| NU HORIZONS ELECTRONICS CORP ITEM 1A RISK FACTORS: Risk Factors: A large portion of the Company’s revenues come from sales of semiconductors, which is a highly cyclical industry, and an industry down-cycle could adversely affect its operating results |
| The semiconductor industry historically has experienced periodic fluctuations in product supply and demand, often associated with changes in technology and manufacturing capacity, and is generally considered to be highly cyclical |
| According to the Semiconductor Industry Association, the semiconductor industry experienced its worst annual downturn in history with revenue from worldwide semiconductor sales estimated to have fallen by approximately 50prca from calendar 2000 to 2001 |
| The Company’s revenue closely follows the strength or weakness of the semiconductor market |
| The Company’s total sales of electronic components in fiscal years 2006, 2005, 2004, 2003, 2002 and 2001 were dlra561cmam000cmam000, dlra467cmam000cmam000, dlra346cmam000cmam000, dlra302cmam000cmam000, dlra282cmam000cmam000 and dlra634cmam000cmam000 respectively |
| Although the Company’s and the industry’s sales have recently shown signs of an upward trend, a technology industry downcycle, particularly in the semiconductor sector, could adversely affect the Company’s operating results in the future |
| The Company’s revenues and profitability previously declined significantly from historical highs and, although revenues have shown substantial growth in recent quarters, the Company may be unable to achieve acceptable profitability at levels experienced in the past |
| The Company’s operations have been significantly and negatively affected in the past by the downturn in the technology industry and the general economy |
| From a high of approximately dlra191 million in sales in the fiscal quarter ended November 2000, the Company’s sales stabilized in the dlra70 to dlra80 million range per quarter for eight sequential quarters |
| In the fiscal year ended February 28, 2005, the Company’s revenues showed signs of a return to stability with sequential revenues of dlra118cmam000cmam000, dlra119cmam000cmam000, dlra116cmam000cmam000 and dlra114cmam000cmam000 |
| The four most recent quarters ended February 28, 2006 have shown a return to significant top line growth with sequential sales of dlra121cmam000cmam000, dlra128cmam000cmam000 and dlra147cmam000cmam000 and dlra165cmam000cmam000 |
| Nevertheless, the Company has not yet been able to achieve consistent profitability at a level deemed acceptable to management |
| The Company has determined to increase the Company’s sales force in an attempt to increase sales and profitability |
| In the event that this strategy is unsuccessful, the Company may need to adopt cost-cutting measures which may include restructuring and other charges |
| If the Company is unable to maintain its relationships with key suppliers, the Company’s sales could be adversely affected |
| In fiscal 2006, sales of products and services from each of three suppliers exceeded 10prca of the Company’s sales on a consolidated basis |
| As a result, in the event that one or more of those suppliers experience financial difficulties or those suppliers are not willing to do business with the Company in the future on terms acceptable to management, there could be a material adverse affect on the Company’s business, results of operations, financial condition or liquidity |
| Additionally, the Company’s relationships with its customers could be materially adversely affected because the Company’s customers depend on the Company’s distribution of electronic components and computer products from the industry’s leading suppliers |
| Page 7 ______________________________________________________________________ [37]Table of Contents ITEM 1A RISK FACTORS (continued): Declines in the value of the Company’s inventory could materially adversely affect the Company’s business, results of operations, financial condition or liquidity |
| The electronic components and computer products industry is subject to rapid technological change, new and enhanced products and evolving industry standards, which can contribute to decline in value or obsolescence of inventory |
| During an economic downturn it is possible that prices will decline due to an oversupply of product and, therefore, there may be greater risk of declines in inventory value |
| Although it is the policy of many of the Company’s suppliers to offer distributors like the Company certain protections from the loss in value of inventory (such as price protection, limited rights of return and rebates), the Company cannot assure you that that the vendors will choose to, or be able to, honor such agreements or that such return policies and rebates will fully compensate it for the loss in value |
| The Company cannot assure you that unforeseen new product developments or declines in the value of its inventory will not materially adversely affect the Company’s business, results of operations, financial condition or liquidity, or that the Company will successfully manage its existing and future inventories |
| The volume and timing of customer sales may vary and could materially affect the Company’s results of operations |
| The volume and timing of purchase orders placed by the Company’s customers are affected by a number of factors, including variation in demand for customers’ products, customer attempts to manage inventory, changes in product design or specifications and changes in the customers’ manufacturing strategies |
| The Company often does not obtain long-term purchase orders or commitments but instead works with its customers to develop nonbinding forecasts of future requirements |
| Based on such nonbinding forecasts, the Company makes commitments regarding the level of business that it will seek and accept, the timing of production schedules and the levels and utilization of personnel and other resources |
| A variety of conditions, both specific to each individual customer and generally affecting each customer’s industry, may cause customers to cancel, reduce or delay orders that were either previously made or anticipated |
| Generally, customers may cancel, reduce or delay purchase orders and commitments without penalty, except for payment for services rendered or products completed and, in certain circumstances, payment for materials purchased and charges associated with such cancellation, reduction or delay |
| Significant or numerous cancellations, reductions or delays in orders by customers, or any inability by customers to pay for services provided by the Company or to pay for components and materials purchased by it on such customers’ behalf, could have a material adverse effect on the Company’s operating results |
| Substantial defaults by the Company’s customers on the Company’s accounts receivable could have a significant negative impact on the Company’s business, results of operations, financial condition or liquidity |
| A significant portion of the Company’s working capital consists of accounts receivable from customers |
| If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a timely manner, the Company’s business, results of operations, financial condition or liquidity could be adversely affected |
| The electronics component and computer industries are highly competitive and if the Company cannot effectively compete, its revenue may decline |
| The market for the Company’s products and services is very competitive and subject to rapid technological advances |
| Not only does the Company compete with other distributors, it also competes for customers with some of its own suppliers |
| The Company’s failure to maintain and enhance its competitive position could adversely affect its business and prospects |
| Some of the Company’s competitors may have greater financial, personnel, capacity and other resources than it has |
| As a result, the Company’s competitors may be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements |
| Additional competition has emerged from third party logistics providers, fulfillment companies, catalogue distributors and on-line distributors and brokers |
| Additionally, prices for the Company’s products tend to decrease over their life cycle |
| Such decreases often result in decreased gross profit margins for the Company |
| There is also substantial and continuing pressure from customers to reduce their total cost for products |
| Suppliers may also seek to reduce the Company’s margins on the sale of their products in order to increase their own profitability |
| The Company expends substantial amounts on the value creation services required to remain competitive, retain existing business and gain new customers, and the Company must evaluate the expense of those efforts against the impact of price and margin reductions |
| Page 8 ______________________________________________________________________ [38]Table of Contents ITEM 1A RISK FACTORS (continued): Further, the manufacturing of electronic components and computer products is increasingly shifting to lower-cost production facilities in Asia, most notably China |
| Suppliers in Asia have traditionally had lower gross profit margins than those in the United States and Europe, and typically charge lower prices in the Asian markets for their products, which places pressure on the Company to lower its prices to meet competition |
| Thus, the Company’s consolidated gross profit margins have eroded over time, from 18dtta3prca in fiscal 2003, to 17dtta6prca in fiscal 2004, 16dtta6prca fiscal in 2005 and 15dtta8prca in fiscal 2006 |
| If the Company is unable to effectively compete in its industry or is unable to maintain acceptable gross profit margins, its business could be materially adversely affected |
| The Company may not have adequate or cost-effective liquidity or capital resources |
| The Company needs cash to make interest payments on and to refinance indebtedness, and for general corporate purposes, such as funding its ongoing working capital and capital expenditure needs |
| At February 28, 2006, the Company had cash, cash equivalents, and short-term investments of approximately $ 11 million |
| The Company’s ability to satisfy its cash needs depends on its ability to generate cash from operations and to access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control |
| The Company may in the future need to access the financial markets to satisfy its cash needs |
| Under the terms of any external financing, the Company may incur higher than expected financing expenses and become subject to additional restrictions and covenants |
| For example, the Company’s existing debt agreements contain restrictive covenants, including covenants requiring compliance with specified financial ratios and a failure to comply with these or any other covenants may result in an event of default |
| An increase in the Company’s financing costs or a breach of debt instrument covenants could have a material adverse effect on the Company |
| The agreements governing the Company’s financings contain various covenants and restrictions that, in certain circumstances, could limit its ability to: • grant liens on assets; • make restricted payments (including paying dividends on capital stock or redeeming or repurchasing capital stock); • make investments; • merge, consolidate or transfer all or substantially all of its assets; • incur additional debt; or • engage in certain transactions with affiliates |
| As a result of these covenants and restrictions, the Company may be limited in how it conducts its business and may be unable to raise additional debt, compete effectively, make investments, or engage in other activities that may be beneficial to its business |
| Products sold by the Company may be found to be defective and, as a result, warranty and/or product liability claims may be asserted against the Company which may have a material adverse effect on the Company |
| Products sold by the Company are at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated |
| Since a defect or failure in a product could give rise to failures in the end products that incorporate them (and claims for consequential damages against the Company from its customers), the Company may face claims for damages that are disproportionate to the sales and profits it receives from the products involved |
| While the Company and its suppliers specifically exclude consequential damages in their standard terms and conditions, the Company’s ability to avoid such liabilities may be limited by the laws of some of the countries where it does business |
| The Company’s business could be materially adversely affected as a result of a significant quality or performance issue in the products sold by the Company, if it is required to pay for the damages that result |
| Although the Company currently has product liability insurance, such insurance is limited in coverage and amount |
| The Company’s non-US locations represent a significant and growing portion of the Company’s revenue, and consequently, we are increasingly exposed to risks associated with operating internationally |
| In fiscal 2006, approximately 25prca of the Company’s sales came from the Company’s operations outside the United States |
| During fiscal 2005, 2004, 2003 and 2002 approximately 24prca, 18dtta5prca, 8prca and 11dtta8prca of sales, respectively, were from locations outside the United States |
| Most notable in this growth of non-US sales is the increasing volume of sales activity in the Asia region, which accounted for approximately 22dtta3prca of consolidated sales in fiscal 2006 and 21dtta4prca in fiscal 2005 |
| As a result of the Company’s foreign sales and locations, the Company’s operations are subject to a variety of risks that are specific to international operations, including the following: • potential restrictions on transfers of funds; Page 9 ______________________________________________________________________ [39]Table of Contents ITEM 1A RISK FACTORS (continued): • foreign currency fluctuations; • import and export duties and value added taxes; • import and export regulation changes that could erode profit margins or restrict exports; • changing foreign tax laws and regulations; • potential military conflicts; • inflexible employee contracts in the event of business downturns; and • the burden and cost of compliance with foreign laws |
| Manufacturing of electronic component and computer products is increasingly shifting to lower-cost production facilities in Asia, and most notably the People’s Republic of China |
| The Company’s business and prospects have been and could continue to be adversely affected by the shift to the Asian marketplace |
| In addition, we have operations in several locations in emerging or developing economies that have a potential for higher risk |
| The Company may not adequately manage its international operations |
| The Company anticipates that its foreign subsidiaries will engage in substantial regional operations |
| The Company currently manages its Asian and European subsidiaries, and plans to continue to manage future foreign subsidiaries, on a decentralized basis, with local and regional management retaining responsibility for day-to-day operations, profitability and the growth of these subsidiaries |
| If the Company fails to maintain or implement effective controls, it may experience inconsistencies in the operating and financial practices among its subsidiaries, which may harm its business, results of operations and liquidity |
| If the Company is unable to recruit and retain key personnel necessary to operate its businesses, its ability to compete successfully will be adversely affected |
| The Company is heavily dependent on its current executive officers, management and technical personnel |
| The loss of any key employee or the inability to attract and retain qualified personnel could adversely affect the Company’s ability to execute its current business plans |
| Competition for qualified personnel is intense, and the Company might not be able to retain its existing key employees or attract and retain any additional personnel |
| If the Company fails to maintain an effective system of internal controls or discovers material weaknesses in its internal controls over financial reporting, it may not be able to report its financial results accurately or timely or detect fraud, which could have a material adverse effect on its business |
| An effective internal control environment is necessary for the Company to produce reliable financial reports and is important in its effort to prevent financial fraud |
| The Company is required to periodically evaluate the effectiveness of the design and operation of its internal controls over financial reporting |
| These evaluations may result in the conclusion that enhancements, modifications or changes to internal controls are necessary or desirable |
| While management evaluates the effectiveness of the Company’s internal controls on a regular basis, these controls may not always be effective |
| There are inherent limitations on the effectiveness of internal controls including collusion, management override, and failure of human judgment |
| In addition, control procedures are designed to reduce rather than eliminate business risks |
| If the Company fails to maintain an effective system of internal controls or if management or the Company’s independent registered public accounting firm was to discover material weaknesses in the Company’s internal controls, it may be unable to produce reliable financial reports or prevent fraud and it could have a material adverse effect on the Company’s business |
| In addition, the Company may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or NASDAQ Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Company’s financial statements, which could cause the market price of its common stock to decline or limit the Company’s access to other forms of capital |
| The Company relies heavily on its internal information systems which, if not properly functioning, could materially adversely affect the Company’s business |
| The Company’s current global operations reside on the Company’s technology platforms |
| Any of these systems are subject to electrical or telecommunications outages, computer hacking or other general system failure |
| Failure of its internal information systems or material difficulties in upgrading its global financial system could have material adverse effects on the Company’s business |