Risk Factors

4. RiSK FACTORS
In addition 10 the other information ill this Prospectus, the following factors should be considered car~fully in evaluating an ull’estmeJII in (he ordinary shares offered by this Prospectus. The dJscu$,~lon /n this Prospectus coll/ains cerlain fo~·ard.looking statements Ihat ifrVolve risks and uncerlainries. Prospective investors are cautiolled Ihal such stalements are only predictions and “1£1/ octual results or events when materialised may differ materiallyfrom those disclosed in this Prospectus.
Factors that could cause 01′ contribute to such differences include. but are not limited ro those discussed in Section 4 “Risk Fact()fs.” Section j “Managements Discussion andAnalysisofFinancialCondition mrdResults ofOperatlollS” alld Section 7 ~Business Overview”. as well as those discussed elsewhere In this Prospectus.
Significant and Continuing Louu; Accumulated Ddklt
There can be no assurance: that the: Group’s operations will generate meaning.ful revenue which would be required 10 fund operations or allow it to become profitabl~ save for royahies generate<! on the revenues earned by IRISTech from the MEP and the GMPC projecrs, The MEP project hus three (3) components, numel)’, the hardv,·are and software supply agreement and the substrate supply agreement. As at the date ofthis Prospectus, only the hardware and software agreements have been finalised. ICB equity accounts for its share ofrevenue generated from IRISTcch’s manufacturing operalions and earns a royahy payment from the passport substrates and MyKad by TRTSTech.
An ICB Group company, HIS had on 13 March 1998 entered into an agreement with the Malaysian Government for the implementation of LR,I.S for the authentication of Malaysian Passports issued by JIM. Under the agreement, I1TS agrees to suppl)’, install and commission I.R.I.S and supply the related hardware and software. lITS also agrees and undertakes tu supply silicon substrates to PKN, the currenl supplier of Mal:lY-~ian passport to JIM IITS dues not have any formal agreement with PKN,
Further to the above, Ihe Group has incurred significant losses in each period since its inception resulting in an accumulated deficit at ) I December 200 I of RM20.91 million (including an exchange loss of RMI.61 million) and the openuions an: incurring losses us at the date ofthis Prospectus. Tn as much as the Group will conlinue 10 have a high level of operating expenses and will be required to make significanl up-front expenditures ill conm;,,;tion with both the development of its business Ilnd the commercialisation of ils smart card based security solutions (including, without limitation. s.o.lories of executive, technical, markeling;wd other personnel), Ihe Group 3n1icipntes that it will continue to incur significant losses for the foreseeable future until such time as the Group is able to generate sufficient revenues to finance its operations. lnere can be no assurance that the Group’s smart card based security solutions will gain market acceptaoce. or Ihal the Group will be able to successfully implcml:111 its business strategy, generate meaningful revenues or achieve profitable operalions.
Nevertheless the Group is aciivel)’ marketing its products to various markets such as Ireland, lndonesia. United Arab Emirates, Iran. Saudi Arabia, Kuwait, Australia and New ZcttlllOJ thai have a heed for smart card based security solutions. The huge loo~ incurred in the past are mainly attributable to the high cost of capital, amortisation of deferred expenditure and R&D expenses suffcretl by the Group which were inevitable ns the operntions of the Group which require substantia.! capital outlays that need 10 be funded. Further to the above, the Group’s output of the MEP and MyKad is growing which will eventually result in economies of scale in production cost. Apart frolll Ihc above, lhe Group is also undertaking research in lowering its cost of production.
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4.2 Changes in Technology
The smart card market is subject to rapid technological change and intense competition_ There can be no as~urance that the Group will be able to kc,,’p pacc with this change. The Group’s prodUClS could be subjecl to technological obsolescence and there can be no assurance that the Group will be able to adapt to rapidl}’ changing technology. If the Group is unllble for technological or other reasons to develop products and solutions on a timely basis in response 10 technological changes, or if the Group’s products or product enhancements do not achieve sufficimt market acceptance, lhe Group’s rosiness WOiJld be materially and adversely affected. 1be GrOUJl nevertheless does conduct in house rese31Ch and development t() ensure continuous product development.

4.3 Limited SouTees of Supply
The Group does not have formal agrecments with vendors for lhe supply of components on Ii continuing basis. For example, the Atmel Sari 32K chip used in Ihl:’ manufacture of the Mykad, (IF I wafers and OKI 034 wafers, used in the MEr are sourced based on purchase orders issued on a pl.’iodil:al basis. Should production requirements increase, the need for additional components will increase, Should a key supplier be unwilling or unable to supply any such components in a timely manner, the Group would he materially and adversely affected. The Group may obtain multiple sources of supply for most of its components, but the terms ofsupply for these components may vary.
Notwithstanding the above, the Group believes that it h;JS eSl:lblished good working relationships wilh its suppliers and even in the instance that lerms of supply are 10 be re-m:gotiatt:d, equitable solutions will be agreed upon. Further to the above, as the Group grows in size, the volume of its purchases will invariably give it clout in di~ussions with its suppliers.

4.4 Need for Additional Fuodli
The Group expects that, !’>uhsequent 10 this offering.. it may need to raise substantial additional capilulto fund the ongoing development and t.xpartsion of its business, induding its research, development, marketing and sales effons and altain profitability, the amount of which cannot be quantified al this juncture. As at 6 June 2002, the Group has borrowings amoWlting to RM32.8 mi11ion, all of which are interest bearing and procured locally. There is no assurance that any additional funds needed will be available to the Group on favorable terms, or at all. Although bnsed on nssumptions lhat the Group considers reasonable, then: is also no ussunmc-c that the Group’s estimate of its anticipated liquidity needs is accurate or that new bUSitlCSS developments or other unforeseen events will flot occur, fCSulting in the need to raise additional funds. In addition, it is probable that raising additional funds via equilY issues will resull in a substanlial additional dilution and reduction in returns, if any, 10 inveslors.
The DireclOfS of ICR believe that, upon the listing of the Company on \.he MESDAQ Markel, the Company would have the option oftapping the debt capital market or further raising equity capital, if required. A$ such. they believe that there would be further funding options upon its successful listing on lite MESDAQ Market to meet its requirements.

4.5 Compttitioo
The Group is engaged in a rapidly evolving field. Competition from other companies is intCl\se and expected to increase. The Group competes with numerous well established companies including Gemplus (France), Bull SC & T (France), SchlumbergerSema (France) and Giesecke & Devrienl (Germany) which have substantially greater resources, research and development staff, sales and marketing suff, ond [llCilities tbllll \htl Group does. In addition, other recently developed technologies are, or mil}’ in th(: future ~, the basis of competitive products. There can be no assurance that the Group’s competitors will nol develop technologies and products that are more effeaive ilian those being developed by the Group or that would render the Group’s technology and producls obsolete or non-competitive or that the Group will be able to succcssfully enhance iL\ prodUCL\ or develop new products when necessary. Regardless, being a Malaysian company currently offering solutions of comparllbJe quality with foreign players, the Group is confident that it would be in II positioo to offer local and regionll1 customers tWlgible benefits. Further to the above, lhe Group believes its heavy investment in R&D give it the ability to compete inlht: global market plal,;l; as wdl.
4. RISK FACTORS (CONT’D)
4.6 Dependence on Key Personnel
The Group’s operations are materia]])’ dependent upon the services of its financial adviser, Tan Say Jim, the inventor of I.R.I.S technology and the lcas and its underlying components, Yap Hock Eng and the chief consultant to the technology transfer, Lce Kwee l-liang. The loss of the services -of any of these individuals would materially and adversely affect the Group’s business. lhe Group has no service agreements with these individuals. There can be no assurance that the Group will rL1ain the three individuals in its employment, or that it will successfully attract and retain additional or replacement personnel with the requisite experience and capabilities to enable the Group to profitably and effectivel;.. evaluate, develop, and market the Group’s product line. The Group does not currently maintain any key man insurance on any of its officers. However, Tan Say Jim, Lee Kwee l-Iiang and Yap Hock Eng are also promoters, directors and sharehoLders of ICB and as such can be seen as having a long term view on their investment and participation in the Group. As promoters of the Group, part of their shareholdings in rCB arc subject to the MESDAQ Market moratorium requirement detailed in Section 10.3.

4.7 Management of Growth
The Group hopes to significantly expand its business, especially in the area of research and development on biometrics verification application (the science of measuring physical characteristics unique to an individual, such as fingerprint, voice pattern, eye pattern, or facial paltern, in order to identify that individual), in part with the proceeds of this offering. Such anticipated expansion will likely place further demand on the Group’s existing management and operations. The Group’s future growth and profitability will depend, in part, on its ability to successfully manage a growing sales force and implement management and operating systems which react efficiently and timely to short and long­term trends or changes in its business. There can he no assurance that the Group will be able to effectively manage any expansion of its business.

4.8 Arbitrary Offering Prier; No Prior Public Market for Sbares; Possible Volatility of Sbare Price
The price to the Issue Shares in this offering has been determined by agreement between the Company and the Under.Hiter. Such offering price should not be considered an indication of the actual value of the Company, as it bears no relatiunship tu the Company’s assets, bouk vl:l1ue, earnings, net worth or other financial statement criteria of value. There is presently no market, private or public, for the Company’~ securilil:5 and there can be no assurance tbat a trading market will develop, or if developed, that it will be maintained. The MESDAQ Market, the newly established exchange, on which the Company’s shares will be listed on, does not have a long record of listings. Therefore there is no assurance that the MESDAQ Market is able to provide an active and successful trading environment for the Company’s shares. There is also no assurance that the purchasers will be able to resell the Company’s shares at the offering price or at any price. Following this offering, the market price for the ordinary shares may be highly volatile, and may therefore decrease significantly, depending on a number of factors including, but not limited to, operating results and competitive forces, market acceptance of the Group’s products as well as the ongoing development of the Group. Due to the recent economic turmoil in the Asian region, the local bourse has experienced extreme price and volume fluctuations that have particularly affected the market price of many companies for reasons unrelated to the operating perfonnance of or announcements by the companies and these broad market fluctuations and general market conditions may adversely affect the market price of the Company’s ordinary shares, including the Shares offered hereby.
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4. RISK FACTORS (CONT’D)

4.9 Risk Associated witb the Nature of Contract
Most of the Group’s non-government contracts such as sales of readers are short-term in duration. As a
result, the Group must continually replace its contracts with new contracts to sustain its revenue.
Contracts may be terminated for a variety of reasons, including termination of product development,
failure of products to satisfy safety requirements, unexpected or undesired results from usc of the
product or the client’s decision to forego a particular project. On the other hand, the tenns and
conditions of the Group’s long-term contracts, the MEP and the GMPC Projects, may be varied by the
government as provided for by the contracts. The failure to obtain new contracts or the cancellation or
delay of existing contracts could have a material adverse effect on the Group’s business and results of
operations. Nevertheless, it is anticipated that the Group’s continuos R&D effort and active
marketing of new products will give it a wider and diversified customer base.
4.1{) Dependence on Government Contracts
As part of its strategy, the Group intends to market its smart card based security solutions to government agencies in Malaysia and if possible to local and federal Governments overseas. So far, the Group has been successful in securing the MEP and the GMPC projects in Malaysia. The Group rna)’ be expused to special risks inherent in Government contracts, including delays in funding, lengthy review processes for awarding contracts, non-renewal, delay, termination at the convenience of the gu\<crnment, reduction or modification of contracts in the event of changes in the government’s policies or as a result of budgetary constraints and increased or unexpected costs resulting in losses, any or all of which could have a material adverse cffect OIl the Group. Because the Group will be required to go through the competitive bidding process, there can be no assurance that the Group will be successful in having its bids accepted. The competitive bidding process is typically lengthy and often results in thc expenditure offinaucial and other resources in connection with bids that are not accepted. Additionally, inhl.’TCnl in the competitive bidding proccss is the risk that actual pcrformanee costs may exceed projected costs upon which a submitted bid or contract price is based. To the extent that actual eost~ exceed projected costs, the Group would incur losses, which \yould adversely affect the Group’s uperating margin~ and results of uperatiuns. Moreover, in most instances, the Group \,’ould be required to post bids and/or performance bonds in connection with contracts with government agencies. Any inability by the Group to obtain coverage in sufficient amounts could have a material advcr~e effcl.’! on the Group.
Nevertheless, the Group is also developing products that an: targeted for sale to private organisations. Examples of these are the telecommunication cards, security access systems and personal identification cards. With the diversification of its product range, ICB believes that the risks associated with its dl.:pendl.:ncl.: on governmcnt contracts will subside.

4.11 Technology
Biometrics verification is an important component in security applications olTered by the Group. At present, the electronic facial and fingerprint verification technology, targeted for use in the IlPBSS and in the Group’s other product otl’erings, are licensed from its original proprietary owners. The ICOS which the Group claims tu be proprietary has yct to attain registered patent status. The I.R.I.S. technology is also subjected to trading restrictions in the United Kingdom, United Arab Emirates and Egypt as stipulated in the Technology Transfer Agreement between the Company and MCS. Accordingly, the Group does not exclusively own all tbe technology incorporated in its products nor does it have complete rights to exploit the technology in all markets. The success of the Group will therefore depend on its ability to exploit each different technology in the market areas stipulated in the respective agreements. If the Group fails to perform its obligations under the respective licensing agreements, or if it fails to get an extension for the licenses upon expiry, it could lose a critical portion of the technology necessary for the commercialisation of its products. While the Group believes it may be able to utilise other currently available software on biometrics verification or develop such software with its own internal resources, there can be no assurance that such other software will be available to the Group on favorable tenns, or if at all that the Group will have the technical ability to develop its own software, or that such software will ultimately serve as an adequate substitute for the Group’s product offering.
4. RISK FACTORS (CONT’D)
4.12 Intellectual Property Rights
The Group’s success will depend on its ability to obtain patents, protect trade secrets and operate without infringing on the property rights of others. To date the Group has made 7 patent applications to the US Patent and Copyright Office in Washington, D.C., USA, thn:c (3) of which have becn approved to-date. One (1) patent application was made to and approved by the South Africa Patent Office. ICe has also made one (1) patent application to the EU Patent Office, the approval ofwhich is still pending to-date. These patents cover the lCOS, proprietary techniques and applications commercialised by the Group. Although the Group believes its patent application contains patentable claims, there can be no assurance the remaining patent applications will be issued. The Group has not filed any patent application in Malaysia There may be other companies independently developing equivalent or superior technologies or products and may obtain patent or similar rights with respect to them. The Group is not aware ofany infringement by its technology on the proprietary rights of others and has not received any notice of claimed infringement. However, the Group has not conducted any investigation as to possible infringement and there can be no assurance that third parties will not assert infringement claims against the Group in connection with its products, that any such assertion of infringement will not result in litigation, or that the Group would prevail in such litigation. Moreover, in the event that the Group’s technology or proposed products were deemed to infringe upon the rights of others, the Group would be required to obtain Iicenscs to utilise such technology. TlK–re can be no assuranec that the Group would be able to obtain such licenses in a timely manner on acceptable terms and conditions, and the failure to do so could have a material adverse effect on the Group. If the Group was unahle to obtain such licenses, it could cneounter significant delays in product market introductions while it attempted to design around the infringed upon patents or rights, or could find the development, manufacture or sale of products requiring such licenses to be foreclosed. In addition, patent disputes are common in the smart card and computer industries and thcre can bc no assurance that the Group will have the fmaneial resources to enforce or defend a patent infringement or proprietary rights action. The Group also relies on trade secret’! and proprietary know-how to protect the concepts, ideas and documentation relating to its proprietary technology. However, such methods may not afford the Group complete protection and there can be no assurancc that others will not independently obtain access to the Group’s trade secrets and know-how or independently develop products or technologies similar to those of the Group. Furthermore, although the Group has confidentiality and non-competition agreements with its employees, there can be no assurance that such arrangements will adequately protect the Group’s trade secrets. See Section 7.5 “Business Overviev,· -Intellectual Property.”

 

4.13 No Protective Laws
The are no protectionism policies for the emerging smart card based security solution business in Malaysia. With the MSC project, foreign-owned companies are allo,ved to set up smart card operations in Malaysia, which may pose a direct thrcat to the Group espe{;ially if establishcd foreign competitors decide to participate in such projects. The absence of legislation to encourage the use of Malaysian-made smart cards or smart card ha’!ed security solutions when there may be no disparity in product quality may curtail the growth of the Group. It is uncertain whether the Group will be able to overcome such competition in the future in the absence of direct government intervention to protect locally incorporated smart card companies. Notwithstanding the above, management of the Group are confident that the Group’s technological know-how, R&D ability and cost advantagt: place it in a good position in view ofthe anticipated competition.
4.14 Product Performance
The Group’s research and development effort’! are subject to all of the risks inherent in the development of new products and technology (including unanticipated delays, expenses and difficulties). There can be no assurance that the Group’s products will satisfactorily pcrfonn the functions for which they are designed, that they wil1 meet applicable price or performanec objectives or that unanticipated technical or other problems will not occur which would result in increased costs or material delays in the development thereof Furthermore, software products as complex as those developed by the Group and incorporated into ~ts smart card products may contain errors or failures when installed, updated or enhanced. There can he no assurance that, despite testing by the Group and by current and potential end users, errors will not be found in new products aftt:r the delivery by the Group, resulting in loss of or delay in market acceptance. Sec Section 7.3 -“Products” and Section 7.4 -“Core Technology -Imagc Retrieval Identification System”.

4. RISK FACTORS (CONT’D)
4.15 Dependence on Third-Party Marketing Arrangements
The Group has limited marketing resources. To date, the Group has conducted only limited marketing activities and has relied primaril)’ on the efforts of its Directors Lee Kwee Hiang, Yap Hock Eng and Tan Say Jim for such activities. In time to come the Group believes that it ha~ to establish strategic marketing alliances and licensing or other arrangements with systems integrators, value-added re­sellers and other smart card vendors, if it wants to stay ahead of the competition as the Group’s main priority should be product development rather than marketing. Moreover, the Group has limited relevant expertise or resources to carry-out thorough and effective marketing exercises. The Group’s success in future will depend in part on its ability to enter into agreements with such third parties, and on the ability and efforts of such third parties to successfully market the Group’s products. The failure of the Group to complete its third-party marketing strategy or the failure (lof any such party to develop and sustain a market for the Group’s smart cards and other products could have a material adverse effect on the Group. Although the Group views third-party marketing arrangements as a major factor in the commercialization of its smart card systems, there can be no assurance that any strategic partners, licensees or others would view an arrangement with the Group as significant to their businesses. Regardless of the above, in light of the strategic alliances established, the Group has obtained a foothold in the Australian and New Zealand markets through Intercard. Together with lCB, whieh is oversecing marketing efforts in the Asia Pacific region, the Group believes that it will be able to market its products at a global level in a more efficient manner via local representatives rather than to develop an in-house global marketing division.

4.16 Uncertainty of Proposed 5-Year Business Development Plan
‘The success of the Group’s business development plan will be largely dependent upon market acceptance of smart cards generally, as well as thl;: Group’s ability to successfully market its smart card based security solutions and to further develop and commercialise further applications ofits propril;:tary technology. In addition, the Group’s proposed future plan and prospects will be dependent upon, among other things, the Group’s ability to enter into strategic marketing and licensing or other arrangements on a timely basis and on favorable terms, establish satisfaCTory arrangements with sales representatives and marketing consultants, hire and retain skilled management as well a<; tinancial, technical, marketing and other pe:rsonne1, successfull~ manage growth (including monitoring operations, controlling costs and maintaining effective quality, inventory and service controls) and obtain adequate financing when and as needed. The Group has limited experience in developing new products based on innovative technology and there is limited infonnation available concerning the pl;:rfonnance of the Group’s technologies or market acceptance of the Group’s products other than the MEP arld the MyKad. 1bere 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. Moreover, there can be no assurance that the Group will have sufficient capacity to satisf)’ any increased demand for its smart card based security solutions and technologies resulting from the Group’s implementation of its 5-Year Business Development Plan.

4.17 Need for Continued Support from Existing Financiers
To date, the Group’s operating cashflow has not been sufficient to fund alI of its capital and operating expenditures. See Section 4.4 on “Need for Additional Funds”. In the Section 3.5 on “Utilisation of Proceeds”, it has been indicated that a total ofRM23 million of the funds raised from the Public Issue would be used for the part repayment of the Group’s bank borrowings which as at 6 June 2002 amounted to RM32.8 million. Nevertheless, the continued availability of credit lines has an important bearing on the operations and capital expenditure plans of the Group. As such there CUll be no assurance that the creditors that have extended credit will continue to make available the funding facilities required. Further to the above, there can he no assurance that the current assets of the Group will be realised on a timely basis to meet the obligations of the Group as and when they fall due.
As mentioned above, the Directors of fCB believe that upon the listing of the Company on the MESDAQ Market, the Company would have the option of tapping the debt capital market or further raising equity capital, if required. As such, they believe that there would be further funding options upon its sllccessfullisting on the MESDAQ Market.
4. RISK FACTORS (CONT’D)

4.18 Lone Prod1lct Dt\’e:Iopment Cycle
‘fhe lime taken from development to the implementation of the Group’s projects is long and typically involves significM1technicai evaluation and commitment of capital and other resources. For example, the GMPC project for the MyKud which commenced in 1998 was launched much later in April of 2001. This evaluation process, undertaken both internally by the Group and by the customers, invariably is a lengthy process of severoI months and involves risks, including customers’ budgetary cOl\Slraints nnd internal acccJlCancc revil:ws. The length of time taken to implement a particular project will vary from customer to customer and is subject to delays associated with a long testing and approval process. Thc Group’s business, operating results and financial condition could be materially and Ildvel’5Cly affected if customers cancel or delay projects. There can be no assurance that the Group will not continue to experiencc these: additional delays in the furore, which may contributc to significant fluctuations of fUiure operating results and cashflows and may 3dversely affect such results.
4.L9 Produet liability
TIle Group’s projt.”Cls WId supply agreements with its customers have no provisions designed to limit the Group’s exposure to potential product liability claims. The sale and support of U\l~ Group’s products may involve the risk of such liability claims, any of which can be quite substantial. A product liability suit or m:tion, whclh~r or not meritorious, could result in substantial costs and diversion of management’s attention lllld the Group’s re5Ollrce, which could have fl material adverse impact on the Group’s business, operating results lUld Iin:mdal conditions. Additionally, a suit alleging a defect or a breach of an express or implied warranty, if successful, Dlay also have :1dverse pruedent effect on other or future actions.
4.l:0 Ownership and Control of the Company
Following the Public Issue, the Promoters of the Company comprising TSR, lee Kwee Hiang, Yap Hock Eng, Tan Say Jim, MCSM, VPB ;md TLTR (tIK) will hold approximately 56.0% of leB’s issue and puid-up sharI: capital. Collectively, they will be able 10 exercise a material influence over reB including the appointment of ICB’s ooard of directors and inllucncc certain corporuto: tran5actions.
4.21 Potential Acquisitions and Joint Ventures
The Group may from time to time engage in acquisitions of companies Wilh complementary products and services in related arcas. Although no such acquisitions arc currently being negotiatai by the Group, nny future acquisitions could expose the Group to new risks, including those associated with the assimi13tion of new operations and personnel, the diversion of finlUlcial and marUlgem(nt re>ources from existing operations, and the inability of management to integrate successfully acquired businesses, personnel and technologies. Furthcnnorc, there can be no assurance thac the Group will be able to generate sufficient revenues from any such acquisition 10 onSet associated acquisition costs, or that the Group will he able to Olaintain uniform standards of quality and s(rvice, cooU’ols, procedures and policics, which IIlliy result in the impairment of relationships with customt:~ anployees, and new managclIlent personnel. The Group m3y also evaluate, on a case-by-case basis, joint venture relationships with certain complementary businesses. Any such joint venture investment would involve m3ny of the li3me risks posed by acquisitions, particular! y those risks aswciated with the diversion of resources, the inability to generate sufficient revcnues, the management of relationships with third panics and potential additional expenses, any of which could have 3 moterial adverse effect on the Group’s business, financia I condition or operating results.
4. RISK FACTORS (CONT’D)
If appropriate opportunities present themselves, the Group intends to acquire businesses, products or technologies that the Group believes will be in the interest of its shareholders, although the Group currently has no understandings, commitments or agreements with respect to any material acquisition and no material acquisition is currently being pursued. There can be no assurance that the Group will be able to successfully identify, negotiate or finance such acquisitions, or to integrate any such acquisitions with its current business.
The process of integrating an acquired business, product or technology into the Group may rcsult in unforeseen operating difficulties and expenditures, including hut not limited to the assimilation of new operations and personnel, the diversion of financial and management resources from existing operations, and the inability of management to integrate successfully acquired businesses, personnel and technologies, all of which may absorb a significant amount of management attention that would otherwise be availahle for ongoing developmcnt of the Group’s business. There can be no assurance that the anticiputed benefits of any acquisition will be realised, or that the Group will be able to generate sufficient revenues from any such acquisition to offset associated acquisition costs, or that the Group will be able to maintain uniform standards of quality and service, controls, procedures and policies, which may result in the impairment of relationships with customers, em ployees and new management personnel. Acquisitions may also result in potentially dilutive issuance of equity, the incidence of debt and contingent liabilities and amortisation expenses related to goodwill and other intangihle assets.

4.22 MSC Status
TCB was granted MSC status on 25 July 1997 by MDC and its associated company IRISTech .vas granted WiSC status on 10 October 1997. As at todate, all MSC status companieb are granted financial and non-financial incentives. The MDC is the body responsible for monitoring all MSC designated companies. There can be no assurance that the Group will continue to retain its MSC status or that the Group will continue to enjoy or not experience delays in enjoying the MSC incentives outlined above, all of which could materially and adversely affect the Group’s business, operating n:sults and financial condition. There can be no assurance that the MSC incentives including those outlined above will not he changed or modified in anyway in the future. However, both rCB and IRISTech have received the MSC Bill of Guarantees (Le. a bill which grant the MSC status mentioned ahove and further detailed in Section 7.15.4) issued bytbe Malaysian Government.

4.23 Foreign Exchange Risks
A significant amount, approximately 75%, of inputs into the manufacturing processes of the ICB Group rely on imported materials. Examples of imported materials are the CIF 1 wafer and the Atmel 32K chip, which monthly quantum purchased is approximately G13P292,OOO and USD694,000, respectively. As such in an environment of a floating exchange rate, there would exist risks that exchange t1ucruations would affect the profitability of the Group. However at present time, the Malaysian Ringgit has been fixed to the USD. As most transactions are in USD, there is certainty in pricing and costing of goods produced. Nevertheless, the USD is freely floating against other nations currencies and there can be no assurance that future foreign exchange fluctuations will not adversely impact the TCB Group. There can also be no assurance that the exchange rate currently pegged at RM3.80:USDI.OO will be maintained in the future.

4.24 Dependence on IRISTech
By virtue of the transfer of the I.R.I.S. technology and related substrate to TRISTech via the Technology Transfer Agreement dated 13 January 1995, IRISTech became the manufacturing arm of the ICB Group. IRISTcch’s subsidiary, IlTS was granted the hardware and software supply contract for the .MEP project. IRISTech supplies the substrates for the MEP Project. IRTSTech’s associate GCSB is the entity that has been awarded the GMPC Contract. TRISTech manufactures the MyKad of the GMPC project. A significant amount of TeB revenue (averaging approximately 21% of total revenue over the 1998-2001 period) is derived from the royalty income earned from the use ofTCB’s operating systems for these two projects.
4. RISK FACTORS (CONT’D)
ICB is entitled to royalty payments as provided fOl” in agreements entered into with IRISTech dated 13 January 1995 and 1 February 2000 in respect of the MEP and the GMPC projects, respectivel}’. Based on the terms of the agreement dated 13 January 1995, a royalty of 5% on the net sales value of all substrates sold by IRISTech in respect of the MEP project is payable to 1GB by IRISTcch for a period of 5 ycars commencing from the date when such sales is effected hy IRISTcch, i.l:. 4 August 1997. As for the agreement dated 1 Februar)’ 2000, IRISTech agreed to pllY lCB RM2.50 per MCOS masked smartcard produced in perpetuity.
With the complction of the Acquisition, rCB has control over only 49.5% of IRISTech. The othcr major shareholder of IRISTech is Bcrjaya Group Berhad which effectively cunlrols 50.5’% of the compllny. At prescnt, the management ofIRISTech is carried out by ICU.
It can be argued th31 lCB is dependent on IRISTech as the contracts for the two main projcxts as mentioned above are with IRISTech’s suhsidiary and associated companies, and a.~ IRISTech is the manufacwring concern of the ICS Group. There can be no assurance lhm the cordial relationship Ixlween ICB and its associate will continue to exist at all times in the futun;:.
Nevertheless it must be appreciated matlCB is a company involved in the rcscllIch and <kvelopmenl of sman card based security solutions. Jt has developed or is in the process of developing other products. Tt produces its own products e.g. the smart card readcrs which is amongst the various products thai has been commercialised.
On the contrary, the directors of leB believc that IRISTech is dependent on ICB for the technologies !hut are involved in the MEr and MyKl1d of the GMPC project, for example the ICOS and MeOS operating systems that arc employed ill lh~ software solutions for these projects. The management of IRISTech is also undertaken by ICB. As such the above risks, in the opinion of the Directors (If ICR, are to a large extent mitigated.
THE REMAhVDER OF THIS 1’/feR HAS BEENINTENTIONALLY LEfTBLANK

 

 

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