| LASERCARD CORP ITEM 1A RISK FACTORS OUR CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO LOSSES During fiscal year 2006 and each of the previous two fiscal years, we have derived more than 60prca of our optical memory card and drive-related revenues from five programs ― two US government programs and three foreign government programs |
| Due to the lengthy sales cycles, we believe that these programs, with perhaps the addition of one or two other foreign programs, will be the basis for a substantial majority of our revenues in the near-term |
| The loss of or reductions in purchases by any one customer due to program cutbacks, competition, or other reasons would materially reduce our revenue base |
| Annual or quarterly losses occur when there are material reductions, gaps or delays in card orders from our largest US or foreign government programs or if such programs were to be reduced in scope, delayed, canceled, or not extended and not replaced by other card orders or other sources of income |
| PRIOR TO THE QUARTER ENDED DECEMBER 31, 2005 WE INCURRED NET LOSSES DURING THE PREVIOUS ELEVEN QUARTERS AND MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO SUSTAIN PROFITABILITY Although we generated dlra3dtta1 million of profit during the third and fourth quarters of fiscal year 2006, we incurred losses during the first two quarters of fiscal year 2006 aggregating dlra2dtta3 million, and we incurred a loss of dlra8dtta9 million in fiscal year 2005 and dlra12dtta4 million in fiscal year 2004, and had an accumulated deficit of dlra26 million at March 31, 2006 |
| There can be no assurance that we will generate enough card revenues in the near term to maintain profitability |
| We are relying upon our optical memory card technology to generate future product revenues, earnings, and cash flows |
| If alternative technologies emerge or if we are otherwise unable to compete, we may not be able to achieve or sustain profitability on a quarterly or annual basis |
| Annual or quarterly losses would also continue if increases in product revenues or license revenues do not keep pace with increased selling, general, administrative, research and engineering expenses and the depreciation and amortization expenses associated with capital expenditures |
| OUR PROGRAM WITH ITALY, WHICH WE BELIEVE WILL BE OUR LARGEST CUSTOMER FOR THE NEXT FEW YEARS, MAY BE DELAYED OR CANCELLED FOR REASONS OUTSIDE OUR CONTROL WHICH WOULD CAUSE US TO HAVE LESS REVENUE THAN PLANNED AND WOULD LIKELY LEAD US TO INCUR OPERATING LOSSES The Company believes that the Italian CIE and PSE card programs will be our largest customer for the next few years, comprising a significant portion of future revenues |
| Sales of cards and drives for the government of Italy for its CIE and PSE card programs represented 31prca of total revenue for fiscal year 2006, 26prca for fiscal year 2005, and 22prca for fiscal year 2004, while the current backlog for CIE and PSE cards amounts to about one-quarter of total optical memory card backlog |
| We are increasing capacity to meet the anticipated demand |
| However, there can be no assurance that demand will increase as anticipated by the Company |
| We would most likely incur losses if Phase 3 of this program, which is full implementation, was to be delayed, canceled, not extended, or not implemented at the level foreseen or if the government were to change its technology decision and no longer use optical memory cards |
| While during Phase 2, selected Italian cities have been issuing cards and testing the card issuing process, full implementation in Phase 3 is dependent upon card issuance infrastructure developments being successfully undertaken and the national ID card system functioning as designed, of which there can be no assurance |
| Also, if Laser Memory Card SPA of Italy, our VAR customer for this program, were to discontinue participation in this program or discontinue operations, interruptions could occur in orders or shipments for this program until a replacement could be found |
| Overcoming some of these issues may be difficult and complex and involve third parties, which could be time consuming and expensive and lead to delays for implementation of Phase 3 |
| OUR CONTRACT WITH THE US GOVERNMENT, ONE OF OUR TWO LARGEST ULTIMATE CUSTOMERS, EXPIRED IN NOVEMBER 2005 AND IF NOT RENEWED COULD RESULT IN ORDER DELAYS WHICH WOULD LIKELY LEAD US TO INCUR OPERATING LOSSES EVEN IF A NEW CONTRACT IS ISSUED, THE US GOVERNMENT HAS THE RIGHT TO DELAY ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT IN ORDER DELAYS AND POSSIBLY IN OPERATING LOSSES Our fiscal year 2006 revenues included sales of approximately dlra9dtta8 million of Green Cards and Laser Visa BCCs, and comprised 24prca of our revenues |
| The Company expects these revenues to continue at approximately dlra9dtta5 million annually (dlra7dtta5 million for Green Cards and dlra2dtta0 million for Laser Visa BCCs) if the government continues to use the Company’s cards in these programs, continues to personalize cards at that rate and continues to maintain an inventory level equal to six-months of usage |
| However, our US government subcontract 17 _________________________________________________________________ expired in November 2005 |
| While we have backlog as of March 31, 2006, for dlra3dtta7 million in optical memory cards deliverable through August 2006, further orders will require a new contract or a purchase order |
| Based on events to date, the Company believes that a follow-on contract or purchase order will be issued prior to the completion of deliveries from backlog; however, there is no assurance that a follow-on contract or purchase order will be issued by the US government |
| Under US government procurement regulations, even with a contract or purchase order in place, the government reserves certain rights, such as the right to withhold releases, to reduce the quantities released, extend delivery dates, reduce the rate at which cards are issued, and cancel all or part of its unfulfilled purchase orders |
| We would most likely incur losses if both of our largest US government programs were to be delayed, canceled, or not extended or if the government were to change its technology decision and no longer use optical memory cards |
| The US government acting through its prime contractor delayed orders for Green Cards during fiscal year 2004 due to a design change and again in the first part of fiscal year 2005 because of excess inventory, which resulted in a gap in production of several months, and which in turn significantly and adversely affected our operating results for the first half of fiscal year 2005 |
| Any future excess inventory held by the US government, delayed funding, slower than anticipated program volume, or any future changes to the design of the cards may result in future gaps in orders or production which may negatively impact our operating results |
| Our US government card deliveries depend upon the issuance of corresponding order releases by the government to its prime contractor and then to us |
| If Anteon International Corporation, our VAR customer and the US government prime contractor for this program, were to discontinue participation in this program or discontinue operations, interruptions could occur in orders or shipments for this program until a replacement could be found |
| OUR PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS IN THE US OR ABROAD AND IF THE ITALIAN NATIONAL ID PROGRAM IS NOT IMPLEMENTED AS ANTICIPATED Even if our US Government subcontract is renewed, we do not expect future growth from the US Green Card and Laser Visa BCC programs as we expect their steady state revenue to average dlra9dtta5 million annually, about the same as purchased in fiscal year 2006 |
| We expect our revenues from Italian CIE and PSE cards to be between dlra20 million and dlra30 million for fiscal year 2007, compared with about dlra12 million during fiscal year 2006 |
| During full implementation, we expect our revenues from these programs to grow to reach approximately dlra40 million per year |
| In order for us to achieve our overall revenue growth goal, we will need not only for these programs to continue and reach their anticipated levels, of which there can be no assurance, but we will also need to win new business in the US and abroad |
| Emerging optical memory card programs or prospective applications include motor vehicle registration cards in a few states in India, foreign resident identification cards in Costa Rica, and national ID cards for a Middle Eastern country |
| There can be no assurance that sizable orders will follow or even if ordered we will be successful in shipping products for any of these programs, nor can there be any assurance that we will be able to win any other new business in the US or abroad which is necessary to grow our business to the level we desire |
| SINCE THE SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE DIFFICULTY PREDICTING WHEN NEW BUSINESS WILL CONTRIBUTE TO REVENUE GROWTH Obtaining substantial orders usually involves a lengthy sales cycle, requiring marketing and technical time and expense with no guarantee that substantial orders will result |
| This long sales cycle results in uncertainties in predicting operating results, particularly on a quarterly basis |
| In addition, since our major marketing programs involve the US government and various foreign governments and quasi-governmental organizations, additional uncertainties and extended sales cycles can result |
| Factors which increase the length of the sales cycle include government regulations, bidding procedures, budget cycles, and other government procurement procedures, as well as changes in governmental policy-making |
| THE TIMING OF OUR US GOVERNMENT REVENUES COULD BE EXTREMELY VOLATILE AND CANNOT BE PREDICTED BECAUSE WE REQUIRE A FIXED SHIPMENT SCHEDULE IN ORDER TO RECORD REVENUE WHEN WE DELIVER CARDS TO A VAULT, OTHERWISE WE RECOGNIZE REVENUE WHEN THE CARDS ARE SHIPPED OUT OF A VAULT OR WE RECEIVE A FIXED SHIPMENT SCHEDULE FROM THE GOVERNMENT We recognize revenue from product sales when the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the fee is fixed or determinable; and (d) collectibility is reasonably assured |
| Our US government subcontract requires delivery of cards to a secure vault built on our premises |
| Deliveries are made into the vault on a production schedule specified by the government or one of its specified agents |
| When the cards are delivered to the vault, all title and risk of ownership are transferred to the government |
| At the time of delivery, the prime contractor is invoiced, with payment due within thirty days |
| The contract does not provide for any return provisions other than for warranty |
| We recognize revenue when the cards are 18 _________________________________________________________________ delivered into the vault because we have fulfilled our contractual obligations and the earnings process is complete |
| However, if we do not receive a shipment schedule for shipment from the vault, revenue is not recognized until the cards are shipped from the vault |
| In addition, revenue recognition for future deliveries into the vault would be affected if the US government cancels the shipment schedule |
| As a result, our revenues may fluctuate from period to period if we do not continue to obtain shipment schedules under this subcontract or if the shipment schedules are cancelled |
| In this case, we would no longer recognize revenue when cards are delivered to the vault, but instead such revenue recognition would be delayed until the cards are shipped from the vault to the US government |
| WE COULD EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME There can be no assurance that we will be able to meet our projected card manufacturing capacity if and when customer orders reach higher levels |
| We have made and intend to continue to make significant capital expenditures to expand our card manufacturing capacity |
| For example, we plan dlra9 million of capital expenditures during the next twelve months |
| However, since customer demand is difficult to predict, we may be unable to ramp up our production quickly enough to timely fill new customer orders |
| This could cause us to lose new business and possibly existing business |
| In addition, if we overestimate customer demand, we could incur significant costs from creating excess capacity which was the case during fiscal year 2005 |
| We may experience manufacturing complications associated with increasing our manufacturing capacity of cards and drives, including the adequate production capacity for sheet-lamination process cards to meet order requirements and delivery schedules |
| We may also experience difficulties implementing new manufacturing processes, meeting customers’ quality or standards requirements, or outsourcing some of our manufacturing |
| The addition of fixed overhead costs increases our breakeven point and results in lower profit margins unless compensated for by increased product sales |
| When purchasing raw materials for our anticipated optical card demand, we take into consideration the order-to-delivery lead times of vendors and the economic purchase order quantity for such raw materials |
| If we over-estimate customer demand, excess raw material inventory can result |
| IF WE ARE UNABLE TO BUY RAW MATERIALS IN SUFFICIENT QUANTITIES AND ON A TIMELY BASIS, WE WILL NOT BE ABLE TO DELIVER PRODUCTS TO CUSTOMERS ON TIME WHICH COULD CAUSE US TO LOSE CUSTOMERS, AND OUR REVENUES COULD DECLINE We depend on sole source and limited source suppliers for optical card raw materials |
| Such materials include plastic films used in optical memory card production, which are available from one supplier in the US and from multiple foreign suppliers |
| Processing chemicals, inks, and bonding adhesives are obtained from various US and foreign suppliers |
| Certain photographic films are commercially available solely from Eastman Kodak Company, of the United States |
| No assurance can be given that Kodak will continue to supply such photographic films on a satisfactory basis and in sufficient quantities |
| If Kodak were to discontinue manufacturing the film from which our optical media is made, we would endeavor to establish an alternate supplier for such film, although the purchase price could increase and reliability and quality could decrease from a new supplier |
| No assurance can be given that there will be adequate demand to attract a second source |
| In addition, an alternate supplier could encounter technical issues in producing the film as there may be know-how and manufacturing expertise which Kodak has developed over the years which an alternate supplier may have difficulty to replicate |
| We have pre-purchased a long-term supply of the film used to produce mastering loops for prerecording cards |
| With regard to the film from which our optical media is made, we currently have an order which Kodak has accepted with deliveries scheduled through October 2006 |
| If Kodak announced that it was no longer going to sell film, we would request that Kodak provide us with a last-buy opportunity which we would plan to take maximum advantage of, although no assurance can be given that Kodak would provide us with such an opportunity |
| We have film on hand plus on order that we believe would provide us with an adequate supply to meet anticipated demand until we could locate and begin volume purchases from a second source |
| AN INTERRUPTION IN THE SUPPLY OF READ/WRITE DRIVE PARTS OR DIFFICULTIES ENCOUNTERED IN READ/WRITE DRIVE ASSEMBLY COULD CAUSE A DELAY IN DELIVERIES OF DRIVES AND OPTICAL MEMORY CARDS AND A POSSIBLE LOSS OF SALES, WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS Several major components of our read/write drives are designed specifically for our read/write drive |
| For example, the optical recording head for the current drive is a part obtained from one supplier; and at current production volumes, it is not economical to have more than one supplier for this custom component |
| The ability to produce read/write drives in high-volume production, if required, will be dependent upon maintaining or developing sources of supply of components that meet our requirements for high volume, quality, and cost |
| In addition, we could encounter quality control or other production problems at high-volume production of read/write drives |
| We are also investing in research and engineering in an effort to develop new drive products |
| 19 _________________________________________________________________ IF WE ARE UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE AND ALSO A READ-ONLY DRIVE, WE COULD LOSE POTENTIAL NEW BUSINESS The price of our read/write drive product line ranges from dlra1cmam800 to approximately dlra2cmam500 depending on features and quantity purchased |
| We believe the price of our drives is competitive in applications requiring a large number of cards per each drive, because the relatively low cost for our cards offsets the high cost per drive when compared with our major competition, IC card systems |
| In addition, we have undertaken a product development program for a portable read-only drive that has been sampled in limited quantities at prices less than dlra1cmam000, which we believe would increase our prospects for winning future business |
| However, there can be no assurance that our development program will be successful, that volume production of any new design will occur in the near term, or that significantly lower manufacturing costs or increased sales will result |
| WE MAY NOT BE ABLE TO ADAPT OUR TECHNOLOGY AND PRODUCTS TO COMMERCIAL APPLICATIONS WHICH GENERATE MATERIAL AMOUNTS OF REVENUE AND PROFIT THIS WOULD LIMIT THE FUTURE GROWTH OF OUR BUSINESS TO THE GOVERNMENT SECTOR AND THE LACK OF DIVERSIFICATION EXPOSES US TO ENHANCED RISK OF COMPETITION We are seeking commercial applications for our optical memory products in order to lessen our dependence upon the government sector |
| Our efforts to develop OpticalProximity^TM access cards are one example |
| We may be unsuccessful in these efforts in which case we would not obtain the diversity of revenues we are seeking for the future |
| If the use of our technology remains limited to secure ID card applications for government use, then we are more susceptible to other technologies and products making in-roads or to political pressures or changing laws |
| IF WE ARE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES IN THE DATA CARD INDUSTRY AND IN THE INFORMATION TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE FOR FUTURE BUSINESS The information technology industry is characterized by rapidly changing technology and continuing product evolution |
| The future success and growth of our business will require the ability to maintain and enhance the technological capabilities of the LaserCard® product line |
| There can be no assurance that the Company’s products currently sold or under development will remain competitive or provide sustained revenue growth |
| SEVERAL OF OUR FOREIGN PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES TECHNOLOGIES OF THIRD PARTIES SOME TIMES THESE THIRD PARTY TECHNOLOGIESARE INTEGRATED WITH OUR CARDS BY OUR SYSTEMS INTEGRATOR CUSTOMER OR SUBCONTRACTOR WE THEREFORE HAVE VARYING DEGREES OF CONTROL OVER THE OVERALL SYSTEM WHICH COULD LEAD TO TECHNICAL AND COMPATIBILITY ISSUES WHICH ARE DIFFICULT, EXPENSIVE, AND TIME CONSUMING TO SOLVE THIS COULD CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND FAULT IN OPTICAL CARDS AND SWITCH TO OTHER SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS NOT THE ROOT CAUSE In certain of our current foreign programs such as Italy, India, and a Middle Eastern country, and possibly in future other programs, various third party technologies such as contact or contactless chips will be added to our cards |
| The embedding or addition of other technologies to the LaserCard® optical memory card, especially when contracted to independent third parties, could potentially lead to technical, compatibility and other issues |
| In such circumstances, it may be difficult to determine whether a fault originated with the Company’s technology or that of a co-supplier or the person embedding or adding the third party technology to our cards |
| If such faults occur, they could be difficult, expensive, and time-consuming to resolve |
| Such difficulties could lead to our ultimate customers, the foreign governments, switching to other technologies even though optical technology is not the root cause |
| The resulting loss of customers would adversely affect our revenues |
| IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE REVENUES, OR INCREASE COSTS We use a combination of patent, trademark, and trade secret laws, confidentiality procedures, and licensing arrangements to establish and protect our proprietary rights |
| Our existing and future patents may not be sufficiently broad to protect our proprietary technologies |
| Despite our efforts to protect proprietary rights, we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect proprietary rights as fully as US law |
| Any patents we may obtain may not be adequate to protect our proprietary rights |
| Our competitors may 20 _________________________________________________________________ independently develop similar technology, duplicate our products, or design around any of our issued patents or other intellectual property rights |
| Litigation may be necessary to enforce our intellectual property rights or to determine the validity or scope of the proprietary rights of others |
| This litigation could result in substantial costs and diversion of resources and may not ultimately be successful |
| We cannot predict whether the expiration or invalidation of our patents would result in the introduction of competitive products that would affect our future revenues adversely |
| However, since our technology is now in the commercial stage, our know-how and experience in volume card production, system development and software capabilities, brand-name recognition within our card markets, and dominant-supplier status for optical memory cards are of far greater importance than our patents |
| At this time, we believe that our existing patent portfolio is helpful but is no longer essential for maintaining the LaserCard®apstas market position |
| THE MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW Our optical memory cards may compete with optical memory cards that can be manufactured and sold by three of our licensees (although none is currently doing so) and with other types of portable data storage cards and technologies used for the storage and transfer of digital information |
| These may include contact or contactless integrated circuit (IC) chip cards; 2-dimensional bar code cards and symbology cards; thick, rigid CD or DVD-read only cards or recordable cards; radio frequency, or RFID cards; and small, digital devices such as data-storage keys, tokens, and small cards and tags |
| The financial and marketing resources of some of the competing companies are greater than our resources |
| Competitive product factors include system/card portability, interoperability, price-performance ratio of cards and associated equipment, durability, environmental tolerance, and card security |
| Although we believe our cards offer key technological and security advantages for certain applications, the current price of optical card read/write drives is a competitive disadvantage in some of our targeted markets |
| However, we believe the price of our drives is competitive in applications requiring a large number of cards per each drive, because the relatively low cost for our cards offsets the high cost per drive when compared with our major competition, IC card systems |
| In countries where the telecommunications infrastructure is extensive and low cost, centralized databases and wide-area networks may limit the penetration of optical memory cards |
| These trends toward Internet, intranet, and remote wireless networks will in some cases preclude potential applications for our cards |
| THE PRICE OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY The price of our common stock is subject to significant volatility, which may be due to fluctuations in revenues, earnings, liquidity, press coverage, financial market interest, low trading volume, and stock market conditions, as well as changes in technology and customer demand and preferences |
| Also, since we have a relatively low number of shares outstanding (approximately 11 million shares) there will be more volatility in our stock if one or two major holders, for example, large institutional holders, attempt to sell a large number of shares in the open market |
| There also is a large short position in our stock, which can create volatility when borrowed shares are sold short and later if shares are purchased to cover the short position |
| Furthermore, our trading volume is often small, meaning that a few trades may have disproportionate influence on our stock price |
| In addition, someone seeking to liquidate a sizeable position in our stock may have difficulty doing so except over an extended period or privately at a discount |
| Thus, if one or more stockholders were to sell or attempt to sell a large number of its shares within a short period of time, such sale or attempt could cause our stock price to decline |
| WE ARE SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE RATES Part of the manufacturing process of the LaserCard products that we sell in Italy takes place in our operations in Germany |
| Also, some of the raw materials we use to manufacture optical memory cards are sourced in Europe |
| These costs are denominated in euros, the currency used in much of Europe |
| However, when we sell our finished products the prices that we charge are denominated in United States dollars |
| Accordingly, we are subject to exposure if the exchange rate for euros increases in relation to the United States dollar |
| During fiscal year 2005, we experienced a dlra0dtta2 million loss on foreign currency exchange |
| The losses on foreign currency exchange for both fiscal years 2006 and 2004 were immaterial |
| As of March 31, 2006, we had not entered into a forward exchange contract to hedge against or potentially minimize the foreign currency exchange risk related to transactions other than those related to intercompany and external payables and receivables |
| 21 _________________________________________________________________ WE SOLD A SECOND-SOURCE CARD MANUFACTURING LICENSE TO GLOBAL INVESTMENTS GROUP (GIG), UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP AND TRAINING SERVICES IF WE ARE NOT SUCCESSFUL OR IF GIG IS UNABLE TO FINANCE THIS OPERATION, THE SECOND-SOURCE SUPPLY OF OPTICAL CARDS WILL NOT MATERIALIZE IF WE AND GIG ARE SUCCESSFUL, THE SECOND-SOURCE WILL COMPETE WITH US FOR BUSINESS If GIG is not successful, but current and potential customers require a second source of optical memory cards (which is a common business practice) they could decide to use alternate technology cards, such as chip cards, that have multiple-source suppliers |
| We are obligated to deliver approximately dlra12 million worth of the required manufacturing equipment and installation support to GIG for its to-be-built new card manufacturing facility in Slovenia, to provide a targeted initial manufacturing capacity of 10 million optical cards annually |
| If GIG is successful, this will supply a second source for optical memory cards |
| We will also be assigning personnel to be on site during the license term to assist with quality, security, and operational procedures, with a mutual goal that the facility and the cards made in Slovenia conform to our standards |
| If cards are not produced in conformance with our quality standards, the reputation and marketability of optical memory card technology could be damaged |
| If the factory does not become operational and produce quality cards in high volume, or if GIG is unable to raise sufficient capital to build, equip and operate this facility, we would not obtain the hoped-for benefits--including ongoing royalties, sales of raw materials to GIG, expansion of the European market, and a bona fide second source for optical memory cards |
| In these regards, GIG currently is overdue in paying us approximately dlra5dtta9 million under our Agreement with GIG most recently committing to complete the payment by the end of June |
| The Company has begun to investigate alternative courses of action should GIG fail to make such payment |
| GIG also has not identified a site for the facility, several dates originally proposed by GIG for doing so having passed |
| On the other hand, if and when the factory is successfully manufacturing the cards in high volume, it will compete against us for business in certain territories, which could reduce our potential card revenues if the market does not expand |
| Revenue will be recognized over the remaining term of the agreement beginning when the equipment has been accepted and training completed, which date is dependent on GIG providing a facility in Slovenia |
| The Company could incur greater expenses than it anticipates for the purchase and installation of the required manufacturing equipment thereby reducing cash and anticipated profits |
| WE MAY NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT US FROM SUCCEEDING We may not be able to retain our key personnel or attract other qualified personnel in the future |
| Our success will depend upon the continued service of key management personnel |
| The loss of services of any of the key members of our management team, including our chief executive officer, chief operating officer, the managing directors of our German operations, vice president of business development or our vice president of finance and treasurer, or our failure to attract and retain other key personnel could disrupt operations and have a negative effect on employee productivity and morale, thus decreasing production and harming our financial results |
| In addition, the competition to attract, retain and motivate qualified personnel is intense |
| OUR CALIFORNIA FACILITIES ARE LOCATED IN AN EARTHQUAKE ZONE AND THESE OPERATIONS COULD BE INTERRUPTED IN THE EVENT OF AN EARTHQUAKE, FIRE, OR OTHER DISASTER Our card manufacturing, corporate headquarters, and drive assembly operations, administrative, and product development activities are located near major earthquake fault lines |
| In the event of a major earthquake, we could experience business interruptions, destruction of facilities and/or loss of life, all of which could materially adversely affect us |
| Likewise, fires, floods, or other events could similarly disrupt our operations and interrupt our business |
| FOREIGN GOVERNMENT INTERVENTION COULD ADVERSELY AFFECT RESULTS OF OPERATIONS Economic, political and other risks associated with foreign operations could adversely affect our international sales |
| We sell our products worldwide and therefore, our business could be subject to risks due to changes in a country’s or region’s political or economic conditions |
| Differing tax laws and changes in those laws may also affect future results of our operations |
| PANDEMICS THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS The occurrence of a pandemic such as the Bird Flu coupled with the lack of government readiness and support in those countries where we do business could temporarily impede our revenue growth |
| ACTS OF TERRORISM OR WAR MAY ADVERSELY AFFECT OUR BUSINESS Acts of terrorism, acts of war, and other events may cause damage or disruption to our properties, business, employees, suppliers, distributors, 22 _________________________________________________________________ resellers, and customers, which could have an adverse effect on our business, financial condition, and operating results |
| Such events may also result in an economic slowdown in the United States or elsewhere, which could adversely affect our business, financial condition, and operating results |
| WE ARE PLANNING TO IMPLEMENT ENTERPRISE RESOURCE PLANNING (“ERP”) SOFTWARE DURING CALENDAR 2006 TO PROVIDE US THE INFORMATION WE NEED TO BETTER MANAGE AND PLAN OUR BUSINESS AND ENHANCE OUR FINANCIAL REPORTING IF THIS IMPLEMENTATION IS UNSUCCESSFUL OR DELAYED, IT COULD ADVERSELY IMPACT RATHER THAN ENHANCE OUR ABILITY TO MANAGE AND GROW OUR BUSINESS Our ability to successfully implement our business plan and comply with regulations requires an effective planning and management process |
| We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future, especially as we integrate our German subsidiary’s management and accounting information system |
| We are planning to implement ERP software during calendar 2006 to provide us the information we need to better manage and plan our business and enhance our financial reporting |
| Such implementations are costly and require personnel time and attention in order to succeed and can be delayed and problematic |
| Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information on a timely and accurate basis |
| AS A RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION, WHICH COULD HARM OUR REPUTATION We have completed the first and second annual evaluation of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2005 and 2006 |
| Although our assessment, testing and evaluation resulted in our conclusion that as of both March 31, 2006 and 2005, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in future periods |
| Because of the inherent limitation of disclosure controls, no evaluation of such controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected |
| If our internal controls are found to be ineffective in future periods, our reputation could be harmed |
| We may incur additional expenses and commitment of management’s time in connection with further evaluations, either of which could materially increase our operating expenses and accordingly reduce our net income |
| BEGINNING WITH OUR FISCAL YEAR 2007, WE WILL BE REQUIRED TO RECORD COMPENSATION EXPENSE FOR STOCK OPTIONS AS A RESULT OF THE RESULTING SIGNIFICANT EXPENSES, IT WILL BE MORE DIFFICULT FOR US TO CONTINUE TO BE PROFITABLE AND ANY PROFITABILITY WE ACHIEVE WILL BE REDUCED SIGNIFICANTLY In December 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard 123R that requires the fair value of all equity-based awards granted to employees be recognized in the statement of operations as compensation expense, for fiscal years beginning after December 15, 2005, rather than just to disclose such expense in a footnote as we have done in the previous years |
| Given our outstanding options and our current intention to continue to grant options in the future as an incentive and retention tool for our employees, the adoption of this accounting standard will reduce our profitability as measured by generally accepted accounting principles (GAAP) which may adversely affect our stock price |
| Such adoption could lead us to supplement our GAAP reports with non-GAAP measures in order to provide analysts with the same metrics we use to measure our business |
| Such adoption could also lead us to reduce or otherwise alter our use of stock options which we believe help align our employees’ long-term interests with increasing our enterprise value |
| This could, in turn, hurt our ability to recruit employees and retain existing employees and directors |