Risk Factors

3. RISK FACTORS 3. RISK FACTORS In evaluating an investment in the Public Issue Shares, prospective applicants should carefully consider all information contained in this Prospectus including but not limited to the general and specific risks of the following investment considerations:­(a) Business Risks The Group is subject to certain risk inherent to the ATE industry. These may include entry of new players, shortage in skilled workforce and raw materials. increase in cost of labour, cost of operations and raw materials, changes in government policies affecting the industries, changes in general economic, business and credit conditions, and introduction of new technologies. The Group has taken steps to mitigate the risks through implementing various strategies, such as increasing ils product range and value added services to its customers by providing integrated test and automation systems. Efforts have been made to expand its market base and R&D to strengthen and enlarged its business activities. However. no assurance can be given that any change in the market forces will not have a material adverse effect on the Group. (b) High Development Expenditure Although Elsoft Group is a highly intellectual based company, high development expenditure is required to keep abreast with new CAD technologies in order to develop its solution design capabilities and compete effectively. In addition, the trend of the test development industry is moving along with the trend of product miniaturisation with high emphasis on design for test capability. Thus, strategic investments need to be made on high-end design tools. High performance machine languages need to be upgraded for digital test development. The Group would need to continuously invest in its R&D facilities to enhance its technological competitiveness. Should the Group fail to consistenlly invest in the capital expenditure, the Group’s operation may be rendered less efficient, reSUlting in a compromise in quality or losing an edge in technological competitiveness, This may adversely affect the operating and financial performance of Elsoft Group. The Group has invested significantly in its R&D facilities since its incorporation. As at to date, the Group has invested over RM5 million in its R&D expenses over the last three (3) years to position and ensure that it remains as a leading ATE Solutlon provider. The Directors and management team of the Group constantly update themselves with the technological changes and requirements through discussions with vendors and its MNCs customers to understand the latest manufacturing trends and requirements. This enables the Directors to plan the Group’s latest capital expenditure to be in line with the customers’ requirements and the technical know· how of the Group. (c) Rapid Technologicat Changes in the ATE Industry The ATE industry is dynamic, characterised by rapid technological changes and frequent introduction of new and more advanced test solutions, changes in customer demands and evolving industry trends. Hence, the Group would need to keep abreast with the latest technologies in order to compete successfully with its competitors. The Group will be sul:Jject to the risks, uncertainties and prol:Jlems frequently encountered l:Jy companies in the ATE industry, which include, amongst others, the fOIiOwing:­(i) failure to keep abreast with changing technOlogical standards and requirements;
(ii) failure to anticipate and adapt to developing market trends and requirements; and

31 3. RISK FACTORS (Cant’d) (iii) inability to maintain. upgrade and develop its systems and infrastructure to cater to rapidly expanding operations. Recognising this, the Group’s R&D team constantly keeps abreast with new technologies and market trends wherein the business development team works closely with the R&D team to provide feedback on market trends and client requirements. Elsoft Group is confident that with the on-the-job training and development programmes conducted by the Group for its employees coupled with its experienced management team, it will be able to keep abreast with the changing market demand for the wide range of services the Group provides. However, there can be no assurance that the Group’s development policy will be successful to procure the latest technologies and technical know-how. (d) Intensity of Competition The Group’s success will depend largely on its ability to increase its market share for existing business and in overcoming entrenched players in overseas markets. The ATE industry is SUbject to intense competition and very rapid technological changes, and there is every indication that this competition and rapid changes will intensify even further in future. The Group will be SUbject to this intensifying level of competition, To the best knowledge of the Promoters, while the Elsoft Group has very successfully overcome such competition in the past to become one of the market leaders in Malaysia, there is no certainty that it will continue to overcome such competition in the future. There is no assurance that the Group will be able to compete successfully against current or future competitors, or against entrenched competitors in new markets. Increased competition may result in reduced revenue and margins that could adversely affect the Group’s business and operating results. Competitors from overseas who are large conglomerates with greater financial resources and global presence are among the risks associated with the highly competitive market for ATE industry. Given the intense competition and the dynamics of the industry wherein technology changes rapidly, the Group’s focus on R&D to enhance eXisting products and develop new products that maximise the price and operational acceptance of new technologies. The Group believe that its principal competitive advantages, namely integrated synergistic operations, experienced management team, prompt completion and timely delivery of customers’ orders, consistent quality and ability to offer competitive pricing will help to ensure that risks from competition is minimised. (e) Dependence on Directors and Key Personnel The Group’s continued success will depend substantially upon the abilities and continued efforts of its existing Directors and key personnel. The Group will strive to continue attracting and retaining skilled personnel to support its business operations and has made efforts to Irain its personnel. The loss of any key personnel may adversely affect the Group’s performance. The Group’s future success will also depend upon its ability to attract and retain a sufficient number of highly skilled employees. The Group mitigates this by continuing to hire personnel as and when necessary to accommodate any increase in the size of the Group’s operations. The Board believes that by offering a competitive salary package, training and conducive working environment should mitigate this risk further. Recognising the importance of its human resource, efforts have been taken to groom younger members of the senior management team to ensure smooth transition in the management team. The Group will also be implementing an ESOS in conjunction with the listing on the MESDAQ Market to allow employees of the Group to participate in the Group’s future growth and success. By becoming shareholders, employees will hopefully have a different view of the Group and work with the Group and its activities with even more vigor and passion in the years ahead. 32 3. RISK FACTORS (Cont’d) (f) Absence of Long Term Contractual Agreement with Customers Elsoft Group does not have any formal long term contract with its customers. Although there are no formal contractual agreements with its customers. Elsoft Group has established a close working relationship with most of its customers. For the financial year ended 31 December 2004, most of its major customers have been dealing with the Group for more than four (4) years. As at 31 May 2005 (being the latest practicable date prior to the issuance of this Prospectus), there is no legal redress taken by Elsoft Group against its customers for termination of orders. The Group believes that by providing quality products, on-time delivery, competitive pricing and value added services, it will be able to mainlain a firm relationship wilh its customers. The Group seeks 10 limit this risk by working closely with its existing customers and also by employing various strategies to broaden its customer base which includes, inter-alia, venturing into new markets and developing new products and services. (g) Dependence on Major Customers The Group’s customer base is made up of leading corporations and MNCs in the semiconductor and optoelectronic industries. The Group’s top customer, Agilent Industries Technology (M) Sdn Bhd accounted for approximately 34.5% of the Group’s total turnover for the financial year ended 31 December 2004. However, Ihis customer has been with the Group for approximately eight (8) years and Ihis indicates a long-term and stable customer relationship. To reduce over-dependency on any single customer, the Group has broaden its customer base, which mainly consists of large corporations and MNCs such as ASE Electronics (M) Sdn Bhd and Lumileds Lighting (M) Sdn Bhd in Malaysia, Manjer Engineering Co Ltd and Universal Scientific Industrial Co Ltd in Taiwan and some local medium-sized enterprises. To date, the Group has a clientele base of approximately 52 customers. 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. The semiconductor and optoelectronic industries are dominated by large established MNC players which subject new vendors to laborious screening and pre-qualification procedures. This is a lengthy and time-consuming process which may 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. Being the approved vendor for these major customers, the Group has built a strong relationship with these major customers by proving its capability to produce competitive and quality products over the years. (h) Dependence on Suppliers All the raw materials used by the Group are sourced directly from the suppliers. PCB boards, IC components, computer peripherals and consumable tools are the main raw materials consumed. For the financial year ended 31 December 2004, approximately 45.0% of the raw materials are sourced locally whilst the remaining 55.0% are imported. The Group has not encountered any major problems in sourcing its raw material requirements. The Group has established a working relationship with its suppliers. For the financial year ended 31 December 2004, most of its major suppliers have been dealing with the Group for more than 5 years. The Group has not encountered any problem in procurement of raw materials for its operations with many sources readily available. However, no assurance can be given that any future change in the relationship with the suppliers will not have an impact on the Group’s business. 33 3. RISK FACTORS (Cont’d) (i) Market Acceptance of New Products The markets for the Group’s products and services are characterised by rapid technological developments, evolving industry standards, swift changes in customer requirements, computer operating environments and software applications, and frequent new product introductions and enhancements. The Group’s future prospects depend substantially on its ability to address the increasingly sophisticated needs of its customers by supporting existing and emerging hardware and software design. The timely development of new or enhanced products and services is a complex and uncertain process. Although the Group believes that it will have the funding to implement its business plan, there can be no assurance that the Group will continue to have sufficient resources to successfully and accurately anticipate technological and market trends, or to successfully manage long development cycles. The Group may also experience design, marketing and other difficulties that could delay or prevent the development, introduction or marketing of its products and services, as well as new products and services and enhancements. The Group may also be required to collaborate with third parties to develop products and services and may not be able to do so on a timely and cost-effective basis, or at all. If the Group is not able to develop new products and services or enhancements to its existing products and services on a timely and cost-effective basis, or if the Group’s new products and services or enhancements fail to achieve market acceptance, or if one or more of the Group’s competitors introduce products and services that better address customer needs or for any reason gain market share, the Group’s business, operating results and financial condition may be affected. However, with the continuous emphaSIS placed by the Group on R&D activities, the Company is confident to mitigate the abovementioned risk factor. Ul Foreign Currency Risks For the financial year ended 31 December 2004, apprOXimately 74.0% of the Group’s revenue was transacted in RM whilst the remaining 26.0% of the Group’s revenue was transacted in USD. Meanwhile approXimately 55.0% of its raw materials requirements were imported from overseas and transacted in USD. This exposes the Group to foreign currency risk. However, the pegging of the RM against the USD has allowed the Group to minimise the foreign currency risk. Nonetheless, the Group has adopted a more prudent approach for foreign currency transactions such as performing continuous monitoring of foreign currency movements and undertaking hedging to mitigate foreign currency risk, if necessary. However, there can be no assurance that the existing currency pegging or currency controls will remain and that future foreign exchange fluctuation arising from the changes in the currency pegging or lifting of the currency controls will not have any impact on the Group’s business. (k) Insurance Coverage on Assets The Group is aware of the adverse consequences arising from inadequate insurance coverage that could affect its business operations. In ensuring such risks are minimised, the Group reviews and ensures adequate coverage for its assets on a continuous basis. Although the Group has taken necessary measures to ensure that its building, plant and machinery and all its other assets are adequately covered Dy insurance, there can be no assurance that the insurance coverage would be adequate for the replacement cost of the other assets of Elsoft Group, including but not limited to, the building, plant and machinery, raw materials, finished products or any consequential costs arising therefrom. 34 3. RISK FACTORS (Cont’d) (I) Control by Promoters After the Public Issue, the Promoters, as set out in Section 5.1 of this Prospectus will collectively control approximately 64.8% of Elsoft’s enlarged issued and paid-up share capital. As a result, these Promoters will be able to exercise some extent of influence on the outcome of certain matters requiring the vote of the Company’s shareholders unless they are required to abstain from voting by laws, covenants and/or by the relevant authorities. (m) Disclosure Regarding Forward-Looking Statements Certain statements in this Prospectus are based on historical data, which may not be reflective of the future results. Any forward-looking statements are subject to uncertainties and contingencies. The Group believes such statements to be reasonable, but IS subject to unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to differ materially from the expressed results, performance or achievements, expressed or implied in such forward-looking statements, Such factors include, inter-alia, general economic and business conditions, competition and the impact of new laws and regulations affecting the Group. In the light of these and other uncertainties, the inclusion of any forward­looking statements in this Prospectus should not be regarded as a representation of the Company or its adviser that the plans and objectives of the Group will be achieved. (n) No Prior Market for Elsoft’s Shares Prior to this Public Issue, there has been no public market for Elsoft’s Shares. There can be no assurance that an active market for Elsoft’s Shares will develop and continue to develop upon or subsequent to its listing on the MESDAQ Market of the Bursa Securities or, if developed, that such a market will be sustained. The issue price of RMO.60 for the Public Issue Shares has been determined after taking into consideration a number of factors, as mentioned in Section 2.4 of this Prospectus. The Group believes that a variety of factors could cause the price of the Shares to fluctuate, including sales of substantial amounts of the Shares in the public market in the immediate future, announcements of developments relating to the Group’s business, fluctuation in the Group’s operating results and sales levels, general industry conditions or the world wide economy. (0) Political, Economic and Regulatory Consideration Adverse developments in political, economic and regUlatory conditions in MalaySia and the other countries where the Group may operate, source its supplies or market its products could materially and adversely affect the financial and business prospects of the Group. Political and economic uncertainties, include (but are not limited to) risks of war, expropriation, nationalisation, methods of taxation and currency exchange controls. Whilst Elsoft Group will continue to take effective measures such as financial management and efficient operating procedures, there is no assurance that the adverse political, economic and regulatory conditions will not materially affect the Group. (p) Failure! Delay in the Listing The success of the listing exercise is also exposed to the risk that it may fail or be delayed should any of the following event occurs:­(i) The underwriters of the Public Issue fail to honour their obligations under the Underwriting Agreements: 35 3. RISK FACTORS (Cont’d) (ii) The placees under the private piacement fail to subscribe the Public Issue Shares allocated to them; and (iii) Elsoft is unable to meet the public spread requirements Le. at least 25% but not more than 49% of the total number of shares of Elsofl for which iisting is sought must be held by a minimum of 200 public shareholders holding no less than 100 Shares each at the time of Listing. (q) Capital Market Risks Investors of Elsoft should note that Elsofl will be listed on the MESDAQ Market of the Bursa Securities. The performance of our local bourse is very much dependent on external factors such as the performance of the regional and world bourses and the inflow and outfiow of foreign funds. Sentiments are also largely driven by internal factors such as the economic and poiitical conditions of the country as well as the growth potential of the various sectors of the economy. These factors will invariably contribute to the volatiiity of trading volumes witnessed on Bursa Securities. thus adding risk to the market price of the Shares of ElsaH to be iisted on the Bursa Securities. Nevertheless, it shall be noted that the profitability of ElsoH Group is not dependent on the performance of the Bursa Securities. (r) Change in MSC Status Elsoft was granted MSC status on 31 December 2003 by MDC. As a MSC status company, Elsoft enjoys certain financial and non-financial incentives, which are guaranteed under the Malaysian Government’s Bill of Guarantees for MSC status companies. Among the financial incentives entitled is the tax exemption on all profits derived from its MSC-quaiifying activities. MDC is the body responsible for monitoring all MSC status companies. MDC has the right to revoke any company’s MSC status at any time if it does not comply with the conditions of grant of MSC status as imposed by the MDC. As such, there can be no assurance that the Company will continue to retain its MSC status or that the Company will continue to enjoy or not experience delays in enjoying the MSC incentives, all of which could materially and adversely affect the Group’s business, operating results and financial condition. There can also be no assurance that the MSC incentives will not be changed or modified in any way in the future. Details of the conditions imposed by MDC in granting the MSC status to Elsoft are set out in Section 6.3 of this Prospectus. (s) Uncertainty in the Group’s Future Plans, Strategies and Prospects The Group’s future plans and strategies and materialisation of its future prospects will be dependent upon, amongst others, the Group’s ability to enter strategic marketing or other arrangements on a timely basis and on favourable terms; hire and retam skilled management as well as financial. technical, marketing and other personnel; successfully manage growth; and obtaining adequate financing as and when needed. As a mitigating factor, the Group has been in operations since 1997 and its management is experienced in the supporting industry for semiconductor, optoelectronic and automation industries. Nevertheless, there can be no assurance that the Group will be able to successfully implement its business plan or that unanticipated expenses or problems or technical difficulties will not occur which would result in material delays in its implementation or even deviation from its original plans. In addition, the actual results may deviate from the business plan due to rapid technological changes, market as well as competitive pressures. 36

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