| You should carefully consider all of the information contained in this Annual Report on Form 10-Ks and, in particular, the risks described below |
| Additional risks and uncertainties not presently known to us or those we currently deem immaterial may impair our business operations in the future |
| If any of the following risks actually occur, our business, financial condition or results of operations could be materially harmed and you may lose part or all of your investment |
| We experienced a loss from continuing operations of dlra4dtta5 million in fiscal 2006, and continued losses may negatively impact our financial position and value of our common stock |
| We incurred a loss from continuing operations in fiscal 2006 of dlra4dtta5 million |
| The primary reasons for the loss from continuing operations in fiscal 2006 were a charge for impairment of goodwill and expenses associated with a long-term, nationwide, enterprise maintenance contract which terminated on April 30, 2006 |
| In addition, we may not be able to generate sufficient new business to replace the contribution margins derived from the contracts sold in connection with the sale of our secure network services business sold on June 30, 2005, contain costs to a reduced level or expand our existing business in order to regain profitable operations |
| Although we reported net income for the year ended March 31, 2006, the net income was the result of gain on the sale of our secure network services business on June 30, 2005 |
| We will continue to incur expenses in operating our business |
| As we focus on our core business, there are no assurances that our cost containment efforts will be successful in curbing expenses or that we will be able to accurately estimate start-up costs and expenses associated with new contracts |
| If we incur expenses at a greater pace than our revenues, we could incur additional losses |
| If we continue to experience losses, our financial position could be negatively impacted and the value of our common stock may decline |
| Our revenues are derived from a few major customers, the loss of any of which could cause our results of operations to be adversely affected |
| We have a number of major customers |
| Our largest customer accounted for 20prca, 20prca, and 22prca of our revenues for the fiscal years ended March 31, 2006, 2005 and 2004, respectively |
| Through the aggregation of multiple contracts, our largest customer during fiscal year ended March 31, 2006 was IBM Our five largest customers collectively accounted for 54prca, 65prca and 67prca of revenues for the fiscal years ended March 31, 2006, 2005 and 2004, respectively |
| As of June 30, 2005, as a result of the sale of our secure network services business, we no longer have the economic 6 _________________________________________________________________ benefit of any material contracts or subcontracts providing services to the Federal government |
| We anticipate that significant customer concentration will continue for the foreseeable future, although the companies which constitute our largest customers may change from period to period |
| Factors beyond our control, including political, state and federal budget issues, competitor prices and other factors may have an impact on our ability to retain contracts |
| The loss of any one or more of these customers may adversely affect our results |
| As a result of the sale of our secure network services business, there can be no assurances that we can replace the revenue stream from our secure network services business with other new business |
| If we experience a decline in cash flow or are unable to maintain compliance with the covenants contained in our revolving credit facility, our ability to operate could be adversely affected |
| If either cash flow from operations decline in value or borrowings under our revolving credit agreement are insufficient to meet our needs, our ability to operate could be adversely affected |
| In addition, the loss of a significant contract, adverse economic conditions or other adverse circumstances may cause our capital resources to change dramatically |
| Operating results may also be negatively affected due to costs associated with starting a major contract |
| Many costs associated with starting a new contract, such as hiring additional personnel, training, travel and logistics are expensed as incurred and may also significantly impact cash flow during the startup period |
| Additional funds, if needed, to help fund start-up costs related to a major new contract may not be available |
| We view our revolving credit facility as a critical source of available liquidity |
| This facility contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds |
| We were not in compliance with the terms of our revolving credit facility at December 31, 2004 and March 31, 2005 as we failed to meet certain financial covenants |
| In both instances we requested and received waivers from our lender |
| On June 29, 2005 our revolving credit agreement was amended to adjust the covenants prospectively and to extend the maturity of the agreement to June 30, 2007 |
| At March 31, 2006, we were in compliance with these financial covenants |
| There is no assurance that we will remain in compliance with the conditions, covenants and representations contained in the revolving credit agreement |
| Although we believe our relationship with our lender is satisfactory and we have requested and received waivers in the past for non-compliance with the financial covenants of our revolving credit agreement, there are no assurances that the lender will waive these covenants should we experience non-compliance in the future |
| We operate in a highly competitive market |
| If we are unable to offer competitive products and services, our business may be adversely affected |
| We have numerous competitors in our marketplace |
| Some competitors are large diversified firms having substantially greater financial resources and a larger technical staff than us, including, in some cases, the manufacturers of the systems being supported, and others are small companies within a regional market or market niche |
| Customer in-house capabilities can also create competition in that they perform certain services which might otherwise be performed by us |
| It is not possible to predict the extent of competition which our present or future activities will encounter because of changing competitive conditions, customer requirements, technological developments and other factors |
| The industry in which we operate has been characterized by rapid technological advances that have resulted in frequent introductions of new products, product enhancements and aggressive pricing practices, which also impacts pricing of service activities |
| We continue to see significant price competition and customer demand for higher service attainment levels |
| In addition, there is significant price competition in the market for state and local government contracts as a result of budget issues, political pressure and other factors beyond our control |
| As experienced with losses of some of our contracts, high quality and longevity of service may have little influence in the customer decision making process |
| Also, our operating results could be adversely impacted should we be unable to achieve the revenues growth necessary to provide profitable operating margins in various operations |
| Our operating results may be adversely affected because of pricing pressures brought about by competition, proprietary technology that we are unable to support, presence of competitors with greater financial and other resources or other factors beyond our control |
| 7 _________________________________________________________________ Our revenues and results of operations may vary period to period, which may cause the common stock price to fluctuate |
| Our quarterly and annual revenues and results of operations may vary significantly in the future due to a number of factors, which could cause the common stock price to fluctuate greatly |
| Factors that may affect our quarterly and annual results include but are not limited to: • changes in economic conditions; • disruptions or downturns in general economic activity resulting from terrorist activity and armed conflict; • competitive pricing pressure; • lengthening sales cycles; • obsolescence of technology; • increases in prices of components used to support our enterprise maintenance solutions; • loss of material contracts; and • the success of our business strategy in providing improved operating results |
| Unfavorable economic conditions and additional costs associated with a new long-term nationwide enterprise maintenance contract have adversely affected our results of operations and led to a decline in our growth rates |
| We incurred a loss from continuing operations of dlra4dtta5 million for the fiscal year ended March 31, 2006, which includes the effect of additional costs from this contract as well as a goodwill impairment charge of dlra3dtta2 million |
| This contract was terminated on April 30, 2006 |
| Our business was also negatively affected by the economic slowdown and reductions in spending by our customers in 2006 and 2005 |
| The rate at which the portions of our industry improve is critical to our overall performance |
| Many of our services are sold as part of a larger technology outsourcing solution |
| In the past, we have experienced historical growth in our business as we have assumed responsibility for maintaining our customers IT infrastructure |
| The demand for these services has been adversely affected by the effects of a weakened economy in recent periods with many businesses focusing on cost containment strategies and eliminating or curtailing maintenance |
| Although revenues increased in the fiscal year ended March 31, 2006, we have been unable to replace the contracts lost in connection with the sale of our secured networks services business which was completed on June 30, 2005 with a sufficient number of new contracts |
| As a result, there can be no assurances that either our revenues will increase over time or that we will be able to return to profitable operations |
| We depend on recurring long-term contracts for services from a limited number of large original equipment manufacturers, or OEMs, partners and end users |
| Our agreements with OEMs are in the form of master service agreements and are typically cancelable, non-exclusive and have no minimum purchase requirements |
| Factors beyond our control, including political, state and federal budget issues, price and other factors may have an impact on our ability to successfully retain contracts |
| If we are unable to generate sufficient revenues, we may have to further down size |
| On June 30, 2005, we sold our secure network services business |
| For the fiscal years ended March 31, 2005 and 2004 the secure network services business generated revenues of dlra13dtta6 million and dlra9dtta4 million, respectively |
| Contribution to overhead of this business was dlra2dtta2 million and dlra1dtta2 million for 8 _________________________________________________________________ fiscal years 2005 and 2004 |
| If we are unable to generate sufficient new business to replace the business sold, we may be forced to consolidate our operations to reduce operating expense sufficiently to regain profitable operations |
| There can be no assurances that we will be able to generate sufficient new business or that our cost containment measures in place will provide us the ability to regain profitability in the future |
| If we are unable to retain and attract highly qualified personnel to fulfill our contract obligations, our business may be harmed |
| Our most important resource is our employees |
| Although many of our personnel are highly specialized, we have not experienced material difficulties obtaining the personnel required to perform under our contracts and generally do not bid on contracts where difficulty may be encountered in providing these necessary services |
| There can be no assurance that we will not experience difficulties in the future obtaining the personnel necessary to fulfill our obligations under our contracts |
| We are subject to risks related to fluctuations in interest rates |
| We are exposed to changes in interest rates, primarily as a result of using borrowed funds to finance our business |
| The floating interest debt exposes us to interest rate risk, with the primary interest rate exposure resulting from changes in the prime rate |
| Adverse changes in the interest rates or our inability to refinance our long-term obligations may have a material negative impact on our results of operations and financial condition |
| We incur significant costs in connection with the start-up of new contracts before receiving related revenues, which could result in cash shortfalls and fluctuations in quarterly results from period to period |
| When we are awarded a contract to provide services, we may incur expenses before we receive any contract payments |
| These expenses include purchasing equipment and hiring personnel |
| For example, contracts may not fund program start-up costs and we may be required to invest significant sums of money before receiving related contract payments |
| Additionally, any resulting cash shortfall could be exacerbated if we fail to either invoice the customer or to collect fees in a timely manner |
| A cash shortfall could result in significant consequences |
| For example, it: • could increase our vulnerability to general adverse economic and industry conditions; • will require us to dedicate a substantial portion of our cash flow from operations to service payments on its indebtedness; reducing the availability of our cash flow to fund future capital expenditures, working capital, execution of its growth strategy, research and development costs and other general corporate requirements; • could limit our flexibility in planning for, or reacting to, changes in its business and industry, which may place us at a competitive disadvantage compared with competitors; and • could limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity |
| As a result, there are no assurances that additional funds, if needed, to help fund start-up costs related to a major new contract would be available or, if available on terms advantageous to us |
| Some of our contracts contain fixed-price provisions that could result in decreased profits if we fail to accurately estimate our costs |
| Some of our contracts contain pricing provisions that require the payment of a set fee by the customer for our services regardless of the costs we incur in performing these services |
| In such situations, we are exposed to the risk that it will incur significant unforeseen costs in performing the contract |
| Therefore, the financial success of a fixed-price contract is dependent upon the accuracy of our cost estimates made during contract negotiations |
| Prior to bidding on a fixed-price contract, we attempt to factor in variables including equipment costs, labor and related expenses over the term of the contract |
| However, it is difficult to predict future costs, especially for contract terms that range from 3 to 5 years |
| Any shortfalls resulting from the risks associated with fixed-price contracts will reduce our working capital and profitability |
| Our inability to accurately estimate the cost of providing services under these contracts could have an adverse effect on our profitability and cash flows |
| One of the factors contributing to the loss from continuing 9 _________________________________________________________________ operations we incurred for the year ended March 31, 2006, on long-term nationwide enterprise maintenance contract, was underestimating failure rates on certain pieces of equipment, which resulted in increased parts and labor cost and not anticipating certain service costs |
| These costs were comprised of procurement and consumption of inventory, freight costs, increases in overtime and higher than anticipated usage of subcontractors |
| If we are unable to effectively and efficiently reduce costs and replace the revenues lost as a result of the sale of our secure network services business, our results of operations may be adversely affected |
| We have taken, and continue to take, cost reduction actions |
| Our ability to complete these actions and the impact of such actions on our business may be limited by a variety of factors |
| The cost reduction actions may in turn expose us to additional service delivery risks and have an adverse impact on our sales and profitability |
| We have been reducing costs and streamlining our business process throughout our organization |
| We have reduced our physical facilities, reduced our employee population, improved our repair facilities, and reduced other costs |
| The impact of these cost-reduction actions on our revenues and profitability may be influenced by factors including, but not limited to: • our ability to complete these on-going efforts, • our ability to generate the level of savings we expect and/or that are necessary to enable us to effectively compete, • decrease in employee personnel, • ability to generate sufficient revenue and or reduce operating expenses to offset the contribution that was generated from the secure network services business which was sold on June 30, 2005, and • the performance of other parties under arrangements on which we rely to support parts or components |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud |
| During fiscal 2005, we began to evaluate our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments beginning in fiscal year ending March 31, 2008 |
| In this regard, management will be required to dedicate internal resources to (i) assess and document the adequacy of internal controls over financial reporting, and (ii) take steps to improve control processes, where appropriate |
| If we fail to correct any issues in the design or operating effectiveness of internal controls over financial reporting or fail to prevent fraud, current and potential stockholders and customers could lose confidence in our financial reporting, which could harm our business, the trading price of our stock and our ability to retain our current customers and obtain new customers |
| If we make future acquisitions of companies, technology and other assets that involve numerous risks such as difficulty integrating acquired companies, technologies and assets or generating an acceptable return on its investments |
| If we pursue opportunities to acquire companies, technologies and assets that would complement our current service offerings, expand the breadth of its markets, enhance its technical capabilities, or that may otherwise offer growth opportunities as we have done in the past |
| Acquisitions involve numerous risks, including the following: difficulties in integrating the operations, technologies, products and personnel of the acquired companies; • diversion of management’s attention from normal daily operations of our business; • difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; 10 _________________________________________________________________ • initial dependence on unfamiliar supply chains or relatively small supply partners; • insufficient revenues to offset increased expenses associated with acquisitions; and • the potential loss of key employees of the acquired companies |
| Acquisitions may also cause us to: • issue common stock or preferred stock or assume stock option plans that would dilute current shareholders’ percentage ownership; • use cash, which may result in a reduction of our liquidity; • assume liabilities; • record goodwill and non-amortizable intangible assets that would be subject to impairment testing and potential periodic impairment charges; • incur amortization expenses related to certain intangible assets; • incur large and immediate write-offs; and • become subject to litigation |
| Mergers and acquisitions of companies in our industry and related industries are inherently risky, and no assurance can be given that our acquisition strategy will be successful, that we will have the resources to pursue this strategy, and will not materially adversely affect its business, operating results, or financial condition |
| Failure to manage and successfully integrate acquisitions could harm our business and operating results in a material way |
| Even when an acquired company has already developed and marketed products or services, there can be no assurance that product enhancements will be made in a timely fashion or that all pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products or services |
| We do not expect to pay dividends on our common stock |
| We have not declared or paid any dividends on our common stock during fiscal 2006, fiscal 2005 or 2004 and do not anticipate paying any cash dividends on our common stock in the foreseeable future |
| Shareholders of our common stock may face a lack of liquidity |
| Although our common stock is currently traded on the American Stock Exchange, given the fact that our common stock is thinly traded, there can be no assurance that the desirable characteristics of an active trading market for such securities will ever develop or be maintained |
| Therefore, each investor’s ability to control the timing of the liquidation of the investment in our common stock will be restricted and an investor may be required to retain his investment in our common stock indefinitely |
| The market price of our common stock has been and is likely to continue to be volatile, which may make it difficult for shareholders to resell common stock when they want to and at prices they find attractive |
| Our share price has been volatile due, in part, to the general volatile securities market |
| Factors other than our operating results may affect our share price may include the level of perceived growth of the industries in which we participate, market expectations of our performance success of the partners, and the sale or purchase of large amounts of our common stock |
| 11 _________________________________________________________________ Provisions in our corporate charter documents could delay or prevent a change in control |
| Our Articles of Incorporation, as amended, and Bylaws contain certain provisions that would make a takeover of our company more difficult |
| Under our Articles of Incorporation, as amended, we have authorized 1cmam500cmam000 shares of preferred stock, which the Board of Directors may issue with terms, rights, preferences and designations as the Board of Directors may determine and without the vote of shareholders, unless otherwise required by law |
| Currently, there are no shares of preferred stock issued and outstanding |
| Issuing the preferred stock, depending on the rights, preferences and designations set by the Board of Directors, may delay, deter, or prevent a change in control of us |
| Issuing additional shares of common stock could result in a dilution of the voting power of the current holders of the common stock |
| This may tend to perpetuate existing management and place it in a better position to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business |