| If any of the following risks occur, the market price of our shares of common stock and other securities could decline and investors could lose all or part of their investment |
| In addition, the following risk factors and uncertainties could cause our actual results to differ materially from those projected in our forward-looking statements, whether made in this Annual Report on Form 10-K or the other documents we file with the SEC, or in our annual or quarterly reports to shareholders, future press releases, or orally, whether in presentations, responses to questions or otherwise |
| We are dependent upon the electronics industry, which is highly cyclical and suffers significant downturns in demand resulting in excess manufacturing capacity and increased price competition |
| The electronics industry, on which a substantial portion of our business depends, is cyclical and subject to significant downturns characterized by diminished product demand, rapid declines in average selling prices and over-capacity |
| This industry has experienced periods characterized by relatively low demand and price depression and is likely to experience recessionary periods in the future |
| Economic conditions affecting the electronics industry, in general, or specific customers, in particular, have adversely affected our operating results in the past and may do so in the future |
| The electronics industry is characterized by intense competition, rapid technological change, relatively short product life-cycles and pricing and margin pressures |
| These factors adversely affect our customers and we suffer similar effects |
| Our customers are primarily high-technology equipment manufacturers in the communications, automotive, high-end computing and storage, test and measurement, and aerospace and defense end markets of the electronics industry |
| Due to the uncertainty in the markets served by most of our customers, we cannot accurately predict our future financial results or accurately anticipate future orders |
| At any time, our customers can discontinue or modify products containing components manufactured by us, adjust the timing of orders and shipments or affect our mix of consolidated net sales generated from quick-turn services and premium revenues versus standard lead time production, any of which could have a material adverse effect on our results of operations |
| We may not be able to remediate material weaknesses in our internal control over financial reporting |
| of this Annual Report on Form 10-K for the fiscal year ended May 27, 2006, we have identified material weaknesses in our internal control over financial reporting, as follows: 1 |
| The Company did not maintain a sufficient complement of personnel to maintain an appropriate accounting and financial reporting organizational structure to support the activities of the Company |
| Specifically, the Company did not maintain personnel with an appropriate level of accounting knowledge, experience and training in the selection, application and implementation of generally accepted accounting principles with respect to: (i) stock-based compensation, (ii) external financial reporting, including income tax disclosures, (iii) accrued liabilities, and (iv) classification of assets held-for-sale |
| This material weakness resulted in audit adjustments to the Company’s 2006 annual consolidated financial statements and contributed to the material weakness discussed in 2 below |
| Additionally, this control deficiency could result in a misstatement of the above mentioned accounts and disclosures that would result in a material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected |
| Accordingly, management has determined that this control deficiency constitutes a material weakness |
| The Company did not maintain effective controls over the completeness, accuracy and disclosure of segment information |
| Specifically, controls over segment reporting were not effective to ensure that disclosures were determined in accordance with generally accepted accounting principles |
| This control deficiency resulted in an audit adjustment to the required disclosure included in the notes to the Company’s 2006 annual consolidated financial statements |
| Additionally, this control deficiency could 9 ______________________________________________________________________ [38]Table of Contents result in a misstatement of segment information that would result in a material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected |
| Accordingly, management has determined that this control deficiency constitutes a material weakness |
| As a result of the aforementioned material weaknesses, the PricewaterhouseCoopers LLP opinion set forth in the Internal Control over Financial Reporting section of the Report of Independent Registered Public Accounting Firm as of May 27, 2006 states that we have not maintained effective internal control over financial reporting as of May 27, 2006 |
| Although the Company is implementing remedial controls to address this matter, if we fail to remedy the material weaknesses in a timely matter, it could cause us to improperly record our financial position and results of operations and could result in us failing to meet our financial reporting responsibilities in future reporting periods |
| Our recent acquisitions may be costly and difficult to integrate, may divert management resources and may dilute shareholder value |
| As part of our business strategy, we have made and may continue to make acquisitions of, or investments in, companies, products or technologies that complement our current products, augment our market coverage, enhance our technical capabilities or production capacity or that may otherwise offer growth opportunities |
| In connection with our San Jose and Asian acquisitions or any future acquisitions or investments, we could experience: • problems integrating the purchased operations, technologies or products; • failure to achieve potential sales, materials costs and other synergies; • unanticipated expenses and working capital requirements; • difficulty achieving sufficient revenues to offset increased expenses associated with acquisitions; • diversion of management’s attention; • adverse effects on business relationships with our or the acquired company’s suppliers and customers; • difficulty in entering markets in which we have limited or no prior experience; • losses of key employees, particularly those of the acquired organization; and • problems completing anticipated technology transfers to our Asian operations |
| In addition, in connection with any future acquisitions or investments, we could: • issue stock that would dilute our current shareholders’ percentage ownership; • incur debt and assume liabilities that could impair our liquidity; • incur amortization expenses related to intangible assets; or • incur large and immediate write-offs that would reduce net income |
| Any of these factors could prevent us from realizing anticipated benefits of an acquisition or investment, including operational synergies, economies of scale and increased profit margins and revenue |
| Acquisitions are inherently risky, and any acquisition may not be successful |
| 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, product enhancements may not be made in a timely fashion |
| In addition, unforeseen issues might arise with respect to such products after the acquisition |
| If we are unable to successfully integrate Merix Asia, our business may be materially adversely affected |
| We recently acquired Eastern Pacific Circuits Limited and certain of its subsidiaries, now Merix Asia, and are attempting to integrate Merix Asia’s operations with our domestic operations |
| We have never acquired foreign operations before and have never had facilities in Asia |
| Our operations in Asia will increase our exposure to certain risks, including the risks that we may not be able to successfully attract and retain qualified personnel in 10 ______________________________________________________________________ [39]Table of Contents Asia, realign our resources for cost savings, realize any anticipated cost savings, adapt to business practices which may be different from our other business locations, integrate our accounting software systems and implement adequate internal controls and procedures |
| Under prior ownership, Merix Asia experienced difficulty in reaching and maintaining profitability |
| To date, we have not realized expected growth in sales opportunities in Asia from our domestic operations, nor have we realized expected materials cost savings by operating as a multinational business |
| If we are unable to successfully integrate Merix Asia or if Merix Asia is unable to reach and maintain profitability, our business and results of operations will likely be materially adversely affected |
| We have minority investors in our China manufacturing facilities |
| We have four printed circuit board manufacturing plants in the People’s Republic of China that are each owned by a separate Chinese company |
| While we are the majority interest holder in all of these companies, there are minority interest holders in each of them |
| The aggregate minority interest in these companies ranges from five percent to 15 percent |
| These minority holders are local investors with close ties to local economic development and other government agencies |
| In some cases, the investors lease to the Chinese operating companies the land on which the plants are located |
| In connection with the negotiation of their investments, the local investors secured certain rights to be consulted and consent to certain operating and investment matters concerning the plants and to board representation |
| Failure to maintain good relations with these investors could materially adversely affect our ability to manage the operations of one or more of the plants and our ability to realize the anticipated benefits of the Asian acquisition |
| We do not currently have options to renew our leased manufacturing facilities in the People’s Republic of China and Hong Kong |
| We have two printed circuit board manufacturing plants in the People’s Republic of China that are leased from separate Chinese companies under operating leases that do not contain lease renewal options |
| The facilities include one of our major multi-layer plants and one of our smaller single-layer facilities in the People’s Republic of China |
| While we lease these facilities from companies that have minority interests ranging from five percent to fifteen percent in our majority-owned subsidiaries in the People’s Republic of China, we cannot be assured that these minority interest holders will renew our leases |
| Failure to maintain good relations with these investors could materially adversely affect our ability to negotiate the renewal of our operating leases or continue to operate one or more of the plants |
| Further, failure to successfully renew such leases could materially adversely affect our ability to realize the anticipated benefits of the Asian acquisition |
| A significant portion of our operating expenses are relatively fixed in nature, and planned expenditures are based in part on anticipated orders |
| If we do not receive orders as anticipated or if revenue is reduced by reductions in the proportion of our quick-turn services and premium business, our operating results will be adversely affected |
| Revenue shortfalls have historically resulted in an underutilization of our installed capacity and, together with adverse pricing, have decreased our gross margins |
| Future decreases in demand or pricing will likely decrease our gross margins and have a material adverse impact on our results of operations |
| Competition in the printed circuit board market is intense and we could lose sales if we are unable to compete effectively |
| The market for printed circuit boards is intensely competitive, highly fragmented and rapidly changing |
| We expect competition to persist, which could result in continued reductions in pricing and gross margins and loss of market share |
| We believe our major competitors are United States, Asian and other international independent manufacturers of multi-layer printed circuit boards, backplanes and other electronic assemblies, and companies that offer quick-turn services |
| Those competitors include Daeduck Electronics Co, DDi Corp, Kingboard Chemical Holdings Ltd, LG Electronics, Multek Corporation (a division of Flextronics International Ltd |
| 11 ______________________________________________________________________ [40]Table of Contents Many of our competitors and potential competitors may have a number of significant advantages over us, including: • significantly greater financial, technical, marketing and manufacturing resources; • preferred vendor status with some of our existing and potential customer; and • larger customer bases |
| In addition, these competitors may have the ability to respond more quickly to new or emerging technologies, more successfully enter or adapt to existing or new end markets, may adapt more quickly to changes in customer requirements and may devote greater resources to the development, promotion and sale of their products than we can |
| Consolidation in the printed circuit board industry, which we expect to continue, could result in an increasing number of larger printed circuit board companies with greater market power and resources |
| Such consolidation could in turn increase price competition and result in other competitive pressures for us |
| We must continually develop improved manufacturing processes to meet our customers’ needs for complex, high technology products, and our basic interconnect technology is generally not subject to significant proprietary protection |
| We may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively |
| During recessionary periods in the electronics industry, our competitive advantages in providing an integrated manufacturing solution and responsive customer service may be less important to our customers than when they are in more favorable economic climates |
| If production capabilities increase in Asia, where production costs are lower, we may lose market share and our gross margins may be materially adversely affected by increased pricing pressure |
| Price competition from printed circuit board manufacturers in Asia and other locations with lower production costs may play an increasing role in the printed circuit board markets in which we compete |
| While printed circuit board manufacturers in these locations have historically competed primarily in markets for less technologically advanced products, they are expanding their manufacturing capabilities to produce higher layer count, higher technology printed circuit boards |
| Success in Asia may adversely affect our US operations |
| To the extent Asian printed circuit board manufacturers, including Merix Asia, are able to compete effectively with products historically manufactured in the United States, our facilities in the United States may not be able to compete as effectively and parts of our US operations may not remain viable |
| The cyclical nature of automotive production and sales could adversely affect Merix’ business |
| A significant portion of Merix Asia’s products are sold to customers in the automotive industry |
| As a result, Merix Asia’s results of operations may be materially and adversely impacted by market conditions in the automotive industry |
| Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences |
| In addition, automotive production and sales can be affected by labor relations issues, regulatory requirements, trade agreements and other factors |
| Any significant economic decline that results in a reduction in automotive production and sales by Merix Asia’s customers could have a material adverse effect on Merix’ business, results of operations and financial condition |
| Automotive customers have higher quality requirements and long qualification times |
| For safety reasons, our automotive customers have strict quality standards that generally exceed the quality requirements of our other customers |
| Because a significant portion of Merix Asia’s products are sold to customers in the automotive industry, if our manufacturing facilities in Asia do not meet these quality standards, our results of operations may be materially and adversely impacted |
| These automotive customers may require long periods of time to evaluate whether our manufacturing processes and facilities meet their quality standards |
| If we were to lose automotive customers due to quality control issues, we might not be able to regain those customers, or gain new automotive customers, for long periods of time, which could significantly decrease our consolidated net sales and profitability |
| 12 ______________________________________________________________________ [41]Table of Contents A small number of customers accounts for a substantial portion of our consolidated net sales and our consolidated net sales could decline significantly if we lose a major customer or if a major customer orders fewer of our products or cancels or delays orders |
| Historically, we have derived a significant portion of our consolidated net sales from a limited number of customers |
| Our five largest OEM customers, which vary from year to year, comprised 39prca, 59prca, and 68prca of our consolidated net sales during the fiscal years ended May 27, 2006, May 28, 2005 and May 29, 2004, respectively |
| While two OEM customers accounted for more than 10prca of our consolidated net sales during the fiscal years ended May 28, 2005 and May 29, 2004, only one OEM customer accounted for more than 10prca of our consolidated net sales during the fiscal year ended May 27, 2006 |
| We expect to continue to depend upon a small number of customers for a significant portion of our consolidated net sales for the foreseeable future |
| The loss of, or decline in, orders from one or more major customers could reduce our consolidated net sales and have a material adverse effect on our results of operations |
| Some of our customers are relatively small companies, and our future business with them may be significantly affected by their ability to continue to obtain financing |
| If they are unable to obtain adequate financing, they will not be able to purchase products, which, in the aggregate, would adversely affect our consolidated net sales |
| Because we do not generally have long-term contracts with our customers, we are subject to uncertainties and variability in demand by our customers, which could decrease consolidated net sales and negatively affect our operating results |
| We generally do not have long-term purchase commitments from our customers, and, consequently, our consolidated net sales are subject to short-term variability in demand by our customers |
| Customers generally have no obligation to order from us and may cancel, reduce or delay orders for a variety of reasons |
| The level and timing of orders placed by our customers vary due to: • fluctuation in demand for our customers’ products; • changes in customers’ manufacturing strategies, such as a decision by a customer to either diversify or consolidate the number of printed circuit board manufacturers used; • customers’ inventory management; and • changes in new product introductions |
| We have experienced terminations, reductions and delays in our customers’ orders |
| Future terminations, reductions or delays in our customers’ orders could lower our production asset utilization, which would lower our gross margins, decrease our consolidated net sales and negatively affect our business and results of operations |
| We rely on suppliers for the timely delivery of materials used in manufacturing our printed circuit boards, and an increase in industry demand or a shortage of or in the price of raw materials may increase the price of the raw materials we use and may limit our ability to manufacture certain products and adversely impact our gross margins |
| To manufacture our printed circuit boards, we use materials such as laminated layers of fiberglass, copper foil and chemical solutions which we order from our suppliers |
| Suppliers of laminates and other raw materials that we use may from time to time extend lead times, limit supplies or increase prices due to capacity constraints or other factors, which could adversely affect our gross margins and our ability to deliver our products on a timely basis |
| We have begun to experience, and expect that we will continue to experience, significant increases in the cost of laminate materials, copper products and oil-based or oil-derivative raw materials |
| These cost increases have had an adverse impact on our gross margins and the impact has been particularly significant on our Asian operations which maintain fixed prices arrangements with a number of large automotive customers |
| Although other manufacturers of advanced printed circuit boards also must use the single supplier and our OEM customers generally determine the type of laminates used, a failure to obtain the material from the single supplier 13 ______________________________________________________________________ [42]Table of Contents for any reason may cause a disruption, and possible cancellation, of orders for printed circuit boards using that type of laminate, which in turn would cause a decrease in our consolidated net sales |
| If we do not effectively manage the expansion of our operations, our business may be harmed, and the increased costs associated with the expansion may not be offset by increased consolidated net sales |
| We recently acquired Merix Asia and believe that additional capital investment will be required to fully realize the value of the assets we acquired |
| Any future capacity expansion with respect to our Asian facilities will expose us to significant start-up risks including: • delays in receiving and installing required manufacturing equipment; • inability to retain management personnel and skilled employees, or labor shortages in general; • difficulties scaling up production at our expanded facilities; • challenges in coordinating management of operations and order fulfillment between our US and Asian facilities; • a need to improve and expand our management information systems and financial controls to accommodate our expanded operations; • additional unanticipated costs; and • shortfalls in production volumes as a result of unanticipated start-up or expansion delays that could prevent us from meeting our customers’ delivery schedules or production needs |
| The success of our integration and anticipated expansion efforts will depend upon our ability to expand, train, retain and manage our employee base |
| In connection with our expansion efforts in Asia, we expect to require additional employees throughout the company |
| If we are unable to attract and train and retain new workers, or manage our employee base effectively, our ability to fully utilize our Asian assets will likely be impaired |
| If we are unable to effectively expand, train and manage our employee base, our business and results of operations could be adversely affected |
| In addition, if our consolidated net sales do not increase sufficiently to offset the additional fixed operating expenses associated with our Asian operations, our results of operations may be adversely affected |
| If demand for our products does not meet anticipated levels, the value of the expanded operations could be significantly impaired, which would adversely affect our results of operations and financial condition |
| We were unable to implement adequate internal controls and procedures at Merix Asia |
| Our management was unable to complete an evaluation and review of Merix Asia’s internal control over financial reporting for the year ended May 27, 2006, and accordingly, our management excluded Merix Asia from its 2006 assessment of internal control over financial reporting |
| We are required to complete an evaluation and review of Merix Asia’s internal control over financial reporting by the year ended May 26, 2007 |
| We are in the process of upgrading the accounting systems and strengthening our internal staffing and technical expertise in financial and SEC accounting and reporting at our Asia operations and our management intends to include Merix Asia in its 2007 assessment of internal control over financial reporting |
| However, if we are not able to attract and retain qualified accounting personnel or successfully upgrade our accounting systems, our management may have to exclude Merix Asia in its 2007 assessment of internal control over financial reporting, which may subject us to adverse regulatory consequences and could result in a negative reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements |
| If we fail to develop and maintain effective controls and procedures at Merix Asia, we may be unable to provide required financial information in a timely and reliable manner or otherwise comply with the standards applicable to us as a public company |
| Any failure by us to timely provide required financial information could materially and adversely impact our financial condition and the market value of our securities |
| 14 ______________________________________________________________________ [43]Table of Contents Our operations in the People’s Republic of China subject us to risks and uncertainties relating to the laws and regulations of the People’s Republic of China |
| Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization |
| No assurance can be given, however, that the government of the People’s Republic of China will continue to pursue such policies, that such policies will be successful if pursued, or that such policies will not be significantly altered from time to time |
| Despite progress in developing its legal system, the PRC does not have a comprehensive and highly developed system of laws, particularly with respect to foreign investment activities and foreign trade |
| Enforcement of existing and future laws and contracts is uncertain, and implementation and interpretation thereof may be inconsistent |
| As the Chinese legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors |
| Further, any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and management attention |
| In addition, some government policies and rules are not timely published or communicated in the local districts, if they are published at all |
| These uncertainties could limit the legal protections available to us |
| Our Chinese and Hong Kong manufacturing operations subject us to a number of risks we have not faced in the past |
| A substantial portion of our current manufacturing operations is located in the People’s Republic of China and Hong Kong |
| The geographical distances between these facilities and our US headquarters create a number of logistical and communications challenges |
| We are also subject to a highly competitive market for labor in the People’s Republic of China and Hong Kong, which may require us to increase employee wages and benefits to attract and retain employees and spend significant resources to train new employees due to high employee turnover, either of which could cause our labor costs to exceed our expectations |
| In addition, because of the location of these facilities, we could be affected by economic and political instability in the People’s Republic of China or Hong Kong, including: • lack of developed infrastructure; • currency fluctuations; • overlapping taxes and multiple taxation issues; • employment and severance taxes; • the burdens of cost and compliance with a variety of foreign laws; • difficulty in attracting and training workers in foreign markets and problems caused by labor unrest; and • less protection of our proprietary processes and know-how |
| Moreover, inadequate development or maintenance of infrastructure in the People’s Republic of China, including inadequate power and water supplies, transportation or raw materials availability, or the deterioration in the general political, economic or social environment, could make it difficult and more expensive, and possibly prohibitive, to continue to operate our manufacturing facilities in the People’s Republic of China |
| Products we manufacture may contain manufacturing defects, which could result in reduced demand for our products and liability claims against us |
| We manufacture highly complex products to our customers’ specifications |
| These products may contain manufacturing errors or failures despite our quality control and quality assurance efforts |
| Defects in the products we manufacture, whether caused by a design, manufacturing or materials failure or error, may result in delayed shipments, increased warranty costs, customer dissatisfaction, or a reduction in or cancellation of purchase orders |
| If these defects occur either in large quantities or too frequently, our business reputation may be impaired |
| Since our products are used in products that are integral to our customers’ businesses, errors, defects or other performance problems could result in financial or other damages to our customers beyond the cost of the printed 15 ______________________________________________________________________ [44]Table of Contents circuit board, for which we may be liable in some cases |
| Although we generally attempt to sell our products on terms designed to limit our exposure to warranty, product liability and related claims, in certain cases, the terms of our agreements allocate to Merix substantial exposure for product defects |
| In addition, even if we can contractually limit our exposure, existing or future laws or unfavorable judicial decisions could negate these limitations of liability provisions |
| Product liability litigation against us, even if it were unsuccessful, would be time consuming and costly to defend |
| Merix may incur material losses and costs as a result of product liability and warranty claims that may be brought against us |
| We face an inherent business risk of exposure to warranty and product liability claims in the event that our products, particularly those supplied by Merix Asia to the automotive industry, fail to perform as expected or such failure results, or is alleged to result, in bodily injury and/or property damage |
| In addition, if any of our products are or are alleged to be defective; we may be required to participate in a recall of such products |
| As suppliers become more integral to the vehicle design process and assume more of the vehicle assembly functions, vehicle manufacturers are increasingly looking to their suppliers for contributions when faced with product liability claims or recalls |
| In addition, vehicle manufacturers, who have traditionally borne the cost associated with warranty programs offered on their vehicles, are increasingly requiring suppliers to guarantee or warrant their products and may seek to hold us responsible for some or all of the costs related to the repair and replacement of parts supplied by us to the vehicle manufacturer |
| A successful warranty or product liability claim against us in excess of our available insurance coverage or established warranty and legal reserves or a requirement that we participate in a product recall may have a material adverse effect on our business |
| If we are unable to respond to rapid technological change and process development, we may not be able to compete effectively |
| The market for our products is characterized by rapidly changing technology and continual implementation of new production processes |
| The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to manufacture products that meet changing customer needs, and to successfully anticipate or respond to technological changes on a cost-effective and timely basis |
| In addition, the printed circuit board industry could encounter competition from new or revised manufacturing and production technologies that render existing manufacturing and production technology less competitive or obsolete |
| We may not be able to respond effectively to the technological requirements of the changing market |
| If we need new technologies and equipment to remain competitive, the development, acquisition and implementation of those technologies and equipment may require us to make significant capital investments |
| We may not be able to raise the necessary additional funds at all or as rapidly as necessary to respond to technological changes as quickly as our competitors |
| As we commence our work to implement a new enterprise resource planning system, unexpected problems and delays could occur and could cause disruption to the management of our business and significantly increase costs |
| In the fourth quarter of the fiscal year 2006, as part of a multi-phase process, the Company decided to implement a new enterprise resource planning, or ERP, for our world wide operations |
| As of the end of fiscal 2006, the Company selected an ERP Vendor and began the initial design and implementation during the first quarter of fiscal 2007 |
| We expect the new ERP system will become integral to our ability to accurately and efficiently maintain our books and records, record our transactions, provide critical information to our management and prepare our financial statements |
| Our work to plan, develop and implement this new ERP system will continue into the fiscal year 2008 as an active project |
| The new ERP system could eventually become more costly, difficult and time-consuming to purchase and implement than we currently anticipate |
| Implementation of the new ERP system may require us to change certain internal business practices |
| We may encounter unexpected difficulties, delays, costs or other challenges, any of which may disrupt our business |
| Corrections and improvements may be required as we continue the implementation of our new system, procedures and controls, and could cause us to incur additional costs and require additional management attention, 16 ______________________________________________________________________ [45]Table of Contents placing burdens on our internal resources |
| Any delay in the implementation of, or disruption in the transition to our new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and records and to report financial and management information on a timely and accurate basis |
| Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources and impact our ability to manage our business and our results of operations |
| If we lose key management, operations, engineering and sales and marketing personnel, we could experience reduced sales, delayed product development and diversion of management resources |
| Our success depends largely on the continued contributions of our key management, operations, engineering and sales and marketing personnel, many of whom would be difficult to replace |
| We generally do not have employment or non-compete agreements with our key personnel |
| If one or more members of our senior management or key professionals were to resign, the loss of personnel could result in loss of sales, delays in new product development and diversion of management resources, which would have a negative effect on our business |
| We do not maintain “key man” insurance policies on any of our personnel |
| Successful execution of our day-to-day business operations, including our manufacturing process, depends on the collective experience of our employees and we have experienced periods of high employee turnover |
| If high employee turnover persists, our business may suffer and we may not be able to compete effectively |
| We rely on the collective experience of our employees, particularly in the manufacturing process, to ensure we continuously evaluate and adopt new technologies and remain competitive |
| Although we are not generally dependent on any one employee or a small number of employees involved in our manufacturing process, we have experienced periods of high employee turnover generally and continue to experience significantly high employee turnover at our Asian facilities |
| If we are not able to replace these people with new employees with comparable experience, our operations could suffer as we may be unable to keep up with innovations in the industry or the demands of our customers |
| As a result, we may not be able to continue to compete effectively |
| We are exposed to the credit risk of some of our customers and also as a result of a concentration of our customer base |
| We monitor individual customer payment capability in granting open credit arrangements, seek to limit open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts |
| During periods of economic downturn in the global economy and the electronics and automotive industries, our exposure to credit risks from our customers increases |
| Although we have programs in place to monitor and mitigate the associated risk, those programs may not be effective in reducing our credit risks |
| In total, five entities represented approximately 39prca of the consolidated net trade accounts receivable balance at May 27, 2006, individually ranging from 5prca to 15prca |
| Comparatively, five entities represented approximately 67prca of the consolidated net trade accounts receivable balance at May 28, 2005, individually ranging from 5prca to 39prca |
| Our OEM customers direct our sales to a relatively limited number of electronic manufacturing service providers |
| Our contractual relationship is typically with the electronic manufacturing service providers, who are obligated to pay us for our products |
| Because we expect our OEM customers to continue to direct our sales to electronic manufacturing service providers, we expect to continue to be subject to the credit risk of a limited number of customers |
| This concentration of customers exposes us to increased credit risks |
| If one or more of our significant customers were to become insolvent or were otherwise unable to pay us, our financial condition results of operations would be harmed |
| Our failure to comply with environmental laws could adversely affect our business |
| Our operations are regulated under a number of federal, state and municipal environmental and safety laws and regulations including laws in Hong Kong and the People’s Republic of China that govern, among other things, the discharge of hazardous and other materials into the air and water, as well as the handling, storage, labeling, 17 ______________________________________________________________________ [46]Table of Contents and disposal of such materials |
| We have evaluated our environmental and safety practices to determine where deficiencies exist and are working to improve our compliance with these laws |
| For example, we are working cooperatively with the appropriate agencies in the People’s Republic of China to improve our compliance with laws related to wastewater discharges at the Huiyang and Huizhou facilities |
| When violations of environmental laws occur, we can be held liable for damages, penalties and costs of investigation and remedial actions |
| Violations of environmental laws and regulations may occur in the future as a result of our failure to have necessary permits, human error, equipment failure or other causes |
| Moreover, in connection with our acquisitions in San Jose, California and in Asia, we may be liable for any violations of environmental and safety laws at those facilities by prior owners |
| If we violate environmental laws, we may be held liable for damages and the costs of investigations and remedial actions and may be subject to fines and penalties, and revocation of permits necessary to conduct our business |
| Any permit revocations could require us to cease or limit production at one or more of our facilities, and harm our business, results of operations and financial condition |
| Even if we ultimately prevail, environmental lawsuits against us would be time consuming and costly to defend |
| Our failure to comply with applicable environmental laws and regulations could limit our ability to expand facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with these laws and regulations |
| In the future, environmental laws may become more stringent, imposing greater compliance costs and increasing risks and penalties associated with violations |
| We operate in environmentally sensitive locations and we are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups |
| Changes or restrictions on discharge limits, emissions levels, permitting requirements and material storage, handling or disposal might require a high level of unplanned capital investment, operating expenses or, depending on the severity of the impact of the foregoing factors, costly plant relocation |
| It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, results of operations and financial condition |
| We are potentially liable for contamination at our current and former facilities as well as at sites where we have arranged for the disposal of hazardous wastes, if such sites become contaminated |
| These liabilities could include investigation and remediation activities |
| It is possible that remediation of these sites could adversely affect our business and operating results in the future |
| Because we have significant foreign sales and presence, we are subject to political, economic and other risks we do not face in the domestic market |
| With the acquisition of our Asian operations, we expect sales in, and product shipments to, non-US markets to represent an increasingly significant portion of our total sales in future periods |
| Our exposure to the business risks presented by foreign economies includes: • logistical, communications and other operational difficulties in managing a global enterprise; • potentially adverse tax consequences; • restrictions on the transfer of funds into or out of a country; • longer sales and collection cycles; • potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws; • protectionist and trade laws and business practices that favor local companies; • restrictive governmental actions; • burdens and costs of compliance with a variety of foreign laws; • political and economic instability, including terrorist activities; • natural disaster or outbreaks of infectious diseases affecting the regions in which we operate or sell products; and • difficulties in collecting accounts receivable |
| 18 ______________________________________________________________________ [47]Table of Contents We are subject to risks associated with currency fluctuations, which could have a material adverse effect on our results of operations and financial condition |
| A significant portion of our costs are denominated in foreign currencies, including the Hong Kong Dollar and the Chinese Renminbi (RNB) |
| Substantially all of our consolidated net sales are denominated in US Dollars |
| As a result, changes in the exchange rates of these foreign currencies to the US Dollar will affect our cost of sales and operating margins and could result in exchange losses |
| The exchange rate of the Chinese Renminbi to the US Dollar is fixed by the Chinese government |
| While there has been some pressure by the US government to allow the value of the Renminbi to fluctuate, it is uncertain to what extent, if any, this will occur |
| To the extent that the value of the Renminbi relative to the US Dollar increases, the costs of our Chinese operations are likely to increase |
| The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted |
| We may enter into exchange rate hedging programs from time to time in an effort to mitigate the impact of exchange rate fluctuations |
| However, hedging transactions may not be effective and may result in foreign exchange hedging losses |
| Pending or future litigation could have a material adverse impact on our operating results and financial condition |
| We are currently subject to legal proceedings and claims, including a securities class action lawsuit and a shareholder derivative lawsuit |
| In each complaint, the plaintiffs seek unspecified damages |