| CSP INC /MA/ Item 1A Risk Factors This document contains forward-looking statements based on current expectations that involve a number of risks and uncertainties |
| Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made |
| As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of actual future financial condition or results |
| In response to competitive pressures or new product introductions, we may take certain pricing or marketing actions that could adversely affect our operating results |
| In addition, changes in the products and services mix may cause fluctuations in our gross margin |
| Due to the potential quarterly fluctuations in operating results, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily an indicator of future performance |
| Markets for our products and services are characterized by rapidly changing technology, new product introductions and short product life cycles |
| These changes can adversely affect our business and operating results |
| Our success will depend upon our ability to enhance our existing products and services and to develop and introduce, on a timely and cost effect basis, new products that keep pace with technological developments 8 ______________________________________________________________________ [36]Table of Contents and address increasing customer requirements |
| The inability to meet these demands could adversely affect our business and operating results |
| We Depend on a Small Number of Customers for a Significant Portion of our Revenue and Loss of any Customer Could Significantly Affect the Business We are dependent on a small number of customers for a large portion of our revenues |
| Sales to E-Plus, a wireless telecommunications company in Germany, and those to E-Plus through its system integrator, Atos, accounted for 15prca, 22prca and 33prca of sales in fiscal years ended September 30, 2005, 2004 and 2003, respectively |
| Lockheed-Martin, a large defense contractor, accounted for 5prca of our sales in 2005 and 11prca and 3prca of our sales in fiscal years 2004 and 2003, respectively |
| A significant diminution in the sales to or loss of any of our major customers would have a material adverse effect on our business, financial condition and results of operations |
| In addition, our revenues are largely dependent upon the ability of our customers to have continued growth or need for services or to develop and sell products that incorporate our products |
| No assurance can be given that our customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our results of operations |
| We Depend on Defense Business for a Significant Amount of our Revenue and the Loss or Decline of Existing or Future Defense Business Could Adversely Affect our Financial Results Sales of our systems to the defense market accounted for approximately 16prca, 18prca and 18prca of our consolidated revenues and 97prca, 97prca and 95prca of the Systems segment sales for the fiscal years ended September 30, 2005, 2004 and 2003, respectively |
| Reductions in government spending on programs that incorporate our products could have a material adverse effect on our business, financial condition and results of operations |
| Moreover, our subcontracts are subject to special risks, such as: • delays in funding; • ability of the government agency to unilaterally terminate the prime contract; • reduction or modification in the event of changes in government policies or as the result of budgetary constraints or political changes; • increased or unexpected costs under fixed price contracts; and • other factors that are not under our control |
| In addition, consolidation among defense industry contractors has resulted in fewer contractors with increased bargaining power relative to our bargaining power |
| No assurance can be given that such increased bargaining power will not adversely affect our business, financial condition or results of operations in the future |
| Changes in government administration, as well as changes in the geo-political environment such as the current “War on Terrorism,” can have significant impact on defense spending priorities and the efficient handling of routine contractual matters |
| Such changes could have a negative impact on our business, financial condition, or results of operations in the future |
| We Face Competition That Could Adversely Affect our Sales and Profitability The markets for our products are highly competitive and are characterized by rapidly changing technology, frequent product performance improvements and evolving industry standards |
| Due to the rapidly changing nature of technology, new competitors may emerge of which we have no current awareness |
| Competitors may be able to offer more attractive pricing or develop products that could offer performance features that are superior to our products, resulting in reduced demand for our products |
| Such competitors could have a negative impact on our ability to win future business opportunities |
| There can be no assurance that a new competitor will not attempt to 9 ______________________________________________________________________ [37]Table of Contents penetrate the various markets for our products and services |
| Their entry into markets historically targeted by us may have a material adverse effect on our business, financial condition and results of operations |
| Slowdown in the Economy Can Affect our Revenue and Profitability The uncertainty regarding the growth rate of the worldwide economies has caused companies to reduce capital investment and this may cause further reduction of demand for our products and services |
| These reductions have been particularly severe in the electronics and technology industries |
| Growth in our European markets may be adversely affected by continued weakness in the German economy in 2006 |
| Our Operating Results May Fluctuate Significantly Our operating results have fluctuated widely on a quarterly and annual basis during the last several years, and we expect to experience significant fluctuations in future operating results |
| Many factors, some of which are beyond our control, have contributed to these fluctuations in the past and may continue to do so |
| Such factors include: • sales in relatively large dollar amounts to a relatively small number of customers; • competitive pricing programs; • loss of customers; • market acceptance of our products; • product obsolescence; • general economic conditions; • change in the mix of products sold; • obtaining or failure to obtain design wins for significant customer systems; • timing of significant orders; • delays in completion of internal product development projects; • delays in shipping our products; • delays in acceptance testing by customers; • production delays due to quality programs with outsourced components; • shortages of components; • timing of product line transitions; • declines of revenues from previous generations of products following announcement of replacement products containing more advance technology; and • fixed nature of our expenditures on personnel, facilities and marketing programs |
| We believe that period-to-period comparisons of our results of operations will not necessarily be meaningful and should not be relied upon as indicative of our future performance |
| It is also possible that in some periods, our operating results may be below the expectations of securities analysts and investors |
| In such circumstances, the price of our common stock may decline |
| 10 ______________________________________________________________________ [38]Table of Contents We Rely on Single Sources for Supply of Certain Components and our Business may be Seriously Harmed if our Supply of any of These Components or Other Components is Disrupted Several components used in our Systems products are currently obtained from sole-source suppliers |
| We are dependent on key vendors like Myricom as well as Freescale for many of our PowerPC line of processors |
| Generally, suppliers may terminate their purchase order with us without cause upon 30-days notice and may cease offering products to us upon 180-days notice |
| If Motorola was to limit or reduce the sale of such components to us, or if these or other component suppliers to us, some of which are small companies, were to experience financial difficulties or other problems which prevented them from supplying us with the necessary components, such events could have a material adverse effect on our business, financial condition and results of operations |
| These sole source and other suppliers are each subject to quality and performance issues, materials shortages, excess demand, reduction in capacity and other factors that may disrupt the flow of goods to us or our customers; thereby may adversely affect our business and customer relationships |
| We have no guaranteed supply arrangements with our suppliers and there can be no assurance that our suppliers will continue to meet our requirements |
| If our supply arrangements are interrupted, there can be no assurance that we would be able to find another supplier on a timely or satisfactory basis |
| Any shortage or interruption in the supply of any of the components used in our products, or the inability to procure these components from alternate sources on acceptable terms could have a material adverse effect on our business, financial condition and results of operations |
| There can be no assurance that severe shortages of components will not occur in the future |
| Such shortages could increase the cost or delay the shipment of our products, which could have a material adverse effect on our business, financial condition and results of operations |
| Significant increases in the prices of these components would also materially adversely affect our financial performance since we may not be able to adjust product pricing to reflect the increase in component costs |
| We could incur set-up costs and delays in manufacturing should it become necessary to replace any key vendors due to work stoppages, shipping delays, financial difficulties or other factors and, under certain circumstances, these costs and delays could have a material adverse effect on our business, financial condition and results of operations |
| We Depend on Key Personnel and Skilled Employees and Face Competition in Hiring and Retaining Qualified Employees We are largely dependent upon the skills and efforts of our senior management, managerial, sales and technical employees |
| None of our senior management or other key employees are subject to any employment contract which require services for a period of time |
| The loss of services of any of our executives or other key personnel could have a material adverse effect on our business, financial condition and results of operations |
| Our future success will depend to a significant extent on our ability to attract, train, motivate and retain highly skilled technical professionals |
| Our ability to maintain and renew existing engagements and obtain new business depends, in large part, on our ability to hire and retain technical personnel with the skills that keep pace with continuing changes in industry standards and technologies |
| The inability to hire additional qualified personnel could impair our ability to satisfy our growing client base, requiring an increase in the level of responsibility for both existing and new personnel |
| There can be no assurance that we will be successful in retaining current or future employees |
| Our International Operations are Subject to a Number of Risks We market and sell our products in certain international markets, and we have established subsidiaries in the United Kingdom and Germany |
| Foreign-based revenue is determined based on the location to which the product is shipped or services are rendered, and represented 50prca, 46prca and 62prca of our total revenue for the fiscal years ended September 30, 2005, 2004 and 2003, respectively |
| If revenues generated by foreign activities are not adequate to offset the expense of establishing and maintaining these foreign subsidiaries and activities our business, financial condition and results of operations could be materially adversely affected |
| In addition, there are certain risks inherent in transacting business internationally, such as changes in applicable laws and regulatory requirements, export and import restrictions, export controls relating to technology, tariffs and other trade barriers, less favorable operations, longer payment cycles, problems in collecting accounts receivable, 11 ______________________________________________________________________ [39]Table of Contents political instability, fluctuations in currency exchange rates, expatriation controls and potential adverse tax consequences, any of which could adversely impact the success of our international activities |
| In the recent past, the financial markets in Asia have experienced significant turmoil |
| A portion of our revenues are from sales to foreign entities, including foreign governments, which are primarily in the form of foreign currencies |
| There can be no assurance that one or more of such factors will not have a material adverse effect on our future international activities and, consequently, on our business, financial condition or results of operations |
| To be Successful, We Must Respond to the Rapid Changes in Technology Our future success will depend in part on our ability to enhance our current products and to develop new products on a timely and cost-effective basis in order to respond to technological developments and changing customer needs |
| The defense market, in particular, demands constant technological improvements as a means of gaining military advantage |
| Military planners historically have funded significantly more design projects than actual deployments of new equipment, and those systems that are deployed tend to contain the components of the subcontractors selected to participate in the design process |
| In order to participate in the design of new defense electronics systems, we must be able to demonstrate our ability to deliver superior technological performance on a timely and cost-effective basis |
| There can be no assurance that we will be able to secure an adequate number of defense electronics design wins in the future, that the equipment in which our products are intended to function eventually will be deployed in the field, or that our products will be included in such equipment if it is eventually deployed |
| The design-in process is typically lengthy and expensive, and there can be no assurance that we will be able to continue to meet the product specifications of our OEM customers in a timely and adequate manner |
| In addition, if we fail to anticipate or to respond adequately to changes in technology and customer preferences, or any significant delay in product developments or introductions, this could have a material adverse effect on our business, financial condition and results of operations, including the risk of inventory obsolescence |
| Because of the complexity of our products, we have experienced delays from time to time in completing products on a timely basis |
| If we are unable to design, develop or introduce competitive new products on a timely basis, our future operating results would be adversely affected |
| There can be no assurance that we will be successful in developing new products or enhancing our existing products on a timely or cost-effective basis, or that such new products or product enhancements will achieve market acceptance |
| We Need to Maintain our Research and Development Effort to Meet the Needs of our Customers The industry in which our Systems segment competes is characterized by the need for continued investment in research and development |
| If we fail to invest sufficiently in research and development, our products could become less attractive to potential customers, and our business and financial condition could be materially adversely affected |
| As a result of our need to maintain or increase our spending levels in this area and the difficulty in reducing costs associated with research and development, our operating results could be materially harmed if our revenues fall below expectations |
| In addition, as a result of CSPI’s commitment to invest in research and development, spending as a percent of revenues may fluctuate in the future |
| We May be Unable to Successfully Integrate Acquisitions We may in the future acquire or make investments in complementary companies, products or technologies |
| Acquisitions may pose risks to our operations, including: • problems and increased costs in connection with the integration of the personnel, operations, technologies or products of the acquired companies; • unanticipated costs; • diversion of management’s attention from our core business; • adverse effects on business relationships with suppliers and customers and those of the acquired company; 12 ______________________________________________________________________ [40]Table of Contents • acquired assets becoming impaired as a result of technical advancements or worse-than-expected performance by the acquired company; • entering markets in which we have no, or limited, prior experience; and • potential loss of key employees, particularly those of the acquired organization |
| In addition, in connection with any acquisitions or investments we could: • issue stock that would dilute existing shareholders’ percentage of ownership; • incur debt and assume liabilities; • obtain financing on unfavorable terms; • incur amortization expenses related to acquired intangible assets or incur large and immediate write-offs; • incur large expenditures related to office closures of the acquired companies, including costs relating to termination of employees and leasehold improvement charges relating to vacating the acquired companies’ premises; and • reduce the cash that would otherwise be available to fund operations or to use for other purposes |
| The failure to successfully integrate any acquisition or for acquisitions to yield expected results may negatively impact our financial condition and operating results |
| Our Stock Price May Continue to be Volatile Historically, the market for technology stocks has been extremely volatile |
| Our common stock has experienced, and may continue to experience, substantial price volatility |
| The following factors could cause the market price of our common stock to fluctuate significantly: • our loss of a major customer; • the addition or departure of key personnel; • variations in our quarterly operating results; • announcements by us or our competitors of significant contracts, new products or product enhancements; • acquisitions, distribution partnerships, joint ventures or capital commitments; • regulatory changes; • sales of our common stock or other securities in the future; • changes in market valuations of technology companies; and • fluctuations in stock market prices and volumes |
| In addition, the stock market in general, and the NASDAQ National Market and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies |
| These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such companies |