| SIGMATRON INTERNATIONAL INC ITEM 1A RISK FACTORS |
| 10 ITEM 1 A RISK FACTORS The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K Any of the following risks could materially adversely affect our business, operations, industry or financial position or our future financial performance |
| While the Company believes it has identified and discussed below the key risk factors affecting its business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect its business, operations, industry, financial position and financial performance in the future |
| THE COMPANY &apos S ABILITY TO SECURE AND MAINTAIN SUFFICIENT CREDIT ARRANGEMENTS IS KEY TO ITS CONTINUED OPERATIONS The Company entered into an Amended Loan and Security Agreement in July 2005, which provided for a revolving credit facility |
| The maximum borrowing limit under the amended revolving credit facility is limited to the lesser of: (i) dlra17cmam000cmam000 or (ii) an amount equal to the sum of 85prca of the receivable borrowing base and the lesser of dlra8cmam500cmam000 or varying percentages of the inventory base |
| The Amended Loan and Security Agreement expires on June 30, 2008, and includes certain financial covenants |
| The Amended Loan and 10 Security Agreement also provides a four year term loan in the amount of dlra3cmam000cmam000 |
| Interest on the term loan accrues at 5dtta75prca and interest only is due each quarter through June 30, 2006 |
| Quarterly principal payments of dlra250cmam000 are due beginning June 30, 2006 |
| In September 2005 the Company further amended the above described credit facility to increase the revolving credit facility from dlra17cmam000cmam000 to dlra22cmam000cmam000 |
| The amended revolving credit facility is limited to the lesser of: (i) dlra22cmam000cmam000 or (ii) an amount equal to the sum of 85prca of the receivable borrowing base and the lesser of dlra11cmam000cmam000 or varying percentages of the inventory base |
| At April 30, 2006, the Company was in compliance with its financial covenants and had borrowings of dlra17cmam924cmam000 outstanding under this line of credit and a term note of dlra3cmam000cmam000 outstanding |
| SigmaTron China entered into a loan agreement in April 2005, which provides for a line of credit from the China Construction Bank |
| The interest rate under the agreement is 5dtta76prca and at April 30, 2006, SigmaTron China had dlra1cmam237cmam500 outstanding under the line of credit |
| The line of credit is collateralized by the Companyapstas building in Suzhou-Wujiang China and 60 of the 100 Chinese acres leased at the property (Footnote K, contingencies) |
| The Company anticipates credit facilities, cash flow from operations and leasing resources will be adequate to meet its working capital requirements in fiscal year 2007 |
| In the event the business grows rapidly or the Company considers an acquisition, additional financing resources could be necessary in the current or future fiscal years |
| There is no assurance that the Company will be able to obtain equity or debt financing at acceptable terms in the future |
| THE COMPANY EXPERIENCES VARIABLE OPERATING RESULTS The Companyapstas results of operations have varied and may continue to fluctuate significantly from period to period, including on a quarterly basis |
| Consequently, results of operations in any period should not be considered indicative of the results for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Companyapstas common stock |
| The Companyapstas quarterly and annual results may vary significantly depending on numerous factors, many of which are beyond the Companyapstas control |
| These factors include: - Changes in sales mix to customers - Changes in availability and cost of components - Volume of customer orders relative to capacity - Market demand and acceptance of our customers &apos products - Price erosion within the EMS marketplace - Capital equipment requirements needed to remain technologically competitive THE COMPANY &apos S CUSTOMER BASE IS CONCENTRATED Sales to the Companyapstas five largest customers accounted for 64prca, 63prca and 68prca of net sales for the fiscal years ended April 30, 2006, 2005 and 2004, respectively |
| Further, the Companyapstas two largest customers accounted for 30dtta1prca and 19dtta7prca of net sales, respectively, for the fiscal year ended April 30, 2006 |
| Significant reduction in sales to any of the Companyapstas major customers or the loss of a major customer could have a material impact on the Companyapstas operations |
| If the Company cannot replace canceled or reduced orders, sales will decline, which could have a material impact on the results of operations |
| Although the Company believes its relationships with its large customers are good, the Company generally does not enter into long-term contracts in connection with the sale of its goods and services |
| This risk may be further complicated by pricing pressures and intense competition prevalent in our industry |
| 11 THERE IS VARIABILITY IN THE REQUIREMENTS OF THE COMPANY &apos S CUSTOMERS The Company does not generally obtain long-term purchase contracts |
| The timing of purchase orders placed by the Companyapstas customers is affected by a number of factors, including variation in demand for the customers &apos products, regulatory changes affecting customer industries, customer attempts to manage inventory, changes in the customers &apos manufacturing strategies and customers &apos technical problems or issues |
| Many of these factors are outside the control of the Company |
| THE COMPANY AND ITS CUSTOMERS MAY BE UNABLE TO KEEP CURRENT WITH THE INDUSTRY &apos S TECHNOLOGICAL CHANGES The market for the Companyapstas manufacturing services is characterized by rapidly changing technology and continuing product development |
| The future success of the Companyapstas business will depend in large part upon its customers &apos ability to maintain and enhance their technological capabilities, develop and market manufacturing services which meet changing customer needs and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis |
| Effective mid-2006 the Companyapstas customers must be in compliance with the European Standard; RoHS for all products shipped to the European marketplace |
| The purpose of the directive is to restrict the use of hazardous substances in electrical and electronic equipment and to contribute to the environmentally sound recovery and disposal of electrical and electronic equipment waste |
| In addition, electronic component manufacturers must produce electronic components which are lead-free |
| The Company relies on numerous third-party suppliers for components used in the Companyapstas production process |
| Customers &apos specifications may require the Company to obtain components from a single source or a small number of suppliers |
| There is no assurance these suppliers will comply with RoHS The inability to utilize any such suppliers could have a material impact on the Companyapstas results of operations |
| THE COMPANY FACES INTENSE INDUSTRY COMPETITION AND DOWNWARD PRICING PRESSURES The EMS industry is highly fragmented and characterized by intense competition |
| Many of the Companyapstas competitors have substantially greater experience, as well as greater manufacturing, purchasing, marketing and financial resources than the Company |
| There can be no assurance that competition from existing or potential competitors will not have a material adverse impact on the Companyapstas business, financial condition or results of operations |
| The introduction of lower priced competitive products, significant price reductions by the Companyapstas competitors or significant pricing pressures from its customers could adversely affect the Companyapstas business, financial condition, and results of operations |
| THE COMPANY HAS FOREIGN OPERATIONS THAT MAY POSE ADDITIONAL RISKS A substantial part of the Companyapstas manufacturing operations is based in Mexico |
| Therefore, the Companyapstas business and results of operations are dependent upon numerous related factors, including the stability of the Mexican economy, the political climate in Mexico and Mexicoapstas relations with the United States, prevailing worker wages, the legal authority of the Company to own and operate its business in Mexico and the ability to identify, hire, train and retain qualified personnel and operating management in Mexico |
| The Company has opened an operation in China in order to better support and grow its customer base |
| It is uncertain whether the China operation will have a material impact, either positive or negative, on the Companyapstas business, financial condition and results of operations |
| The success of the operation is dependent on the Companyapstas ability to obtain new business; to hire and train qualified personnel; and to implement an efficient manufacturing environment |
| Other factors could have a material impact on the business, including the Chinese political climate and its relations with the United States, stability of the Chinese economy and the need for additional capital to expand operations in China |
| The Company obtains many of its materials and components through its office in Taipei, Taiwan and, therefore, the Companyapstas access to these materials and components is dependent on the continued success of its Asian suppliers |
| 12 INABILITY TO MANAGE GROWTH The Company may not effectively manage its growth and successfully integrate the management and operations of its recent Able acquisition |
| Acquisitions involve significant financial and operating risks that could have a material adverse effect on the Companyapstas results of operations |
| DISCLOSURE AND INTERNAL CONTROLS The Companyapstas management, including the CEO and CFO, do not believe that its disclosure controls and internal controls will prevent all errors and all fraud |
| Controls can provide only reasonable assurance that the procedures will meet the control objectives |
| The limitations include errors and mistakes can be made, including faulty judgments in decision-making |
| Further, controls can be circumvented by collusion of two or more people or by management override of controls |
| Because of the limitations of a cost effective control system, error and fraud may occur and not be detected |
| THERE IS A RISK OF FLUCTUATION OF VARIOUS CURRENCIES INTEGRAL TO THE COMPANY &apos S OPERATIONS The Company purchases some of its material components and funds some of its operations in foreign currencies |
| From time to time the currencies fluctuate against the US dollar |
| Such fluctuations could have a measurable impact on the Companyapstas operations and performance |
| These fluctuations are expected to continue |
| The Company does not utilize derivatives or hedge foreign currencies to reduce the risk of such fluctuations |
| THE AVAILABILITY OF RAW COMPONENTS MAY AFFECT THE COMPANY &apos S OPERATIONS The Company relies on numerous third-party suppliers for components used in the Companyapstas production process |
| Certain of these components are available only from single sources or a limited number of suppliers |
| In addition, a customerapstas specifications may require the Company to obtain components from a single source or a small number of suppliers |
| The loss of any such suppliers or increases in component cost could have a material impact on the Companyapstas results of operations |
| The Company could operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers |
| THE COMPANY IS DEPENDENT ON KEY PERSONNEL The Company depends significantly on its President and Chief Executive Officer, Gary R Fairhead, and on other executive officers |
| The loss of the services of any of these key employees could have a material impact on the Companyapstas business and results of operations |
| In addition, despite significant competition, continued growth and expansion of the Companyapstas EMS business will require that it attract, motivate and retain additional skilled and experienced personnel |
| The inability to satisfy such requirements could have a negative impact on the Companyapstas ability to remain competitive in the future |
| FAVORABLE LABOR RELATIONS ARE IMPORTANT TO THE COMPANY The Company currently has labor union contracts with its employees constituting approximately 70prca of its workforce |
| Although the Company believes its labor relations are good, any labor disruptions, whether union-related or otherwise, could significantly impair the Companyapstas business, substantially increase the Companyapstas costs or otherwise have a material impact on the Companyapstas results of operations |
| FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD SUBJECT THE COMPANY TO LIABILITY The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process |
| Any failure by the Company to comply with present or future regulations could subject it to future liabilities or the suspension of production which could have a material negative impact on the Companyapstas results of operations |
| 13 THE PRICE OF THE COMPANY &apos S STOCK IS VOLATILE The price of the Companyapstas common stock historically has experienced significant volatility due to fluctuations in the Companyapstas revenue and earnings, other factors relating to the Companyapstas operations, the marketapstas changing expectations for the Companyapstas growth, overall equity market conditions and other factors unrelated to the Companyapstas operations |
| In addition, the limited float of the Companyapstas common stock and the limited number of market makers also affect the volatility of the Companyapstas common stock |
| Such fluctuations are expected to continue |
| BEING A PUBLIC COMPANY INCREASES THE COMPANY &apos S ADMINISTRATIVE COSTS The Sarbanes-Oxley Act of 2002 ( "e Sarbanes-Oxley "e ), as well as rules subsequently implemented by the Securities and Exchange Commission and listing requirements subsequently adopted by Nasdaq in response to Sarbanes-Oxley, have required changes in corporate governance practices, internal control policies and audit committee practices of public companies |
| These new rules, regulations, and requirements have increased the companyapstas legal, financial compliance and administrative costs, and made many other activities more time consuming and costly |
| Specifically, the Companyapstas ability to become compliant with Sarbanes-Oxley Section 404, Internal Control Over Financial Reporting, may be very costly |
| These new rules and regulations have also made it more difficult for the Company to obtain director and officer liability insurance |
| These new rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on its audit committee |