUP (Cont’d) The management of the Group is of the opinion that its dedicated, efficient and trained employees are instrumental to its success. The management of the Group enjoys a good working relationship with the employees. The Group does not have any employees who are members of labour unions and the employees enjoy cordial relationships with the management. There have not been any industrial disputes in the past between the employees and the management.
4.2.16 Key Achievements/Milestones/Awards The key milestones and achievements of the Elsoft Group are as set out below:­
4. INFORMATION ON THE GROUP (Cont’d) Year Events 2004 • STSB obtained ISO 9001 :2000 certification for Quality Management Systems in respect of manufacturing process.
• STSB awarded Malaysia Top 100 Small Medium Enterprises Golden Bull Award 2004.
• Elsoft converted to Berhad status on 10 August 2004.
• STSB awarded Year 2004 Enterprise 50.
• STSB awarded Deloilte Technology Fast 500 Asia Pacific Award.
• STSB named the Year 2004 Best Overall SMI Award by SMI Malaysia.

4.2.17 Modes of Marketingl Distributionsl Sales Currently, the Group’s products and services cover various Industries such as semiconductor, electrical and electronics. optoelectronic and telecommunication within the manufacturing sector. lis products and services are mainly sold to MNCs located in Malaysia and overseas market, which eventually export their final products worldwide. The current trend which is moving towards highly customised test solution coupled well with the Group’s products and services. The Group will capitalise on this trend by offering its expertise, capabilities and services to support the MNCs operations and markets. The Group in-house marketing team consists of two (2) customer service staff who are spearheaded by the Chief Executive Officer. Due to the nature of the Group’s services which involve high level of technical specifications and processes, the marketing department works closely with the development department for both pre-sales and post-sales activities. The marketing process involves a relatively lengthy CyCle which begins with the initial contact with a prospective customer. followed by presentations of the Group’s capabilities, facilities and track record, site visits, product demonstrations, audit and verification by the potential customer, qualification and finally price negotiations. The marketing team is also responsible for front line post-sales customer service which covers project management including making the necessary logistic arrangements and overseeing quality malters to ensure scheduled and timely delivery to customers. The Group’s marketing plan has been termed global domination plan. II entails a detailed marketing and positioning strategy to accelerate market share and brand acceptance by global semiconductor and optoelectronic manufacturing companies for its range of products and services. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) 4.2.18 Location of Business and Production Capacities The location of the Group’s assets and operations are tabulated below:­Company  Location/ Built-up Area  Beneficial/ Registered Owner  Production/ operating capacities and output per annum  !  Elsoft  Plot 9, Medan Bayan Technoplex, Bayan Industrial Zone Phase 4 11900 Penang 6,000 sq ft  Lepas, Lepas  STSB  500·1,000 per annum  systems I I  STSB  Plot 9, Medan Bayan Technoplex Bayan Industrial Zone Phase 4  Lepas Lepas  STSB  7,500-10,000 per annum  units  11900 Penang 16,000 sq ft  AGS  No. 27, Lintan9 Beringin 6 Off Jalan Permatang Damar Laut Diamond Valley Industrial Park II Bayan Lepas 11960 Penang 5,000 sq ft  Rented  30·100 annum  systems  per
4.3 SUBSIDIARIES 4.3.1 STSB (a) History and Business 8T8B was incorporated in Malaysia on 7 May 1996 under the Companies Act, 1965 as a private limited company under its present name. It commenced operations in January 1997. 8TSB is principally engaged in electronic devices/modules assembly, test and burn·in system integration and customised manufacturing solutions. ST8B focuses on providing customised manufacturing solution based on its customers’ requirements, 8TSB is mainly the manufacturing arm supporting the internal requirements of the Group, Currently, 8T8B is operating in Plot 9, Medan Bayan Lepas. Technolplex, Bayan Lepas Industrial Zone Phase 4, 11900 Penang with a built up area of 16,000 sq ft. As at 31 May 2005 (being the latest practicable date prior to the issuance of the Prospectus), ST8B has a total of 16 employees. (b) Share Capital 8T8B’s present authorised share capital is RM500,000 comprising 500,000 ordinary shares of RM1 each whilst its issued and paid-Up share capital is RM500,000 comprising 500,000 ordinary shares of RM1.00 each. 65 4. INFORMATION ON THE GROUP (Cant’d) The changes in STSB’s issued and paid-up share capital since incorporation are as follows:­Date Issued 07.05.1996 02.12.1996 28.06.2001  No. of shares allotted 3 199.997 300,000  Par value RM 1.00 1.00 1.00  Consideration Subscribers’ shares Cash Bonus shares  Cumulative issued and paid up share capital RM 3 200,000 SOO,OOO
(c) Substantial Shareholder STSB is a wholly owned subsidiary of Elsoft. The substantial shareholders of STSB are as follows:­Direct Interest  Indirect Interest  No. of Ordinary  No. of Ordinary  Shares of  Shares of  Name  RM1.00 Each %  RM1.00 Each % — Elsoft  500.000 100.00  ran Cheik Ealk  — ‘500,000 100.00
Note:­ Deemed interested by virtue of his shareholding of not less than 15% in  Elsoft pursuant to Seclion 6A of the Act.  (d)  Subsidiary/Associated Corporations  srSB does not have any subsidiary or associated corporations.  4.3.2  AGS  (a)  History and Business  AGS was incorporated in Malaysia on 3 November 1999 under the  Companies Act, 1965 as a private limited company under its present  name. It commenced operations in December 1999.  AGS  is  principally  engaged  in  the  design  and  production  of  specialised  machinery  and  equipment  namely  material  handling  equipment and robotic factory automation equipments.  Currently, AGS is operating in No. 27, Lintang Beringin 6, Off Jalan  Permatang Damar Laut, Diamond Valley  Industrial Park II, Bayan  Lepas, 11960 Penang, with a built up area of 5,000 sq ft. As at 15  May 2005 (being the latest practicable date prior to the issuance of  the Prospectus). AGS has a total of 15 employees.
4. INFORMATION ON THE GROUP (Cont’d) (b) Share Capital AGS’s present authorised share capital is RM500,000 comprising 500,000 ordinary shares of RM1.00 each whilst its issued and paid­up share capital is RM500.000 comprising 500.000 ordinary shares of RM1.00 each. The changes in AGS’s issued and paid-up share capital since incorporation are as follows:­Date Issued  No. of shares allotted  Par VarU8 RM  Consideration  Cumulative issued and paid up share capital RM  03.11.1999 11.05.2000 06.06.2003  2 99.998 400.000  1.00 1.00 1.00  Subscribers’ shares Cash Cash  2 100,000 500.000
(c) Substantial Shareholder The substantial shareholders of AGS are as follows:­Direct Interest  Indirect Interest  No. of Ordinary  No. of Ordinary  Shares of  Shares of  Name  RM1.00 Each %  RM1.00 Each % — Elsoft  300,000 60.00  Tan Chelk Eaik  — ‘300.000 60.00  Oh Kuang Eng  200.000 40.00
Note:­Deemed interested by virtue of his shareholding of not Jess than 15% in Eisoft pursuant to Section 6A o( the Act. (d) Subsidiary/Associated Corporations AGS does not have any subsidiary or associated corporations. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) 4.4 INDUSTRY OVERVIEW AND PROSPECTS The Elsoft Group is principally involved in research, design and development of test and burn-in system and application specific embedded systems. electronic devices! modules assembly, test and burn-in system integration and customised manufacturing solutions and design and production of specialised machinery and equipment. Therefore, the prospects of the Elsoft Group can be linked to the growth of the following:­(i) Global Economy;
(ii) Malaysian Economy;

(iii) Semiconductor Industry; (iv) HB LED Industry; and
(v) ATE Industry,

4.4.1 Overview of the Global Economy The global macroeconomic outlook for 2004 has gotten brighter. Since our last update in early April, Global Insight, Gartner Dataquest’s preferred provider of economic data. has once again revised its guidance slightly upward from 3.9 percent to 4.3 percent for worldwide gross domestic product growth. Economic growth in the USA and China continues to be of high importance for acceierating global growth. As we mentioned in an earlier report, risks to worldwide growth are posed by a precarious overdependence on those countries. Both nations bear close watching in the months ahead. In China, virtually everything will turn on the ability of the central leadership to downshift the economy without stalling it. The key question is not just whether China’s leadership has sufficient command of the economy to bring it under control, but also whether the economy can be reined in without shocking it. A few analysts have blown the implications of a Chinese financial meltdown scenario out of proportion to its actual probability. But the risks embodied in this scenario are real. The challenge ahead for China will not only be a significant test of its economic fitness but is also likely to be an important determinant of its geopolitical standing, well beyond the next 12 months. Given the possible twists the global economy could take in the coming months, it is especially important for companies to have a strategy contingent on simultaneous and potentially sharp slowdowns in the United States and China. Although this remains a distinctly low-probability scenario. its implications for the global economy are such that it deserves particularly careful planning. With a positive global economic environment, the outlook for electronic equipment is strong for 2004 and 2005. We are forecasting end-user application revenue to expand to B percent and 9 percent, respectively. In the near term. solid consumer and strong cellular phone sales and an accelerating PC replacement cycle continue to stimulate growth. And this growth is not just a 2004 affair but a multiyear event. A revival in even-wired communications in late 2004 will provide add-on momentum. 4. INFORMATION ON THE GROUP (Cont’d) 4.4.2 As for semiconductor sales. our forecast outlook as we enter the third quarter is still robust at 25 percent growth, with latest market indicators showing that the industry is still on track and quite possibly may surpass our earlier growth projections. Our third quarler outlook sees device unit shipments rising 15 percent to 16 percent in 2004. Average sales prices are increasing as well, affording a more rapid market expansion in 2004. As for 2005, we hold to a follow-on expansion, albeit at a slower rate of 14 percent Our view of end­user demand remains largely unchanged and heallhy as in our prior forecast. (Source: Gartner Dataques! Report dated 6 July 2004 by Gartner Ireland Limned) Overview of the Malaysian Economy The Malaysian economy accelerated its growth momentum in the first half of 2004, after a strong take-off in 2003, and is expected to surpass earlier expectations with higher growth of 7% for the whole year. Positive signs of a firm economic recovery at the global front, parlicularly in the first six months as well as higher commodity prices, reinforced the “feel good” factor that contributed to further improvement in consumer and business sentiments. Growth has become more broad based with all sectors registering positive growth. Domestic demand, partiCUlarly private consumption, continued to sustain growth for five consecutive years, while private investments, which picked up in 2003, became more entrenched, resulting in a private sector-led growth. The broad-based growth is evident of the effective measures implemented by the Government to develop new sources of growth to reduce the nation’s vulnerability to the external environment. Expanding at 10.5%, the manufacturing sector, which has become more diversified with higher-end, value-added and new emerging industries and products, remains a major contributor to growth. New growth areas in information and communication technology, strong expansion in financial services and revival in tourism activities supported growth in the services sector, enabling it to maintain its premier position in terms of share to gross domestic product (“GOP”) at 57%. Meanwhile, the Government’s commitment 10 revitalise the agriculture sector as the third engine of economic growth, particularly in food production. has resulted in the expansion in outpul of frUits, aquaculture and livestock. The synchronised upswing in the global economy and upsurge in electronics demand, as well as high prices for palm oil and crude oil, continued to propel export volume and earnings. Import growth was strong, parlicularly for intermediate and capital goods, reflecting robust domestic economic activities, fuelled by recovery in private investment and higher disposable income. The trade balance in July 2004, remained in surplus for 81 consecutive months since November 1997. Belter export earnings and inflow of foreign funds increased the international reserves to USD54,4 billion as at 14 August 2004, sufficient to finance 7.2 months of retained imports and five times the shoo-term external debt. The national resource position remains strong with gross national savings at 36.5% of gross national product, providing ample liquidity to finance both public and private sector initiatives. (Source: Economic Report 200412005) 4. INFORMATION ON THE GROUP (Conl’d) The robust domestic economic activities, which supported growth in 2002 through to 2004, are further augmented by favourable external environment. Of significance, the domestic sector is buoyed by the expansion in private consumption and investment activities. The manufacturing sector registered a solid growth of 12.3% during the first half of 2004, while the services sector expanded strongly by 6.8% in the same period. With the Leading Index pointing towards further expansion in the second half of the year, both sectors are envisaged to contribute significantly to the economic growth. The build-up in international reserves arising from larger current account surplus and inflows of foreign capital continues to strengthen Malaysia’s macroeconomic fundamentals. Given this favourable scenario. the Malaysian economy is set to surpass its earlier estimate of 6.0-6.5% and post a stronger growth of 7% in 2004 (2003 : 5.3%). The outlook for 2005 will generally remain favourable although global growth is expected to moderate on account of high oil prices, inflationary pressures, interest rate hikes and a probable slowdown in China’s economy. The emergence of these risks, that became apparent in the second half of 2004 and are expected to continue into 2005, will have a larger impact on growth next year. Global economic growth is projected to moderate to 4.4% in 2005 from 4.6% in 2004. The stronger macroeconomic fundamentals and resilience, backed by sturdy domestic demand and broad-based growth, will however, continue to support Malaysia’s GDP growth, forecast at 6% in 2005 (Source: Economic Report 2004/2005) Growth of the manufacturing sector accelerated since September 2003, underpinned by dOUble-digit and broad-based growth in both export and domestic-oriented industries. Favourable external environment with continued strong growth in China, coupled with the firm recovery in the US and sustained recovery in Japan, fuelled the higher demand for manufactured goods, particularly for electronic products. Meanwhile, growth in domestic­oriented industries strengthened on the back of the improved economic performance. With these positive developments driving the manufacturing sector, its contribution to GDP growth is expected to increase. Overall capacity utilisation of the manufacturing sector was sustained at a high levei with 42% of the manufacturers producing at near-maximum capacity (81 %-1 00%) during the second quarter of 2004 compared with 35% in the first quarter of the year. The percentage of manufacturers with capacity utilisation in the range of 61 %-80% has edged up to 40% from 37%, following stronger demand. The expansion in output is reflected in the 18.6% increase in manufacturing sales for the first half of 2004 to reach RM192,559 million (January-June 2003: RM162,331 million). The strong growth in sales value was mainly due to the significant increase in demand for semiconductors and basic metals. Output growth in 2005 is expected to be broad-based with the manufacturing and servicing sectors remaining the growth drivers. The manufacturing sector is envisaged to expand strongly, propelled by strengthened domestic demand and sustained performance of the external sector. Overall production is expected to grow more than 10%, while exports at 11.3%. Buoyed by the upswing in the electronics market. electrical and electronics will continue to grow at a steady rale despite the overstated fears of an electronics slowdown. (Source: Economic Report 2004/2005) 70 4. INFORMATION ON THE GROUP (Cont’d) 4.4.3 Overview of the Semiconductor Industry The uptrend in global demand for semiconductors pushed the output of electrical and electronics sharply by 24.4% during the first six months of 2004 (January-June 2003: 4.3%). In addition, greater outsourcing activities as well as software development helped to enhance the sector’s growth. Within the group, output of semiconductors, accounting for more than one-third of the total output of the manufacturing sector, increased sharply by 33.4% (January-June 2003: 7.8%). This was also reflected by the higher sales of semiconductors, which recorded 14.1 % increase during the same period (January-June 2003: 6.9%). These strong increases were in line with the expansion of broadband infrastructure facilities in the information and communication technology sector to support increasing demand for global supply network and back-office facilities. Given the importance of semiconductor industry in terms of its contribution to gross domestic product growth and export, efforts are ongoing to further develop the industry, especially in advanced integrated circuits design and packaging. (Source: Economic Report 2004/2005) 4,4.4 Overview of the HB LED Industry The market for HB LEDs has been one of the more notable success stories in the compound semiconductors over the past decade. The history of this market since 1995 is shown in Figure 1. The compound annual growth rate over 1995-2002 has been 47.4%. Growth has been relatively steady, except for the flattening of the market in 2000-2001. This was due to a variety of reasons, including a worldwide economic slowdown, a flattening of the mobile phone market (the major user of HB LEDs), inventory effects, and several other causes. However, the HB LEDs market bounced back in 2002, growing by more than 50% to reach USD1.84 billion. This growth was led by a dramatic ramp-up in the use of HB LEDs in mobile phones, including both white LCD backUghting for full-colour screens, and keypad backlighting in various colours. Other applications grew as well, aithough not as strongly as mobile phones. The total worldwide market for HB LEDs is forecast to grow from USD1.84 billion in 2002 to USD5.9 billion in 2008, for CAGR of 22%. The six major applications for HB LEDs are mobile appliances, automotives, signs/displays, signals, illumination and electronic eqUipments. The forecast growth rates for the six application categories vary widely, reflecting the particular dynamics of each application, including degree of market maturity, expected future rate of market penetration, etc. Illumination is currently one of the smallest applications, yet it has a large potential for market growth in specialty lighting niches. THE REST OF THIS PAGE IS INTENTlONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) I-El LEOs MlJ'<etTrend and Outlook
Figure 1 HB LEO Market Forecast2002·2Q08 7000 r——–~——————____,
.lIluminalion • Signals! I Eleclronics EQoipmenVOlher • Automollve _ S,gnlD,splay _ Mobile Appliances USD’mHlion  2002  2003  2004  2005  2006  2007  2008  CAGR  Illumination  85  129  197  282  366  521  691  17%.  Signals  44  50  63  74  87  97  94  24%  Electronics EquipmenVOther  222  275  437  540  664  818  946  14%  Automotive  333  397  457  534  624  735  865  17%  Sign/Display  427  482  525  573  643  774  1,093  42°/c  Mobile Appliances  733  1.370  1.896  2,197  2.273  2.300  2.263  28%  1.844  2.703  3.575  4,200  4.677  5,245  5,952  22%
THE REST OF THIS PAGE IS INTENTIONAllY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) The major applications, both existing and emerging, for HB LEDs and the application trends that will drive the use of LEOs in the coming years are as follows:­(a) Mobile Appliances Substantial momentum is building in the mobile phone handset market for the adoption of full-colour displays, and all of these will use white InGaN LEOs for backlighting. The colour display penetration in mobile phones was over 20% in 2002, is expected to exceed 40% in 2003, and will continue increasing thereafter. Nearly all new models introduced by major handset manufacturers feature full-colour displays. Keypad backlighting using blue and even white LEOs has increased dramatically during the past year and will contribute strongly to the mobile appliance market total. The backlight forecast relies on a forecast of the total growth in units of mobile phones and the fraction of those phones that have full-colour displays. The rate of growlh in the unit sales of full-colour LCD screen mobile phones rellects the projected growth in market penetration of these devices ­from 42% in 2002 to 96% in 2007, which corresponds to 617 millions units. Mobile Phone Market Trend Outlook (2000-2007)
2000 2001 2lXJ2 2003 2004 2005 2lXJ6 2007 (Source: High Brightness LED Report dated July 2003 by Strategies Unlimited) (b) Automotive Lighting To date, interior HB LEOs lighting has been most common in European vehicles, with 80% penetration achieved in 2002. II is also beginning to make inroads in Japanese vehicles but has not yet had any significant penetration of the North American markel. Because HB LEOs have been proven in the European auto industry and in European car manufacturing facilities, they are expected to continue to be designed into new car models as manufacturing facilities are retooled 10 allow their installation. Use in Japanese cars will likewise gradually expand beyond the current limited base as manufacturing lines are relooled for new modeis. Overall, the interior automotive lighting market is forecast to grow to US0481 million in 2007, with a CAGR of 13.5%. 73 4. INFORMATION ON THE GROUP (Cont’d) 4.4.5 (e) Signs and Displays The use of power LEDs in RGB combination for backlighting relatively large (15+ inches) fixed LCD monitors is an emerging application, with the first commercial models being introduced for specialised applications in late 2003. These include applications such as medical and graphic arts, in which higher colour rendition is required compared to standard computer monitors, which constitute the bulk of the LCD monitor market. Applications in which the higher cost of HB LEDs, compared to CCFL backlights, can be justified in order to achieve higher image quality are expected to be limited in the early years, but continued penetration of the LCD monitor market is expected through the forecast period. Because of the large unit size of the LCD monitor market (even excluding laptop computers), even a modest penetration results in a significant market for LEOs. As such, this application is projected to grow from USD13 million in 2003 to USD456 million in 2007, corresponding to a CAGR of 146%. The overall outlook for the HB LED market remains highly positive for the next five years. Although some market segments will begin to mature, new applications will arise that will keep growth rate high. New technology coming into the market, such as power LEOs will enable new applications (e.g. automotive forward lighting) or help to accelerate existing ones (e.g. illumination). There will be increased competition as new players enter the market, often based on new technology, or improved manufacturing of existing technology. Prices will continue to trend down drive by economies of scales, but overall revenue growth will still be significant for most applications, as unit growth outpaces price declines. (Source: High Brightness LED Report dated JUly 2003 by Strategies Unlimited) Overview of the ATE Industry The continuing strong recovery in semiconductor demand is rekindling the industry’s business confidence. In the first half of 2004, the majority of semiconductor manufacturers have announced significant increases in planned capital spending for 2004. For 2004, we currently expect global capital spending to increase by nearly 51 percent. However, we believe that official capital spending announcements trail the actual spending of companies. With that, we anticipate some more upward revisions in capital spending plans as the year goes on. Overall, Asia/Pacific will show the heaviesI investment with almost 44 percent of the total. The Americas region is next with 23 percent of total spending, followed by Japan with 21 percent and Europe and the Middle East with 12 percent. ATE spending continues to be robust throughout the first half of 2004. Sales have been so strong that we have again raised our forecast for 2004 to a projected growth of 64 percent. Revenue is up in all regions, and not surprisingly, Asia/Pacific and North America appear to be leading the surge in ATE spending. With the strength of the semiconductor assembly and test services business, the Asia/Pacific region alone is forecast to comprise approximately half of worldwide ATE spending. Emerging markets within the region, especially China, hold great prospects for the ATE industry. 4. INFORMATION ON THE GROUP (Cont’d) 4.4.6 Sales are also up for every market segment, with apparent triple-digit growth for the SOC, radio frequency/microwave and analogllinear equipment segments. This is in line with semiconductor device demands driven largely by growth trends in the consumer electronics and cell phone markets. Capacity requirements are expected to spur additional growth in memory testers, while the requirement for versatility and flexibility in device under test applications will bolster growth of SOC testers. SOC testers are, in fact. forecast to have the highest CAGR through 2009 -at about 41 percent -of any ATE market segment. Much of the spending that was formerly directed toward digital and logic testers is increasingly targeted at purchases of SOC testers. Next year looks like it will continue a solid growth period for the ATE industry. While growth is expected to be somewhat tempered, hovering around 34 percent, all market segments and regions should experience revenue increases on an annual basis. However, by 2006. the ATE industry will head back Into another period of revenue decline as the next semiconductor cycle takes hold. Sequential quarterly growth will take a downward turn by early 2006. Strong end-user demand in the major application markets continues to drive device unit demand to new highs In the first half of 2004. And at last, healthy demand. combined with lean inventories and tight supply, has rekindled the industry’s business confidence. Equipment order momentum is strong, albeit moderating in recent months. New fab announcements have materialised ­not overexuberant but sufficient. Despite rapid order growth and aggressive near·term investments, a sense of discipline is visible in the industry’s investment moves. The surge in new equipment sales in 2004 was a direct result of demand visibility and capacity tightness. However, now that capacity increases are keeping pace with unit demand, equipment orders are slowing. With that, it seems the industry is attempting to more closely match its supply and demand ramps to maximize much-needed profits. This is a difficult balance act. While history will repeat itself once again sooner or later, and the industry will fast-forward to its past, we hope that it is later rather than sooner. Discipline is growing. but cycles will keep rolling on. (Source: Gartner Dataquest Report dated 6 July 2004 by Gartner Ire/and Limited) Players and Competition The Elsoft Group operates in a competitive environment with a few key players dominating the market. Some of the competitors are large conglomerates which have greater financial resources. The operations of these conglomerates are more geographically diversified, thus are in a better position to withstand any adverse economic conditions. Due to their global presence and size, they have competitive edge in terms of access to the latest technology development. well-established In the industry and wider poOl of expertise. While Elsoft Group is aware of the intense competition within the industry, its management believes that its business model that emphasises on innovation and high product quality together with its focus on responsive customer services and competitive pricing will withstand threats from competitors. In this respect, the Group is expected to capitalise on the identified opporiunity gaps such as the market needs for integrated test solutions and a complete suite of test applications that address every aspect of their operational and information requirements and innovative technology. 75 4. INFORMATION ON THE GROUP (Cont’d) 4.4.7 To the best of the Promoters’ knowledge and belief, the Elsort Group does not have any major competition from Malaysian-owned companies in the test and burn-in system development. The Group’s major ATE competitors are mainly foreign-based companies from the USA, Germany and Canada. However, the automation division of the Group providing engineering solution in design and production of specialised machinery and equipment, namely material handling equipment and robotic factory automation equipment. faces the same competition as those in the similar industry. Competitive Advantages The Elsort Group’s products currently have market presence within the ATE industry in Malaysia, Taiwan, China, Korea and Thailand. The Group has buill its reputation over the last eight (8) years as one of the major providers of ATE solution to the semiconductor and optoelectronic industries with the following competitive advantages:­(a) Cost Effective and High Performance Products and Services
By competing among the global players from developed countries in the ATE industry, cost is a friendly ally and powerful ammunition for the Group’s market position due to its position in a low cost geographical region. With the lean operation structure and backup by the Group’s strong technical capabilities, this will impose pressure on its competitors in terms of offering high performance products at competitive cost while maintaining an attractive rate of return.
(b) Synergistic Integrated Total Solutions
The Elsofl Group is able to provide a total solution centre for its customers. To the best knowledge of the management, most of its competitors focus on one aspect of the solution development I.e. either mechanical focus or software focus. Today, the industry is moving towards a total solution paradigm which indirectly demands its suppliers to be more integrated. The Group is able to offer its customers a peace of mind solution with its ability to provide both the test system (tester) as well as the automation portion (test handler). This will increase the success rate of the Group in securing any projects in the long run.
(c) Continuous R&D as the Winning Culture

To remain resilient in the competitive environment, the Elsofl Group continues to invest in its R&D activities for better performance, improvement in product quality and reduction in the development cycle time. High focus is placed on developing solution and capabilities along the digital test technologies which couple well with the trend of product miniaturisation. Other than milestones and performance measurement, the Group also embraces spirit of continuous R&D and challenges the new frontier as the winning culture of the Group. Risks taking and results oriented are among values Which motivate the employees in the Group for continuous improvement. 4. INFORMATION ON THE GROUP (Cont’d) The Group’s highly focused R&D capabilities allow it to provide value-add services to its customers. Having a strong and technically competent R&D team. the Group is able to be innovative in responding to customers’ requests and changes in the industry. thus developing the necessary modifications and improvements to the Group’s processes to cater for such requests and changes. This allows the solutions offered to be viable and remain competitive within the industry. (d) Highly Motivated Management and Design Excellence Technical Team Each of the Group’s divisions and functions is helmed by a highly motivated and experienced leader who has more than ten (10) years experience in the industry. Their past credentials and accomplishments include designing and setting up of new test systems, managing project operations, technical engineering, R&D and business development. This experienced management team in turn lead a team of highly skilled and technically strong work force. The Directors and key management personnel of the Group possess strong technical. engineering, R&D and business development backgrounds. The know-how and skills of this group of people have been honed through years of relevant industrial experience, on-the­job training. apprenticeship and training programs. Their experience and backgrounds are evident in their systematic approach in problem solving, meticulous attention to details and strong quality control practices. (e) Product Quality The ISO 9001 :2000 certification of STSB is an endorsement of the quality assurance systems that are in place. The Elsofl Group adopts a stringent internal quality management policy to ensure that its products and services are of high quality and meet the customers’ specifications and stringent requirements. The Directors believe that the ability of the Group to consistently produce high quality products and services to its MNC customers will further enhance the Group’s position as a preferred vendor specialising in test and burn-in solutions to its eXisting MNC customers as well as attracting new ones. The Elsoft Group is thus. commitled to maintaining a high standard of quality control throughout the entire design and production process. These quality certifications are important as they provide customers with the assurance of confidence in the quality of products as well as a useful marketing tool to attract new customers. THE REST OF THIS PAGE IS lNTENTlONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) 4.4.8 Barriers to Entry The following are entry barriers in Elsoft Group’s competitive environment:­(a) Stringent Pre-qualification The semiconductor and optoelectronic industries are dominated by large established MNCs players which subject new vendors to laborious screening and pre-qualification procedures. This is a lengthy and time-consuming process which will take up to nine (9) months or more. Such stringent screening makes it difficult for new entrants who lack the necessary track record to qualify as approved vendors. Likewise. the rigid and time-consuming accreditation or qualification process by MNCs give rise to high switching costs. making it less desirable for MNCs to frequently change vendors unless there are compelling reasons to do so. Furthermore, it is a common industry practice for MNCs to adopt product or process specialisation by suppliers, which means that no two vendors supply the same components and services. This makes it difficult for new entrants to penetrate the markel. (b) Specialist Knowledge and Cumulative Technological Know-how Integration The know-how and skill sets required to provide certain specialised services such as design of electronics circuitry. test software engineering and knowledge of the high speed functional test methodologies are accumulated through years of extensive on-the­job training. careful sludy and relevant apprenticeship and training programmes. Due to the combination of multiple engineering disciplines in the test development and R&D of a test solution, the achievement of the Elsofl Group today is a result of cumulative test development results from previous versions that were developed in the early days. Thus. it will require a group of technically competent and experienced design team to reverse engineering or reinvent the solutions. As it requires time and significant training expenditure to build such technical competencies. it is costly and difficult for a new entrant to recruit a team of personnel with the relevant specialist knowledge and technical know-how to undertake the complete range of services offered by the Elsofl Group. (c) Long Learning Curve New entrants in the ATE industry would have to brace themselves for a start-up time of at least three (3} years which the Directors estimate is the time length required to prepare the facilities. qualify as an approved vendor of MNCs and ramp up the production to an acceptable level. Considerable investment and start-up time is required to set up an operation of similar size as the Elsofl Group due to high capital investment in machinery and eqUipment including the recruitment of skilled personnel and working capital requirements. 78 4. INFORMATION ON THE GROUP (Cont’d) In addition, continuous investment in new design tools and infrastructures with latest technology is required for the market player to maintain its competitiveness. 4.4.9 Relevant laws and Regulations Governing the Industry Advanced electronic system design namely in research, design and development of test and burn-in systems and application specific embedded systems for the semiconductor and optoelectronic industries which are eligible for MSC status are entitled to enjoy a set of incentives, rights and privileges provided for under the Bill of Guarantees awarded by the MOC. There are Government incentives for the design and production of specialised machinery and equipment. namely material handling equipment and robotic factory automation equipments. Some of the incentives that are available include:­Pioneer Status; and Investment Tax Allowance.
Eligibility for either the Pioneer Status or Investment Tax Allowance will be determined according to the priorities termed as “promoted activities” or “promoted products”. In addition, the level of value-added, technology and industrial linkages will also be taken into consideration. Save as set out above, the Board is not aware of any specific regulations governing the HB LED and ATE industries in Malaysia nor is the Board currently aware of any specific material peculiarity in the said industries. 4.4.10 Prospects of the Group Given the prospects and positive outlook of the global economy, the Malaysian economy, the semiconductor industry, the HB LED industry and the ATE industry, the Group is optimistic that its business will grow. Capitalising on the support and incentives given by the government and also its infrastructure and personnel strength and capabilities, the Group will strive to maintain its reputation as a reliable test and burn-in solutions provider 10 its local and MNC customers. The Group believes that the success of a market player in this sector is largely dependent on its capability to meet the customers’ specifications in terms of timely delivery, high quality products and competitive pricing. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE GROUP (Cont’d) 4.5 MAJOR CUSTOMERS Based on Ihe Group’s audited financial statements for the financial year ended 31 December 2004. the top ten (1 O) customers of the Group are as follows:­Customers  Products/Services Sold  Length of relationship (No. of Years)  Percentage of Total Revenue (%)  AgilentTechnologies (M) Sdn Bhd  Test and Burn-In Systems and Embedded Peripherals  8  345  ASE Electronics (M) Sdn Bhd  Tesl and Burn-In Systems, Automation Systems and Embedded Peripherals  4  14.1  Manjer Engineering Co Ltd  Test and Burn-In Systems and Embedded Peripherals  6  12.8  Universal Scientific Industrial Co Ltd  Test and Burn-In Systems and Embedded Peripherals  1  8.4  SRM Integration (M) Sdn Bhd  Embedded Peripherals  5  7.1  Lumileds Lighting (M) Sdn Bhd  Test and Burn-In Systems and Embedded Peripherals  4  3.3  Hana Semiconductor (Ayullhaya) Co Ltd  Test and Burn·ln Systems and Embedded Peripherals  4  3.1  Mini-Circuit Technologies (M) Sdn Bhd  Test and Burn·ln Systems. Automation Systems and Embedded Peripherals  4  2.6  Ya BanQ Electronics Co.• ltd  Test and Burn-In Systems  4  1.0  Innorex Technology Co.. Ltd  Test and Burn-In Systems  1  0.7
The Group’s top customer. Agilent Technologies (M) Sdn Bhd (“Agilent”) accounted for approximately 34.5% of the Group’s total turnover for the financial year ended 31 December 2004. However, Agilent has been with the Group for approximately eight (8) years and this indicales a long-term and stable customer relationship. Over the years, the Elsoft Group has proven to Agilent its capability to produce quality and competitive products on lime. To reduce over-dependency on any single customer, the Group is consciously expanding its products range with an aim to expand the existing customer and revenue base. To date. the Group has a clientele base of approximately 52 customers. Its long-standing customer relationship serve as an endorsement of the quality of its products and services, and more importantly, a stable customer base. In addition, the Elsoft Group will also continue to enhance its value added services propositions, improve its service level and maintain its competitiveness including broadening its product range and to develop a more diversified portfolio of customers and markets in the future, both locally and overseas. 4. INFORMATION ON THE GROUP (Cont’d) 4.6 MAJOR SUPPLIERS Based on the Group’s audited financial statements for the financial year ended 31 December 2004, the top ten (10) suppliers of the Group are as follows: ­Suppliers  Products/Services Purchased  Length of relationship (No. of Years)  Percentage of Total Purchases (%)  i  AICSYS Inc.  Computer Peripherals  7  14.2  Arrow Electronics Asia (S) PIe Ltd  Electronics Components  7  5.8  M-Link System (Penang) Sdn Bhd  Computer Peripherals  7  5.6  Future Electronics Inc. (OIST) Pte Ltd  Electronics Components  6  3.6  Excelpoint Systems Pte Ltd  Electronics Components  3  3.1  Chong Precision Engineering  Precision Engineering Support  4  2.7  Firstic Electronics Co. Ltd.  Electronics Components  2  2.3  Asia Printed Circuit Sdn Bhd  Raw Printed Circuit Board  7  2.0  CS Vision Technology Sdn Bhd  Computer Peripherals  5  1.9  Equitech Engineering Supplies  Precision Engineering Support  6  1.8
The Group is not dependent on any single supplier for ,ts raw materials as these products are easily available through mUltiple suppliers. The Group enjoys a strong working relationship with its suppliers. This is indicated by the fact that most of its suppliers has been supplying the Group for three (3) or more years. 4.7 FUTURE PLANS, STRATEGIES AND PROSPECTS The Group’s plan for the next five (5) years is as follows:­(a) Streamline the Group’s Operations The operating subsidiaries of the Group provide services which are complementary to one another. To achieve this end, the Group will streamline the operations and business processes of its subsidiaries to minimise dupiication of taSKS, thereby allowing the Group to reap benefits from economies of scale. Apart from doing away with duplication of functions at the operational level, there are opportunities to achieve greater economies of scale and price efficiencies in the areas of purchasing, treasury, human resource, R&D and marketing. (b) Increase the intensity and focus of R&D Activities The Group’s R&D activities were preViously stand-alone activities carried out in the respective operating subsidiaries. With the recent restructuring and future consolidation of the Group, the management intends to harness and leverage on the Group’s wealth of engineering skills, knowledge base and technical know-how to create a strong R&D base as a platform for the Group’s future growth and expansion. 4. INFORMATION ON THE GROUP (Cont’d) The Group believes that investment in R&D is pivotal to keep abreast with the latest technological advancements. changes in customers’ demands and industry developments to ensure that the Group’s services remain relevant in the industry, thereby assuring the viability of the Group’s businesses including:­(i) Putting a stronger R&D team in place by utilising the knowledge and skill sets from a greater pool of human resources available to the Group;
(ii) Incorporating a more systematic approach to R&D;

(iii) Setting aside a larger allocation of financial resources for R&D; and (iv) Identifying a number of R&D projects for the next five (5) years. Based on the Group’s R&D direction, the R&D focus is to be divided into three distinguished areas namely test and burn-in system development, embedded peripherals design and automation system development. Under the test and burn-in focus, resources are to be dedicated for the exploration and path finding on digital test technology areas. Improvement and development on hardware and software design will be carried out with priority focused on high speed functional tests and thermo-control areas. The embedded peripherals division will be focusing in the area of I/O design, remote I/O design, controller drivers and other automation peripherals applications. The automation equipmenVsystem division will be mainly emphasising on the improvement of output performance and other application handler systems. (c) Expand and Explore the Test System Development to Automotive Electronic Industry As the Group’s core capabilities are in the semiconductor and optoelectronic industries, the Group is always on the lookout for new applications and opportunities to leverage on its core competencies in test development in other industries. With the “electronisation” of automotive industry, the management believes that the potential of offering the test solution in this area is promising. In 2004, the Group was engaged to develop the test solution for automotive lighting systems. (d) Expansion of the Embedded Peripherals Division The automation industry presents a high potential and drives demands for embedded peripheral application. With more customised machines and equipments, it presents the Group with great avenue of growth in offering customised electronic boards and components for these customised solutions. Over the years, the Group has successfully developed a series of automation embedded systems ranging from I/O boards, Controllers boards to special purpose circuits boards. The management proposes to allocate marketing resources to further expand the market share of this division and develop web based communication campaigns to further promote its products. 4. INFORMATION ON THE GROUP (Collt’d) (e) Expansion of the Automation Division The Group is keen to develop its automation division and has been aggressively promoting and marketing this division. However. being a relative young player in the industry, the Group will need to rely on its existing major customers for its plan to expand into the automation division. Complementing the test and burn-in division, the automation division is well positioned to support the total solution initiatives which have gained popularity from the industry. Nevertheless. steps will be taken by the Group to ensure that it is able to provide a whole range of services ranging from the designing of the automated machines, fabrication of its parts and components to the assembly of the complete automated machine. The Group is confident of expanding into the automation system required tor their MNCs customers. By doing so, the Group will be able to build its revenue base as well as strengthen its interdependency and bond with its customers. (f) Strengthening of Marketing and Promotional Activities and Broadening of Geographical Network The Group is determined to maintain and expand its market share by continuously selling up and expanding its sales and marketing network into major developing geographical areas around the world. The Group will continue to maintain good relationship with its customers who are mainly MNCs. Such close ties have enabled the Group to be at the forefront of acquiring information in terms of future trends and requirements. Regular participation in local and overseas exhibitions will be strategically coordinated to increase awareness of its products and services. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK

 

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