Risks

1.  Credit balance risk

  In 1999, the Company introduced the credit balance account to clients.
  With this type of account, the company has set up strict systems of
  risk control and risk management. In order to reduce risk, clients are
  required to provide cash or other securities, as determined by KGI
  Securities (Thailand), as collateral. The Company believes that these
  systems effectively manage the risk of loss from such lending.

2.  Interest rates risk

  The Company had foreign floating rate debts amounting to approximately
  US$25.75mn or Bt1,140mn at December 31^(st) 2001. This liability is
  held by HOLDCO, a wholly owned subsidiary.

  HOLDCO, after selling investments in foreign brokerage firms to a
  related company (KGII), also holds KGII’s Secured Convertible Notes
  and Secured Notes amounting to US$35mn and Bt1,575mn, respectively.
  These secured convertible notes and secured notes carry a fixed coupon
  of 6%.

  This combination of fixed interest rate assets and floating interest
  rate liabilities produces a potential interest rate risk for the
  company. However, the Company may use some or all of the following
  strategies to reduce this risk:

1.  Installment repayment of foreign loans using either the interest
    payment from the Secured Notes and Secured Convertible Notes, or
    capital injection from the Company into HOLDCO, or other funds, to
    reduce such risk.

2.  If the floating interest rate is higher than that of the Secured
    Notes, the company may exercise its put option, redeeming up to 20%
    of the initial amount annually, and use some or all of the proceeds
    to reduce its debt.

3.  KGII shares are expected to be listed before the maturity of the
    Secured Notes, subject to market conditions. If the market price of
    KGII shares is higher than exercise price (IPO price), the company
    may convert the Secured Convertible Notes and sell the KGII shares
    and use the proceeds to repay these debts, subject to relevant laws
    and regulations.

3.  Liquidity risk

  The Company has no liquidity problem. As of December 31^(st) 2001,
  cash on hand & at banks was Bt411.97mn. The net capital adequacy ratio
  (CAR) was 185.79%. The Company has appropriate asset management policy
  in accordance with the maturity of debts.

4.  Foreign exchange risk

  As of December 31^(st) 2001, the Company had no major financial
  instruments in foreign currencies. However, the Extraordinary General
  Meeting of Shareholders No. 1/2001 on March 8^(th) 2001 approved the
  change in the Company’s overseas investments structure on the basis
  that HOLDCO sells the overseas investments in associated companies, to
  KGI International Holdings Limited (KGII), a related company (related
  by way of common shareholders and common directors), in consideration
  for newly issued Secured Convertible Notes and Secured Notes of KGII
  at aggregate face value of US$35mn and Bt1,575mn. Thus, the Company’s
  foreign exchange risk reduced as HOLDCO had US$25.75mn liabilities,
  which will be offset with US$35mn Secured Convertible Notes.

5.  Securities investment risk and return

  Fluctuating securities prices and interest rates influence the value
  of and returns on investments. The current economic slowdown results
  in a negative sentiment to the investment in stocks, which is expected
  to be volatile in 2002. However, the Company has a control system by
  specifying conservative long-term investment.

  As of December 31^(st) 2001, the Company’s net securities investment
  was Bt4,731.39mn (14.7% in debt securities due within one year, 67.6%
  in held-to-maturity debt securities, and 17.7% in others). The Company
  has implemented stringent and prudent risk management controls to
  lessen the risk of loss due to market volatility. Fixed income &
  equity securities are mark-to-market and valuation changes are
  reflected in the Company’s portfolio performance and financial
  statements.

6.  Payment default by cash clients risk

  The Company carefully considers the extension of credit for each
  client and closely monitors accounts. As of December 31^(st) 2001,
  outstanding securities receivables and accrued interest payable were
  Bt719.3mn (including securities purchase – customers’ accounts of
  Bt636.34mn). This is mainly advance payment for cash clients who are
  normally obliged to settle payment on the third business day after the
  purchase date (T+3).

7.  Subsidiaries & associated companies risk

  This type of risk may arise if the subsidiaries and associated
  companies incur losses. The Company has fully recognized losses by the
  equity method. Therefore, any future loss in excess of the investment
  value in these companies will not affect the Company’s financial
  statements.

8.  Risk from expanding provincial branch network

  As of February 28^(th) 2002, the Company has operated a total of 14
  branches nationwide. In order to increase its customer bases, market
  shares, as well as its integrated services, the Company has opened new
  branches. Some branches have been closed down so as to reduce
  operating cost. This expansion was in line with the Company’s
  intention to expand market share and to extend a full range of
  services to a wider customer base. The opening of new branch offices
  involves risk as fixed costs are incurred with no certainty of a
  corresponding increase in revenue. However, the Company has a thorough
  review process in establishing new branches. A feasibility analysis is
  first conducted, in which the population, economic position and
  prospects, and number of financial institutions operating in such
  areas are considered. A profit-loss projection is made together with a
  study on the impact of the new office establishment on the maintenance
  of net capital adequacy of the Company.

9.  Competition risk

The securities industry is highly competitive with revenues mainly
derived from equity brokering. However, a change in the securities
commission rates from full liberalization to a minimum commission rate
will help improve the securities companies’ revenues. The Company has
responded on competition risk by establishing an Internet trading unit
to cut marginal costs, improving the skills of marketing staff to better
serve the diverse needs of clients, and launching new services (e.g.,
stock borrowing & lending, and, coming soon, derivatives trading). Value
added services should lead to segmentation of the client base and
eventually result in different fee rates.

10. Underwriting and financial advisory risk

In underwriting business, risk from losses of unsubscribed securities is
likely to occur due primarily to the inappropriate number of shares and
prices of the underwritten securities or the fluctuation of the stock
market, interest rates, and foreign exchange rates. As a result,
investors do not subscribe such securities. To prevent such risk, the
Company will first consider and analyze preliminary information of the
issuer of securities and the interests of customers or investors. In
terms of financial advisory, before accepting any financial advisory
cases, the Company will study preliminary information of customers to
evaluate the customers profile and indicate the concise due diligence
process.

11. Risk from having a major shareholders

As of April 9^(th) 2001, the KGI Group owned 49.2% of the Company. Major
shareholder can exercise significant influence over the Company’s
management & business policies. The major shareholder may increase its
stake to over 50% in the future in order to exert even more control over
the Company. In doing so, the Koos Group would have to comply with SEC
rules, conditions, and procedures governing the acquisition of
securities for business takeovers.

12. Risk from conditions in KGII’s Secured notes

  The Secured Notes and Secured Convertible Notes are issued under Hong
  Kong law. In case of breaches or default by the Issuer, the Company
  can always institute legal proceedings against the Issuer. The Secured
  Notes and Secured Convertible Notes of KGII have no trustee.

HK law offers protections to bondholders as a class of stakeholders of
the company which include:

  1. requiring special resolutions, rather than a simple majority vote,
  for important matters such as alterations to the company's
  constitution, in certain circumstances providing financial assistance
  for the acquisition of shares and buying back the company's own
  shares, reduction of the company's capital, removal of directors, and
  winding up of the company;

  2. sanction of court is required where the decision of the company
  will also directly affect its creditors, as in the case of issuing
  shares for less than their nominal value or a reduction of capital or
  a scheme of arrangement.

  In addition, in this case, KGII, the issuer of the Secured Notes has
  granted debenture holders specific protections. These include the
  following covenants:

(1) the Issuer shall not make any issue, grant or distribution or take
    any other action if the effect thereof would be to dissipate the
    assets of KGII;

  (2) the Issuer shall maintain for the Companies such debt-to-equity
  ratio and solvency ratio as are reasonable in the circumstances and in
  line with industry ratios and international standards;

  (3) if an offer is made to all holders of Shares to acquire all or a
  portion of the Shares and such offer comes to the knowledge of the
  Issuer, the Issuer shall forthwith give notice of such offer to the
  Noteholder;

  (4) in the event of the consolidation or amalgamation of the Issuer
  with, or merger of the Issuer into, any other corporation (other than
  a consolidation, amalgamation or merger in which the Issuer is the
  continuing corporation), or in the case of any sale or transfer of all
  or substantially all of the assets of the Issuer, the Issuer shall
  forthwith give notice of such event to the Noteholder;

  (5) the Issuer shall not amend its articles of association in a manner
  which has material adverse effect on the Noteholder;

  (6) the Issuer shall at all times carry on and conduct its affairs in
  a proper manner;

  (7) the Issuer shall not dispose of its material assets or create any
  indebtedness or other financial obligations which has a material
  adverse effect on the rights of the Noteholder; and

  (8) the Issuer shall furnish to the Noteholder:

  (i) as soon as practicable (and in any event within 5 months after the
  close of each of its financial years) the annual accounts of the
  Issuer;

  (ii) as soon as practicable (and in any event within 3 months after
  the close of each of its interim period) the consolidated accounts of
  the Issuer, for the interim period; and

  (iii) all notices or other documents despatched by the Issuer to their
  creditors (or any class thereof) and/or its shareholders at the same
  time as such notices or documents are despatched to the creditors or
  shareholders (as the case may be); and

  (9) the Issuer shall notify the Noteholder in writing of any Event of
  Default forthwith upon becoming aware of the occurrence thereof.

  Details of such conditions are indicated in the agreement of Secured
  notes and Secured convertible notes.

13. Risk from establishing Thai Trust Funds (TTF)

  According to the resolution of KGI Securities (Thailand) Public
  Company Limited Extraordinary Shareholders Meeting No. 1/2001 dated
  March 8^(th) 2001, the Company will join the Thai Trust Fund program
  (TTF). The objective is to stimulate investment from foreign investors
  and to increase the liquidity of the traded shares. It opens up
  opportunities for foreign investors to purchase the Company’s shares
  through the TTF. The fund would hold no more than 25% of the total
  shares of the Company. Foreign investors in TTF would have no voting
  rights. This leads to a decreasing in the number of voting shares. As
  a result, major shareholders will have increasing number of voting
  rights and control in the Company. As of May 31^(st) 2001, there is no
  share in the TTF.

  In anticipation of the ministerial regulations relating to the Alien
  Business Act B.E. 2542, the Company’s Annual General Shareholders
  Meeting No. 1/2001 dated April 25^(th) 2001 approved for the amendment
  of the Company’s Articles of Association stipulating that shares of
  the Company shall be freely transferable without restrictions (No
  foreign limit). However, such ministerial regulations are currently
  under the examination of the Office of a Royal Decree Committee. The
  Company may consider a change in conditions of the TTF program after
  such ministerial regulations obtain an approval.

14. Risk related to number of warrants

  As of December 31^(st) 2001, the Company’s unexercised of warrants No.
  3 and No. 4 were as follows:

-   The Company has 554,971,440 units of outstanding Warrants No. 3
    (which will expire on May 31^(st) 2002) at the ratio of 0.5 share :
    1 warrant at exercise price of Bt4.09576 and;

-   The Company has 943,558,624 units of outstanding Warrants No. 4 with
    3 years maturity (May 1^(st) 2001–April 30^(th) 2004) at the ratio
    of 0.10 share : 1 warrant at exercise price of Bt5.00.

  Approximately 371,853,530 ordinary shares have been reserved by the
  company in case Warrants No. 3 and No. 4, totaling 1,498,530,064
  units, are exercised. These shares are equivalent to approximately
  24.9% of total paid up shares). In the past, the Company’s share price
  has been lower than the exercise prices of the two warrants. If this
  situation continues, it is expected that no warrants would be
  exercised. As a result, there would be no dilution effect either on
  the earnings per share (EPS) or voting rights.

  However, KGI-W3 will expire on May 31^(st) 2002. Should the share
  price increase over the exercise price of warrants, the warrant
  holders may exercise their warrants. Should there be an exercise of
  the remaining KGI-W3, the Company’s number of shares will be increased
  by 277,485,720 shares or equivalent to 18.6% of the current paid-up
  shares. In regards to the proceeds from the warrants, the Company will
  receive Bt1,136,514,912.54 for which the Company plans to invest the
  proceeds in projects, which should provide sufficient return to
  maintain the return on equity.