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 risk factors: (a) No Prior Market for K·One Tech’s Shares and Possible Volatility of Share Price Prior to this Public Issue. there has been no prior public market for the Company’s Shares. The Public Issue Price of RMO.75 has been determined after taking into consideration a number of factors. There can be no assurance that the Public Issue Price will correspond to the price at which K·One Tech’s Shares will trade on the MESDAO Market of the Bursa Securities upon or subsequent to its listing. There can be no assurance that an active public market in the Shares will develop and continue to develop upon or subsequent to its listing on the MESDAO Market of the Bursa Securities or, jf developed. that such a market will be sustained after this Public Issue or that the market price of the Shares will not decline below the Public Issue Price. The Group believes that a variety of factors could cause the price of the Shares to fluctuate, including sales of substantial amounts of Shares in the public market in the immediate future; announcements of developments relating to the Group’s business; fluctuations in the Group’s operating results and sales levels; general industry conditions or the world-wide economy. (b) Dependence on Directors and Key Personnel The Group’s future performance depends to a significant extent upon the continued efforts and abilities of its Directors and key management personnel, in particular, Ir. Lim Beng Fook, Edwin, Lim Soon Seng, Martin and Bjorn Braten. Furthermore, competition for personnel qualified to deliver the Group’s D&D services is intense and the companies which the Group competes with for these qualified personnel may have more substantial financial and management resources than the Group. There can be no assurance that the Group can retain these individuals in its employment, or that it wili successfully attract and retain additional or replacement personnel with the requisite experience and capabilities to enable the Group to operate competitively. The Group currently enjoys a cordial relationship with its employees and they do not belong to any trade union. The Group has a low turnover of skilled personnel. The Group will, in order to retain current employees and attract new employees by implementing an employee share option scheme. The Group believes that by increasing its profile through the listing of the Company on the MESDAO Market, the Group will be able to attract suitably qualified personnel to play an active role in the growth of the Group. (c) Business Risk The K-One Group is principally involved in D&D of high-end electronic end products, D&D of manufacturing process/tools and manufacturing of electronic end products and sub-systems. The Group is not insulated from the general business risk as well as risks inherent in the various industries to which it provides its services and products to and those which are specific to the electronics industry. These may include shortage in skilled labour, increase in cost of labour and operating costs. adverse changes in general economic, business and credit conditions and unfavourable changes in Government policies and introduction of new technologies. The Group’s revenue and operating results could also be affected by other pertinent factors such as its ability to design, develop and market new services and products and achieve market acceptance of these new services and products. 3. RISK FACTORS (Cont’d) The Directors of the Group should be able to maintain its record of profitability. Prudent cash flow management practices practiced by the Group include the regular monitoring of its debtors position, maintaining good business relationship with its business partners and the monitoring of its expenditures. However, there can be no assurance that the Group will be profitable in the future or that it will achieve increasing or consistent levels of profitability. (d) Competition The industries to which the Group supplies its services and products can be characterised as highly competitive and rapidly changing. Electronic consumer product manufacturers in particular, typically maintain stringent criteria in selecting their contract manutacturers/assemblers, which include a proven track record in assembling high quality products, management capability, delivery dependability and sustainable competitive pricing. In this respect, the Group has been able to meet the standards set by its customers in the past and the Directors of the K-One Group are confident that the Group will continue to meet these requirements in the future with strict quality control, low overheads and continuous R&D activities to produce innovative product designs, at the same time optimising operational efficiency. The Group has experienced and expects to continue experiencing intense competition from its current competitors and those in the future, These competitors do vary in size and in the scope and breadth of the services and products offered. An additional source of competition may also come from its customers which may decide to revert or intensify the design and development of new products internally. Therefore no assurance can be given that the Group will be able to continue to compete successfUlly with its current competitors or new competitors. Reduced margins and lower revenues as a result of price reductions are one of the potential risks faced by the Group should competition become more intense, As a mitigating factor, the Group does however focus on technology that has the potential to further develop and ensures that it continues to be innovative in the manner in which it provides its customers with its services and products. (e) Absence of Long Term Contracts or Agreements As at 7 November 2005 (being the latest practicable date prior to the printing of this Prospectus), the Group does not generally have any long term contracts or agreements with its customers for the provision of D&D services or for the manufacture of specitic products which exceed more than one (1} year in duration. This practice is common for the industries tor which the Group provides its services and products to because these products have a relatively short life span and are continuously replaced by new products that are mOre innovative, enhanced and technologically advanced. The absence of long term contracts in this respect. gives the Group’s customers greater fleXibility in selecting its business partners when developing new products. Nonetheless, given that the Group has a proven track record in performing to the exacting needs of its customers, the Group has successfully maintained good business relationship with its customers and expects to continue to do so for the foreseeable future. (f) Dependency on Particular Markets The customers to which the Group supplies its services and products to are by and large located overseas which in turn market their products globally or internationally. By industry, the K-One Group attributes about 95% of its total business to the Multimedia industry while the balance is on the automotive products/sub-systems sector. The Multimedia industry is extremely volatile with short product life-cycle of approximately six (6} months While the automotive products/sub-systems industry is more stable with a long product life cycle of approximately six (6) years. 28 3. RISK FACTORS (Cont’d) It is envisaged that over the next five (5) years, the ratio between the Multimedia and automotive products/sub-systems industries should be about 85:15. The aim is to create a healthy balance between the volatile, short product life cycle of the Multimedia industry and the stable, long product Ine cycle of the automotive products/sub-systems industry. The stable aU10motive products/sub-systems industry would be a good absorber for the volatile Muttimedia industry, making it easier to plan for production capacity and financial planning. Nonetheless, no assurance can be given should any market to which the Group supplies direc11y or indirectly its services and products experience a downtum, the Group itself will not suffer a reduction in its turnover and overall profitability. However, given that the Group’s 0&0 capabilities enables it to provide services for a wide range of products/industries, the Group believes that a downturn in any given market can be offset by the potential consistency or increase in another market. (g) Rapid Technological Change and Frequent Product Introductions The industries to which the Group supplies its services and products to experience rapid technological change, rapid changes in customer requirements and frequent product introductions. The Group’s success in dealing with these factors has been due largely to its ability to innovate, maintain flexibility, embrace technological advances and anticipate market trends. No assurance however can be given that the Group will continue to be able to deal with these factors in the future. Difficulties may be experienced by the Group that could delay the 0&0 of new products and should the Group fail in dealing with these problems, it could adversely affect the financial performance of the Group. Nevertheless, given its experience and track record of the Group as well as the expertise and experience of its management team in 0&0, the Group expects to be able to cope with rapid technological change. (h) Foreign Exchange Fluctuations The Group’s exposure to foreign exchange risk is limited to USD and Euro. The Group has back to back order and pricing arrangements with some of its suppliers, thus mitigating its exposure to currency fluctuations risk. In addilion, the management of K-One Tech will constantly monitor the Group’s RM exposure and take the necessary steps to minimise fluctuations in the exchange rate which includes hedging. However, there can be no assurance that any fluctuations in the exchange rates will not adversely affect the Group. (i) Management of Growth The Group plans to utilise part of the proceeds to expand its business. 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 its marketing activities and implement management and operating systems which react efficiently and timely to short and long-term trends or changes in its business. As a mitigating factor, the Group has experienced management, technical and production personnel to support its expansion plans. However, there can be no assurance that the Group will be able to effectively manage any expansion of its business. 29 3. RISK FACTORS (Cont’d) (j) Adequacy of Insurance The Group is aware of the adverse consequences arising from inadequate insurance coverage that could potentially jeopardise its business operation. In ensuring such risks are maintained to the minimum, the Group reviews and ensures adequate coverage for its assets on a continuous basis. For the Group’s operations, all assets such as the manufacturing plant, inventories, office equipment and furniture and fittings are insured under fire policies. The Group has purchased insurance policies, among others, for fire breakout as well as fire loss. Although the Group has taken the necessary measures to ensure that all as assets are covered by insurance, there can be no assurance that the insurance coverage would be adequate to compensate for the replacement cost of the assets or any losses arising therefrom. The management of the Group believes that its insurance coverage is adequate and sufficient.
(k) Future Capital Injection The net proceeds of the Public Issue coupled with the cash flow from its operations will, in the opinion of the Directors of the Group, be sufficient to meet the Group’s projected capital, working capital and other cash requirements. However future events, unforeseen by the Group, may require additional capital to be injected into the Group. Should this be the case, no assurance can be given that the Group will procure this additional capital on terms satisfactory to the Group. The Company’s shareholders could potentially be faced with a dilution of their shareholdings should there be an offer of additional equity or other forms of convertible securities to prospective shareholders in the Company.
(I) Acquisitions and Joint Ventures Should the opportunity arise, the Group may acquire new businesses or technologies or enter into joint ventures that in the opinion of the Directors will be in the best interest of the Group. These acquisitions or joint ventures may require the Group to seek additional capaal that mayor may not be available on terms satisfactory to the Group. Furthermore there can be no assurance that the Group will be able to successfully identify acquisitions or joint ventures that will be beneficial to the Group and reap the anticipated benefits in the long term. Apart from the additional cost of capital, such acquisitions or joint ventures may result in additional contingent liabilities and the incurrence of amortisation expenses related to goodwill and other forms of intangible assets. The Group will mitigate this risk, together with other possible venture risks in the future by exercising due care in the evaluation of such ventures and consider related risks prior to undertaking any acquisition and joint ventures. Nevertheless, there can be no assurance that such acquisitions and ventures, if any, will yield positive returns to the Group.
(m) Future Expansion in Overseas Markets The growth and marketing strategy of the Group will involve the establishment of sales offices in countries that include the United States of America, United Kingdom, Japan, Finland, China, Germany, South Korea and France. Approximately RMO.9 million from the proceeds of the Public Issue has been earmarked to finance the establishment of sales offices in some of these countries. These sales offices will be managed by staff hired in each respective country who shall be actively engaging in the promotion of the Group’s business activities and to establish a business presence in each market. 30 3. RISK FACTORS (Cont’d) No assurance can be given that these sales offices will be successful or will generate significant revenue. The risks associated with such expansion include compliance with domestic regulatory requirements and laws, efficiently managing these offices, the risk of repatriating earnings and currency fluctuations that could adversely affect the financial performance of fhe Group. The Group however plans to adopt a prudent approach in establishing such overseas offices by constantly monitoring costs and ensuring that it employs capable staff for these offices. (n) Ownership and Control of the Company
Following the Public Issue, the Promoters will collectively hold approximately 51.7% of K-One Tech’s issued and paid-up share capital. As a resuit, these shareholders, acting together, will possess voting control over the Company, giving them the ability, amongst others, to influence the appointment of the Board of Directors and certain corporate transactions unless it is required to abstain from voting by law, covenants and/or by relevant authorities. As a step towards good corporate governance, the Group has appointed Independent Directors and an audit committee is also in place to ensure that all future transactions involving related parties, if any, are entered into on arms-length terms.
(0) Disclosure Regarding Forward-Looking Statements
All statements contained in this Prospectus, statements made in press releases and oral statements that may be made by K-One Tech, Directors or employees acting on the Company’s behalf, that are not statements of historical fact, constitute “forward· looking statements”. Investors can identify some of these statements by forward-looking terms such as l’expect”, “believe”, “plan”. “intend”. “estimate”, l’anticipate”, “may”, “will”, “would”, and “could” or similar words. However, investors should note that these words are not the exclusive means of identifying forward-looking statements. All statements regarding the Company’s expected financial position, business strategy, plans and prospects are forward-looking statements. These forward-looking statements, including statements as to the Company’s revenue and profitability, cost measures, planned strategy and any other matters discussed in this Prospectus regarding matters that are not historical facts are only predictions. These forward-looking statements invoive known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward· looking statements.
(p) Change in or Loss of Pioneer Status
By virtue of its MSC status, K-One Tech was granted pioneer status on 11 September 2002 for an initialS years periods by MDC pursuant to Section 4A of the Promotion of Investments Act, 1986. Approval of K·One Tech’s pioneer status can be extended for a further five (5) years upon the expiry of the first five (5) years. This is given at the discretion of MITI with the concurrence of the Minister of Finance. However, shouid K-One Tech succeed in obtaining a renewal of its pioneer status, it cannot in any event continue for a period beyond ten (10) years. No assurance can therefore be given that such approval at that point in time will be granted. K-One Ind was also granted Pioneer Status on 31 October 2003 by MIT! pursuant to the Promotion of Investments Act, 1986. Pioneer status allows the company full exemption from having to pay Malaysian income tax for a maximum period of five (5) years. Without their respective pioneer status, both K·One Tech and K-One Ind will be required to pay the statutory income tax. 3. RISK FACTORS (Cont’d) (q) Delays in Product Development Developing new products inherently face the risk of not meeting targeted deadlines due to a variety of causes such as changes to design specifications, quality control issues, human resource constraints, extended test time requirements, additional feature and function requirements, changing customer needs, unanticipated operational impact which necessitates software changes and a variety of other causes. Such delays are not uncommon, and the bigger the design/development project, the longer the potential delay. The Group intends to minimise such delays by stringent control of the entire product development life cycle of each and every product it develops and supports, by focusing on regular training of its development management and staff, by having focus groups with key users who will act as the domain experts to help ensure that the product specifications meet customer needs, by insisting on regular milestone checkpoint reviews, and by clear and precise documentation tD enable effective project resumption in case of human resource interruptions. (r) Uncertainty in the Proposed 5-Year Business Development Plan
The Group’s proposed future plan and prospects will be dependent upon, among other things, the Group’s ability to enter into strategic marketing or other arrangements on a timely basis and on favourable terms; hire and retain skilled management as well as financial, technical, marketing and other personnel; successfully manage growth (inclUding mon”oring operations, controlling CDsts and maintaining effective quality, inventory and service controls); and obtain adequate financing as and when needed. As a mitigating factor, the Group has been in operation since 2001 and its management is experienced in the industry. 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 Irom the business plan due to rapid technolDgical changes, market as well as compet”ive pressures.
(s) Breakout of Fire, Energy Crisis and Other Emergency Crisis
Every business faces the risks of losses arising trom emergencies such as breakout of fire and energy crisis. The Group has taken nDte of such risks and has taken various steps to reduce such risks by having proper fire-fighting systems, segregating the storage of its finished products from the production area and carrying out periodical review on its security and maintenance by its personnel. In the event of a temporary energy crisis, the shortfall in production volume can be made up by increasing the scheduled production volume. The Group has also taken fire insurance coverage to mitigate the financial losses from such happenings where possible.
(t) Change in or Loss of MSC Status
K-One Tech was granted MSC status on 11 September 2002 by MDC. MDC is lhe body responsible for assessing and monitoring all MSC status companies. With its MSC status, K-One Tech enjoys certain financial and non-financial incentives which are guaranteed under the Government’s Bill of Guarantees for MSC status companies. The financial incentives include, amongst others, the following: • a five (5) year exemption from Malaysian income tax (only on income derived from MSC related activities) commencing from the date the company starts generating income, renewable up to ten (10) years. Renewal will depend on the Group’s performance in transferring technology or knowledge to Malaysia, or 100% investment tax allowance on new investments made in the MSC cyber cities, commencing from the date on which the first qualifying capital expenditure is incurred; 3. RISK FACTORS (Cont’d) • duty free importation of multimedia equipment, provided that the equipment is used by the company in the operation of its business, and not for direct sale and trading or use as components in manufactured items; and
• R&D grants for MSC small and medium enterprises that are at least 51% Malaysian owned.
The non-financial incentives include: • unrestricted employment of foreign knowledge workers;
• freedom of ownership; and
• freedom to source capital for MSC infrastructure and the right to borrow funds globally. All MSC status companies will be given exemptions by the Controller of Foreign Exchange from exchange control requirements, which will allow them to execute transactions in any currency in Malaysia or elsewhere, borrow any amount from financial institutions, associate companies or non-residents, hedge foreign exchange exposure, remit funds globally and open foreign currency accounts in Malaysia or abroad with no limits on balances.
Insofar as ~s MSC status is concerned, K-One Tech may lose its status if it fails to comply with the conditions for MSC status as set out by the MOC. The MOC does have the discretion to revoke such status. K-One Tech is of the view that it has complied with these conditions and will continue to do so. Nonetheless, no assurance can be given that it will continue to retain its MSC status and should it fail to retain it, it will not be entitled to the benefits accorded with MSC status. (u) 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 events occurs: (il The underwriters of the Public Issue fail to honour their obligations under the underwriting agreement; (ii) The selected investors under the private placement fail to subscribe the Public Issue Shares allocated to them; and (iii) K·One Tech is unable to meet the public spread requirements I.e. at least 25% of the issued and paid-up capital of K-One Tech must be held by a minimum of 200 public shareholders holding no less than 100 ordinary shares in K-One Tech each. (v) Financial Risks Indebtedness The K-One Group has maintained trade facilities with local financial institutions for its business. These facilities are interest bearing and hence subject to any future fluctuations in interest rates. These fluctuations may in turn affect the Group’s profitability. As at 7 November 2005 (being the latest practicable date prior to the printing of this Prospectus), the K-One Group has outstanding borrOWings amounting to approximately RM1.2 million with a local financial institution. Whilst no assurance can be given that the performance of the K-One Group will continue to remain favourable in the event of fluctuations in changes in the interest rates, the K-One Group’s prudent approach towards cash management should ensure that sufficient funds will be generated to ensure the timely repayment of its bank borrowings. 33 3. RISK FACTORS (Cont’d) Capital Commitment The Group does not have any material commitment, which may have a substantial impact on the result or the financial position of the Group. (w) Dependence on protection of IP
The K-One Group’s success is also dependent on its ability to protect its IP such as its trademark, in-house product design specialised manufacturing and testing processes. Currently, the K-One Group is in the process of registering the ‘K-One” iogo as a trademark which is pending publication in the Government gazette. It will also take steps to patent its in-house product designs, speciaiized manufacturing and testing processes to prevent unauthorized usage and copying by third parties. However, there can be no assurance that the Group will be abie to protect its proprietary rights against unauthorised third party copying, use or exploitation, any of which could have a material adverse effect on the Group’s business, operating results and financial condition.
(x) Security and systems disruptions
The K-One Group’s operations may be interrupted by security and system disruptions. Events that may lead to security risks and system disruptions inciude virus infection of the computer system and power failure. No assurance can be given that a disruption to the Group’s operations will not arise. The management of the K-One Group take regular measures to minimise the risk of its operations being disrupted by ensuring that its computer system is protected by a firewall and anti-virus software. Its manufacturing facility is backed up with a generator set to run critical machines and assembly lines in the event of a power failure to minimize production disruption. The K·One Group has not experienced any major service disruption for the past years, and will continue to ensure viability of the services by continuously taking the necessary preventive measures as mentioned above. (y) Changing Economic Conditions The Group may be affected by cyclical variation as dictated by the level of economic activities. The demand of the Group’s D&D and/or manufacturing services and products is closely associated with the general economic climate as well as the degree of business activity of the Group’s customer base. A general slowdown in the business environment may result in a decrease in demand for the Group’s services andlor products. However, the Group will continue to review its business development strategies in response to the ever-changing economic conditions and market demands. Nonetheless, no assurance could be given that any change to these factors would not have any material adverse impact on the Group’s business. 3. RISK FACTORS (Conl’d)
(z) Risk in Rapid Technology Changes Technology used by the K-One Group ;s subject to the risk of rapid change in technology. The Group intends to overcome the challenges by:• Keeping close monitor of the latest development in technology and innovation.
• Keeping its product designers and developers in constant update of these core technology and innovation developments.
• Keeping close monitor of the market’s changing needs.
• Relating the observed technological and innovation developments with the changes in customers’ and industry’s requirement.
• Continuously enhancing ils product and services based on the latest cost and operationally accepted technological innovation changes to fulfill the requirements in a timely and most cost effective manner.
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