3. RISK FACTORS 3. RISK FACTORS
NOTWITHSTANDING THE PROSPECTS OF THE COMPANY AS OUTLINED IN THIS PROSPECTUS, APPLICANTS FOR THE ISSUE SHARES SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF THE COMPANY IN ADDITION TO OTHER LNFORMATION CONTAINED ELSEWHERE HEREIN, BEFORE APPLYING FOR THE ISSUE SHARES. (A) BUSINESS RISKS (;) ReHanee on a few majo, cUents Scicom’s main strategy lnvolves forming long·term relationsbips with their major clients. This bas resulted In several major clients contributing the bulk of the Company’s annual revenue. The Company’s five (S) largest clients in FYE 30 June 2005 accounted for a total of approximately 86% of revenue for that year. There is no assurance that the Company can retain these clients or any other significant client. Funhennore, there is also no guarantee that should it lose one of these clients, Scicom will be able to replace these clients with another client that would generate a comparable amount of revenue. Consequently, the loss of one or more of these significant clients could have a material adverse effect on the Company’s business, fmancial condition and operations. A mitigating factor is the high switching cost associated with changing BPO veodors due to the high cost of initial investment associated with capital expendirure, renovation and process development costs incwred by the customers. However, despite this fact, Scicom strives to maintain a professional and strong business relationship with its clients, employing trust and fairness at all levels of its client interactions, leading to ‘Total Customer Delight’. Going forward, the Group will aggressively procure more customers to enhance its earnings base and to reduce the reliance on a few clients. (U) Dependence on labour force Scicoro’s success is largely dependent on its ability to recruit, bire, train and retain qualified employees. The contact centre outsourcing industry is very labour intensive and e”..perienccs high attrition and turnover rates, different to that of other indusU’ies. An increase in Scicom’s staff attrition would increase training costs, decrease productivity and affect operational and financial perfonnance. New large clients may require Scicom to be able to recruit, hire and train qualified new staff at a rate greater than the nonnal rate. There can be no assurance that the Company will be able to continue to perform these human resource functions to adequately support the current or potential operational requirements. In addition to this. increases in average wages, cost of employee benefits, statutory and or regulatory requirements pertaining to employee welfare could have a material adver.>e effect on the Company’s business, fmancial condition and operations. Also, the competitive labour market in India resulting from the proliferation of outsourcing activities there can cause problems for Scicom in the area of recruiting and attrition. Employee poaching and unreasonable employee demands can cause poor perfonnance and increased material adverse effects on Scicom’s bottom line. Scicom mitigates this risk by providing a pleasant and rewarding environment for its employees to work in. By providing career development, opportunities for training and organising employee motivational activities. Scioom strives to be an employer of choice within the industry. (Ill) Dependen« on key personnel Scicom’s success to date can be largely attributed to the skills, guidance and leadership of Leo Suresh Ariyanayakam and the senior management team. There can be no assurance that the Company wilt be able to hire or retain the services of key employees. The loss of Mr. Ariyanayakam or any other members of senior management staff could have a material adverse effect on the Company·s business, results of operations or financial condition. 3. RISK FACfORS (Coot’d) However, SCicom has put in place procedW’aJ protocols and !iUccession plans thaI will minimise to a certain extent, any disruption to the day-tlHiay function of the Company. These measures serve to mitigate the risk of any material adverse effect on the Company’s business, results and fmaDcial condition. (Iv) Risk of business interruption Scicom’s operations are dependent upon its ability to protect its contact centres. computers, teleconununication equipment, and software systems against damage or destruction from fIre, power failure, telecommunication interruption/failure, natural disaster or other Acts of God. In the event that Scicom experiences a temporary or pennanent interruption at one or more of its contact centres, caused by any of the above scenarios, there could be rnateriaJly adverse eff«ts to the fmancial and openttionaJ condition of the Company. In additton, such scenarios may lead to contractual damages borne by Scicom, conlJact renegotiations or even contact termination. While the Company has adequate insurance as well as disaster recovery facilities, such mitigating factors may not adequately compensate the Company for all losses that may occur. (v) No prior market for tbe Company’s shares
Prior to the Public Issue, there was no public market for Scicom Shares. There can be no assunmce that an active market can develop for Scicom Shares upon its listing on the MESDAQ Market or if developed, that such a market can be sustained. The Issue Price of RMO.60 per Issue Share has been determined after taking into consideration a number of factors, including but not limited to, the Company’s financial and operating history and conditions, the prospects of the industry in which the Company operates, tbe Company’s R&D capability and technology, the management of the Company and prevailing economic and market conditions. There can be no assurance that the Issue Price will correspond to the price at which Scicom Shares will trade on the MESDAQ Market upon or subsequent to its listing.
(vi) Expansion to foreign markets and iu related risk thereon
The Group intends to expand its operation 10 countries such as China and other foreign markets. However, there can be no assurance that the Group will be able to successfully penetrate the aforemenf1oned new markets. Furthennore, such future expansion could expose the Group to foreign economic, political, legislative and other risks. Any failure to accurately assess these issues could affect the Group’s business, financial condition and operating results. However, the Group’s philosophy in terms of expansion or its provision of new services has always been based on prudence and careful planning. (vii) MSC status Scicom was granted MSC status on 7 November 2002 by the MOe and was awarded pioneer starns under Section 14A oflhe Promotion of Investments (Amendment) Act 1986 by the MlTJ for a five (5) year period commencing from 7 November 2002. As such, it is entitled to enjoy certain fmancial and non-fmancial incentives like 100% income tax exemption on all profits derived from its MSC· qualifying activities. MDC is the body responsible for monitoring all MSC status companies. MIX: has the right to revoke any company’s MSC status at any time ifit does not compty with the conditions of grant ofMSC staniS as imposed by the MDC. As SUCh, there can be no assurance that Ihe Company will continue (0 retain its MSC and pioneer status or that die Company will continue to enjoy or not experience delays in enjoying the MSC in~ntives, all of which could materially Il1ld adversely affect the Group’s business, operating results and financial condition. There can also be no assurance that the conditions of grant of MSC status and or the MSC incentives will not be changed or modified in any way in the future. To this end, Scicom maintains a good relationship with the MOC and the account managers assigned to manage the relationship. Scicom endeavours to keep abreast of all the compliance requirements of the MSC status. 3. RISK FACTORS (CooC’d) (viii) Protection of Trademarks rigbts Scicom has on 24 August 2004 filed applications to register the scicomsM scicomsourcingSM, scicompartne~M, sciComacademlM, scicomconsultingSM and sci¢ommarketingSM marks as trademarks in Malaysia under the Trade Mark Acts 1976 and the Trade Marks Regulations 200 I. As at 24 August 2005, being the latest practicable date prior to the Printing of lhis Prospectus, the aforementioned applications have been published in the Government Gazette, awaiting approval from the Registrar of Trademarks. However, existing IP laws afford only limited protection. As such, there can be no assurance that the Company will be able to protect its trademarks 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. (i:r) Dependence 00 key services Presently, S¢itompartne.-SM module contributes significantly to the lotal Group’s revenue. lt is expected that Ihis service will continue 10 contribute substantially to the Group’s sales for the next five (5) years.
In order to reduce dependency on this product and to diversifY the Group’s income base, the Group has developed and marketed the following services:~
(ii) S¢icomconsultingSM; and (ill) scicommarketingSM•
For details ofthe above services, please refer to Section 4.3.2 ofthis Prospectus. (x) Investment risks The Group may from time to time invest in new equipment or new ventures, which it believes to be beneficial to the business of the Group or is synergistic with the Group’s current operations. However, there is always the potential risk that the returns from these investments may nave a longer payback period than ex.pected or the investment may fail even though the Group will mitigate its investment risks by exercising due care in the evaluation of its investments. There CaD be no assurance that all its future investments will yield positive retwns to the Group and would not hllve any adverse material effect on the Group’s future financiaJ performance. The Group will mitigate the risk of under-performance of investments through a thorough and careful due diligence exercise which wi11 be conducted prior to every major business and investment decision. By employing valuation models and cost~benefit analyses, the Group believes that the risk of investment under-perfonnance can be minimised to II large ex.tent. fwthennore, the Group only believes in making investments that either complement or supplement the core business, which is tbe provision of outsourced cootact centre services. (B) RJSKS RELATING TO INDUSTRY (i) Banim to eotry BPO, specifically contact centre management is the successful integration of operational processes, human resource management, technology and telecommunication, with the goal of providing an organisation’s customers with cost-effective customer service. Entry into this industry is relatively simple, given the reality that most organisations currently maintain a contact centre as a necessary part of meir customer service obligations. However, the operations of complex contact centre outsourcing, require greater competencies in the areas mentioned above, particularly in human resource 3. RISK FACTORS (Cont’d) management and processes. It is with these advaDtages that oulSOurcers have over in-house contact centres that may lead to an organisation outsourcing their contact centres to these outsourcers. While these competencies are not easy to acquire, outsourcers have many avenues in which to acquire these skills. These avenues include hiring the right talent, engaging process-reengineering consultants, and pursuing international accreditation or certification, which ‘necessitates’ process competencies onto an outsourcer. Technology is primarily an enabler, as is telecommunications. Vendors in these areas playa crucial role in sharing their expertise and assisting outsourcers in the seHlp oftheir contact centres. Although the market, both domestically and internationally, has seen the entry of numerous olltsourced contact centre providers. the furure of this industry will see fewer companies entering the market as industry pioneers engage the large multinational clients. Given that vendor switching costs are high, it is unlikely that new players will be able to secure clients that already outsource their contact centres, leaving the remaining market share smaller, more competitive and with lower margins. Looking at the current state of the lndustry, Scicom believes that the threat of entry into this global indusb)’ remains moderate to high. (ii) Competition The BPa market, which includes contact centre outsourcing, is highly competitive and fragmented. Scicom expects competition to persist and increase in the future. Competitors as viewed by Scicom include small finns offering specific applications (boutique providers), divisions ofomer large entities, large service providers and most significantly, in-house operations of clients themselves. lbese competitors have or may develop greater capabilities than those of Scicom, There are also no assurances that foreign fums with greater resources and longer track records may not enter the Company’s main market. Increased competition from external parties could erode Scicom’s market position or pricing power, resulting in a material adverse effect on the Company’s overall fmancial and operational performance. Scicom Group mitigates this threat by focusing on its core business delivery under me mantra of ‘Tala! Customer Delight’_The Group believes that this culture ofsuperior customer service delivery will act as a barrier to entry against new entnlDts to the industry while also serving to differentiate the Group against the competition. (Iii) Techool0l..”)’ Part of Scicom’s business is highly dependent on computers, telecommunication equipment and software systems used. Failure to respond effectively to shifts in technological trends could lead [0 materially adverse effects on the Company’s business, results of operations or financial conditions. There can be no assurance that future products and services may be able to compete successfully with similar products and services of competitors, or that new innovations and advantages garnered by the competition may not render the Company’s products and services non-competitive or irrelevant. Scicom is protected against technological obsolescence from the client’s requirement for uP'”to-date technology. As such, when the need arises, the client will invest in newer technology. (C) OTHER RISKS
(i) Shareboldings of Promoten
The Promoters will collectively hold approximately 68.57% of the Company’s issued and paid-up share capital after the Public Issue. As a result, the Promoters will be able to effectively influence the outcome ofcertain corporate actions in a manner that could cause conflict with the interests ofminority sbareholders. 3. RISK FACTORS (Cont’d) However in the event of related party transactions involving any of the Promoters of the Company, such Promoters would be required to abstain from voting. In addition, Scicom has appointed two (2) independent non-executive Directors, as a step towards good corporate governance and protecting the interests of minority shareholders. (ii) PoliHeal, ecoDomic and legisl.tive considerations Development in political and economic conditions in Malaysia and other countries where the Group is currentJy operating or where the Company may undertake projects or market its products in the future could materially affect the financial prospects of the Group. Political and economic uncertainties include but are not limited to the risks of war, riots, expropriation, nalionalisation, renegotiations or nullification of existing contracts, fluctuations in foreign exchange rates, inflation, changes in interest rates and methods of taxation. (iii) Forward Jooklng statements This Prospectus includes forward-looking statements, which are statements other than statements of historical faclS that are based on asswnptions that are subject to uncertainties and oontingencies. The words “anticipates”, “believe”, “inteJ:lds”, “plans”, “expects”, “forecast”, “predicts” and similar expressions as they relate to the Group or its business are intended to identify such forward-looking statements. The Group believes that the expectations reflected in such forward-looking statements are reasonable at this point of time. There can be no assurance that such expectations will prove to have been correct. Any deviation from the expectations may have an adverse effect on the Group’s fInancial and business perfonnance. (iv) Delay tn or abortion of the Public bsue The occurrence of anyone (I) or more of the following events may cause a delay in or abortion of the Public lssue:(a) the Selected Investors fail to subscribe for the portion oflssue Shares to be placed to them;
(b) the Underwriters exercise its rights purSUBOt to the Underwriting Agreement and discharges itself from its obligations thereunder; or
(c) the Company is unable to meet the public spread requirements, that is. at least 25% but not more than 49% ofthe issued and paid-up share capital ofthe Company be held by a minimum number of2oo public shareholders (including employees).
Although the Board will endeavour to ensure compliance by Scicom of the various Listing Requirements, including, inter-alia., the public spread requirement imposed by Bursa Securities for the successful Public Issue. no assurance can be given that the abovementioned events will not occur and cause a delay in or abortion oflhe Public Issue. (v) Termination ofUoderwritiDg Agreement The Underwriting Agreement is tenninable upon the occurrence of certain events. details of which is set out in Section 2.8.4 of this Prospectus. No assurance can be given that the Underwriters will not terminate the Underwriting Agreement if the events detailed in Section 2.8.4 have occurred. In the event the Public Issue could nOl be completed, all monies paid in respect ofall applications will be returned in full without any interest. 3. RISK FACTORS (Coat’d) (vi) Foreign Extblnge Risk. The revenue of the Group is currently denominated in RM, USD, SGD, EURO,INR and GBP. Given that the reporting currency of the financial statements of the Group is in RM, it is exposed to foreign currency fluctuations. The Group will, as a mitigating factor, attempt to use various hedging techniques to mitigate this risk. In addition, some of the Group’s purchases are also generated in USD, which provides a natural hedge to some degree for any adverse movements in foreign exchange rates. However, there can be no assurance that an)’ future significant fluctuations in exchange rates and financial crisis will not impact on the revenue and earnings ofthe Group. THE REST OF Tms PAGE HAS BEEN INTENTJONALLY LEFr BLANK