UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-5896
----------------
JACO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
New York 11-1978958
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
145 Oser Avenue, Hauppauge, New York 11788
------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 273-5500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes: No: X
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes: No: X
The aggregate market value of voting stock held by non-affiliates of
the registrant as of December 31, 2004 was $ 19,198,400 (based on the last
reported sale price on the Nasdaq National Market on that date).
The number of shares of the registrant's common stock outstanding as of
September 20, 2005 was 6,267,832 shares (excluding 659,900 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant's definitive proxy statement to be filed on
or before October 28, 2005 under Regulation 14A in connection with the
registrant's 2005 Annual Meeting of Shareholders are incorporated by reference
in Part III of this Form 10-K.
Forward-Looking Statements
This Form 10-K contains various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, which represent our management's beliefs and
assumptions concerning future events. When used in this report and in other
documents we file or furnish under the Exchange Act, forward-looking statements
include, without limitation, statements regarding our financial forecasts or
projections, our expectations, beliefs, intentions or future strategies that are
signified by the words "expects", "anticipates", "estimates" "believes",
"intends" or similar language. These forward-looking statements are subject to
numerous assumptions, risks and uncertainties that could cause our actual
results and the timing of certain events to differ materially from those
expressed in the forward-looking statements.
Potential factors that could cause our actual results to differ
materially from those contemplated by the forward-looking statements include,
among others, the following:
o We are dependent on a limited number of suppliers for our
products, which generate a significant portion of our sales. As
a result, to the extent that these suppliers are not willing to
do business with us in the future on terms acceptable to us, the
loss of these suppliers could materially adversely affect our
business, results of operations and financial condition.
o Most of our distributorship agreements are cancelable upon short
notice. While these agreements typically provide for certain
protections in the event of termination to reduce our exposure
to losses from unsold inventory (such as price protection and
rights of return), we cannot assure you that we will not
experience significant losses from unsold inventory in the
future.
o The market for our products and services is very competitive and
subject to rapid technological advances. We compete with many
other distributors of electronic components, many of which are
larger and have significantly greater assets, name recognition
and financial, personnel and other resources than we have.
Failure to maintain and enhance our competitive position could
adversely affect our business.
o A significant portion of our working capital consists of
accounts receivable from customers. If customers responsible for
a large amount of our accounts receivable were to become
insolvent or otherwise unable or unwilling to make payments to
us in a timely manner, our business, results of operations and
financial condition could be adversely affected.
o Our relationship with our lenders are critical to our working
capital requirements and failure to maintain such relationship
could have a material adverse effect upon the Company.
o Some of our customer base is transferring to the Far East in
order to reduce production costs. If we are unsuccessful in
expanding our Far East operations in response to this trend, our
sales could be negatively impacted.
o Downturns in the electronic components industry and in the
general economy have in the past, and could in the future,
adversely affect our business, results of operations and
financial condition.
2
o Strikes or other delays or disruptions in air or sea
transportation and possible future legislative or regulatory
changes with respect to pricing and/or import quotas on products
we import from foreign countries could adversely affect our
business.
o Terrorist attacks may create instability and uncertainty in the
electronic components industry.
o Volatile pricing of electronic components may reduce our profit
margins.
o Costs or difficulties related to the integration of the
operations and personnel of businesses we acquire may be greater
than expected.
o Limited allocation of products by our suppliers may reduce the
availability of certain products we offer.
o Adverse changes may occur in the securities markets.
In light of these and other risks and uncertainties, you are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report. We do not undertake any obligation to update
publicly or revise any forward-looking statements to reflect new information or
events or circumstances occurring after the date of this report.
3
PART I
Item 1. Business.
Jaco Electronics, Inc. was organized in the State of New York in 1961. Our
principal executive offices are located at 145 Oser Avenue, Hauppauge, New York
11788, and our telephone number is (631) 273-5500.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports, if any, filed or
furnished with the Securities and Exchange Commission, or the SEC, under the
Exchange Act are available free of charge on our website at
www.jacoelectronics.com/investor-fin-news.asp as soon as reasonably practicable
after we file or furnish them with the SEC. Information contained on our website
is not incorporated by reference in this report. As used in this report, the
terms, "we", "us", "our", the "Company", "Jaco" and similar terms refer to Jaco
Electronics, Inc. and our consolidated subsidiaries.
Our Company
We are a leading distributor of active and passive electronic
components used in the manufacture and assembly of electronic products to a wide
variety of industrial Original Equipment Manufacturers ("OEMs") and contract
manufacturers (see "Discontinued Operations", Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Comparison of
Fiscal Year Ended June 30, 2005 with Fiscal Year Ended June 30, 2004 -
Discontinued Operations," and Note B - "Discontinued Operations" to our
Consolidated Financial Statements included elsewhere in this report for a
description of our sale in September 2004 of our contract manufacturing
subsidiary, Nexus Custom Electronics, Inc.). We also are a provider of flat
panel display ("FPD") and supporting technology products and services. We
distribute products such as semiconductors, capacitors, resistors,
electromechanical devices, and power supplies, which are used in the manufacture
and assembly of electronic products, including:
o telecommunications equipment o computers and office equipment
o medical devices and instrumentation o industrial equipment and controls
o military/aerospace systems o automotive and consumer electronics
We have two distribution centers and 16 strategically located sales
offices throughout the United States and one sales office in Bejing, China
opened in August 2004. We distribute more than 45,000 products from over 100
vendors, including such market leaders as Kemet Electronics Corporation, NEC,
Samsung Semiconductor, Inc., Vishay Americas, Inc., Sharp Electronics Corp,
Seiko Instruments USA, Inc., Vitesse Semiconductor Corporation, Epson
Electronics America, Inc., Lambda Americas Inc. and Cosel USA, Inc. to a base of
over 5,500 customers through a direct sales force. To enhance our ability to
distribute electronic components, we provide a variety of value-added services
including automated inventory management services; integration, turnkey design
and development, project management, and extended and post-sale support services
for various custom components with flat panel displays; assembly of stock items
for customers into pre-packaged kits; and programming and testing of power
supplies and crystal oscillators. Our core customer base consists primarily of
small and medium-sized manufacturers that produce electronic equipment used in a
wide variety of industries.
4
Our Industry
The electronic components distribution industry represents an important
sales channel for component manufacturers. Electronic components distributors
relieve component manufacturers of a portion of the costs and personnel needed
to warehouse and sell their products. Distributors market manufacturers'
products to a broader range of customers than such manufacturers could
economically serve with their direct sales forces. Today, distributors have
become an integral part of their customers' purchasing and inventory process.
Distributors offer their customers the ability to outsource their purchasing and
warehousing responsibilities. Electronic Data Interchange (EDI) permits
distributors to receive timely scheduling of component requirements from
customers enabling them to better provide these value-added services.
Distributors also provide technical engineers to work directly with their
customers. Our technical engineers provide technical support to our customers'
engineering staff while serving as primary technical point of contact for our
sales force primarily for our flat panel display products, micro controllers and
power supplies. Our technical engineers are trained by our key suppliers on
their specific product offerings and serve as an extension of their marketing
efforts. Our technical engineers are also responsible for our training
designed to increase the technical competence of our sales force in order to
enhance the effectiveness of our sales and marketing effort as a value-added
service to our customers.
Products
We currently distribute over 45,000 stock items. Our products fall into
four broad categories: Semiconductors (Semi), Flat Panel Displays (FPDs),
Passive Components (capacitors and resistors) and Electromechanical Devices
(EMCH). Our net distribution sales in each of these four product categories as a
percentage of our total net distribution sales appears below:
2005 2004
------------ --------- ---------
Semi 58% 53%
FPDs 17% 21%
Passive 17% 19%
EMCH 8% 7%
------------ --------- ---------
Semiconductors consist of such items as integrated circuits,
microprocessors, transistors, diodes, dynamic random access memory (RAM), static
RAMs, and video RAMs. FPDs incorporate such items as flat panels, touch screens
and controllers. Passive components consist primarily of capacitors and
resistors. EMCH consists of such products as power supplies, relays and
printerheads.
5
Value-Added Services
We also provide a number of value-added services which are intended to
attract new customers, to maintain and increase sales to existing customers and,
in the case of flat panel system integration to generate revenues from new
customers. Value-added services include:
o Automated Inventory Management Services. We offer
comprehensive, state-of-the-art solutions that effectively
manage our customers' inventory reordering, stocking and
administration functions. These services reduce paperwork,
inventory, cycle time and the overall cost of doing business
for our customers.
o Kitting. Kitting consists of assembling to a customer's
specifications two or more of our 45,000 stock items into
pre-packaged kits ready for use in the customer's assembly
line. Kitting services allow us to provide a partial or
complete fill of a customer's order and enable the customer to
more efficiently manage its inventory.
o Programming. We offer both Field Programming Instruments, as
well as volume production capabilities performed in-house. All
standard surface mount and dip packages are available. We
provide custom oscillators at a user-specified frequency. In
addition, we offer configurable modular power supplies
featuring the flexibility of 10 wide-range outputs, with the
best technical specifications in its class. This configurable
power supply series offers quick turnaround and fully-tested
units in Medical, Test and Measurement, Industrial and Datacom
applications.
o FPD Integration. Our display sales specialists and technical
engineers work directly with our customers to design, develop,
configure, test and deliver highly customized solutions to
meet specific FPD requirements for both business and consumer
applications. We are able to internalize key elements of the
FPD integration process that were previously sub-contracted to
outside vendors and offer customers a one-stop source for
their FPD and integration needs through our new state of the
art FPD integration facility. See "page 8 Operations -
Manufacturing."
Sales and Marketing
We believe we have developed valuable long-term customer relationships and
an understanding of our customers' requirements. Our sales personnel are trained
to identify our customers' requirements and to actively market our entire
product line to satisfy those needs. We serve a broad range of customers in the
computer, computer-related, telecommunications, data transmission, defense,
aerospace, medical equipment and other industries. We have established inventory
management programs to address the specific distribution requirements of the
global contract manufacturing sector. Two of our customers represented 21% and
13%, 14% and 11%, and 17% and 11% of our total net sales for the fiscal years
ended June 30, 2005, 2004 and 2003, respectively. None of our other customers
individually represented more than 4% of our total net sales for fiscal years
2005 and 2004 or more than 9% for fiscal year 2003.
As an authorized distributor for many component manufacturers, we are
able to offer technical support as well as a variety of supply chain management
programs. Technical engineering, support and supply chain management services
enhance our ability to attract new customers. Many of today's services revolve
around the use of software automation, computer-to-computer transactions
through EDI, internet-based solutions, technically competent product managers
and a team of display sales
6
specialists and technical engineers. We provide design support and technical
assistance to our customers with detailed data solutions employing the latest
technologies.
Sales are made throughout North America from the sales departments
maintained at our two distribution facilities located on the East and West
Coasts of the United States in New York and California and from 16 strategically
located sales offices. Sales are made primarily through personal visits by our
employees and by a staff of trained telephone sales personnel who answer
inquiries and receive and process orders from customers. In addition, we utilize
the services of independent sales representatives whose territories include
parts of North America and several foreign countries. In August 2004, we opened
a sales office in Beijing, China to support our business in the Far East. We
also utilize a third party warehouse to support key customers in the Far East.
Independent sales representatives generally operate under agreements which are
terminable by either party upon 30 days notice and prohibit them from
representing competing product lines. In most cases, independent sales
representatives are authorized to solicit sales of all of our product lines.
For our FPD product, we provide high quality component and value-added
display solutions. As panel technology is added to a rapidly expanding list of
electronic devices, it has become necessary to support specific applications
with a customized solution. We provide in-house design, sub-assembly, and
complete "box-build" capability, high level integration, project management, and
test and after-market capabilities. We define our addressable market as
qualified OEMs and systems integrators with critical time-to-market and product
optimization needs that may have specialized design and engineering service
requirements followed by a scalable FPD program.
Suppliers
Manufacturers of electronic components are increasingly relying on the
marketing, customer service and other resources of distributors who market and
sell their product lines to customers not normally served by the manufacturer,
and to supplement the manufacturer's direct sales efforts for other accounts
often by providing value-added services not offered by the manufacturer.
Manufacturers seek distributors who have strong relationships with desirable
customers, have the infrastructure to handle large volumes of products and can
assist customers in the design and use of the manufacturers' products.
Currently, we have non-exclusive distribution agreements with many
manufacturers, including Dallas Semiconductor Corporation, Sharp Electronics
Corp, NEC, Kemet Electronics Corporation, Samsung Semiconductor, Inc., 3 M Touch
Systems, Inc., Vishay Intertechnology, Inc., Vitesse Semiconductor Corporation,
Seiko Instruments USA, Inc., Lambda, Cosel and Epson Electronics America, Inc.
We continuously seek to identify potential new suppliers such as NEC. During the
fiscal year ended June 30, 2005, products purchased from our two largest
suppliers accounted for 29% and 12%, respectively, of our total net sales. As is
common in the electronics distribution industry, from time to time we have
experienced terminations of relationships with suppliers. We cannot assure you
that, in the event a supplier cancelled its distributor agreement with us, we
would be able to replace the sales associated with such supplier with sales of
other products.
We generally purchase products from manufacturers pursuant to
non-exclusive distributor agreements. As an authorized distributor, we are able
to offer our suppliers marketing support and technical assistance regarding
product knowledge. Products requiring specialized technical assistance typically
have higher average selling prices and higher gross profit margins than
commodity components and there is limited competition for the sale of these
products.
Most of our distributor agreements are cancelable by either party,
typically upon 30 to 90 days notice, although these agreements are usually
entered into with the intention of a long-term relationship.
7
Many of our current agreements have continued for more than fifteen years. These
agreements typically provide for price protection, stock rotation privileges and
the right to return inventory. Price protection is typically in the form of a
credit to us for any inventory in our possession for which the manufacturer
reduces its prices. Stock rotation privileges typically allow us to exchange
inventory in an amount up to 5% of a prior period's purchases for some of our
vendors allow us to scrap 3% of traditionally non-returnable inventory. Upon
termination of a distributor agreement, the right of return typically requires
the manufacturer to repurchase our inventory at our adjusted purchase price. We
believe that these types of protective provisions contained in our
distributorship agreements generally have served to reduce our exposure to loss
from unsold inventory. Because price protection, stock rotation privileges and
the right to return inventory are limited in scope, however, and often subject
to our compliance with certain customary conditions, we cannot assure you that
we will not experience significant losses from unsold inventory in the future.
Operations
Component Distribution. Inventory management is critical to a
distributor's business. We constantly focus on a high number of resales or
"turns" of existing inventory to reduce our exposure to product obsolescence and
changing customer demand.
Our central computer system facilitates the control of purchasing and
inventory, accounts payable, shipping and receiving, and invoicing and
collection information of our distribution business. Our distribution software
system includes financial systems, EDI, customer order entry, purchase order
entry to manufacturers, warehousing and inventory control. Each of our sales
departments and offices is electronically linked to our central computer
systems, which provide fully integrated on-line, real-time data with respect to
our inventory levels. Most of our inventory management system was developed
internally and is considered proprietary. We track inventory turns by vendor and
by product, and our inventory management system provides immediate information
to assist in making purchasing decisions and decisions as to which inventory to
exchange with suppliers under stock rotation programs. Our inventory management
system also uses bar-code technology. In some cases, customers use computers
that interface directly with our computers to identify available inventory and
to rapidly process orders. Our computer system also tracks inventory turns by
customer. We also monitor supplier stock rotation programs, inventory price
protection, rejected material and other factors related to inventory quality and
quantity. This system enables us to more effectively manage our inventory and to
respond quickly to customer requirements for timely and reliable delivery of
components. Our inventory turnover was approximately five times for the fiscal
year ended June 30, 2005.
Manufacturing. Our manufacturing capabilities support customization
requirements for almost any commercial or industrial application, including
prototype, sub-assembly, full system assembly, LCD optical enhancement,
touch-screen integration and system integration. The Company has sold
`ruggedized' applications that address military, aerospace and special
industrial requirements (including hazardous environments). We maintain
world-class quality standards and are ISO 9001 certified for all company
functions, including design and after sales service. As of February 2005, we
completed the construction of a state-of-the-art integration facility in
Hauppauge, New York to meet the needs of our expanding FPD customer base. The
20,000 square foot plant houses design and engineering, manufacturing,
integration, after-market support and operations. The integration center is
equipped with a large, modern batch assembly area as well as work cells designed
for continuous, quality manufacturing. Products with clean room requirements are
manufactured on premises. The facility is configured to accommodate customized
projects that range from low-volume design and prototype to higher volume
assembly as large as 50,000 units.
8
Discontinued Operations
On September 20, 2004, we completed the sale of substantially all of
the assets of our non-core contract manufacturing subsidiary, Nexus Custom
Electronics Inc. ("Nexus") to Sagamore Holdings, Inc. for total consideration of
up to $13,000,000 and the assumption of certain liabilities. Under the terms of
the purchase agreement relating to this transaction, we received $9.25 million
of the purchase consideration in cash at closing. The balance of the fixed
portion of the purchase consideration was satisfied through the delivery of a
$2.75 million subordinated note issued by the purchaser. This note has a
maturity date of September 1, 2009 and bears interest at the lower of the prime
rate or 7%. The note is payable by the purchaser in quarterly cash installments
ranging from $156,250 to $500,000 each, commencing in September 2006 and
continuing for each quarter thereafter until maturity. Prepayment of the
principal of and accrued interest on the note is permitted. Additionally, we are
entitled to receive additional consideration in the form of a six-year earn-out
based on 5% of the annual net sales in excess of $20 million of Nexus after the
closing date, up to $1,000,000 in the aggregate.
Pursuant to the purchase agreement, Sagamore Holdings has also entered
into a contract that designates us as a key supplier of electronic components to
Nexus for a period of five years.
As a result of the sale, we have classified the operations of Nexus as
"discontinued" for all periods presented herein.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Comparison of Fiscal Year Ended June 30,
2005 with Fiscal Year Ended June 30, 2004 - Discontinued Operations," and Note B
- - "Discontinued Operations" to our Consolidated Financial Statements included
under Item 15 of this report for additional information regarding this
transaction.
Competition
The electronic components distribution industry is highly competitive,
primarily with respect to price, product availability and quality of service. We
believe that the breadth of our customer base, services and product lines, our
level of technical expertise and the quality of our services generally are also
particularly important to our competitive position. We compete with large
national distributors such as Arrow Electronics, Inc. and Avnet, Inc., as well
as midsize distributors, such as All American Semiconductor, Inc. and Nu
Horizons Electronic Corporation, many of whom distribute the same or competitive
products. We also compete for customers with some of our own suppliers. Many of
our competitors have significantly greater assets, name recognition and
financial, personnel and other resources than we do.
Our ability to purchase competitively priced electronic components from our
suppliers, who have foreign parents, could be adversely affected by increases in
tariffs, duties, changes in the U.S trade agreements with Japan, Taiwan or other
foreign countries, transportation strikes or the adoption of federal laws
imposing import restriction. In addition, the cost of our components could be
subject to governmental controls and international currency fluctuations. The
decline in the value of the U.S. dollar relative to the currencies of Japan and
other countries would cause increases in the dollar prices we pay for these
components. Although we have not experienced any material adverse effect to date
on our ability to compete or otherwise as a result of any of the foregoing
factors, we cannot assure you that such factors will not have a material adverse
effect on us in the future.
9
Backlog
The trend over the last couple of years has been toward outsourcing,
and more customers have entered into just-in-time contracts with distributors,
instead of placing orders with long lead times. Our backlog is subject to
delivery rescheduling and cancellations by the customer, sometimes without
penalty or notice. Therefore, our backlog is not necessarily indicative of our
future sales for any particular period.
Employees
At June 30, 2005, we had a total of 202 employees, of which five were
engaged in administration, 40 were managerial and supervisory employees, 119
were in sales and 38 performed warehouse, manufacturing and clerical functions.
There are no collective bargaining contracts covering any of our employees. We
believe our relationship with our employees is satisfactory.
Item 2. Properties.
All of our facilities are leased. We currently lease 18 facilities
strategically located throughout the United States, two of which are
multipurpose facilities used principally as administrative, sales and purchasing
offices, as well as warehouses. Since August, 2004, we also lease a sales office
in Beijing, China to support our business in the Far East. Our satellite sales
offices range in size from approximately 200 square feet to approximately 10,000
square feet. Base rents for such properties range from approximately $850 per
month to approximately $8,000 per month. Depending on the terms of each
particular lease, in addition to base rent, we may also be responsible for
portions of real estate taxes, utilities and operating costs, or increases in
such costs over certain base levels. The lease terms range from month-to-month
to as long as ten years. All facilities are linked by computer terminals to our
Hauppauge, New York headquarters. The following table sets forth certain
information as of September 20, 2005 regarding our two principal leased
facilities:
Lease
Base Rent Expiration
Location Per Month Square Feet Use Date
-------- --------- ----------- --- ----
Hauppauge, NY (1) $52,500 72,000 Administrative, 12/31/13
Sales,
Warehouse, and FPD
Integration
Westlake Village, CA $11,400 12,000 Administrative, 4/30/06
Sales and
Warehouse
(1) Leased from a partnership owned by Joel H. Girsky, Chairman and
President of the Company, and Charles B. Girsky, Executive Vice
President, at a current monthly rent, which the Company believes
represents the fair market value for such space.
- --------------------------------------------------------------------------------
10
Prior to our sale of Nexus on September 20, 2004, we owned and
occupied, through Nexus, an approximately 32,000 square foot facility located in
Brandon, Vermont that was used for manufacturing, storage and office space, and
leased, through Nexus, a 30,000 square foot facility located on Woburn,
Massachusetts that was used for contract manufacturing. We believe that our
present facilities will be adequate to meet our needs for the foreseeable
future.
Item 3. Legal Proceedings.
We are a party to legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on our business, results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to our security holders during the fourth
quarter of fiscal 2005.
11
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
(a) Our common stock is traded on the Nasdaq National Market under
the symbol "JACO". The stock prices listed below represent the
high and low sale prices of our common stock, as reported by the
Nasdaq National Market, for each fiscal quarter beginning with
the first fiscal quarter of the fiscal year ended June 30, 2004.
High Low
Fiscal Year 2004:
First quarter ended September 30, 2003..................... $6.50 $4.50
Second quarter ended December 31, 2003..................... 7.50 5.61
Third quarter ended March 31, 2004......................... 9.41 6.12
Fourth quarter ended June 30, 2004......................... 8.44 4.40
Fiscal Year 2005:
First quarter ended September 30, 2004..................... $6.28 $4.26
Second quarter ended December 31, 2004..................... 5.49 3.82
Third quarter ended March 31, 2005......................... 4.15 2.77
Fourth quarter ended June 30, 2005......................... 3.42 2.80
(b) As of September 20, 2005, there were approximately 140 holders of
record of our common stock. We believe our stock is held by more
than 2,200 beneficial owners.
(c) We have never declared or paid any cash dividends on our common
stock. We intend for the foreseeable future to retain future
earnings for use in our business. The amount of dividends we pay
in the future, if any, will be at the discretion of our Board of
Directors and will depend upon our financial condition, operating
results and other factors as the Board of Directors, in its
discretion, deems relevant. In addition, our credit facility
prohibits us from paying cash dividends on our common stock.
Item 6. Selected Financial Data.
The selected consolidated financial data set forth below contains only
a portion of our financial statements and should be read in conjunction with our
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report. The historical results are not necessarily indicative
of results to be expected for any future period. Significant events affecting
the comparability of this schedule include the acquisition of Reptron
Electronics, Inc. in June 2003. The historical results for 2001 to 2003 have
been adjusted to reclassify the results of operations of Nexus as discontinued.
12
Year Ended June 30,
2005 2004 2003 2002 2001
------- ------- ------ ------ ------
(in thousands, except per share data)
Net sales $ 231,824 $ 249,100 $ 202,656 $ 175,948 $321,124
Cost of goods sold 205,924 214,389 176,918 148,693 257,181
--------- --------- --------- --------- --------
Gross profit 25,900 34,711 25,738 27,255 63,943
Selling, general and administrative expenses 32,112 35,016 28,184 32,635 44,776
--------- --------- --------- --------- --------
Operating (loss) profit (6,212) (305) (2,446) (5,380) 19,167
Interest expense 2,029 1,539 1,025 1,683 3,457
--------- --------- --------- --------- --------
(Loss) earnings from continuing
operations before income taxes (8,241) (1,844) (3,471) (7,063) 15,710
Income tax (benefit) provision (2,814) (553) (1,180) (2,500) 6,408
--------- --------- --------- --------- --------
(Loss) earnings from continuing
operations $ (5,427) $ (1,291) $ (2,291) $ (4,563) $ 9,302
Earnings (loss) from discontinued
operations, net of taxes 567 736 (693) (481) 548
--------- --------- --------- --------- --------
NET (LOSS) EARNINGS $ (4,860) $ (555) $ (2,984) $ (5,044) $ 9,850
========= ========= ========= ========= ========
PER SHARE INFORMATION
Basic (loss) earnings per common share:
(Loss) earnings from continuing
operations $ (0.87) $ (0.22) $ (0.40) $ (0.80) $ 1.64
Earnings (loss) from discontinued
operations $ 0.09 $ 0.13 $ (0.12) $ (0.08) $ 0.10
--------- --------- --------- --------- --------
Net (loss) earnings $ (0.78) $ (0.09) $ (0.52) $ (0.88) $ 1.74
========= ========= ========= ========= ========
Diluted (loss) earnings per common share:
(Loss) earnings from continuing
operations $(0 87) $ (0.22) $ (0.40) $ (0.80) $ 1.50
Earnings (loss) from discontinued
operations $ 0.09 $ 0.13 $ (0.12) $ (0.08) $ 0.09
--------- --------- --------- --------- --------
Net (loss) earnings $ (0.78) $ (0.09) $ (0.52) $ (0.88) $ 1.59
========= ========= ========= ========= ========
13
Year Ended June 30,
2005 2004 2003 2002 2001
------- ------- ------ ------ ------
(in thousands, except per share data)
Weighted-average common shares and
common equivalent shares outstanding:
Basic 6,250 5,974 5,783 5,713 5,670
===== ===== ===== ===== =====
Diluted 6,250 5,974 5,783 5,713 6,179
===== ===== ===== ===== =====
At June 30,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet:
Working capital................................... $ 7,334 $ 17,459 $ 11,437 $ 18,327 $ 23,752
Total assets...................................... 112,222 121,782 114,212 110,635 136,315
Short-term debt................................... 33,266 37,089 35,736 34,705 55,639
Long-term debt.................................... 57 119 63 1,072 1,572
Shareholders' equity.............................. 42,071 46,706 45,568 48,668 53,251
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
- ------------------------------------------------------------------------------
For an understanding of the significant factors that influenced the
Company's performance during the past three years, the following discussion
should be read in conjunction with the consolidated financial statements and
other information appearing elsewhere in this report.
Overview
Jaco is a leading distributor of active and passive electronic
components to industrial OEMs that are used in the manufacture and assembly of
electronic products in such industries as telecommunications, medical devices,
computers and office equipment, military/aerospace, and automotive and consumer
electronics. Products distributed by the Company include semiconductors, flat
panel displays, capacitors, resistors, electromechanical devices and power
supplies.
The electronics industry experienced a severe downturn beginning in
2001, which continued through most of 2003. The decline was attributable to
increased manufacturing capacity combined with a significant decrease in demand
for electronic components. The second half of 2003 saw an improvement in the
demand for electronic components throughout the entire industry. While demand
for our products has remained relatively stable in recent periods, the average
selling prices of many of the components we distribute, particularly
semiconductor and passive components, have decreased due to global competitive
pressures, which has adversely affected our operating profits. In response, the
Company has implemented cost reduction initiatives to reduce expenses as
required to support current sales and profit levels. Due to the ongoing shift of
manufacturing to the Far East, the Company has modified its business model to
pursue the business available in the United States, increase its support of
global contract manufacturers that require its value-added services and
logistics programs, and aggressively promote its flat panel display ("FPD")
product offerings, which it believes have promising potential for future growth.
14
Net loss increased in fiscal 2005 to $4.9 million, compared with a net
loss of $0.6 million during fiscal 2004. Fiscal 2005 results were impacted by an
inventory write down of $2.2 million ($1.4 million net of taxes). The
Company determined that due to changes in market conditions in the United
States, certain products, in most cases, originally for specific customers, were
no longer salable.
Critical Accounting Policies
Financial Reporting Release No. 60 recommends that all companies
include a discussion of critical accounting policies used in the preparation of
their financial statements. The SEC defines critical accounting policies as
those that are, in management's view, most important to the portrayal of the
Company's financial condition and results of operations and those that require
significant judgments and estimates.
The preparation of these consolidated financial statements requires our
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the disclosure of
contingent assets and liabilities at the date of our financial statements. We
base our estimates on historical experience, actuarial valuations and various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex and, consequently, actual results
may differ from these estimates under different assumptions or conditions. While
for any given estimate or assumption made by our management there may be other
estimates or assumptions that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial statements. The
accounting principles we utilized in preparing our consolidated financial
statements conform in all material respects to generally accepted accounting
principles in the United States of America.
THE ACCOUNTING POLICIES IDENTIFIED AS CRITICAL ARE AS FOLLOWS:
Valuation of Receivables - The Company performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness. The Company continuously monitors payments
from customers and a provision for estimated uncollectible amounts is maintained
based upon historical experience and any specific customer collection issues,
which have been identified. While such uncollectible amounts have historically
been within the Company's expectations and provisions established, if a
customer's financial condition were to deteriorate, additional reserves may be
required. Concentration of credit risk with respect to accounts receivable is
generally mitigated due to the large number of entities comprising the Company's
customer base, their dispersion across geographic areas and industries, along
with the Company's policy of maintaining credit insurance.
Valuation of Inventories - Inventories are valued at the lower of cost or
market. Cost is determined by using the first-in, first-out and average cost
methods. The Company's inventories are comprised of high technology components
sold to rapidly changing and competitive markets whereby such inventories may be
subject to early technological obsolescence.
The Company evaluates inventories for excess, obsolescence or other
factors rendering inventories as unsellable at normal gross profit margins.
Write-downs are recorded so that inventories reflect the approximate market
value and take into account the Company's contractual provisions with its
suppliers governing price protections and stock rotations. Due to the large
number of transactions and complexity
15
of managing the process around price protections and stock rotations, estimates
are made regarding the valuation of inventory at market value.
In addition, assumptions about future demand, market conditions and
decisions to discontinue certain product lines can impact the decision to
write-down inventories. If assumptions about future demand change and/or actual
market conditions are different than those projected by management, additional
write-downs of inventories may be required. In any case, actual results may be
different than those estimated.
Goodwill and Other Intangible Assets - The purchase method of accounting for
acquisitions requires extensive use of accounting estimates and judgments to
allocate the excess of the purchase price over the fair value of identifiable
net assets of acquired companies allocated to goodwill. Other intangible assets
primarily represent franchise agreements and non-compete covenants.
We evaluate long-lived assets used in operations, including goodwill
and purchased intangible assets. The allocation of the acquisition cost to
intangible assets and goodwill has a significant impact on our future operating
results as the allocation process requires the extensive use of estimates and
assumptions, including estimates of future cash flows expected to be generated
by the acquired assets. An impairment review is performed whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include, but are not limited to, significant under-performance relative
to historical or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for our overall business,
and significant industry or economic trends. When impairment indicators are
identified with respect to previously recorded intangible assets, the values of
the assets are determined using discounted future cash flow techniques.
Significant management judgment is required in the forecasting of future
operating results which are used in the preparation of the projected discounted
cash flows and should different conditions prevail, material write downs of net
intangible assets and goodwill could occur.
Valuation of Deferred Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". We would record a
valuation allowance when, based on the weight of available evidence, it is more
likely than not that the amount of future tax benefit would not be realized.
Currently, we have not recorded a valuation allowance for deferred tax assets.
While we have considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for a valuation allowance, there
is no assurance that a valuation allowance will not be needed in the future to
cover additional deferred tax assets that may not be realized. The recording of
a valuation allowance could have a material adverse impact on our income tax
provision and net income in the period in which such determination is made.
New Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43" ("SFAS No.
151"), which is the result of its efforts to converge U.S. accounting standards
for inventories with International Accounting Standards. SFAS No. 151 requires
idle facility expenses, freight, handling costs, and wasted material (spoilage)
costs to be recognized as current-period charges. It also requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be
16
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of this standard on its
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004)
"Share-Based Payment" (SFAS No. 123R"). SFAS No. 123R addresses all forms of
share-based payment ("SBP") awards, including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
SFAS No. 123R will require the Company to expense SBP awards with compensation
cost for SBP transactions measured at fair value. The FASB originally stated a
preference for a lattice model because it believed that a lattice model more
fully captures the unique characteristics of employee stock options in the
estimate of fair value, as compared to the Black-Scholes model which the Company
currently uses for its footnote disclosure. The FASB decided to remove its
explicit preference for a lattice model and not require a single valuation
methodology. SFAS No. 123R requires the Company to adopt the new accounting
provisions beginning in the first quarter of fiscal 2006. The Company has not
yet determined the impact of applying the various provisions of SFAS No. 123R
will have on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets-an amendment of APB Opinion No. 29" ("SFAS No. 153") SFAS
No. 153 amends Opinion 29 to eliminate the exception for non-monetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for fiscal periods after June 15, 2005. The Company does
not expect the adoption of SFAS No. 153 to have a material impact on the
Company's consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3" ("SFAS No. 154"). Opinion 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does
not expect the adoption of SFAS No. 154 to have an impact on the consolidated
financial statements.
Results of Operations
The following table sets forth certain items in our statement of operations as a percentage of net sales
for the periods shown:
2005 2004 2003
---- ---- ----
Net sales......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................ 88.8 86.1 87.3
---- ---- ----
Gross profit...................................... 11.2 13.9 12.7
Selling, general and administrative expenses...... 13.9 14.0 13.9
---- ---- ----
Operating loss ................................... (2.7) (0.1) (1.2)
Interest expense.................................. 0.9 0.6 0.5
--- --- ---
17
Loss from continuing operations before income taxes (3.6) (0.7) (1.7)
Income tax benefit............................... (1.2) (0.2) (0.6)
---- ---- ----
Loss from continuing operations........................... (2.4) (0.5) (1.1)
Earnings (loss) from discontinued operations,
net of taxes........................................ 0.3 0.3 (0.4)
--- --- ----
Net loss.......................................... (2.1)% (0.2)% (1.5)%
==== ==== ====
================================================================================
Comparison of Fiscal Year Ended June 30, 2005 ("Fiscal 2005") with Fiscal Year
Ended June 30, 2004 ("Fiscal 2004")
Results from Continuing Operations:
Net sales for Fiscal 2005 were $231.8 million as compared to $249.1
million for Fiscal 2004, a decrease of $17.3 million, or 6.9%. We have seen
demand for our products remain stable for the last two quarters of the fiscal
year. The average selling price of many of our components has decreased
over 20% compared to our previous fiscal year and where practical, customers
continue to outsource their manufacturing requirements to the Far East. These
factors were the primary reason for the decrease in our net sales. As a result,
we have adapted our marketing strategy in the United States to support the
business that we see remaining in the United States, and have made changes to
better serve our existing customer base. Recent initiatives include expanding
our quote group to enable us to be more responsive to the mid-level contract
manufacturers and changing our marketing efforts to focus on those core lines,
including FPDs, where we believe we can increase our net sales. During the third
quarter of Fiscal 2005, we opened in our Hauppauge, New York facility an
in-house FPD integration center that enables us to expand our value-added
capabilities to our customers. We believe it is important for distributors of
electronic components to focus on the value-added services that our customers
require. Our ability to grow sales will be partially dependent on our ability to
increase FPD sales and including the integration center, we have made extensive
efforts to increase this business going forward. FPD product represented 16.8%
of our net sales during Fiscal 2005 as compared to 20.7% in Fiscal 2004. We
continue to market semiconductors aggressively. Semiconductor sales represented
57.6% of our net sales in Fiscal 2005 as compared to 53.1% in Fiscal 2004.
Although our business focus is primarily on the U.S. market, we maintain a sales
presence in the Far East targeted at the global contract manufacturing customers
to which we primarily sell semiconductors through our logistics programs, which
consist of inventory management and warehousing capabilities. Passive
components, which are standard commodity items such as capacitors and resistors,
represented 17.3% of our net sales in Fiscal 2005 as compared to 19.0% in Fiscal
2004. Due to the increase in capacity worldwide, we saw pricing in passive
components decrease by over 20%. Electromechanical products, such as power
supplies, relays and printer heads, represented 8.3% of our net sales in Fiscal
2005 as compared to 7.2% in Fiscal 2004. We believe this is a product line with
higher selling prices that still has a viable market in the United States.
Primarily through our logistics programs with global contract manufacturers, our
export sales represented approximately 35% of our net sales for Fiscal 2005 as
compared to 23% in Fiscal 2004. Most of these sales derived from business that
we were able to maintain as it transitioned from the United States to the Far
East. We intend to expand our business with these customers based on our
successful existing relationships with them. In addition, we are continuing to
search for a strategic alliance or partner in the Far East to potentially allow
us to expand more rapidly in this growing market.
18
Gross profit for Fiscal 2005 was $25.9 million, or 11.2% of net sales,
compared to $34.7 million, or 13.9% of net sales for Fiscal 2004. Management
considers gross profit to be a key performance indicator in managing our
business. Gross profit margins are usually a factor of product mix and demand
for product. During the fourth quarter, we took a write-down of approximately
$2.2 million for obsolete inventory based on our determination that, due to
changes in market conditions in the United States, certain of our products
primarily intended for distribution to specific customers were no longer
saleable. Without this write-down, our gross profit margin for Fiscal 2005 would
have been 12.1%. As discussed above the Company conducts large amounts of
business through its logistics programs in support of global contract
manufacturers, which constitute lower-end, value-added services that tend to be
at lower margins than the rest of our business. If the current mix of our sales
continues, we do not anticipate any material change in our margin for the
foreseeable future. In addition, demand and pricing for our products have been,
and in the future may continue to be, adversely affected by industry-wide trends
and other events beyond our control.
Selling, general and administrative ("SG&A") expenses were $32.1
million, or 13.9% of net sales, for Fiscal 2005, as compared to $35.0 million,
or 14.1% of net sales, for Fiscal 2004, representing a reduction of $2.9
million, or 8.3%. Management considers SG&A as a percentage of net sales to be a
key performance indicator in managing our business. We continue to reduce our
costs by targeting our marketing expenditures on our core business areas while
paring back elsewhere. This approach has allowed us to lower SG&A while
maintaining the necessary infrastructure to support our customers. We have been
able to reduce personnel and eliminate non-essential fixed costs by among other
measures, achieving rent reductions, and due to the decrease in gross profit
dollars, our sale commissions have decreased. As of June 30,2005, certain
cost-saving measures were still being implemented. The Company believes SG&A
will continue to decrease during the fiscal year ending June 30, 2006.
Interest expense increased $0.5 million for Fiscal 2005 to $2.0
million, compared to $1.5 million for Fiscal 2004. This increase is primarily
attributable to higher borrowing levels to maintain adequate inventory,
primarily to support a specific customer, and higher borrowing rates. Because we
support our operations in part through bank borrowings, any significant increase
in our borrowing rates could significantly increase our interest expense, which
would have a negative effect on our results of operations.
Net loss from continuing operations for Fiscal 2005 was $5.4 million,
or $0.87 per diluted share, compared to a net loss from continuing operations of
$1.3 million, or $0.22 per diluted share full diluted for Fiscal 2004. As
discussed above our net loss from operations was impacted in part by our
inventory write-down of approximately $1.4 million, net of taxes, or $0.22 per
diluted share. Our net loss from continuing operations compared to last year is
attributable to the decrease in our net sales and reduction in gross profit
margin due to changes in the mix of our products sold and inventory write-down.
Discontinued Operations:
On September 20, 2004, the Company completed the sale of substantially
all of the assets of its contract manufacturing subsidiary, Nexus Custom
Electronics, Inc. ("Nexus"), to Sagamore Holdings, Inc. for consideration of up
to $13,000,000, subject to closing adjustments, and the assumption of certain
liabilities. The divestiture of Nexus allows the Company to focus its resources
on its core electronics distribution business. Under the terms of the purchase
agreement relating to this transaction, the Company received $9,250,000 of the
purchase consideration in cash on the closing date. Such cash consideration was
used to repay a portion of the outstanding borrowings under the Company's line
of credit. The balance of the fixed portion of the purchase consideration was
satisfied through the delivery of
19
a $2,750,000 subordinated note issued by the purchaser. This note has a maturity
date of September 1, 2009 and bears interest at the lower of the prime rate or
7%. The note is payable by the purchaser in quarterly cash installments ranging
from $156,250 to $500,000 commencing September 2006 and continuing for each
quarter thereafter until maturity. Prepayment of the principal of and accrued
interest on the note is permitted. Additionally, the Company is entitled to
receive additional consideration in the form of a six-year earn-out based on 5%
of the annual net sales of Nexus after the closing date, up to $1,000,000 in the
aggregate.
Net earnings from these discontinued operations for Fiscal 2005 was
$0.6 million, or $0.09 per diluted share, compared to $0.7 million, or $0.13 per
diluted share for Fiscal year 2004. The decrease in our net earnings from
discontinued operations compared to last year was primarily attributable to the
decrease in net sales and gross profit from discontinued operations, which was
partially offset by the gain on the sale of Nexus.
Combined Net Loss:
The combined net loss from both our continuing and discontinued
operations for Fiscal 2005 was $4.9 million, or $0.78 per diluted share, as
compared to $0.6 million, or $0.09 per diluted share for Fiscal 2004. The
increase in our combined net loss compared to last year is primarily
attributable to the reduction in our net sales and gross profit margins, as
described above.
Comparison of Fiscal Year Ended June 30, 2004 ("Fiscal 2004") with Fiscal Year
Ended June 30, 2003 ("Fiscal 2003")
Results from Continuing Operations:
Net sales for Fiscal 2004 were $249.1 million, an increase of 22.9%
from $202.7 million for Fiscal 2003. Approximately $41.0 million of the increase
in net sales is attributable to new supplier relationships associated with the
acquisition of certain assets of the electronics distribution business of
Reptron Electronics, Inc. ("Reptron") in June 2003 and the balance is attributed
to internal growth. We have seen an improvement in the demand for components
throughout the electronics industry. FPDs continue to represent our fastest
growing product group. FPD sales increased from 10% of our total net sales
during Fiscal 2003 to nearly 21% for Fiscal 2004. Our ability to sustain our
sales growth will be partially determined by our ability to continue to market
successfully our flat panel displays. Semiconductors continue to represent our
largest product group in terms of net sales. During Fiscal 2004, semiconductors
accounted for 53% of our total net sales. Our semiconductor sales grew during
the fiscal year as a result of increased marketing efforts, improving market
conditions, and the addition of certain strategic franchises that we added
through our acquisition of Reptron. Passive components have become very
competitive in pricing. With manufacturing being done almost entirely off shore,
it has become difficult to pursue new opportunities. Although we continue to
still have a strong presence in selling passive components, our passive
component sales decreased to 19% of net sales during Fiscal 2004 compared to 26%
during Fiscal 2003. We have also increased our marketing of power supplies and
printerheads. These products have a higher selling price per component, usually
require some design work to be performed and as a result often generate higher
gross profit margins. Our sales to the Far East represented approximately 20% of
our total net sales in Fiscal 2004. These sales were primarily derived from
business that we were already doing domestically that we were able to transition
to the Far East. It is important to our ability to increase sales that we are
able to expand our presence in the Far East, which represents the fastest growth
area globally in our industry due to its currently low cost structure.
20
Gross profit was $34.7 million, or 13.9% of net sales for Fiscal 2004,
as compared to $25.7 million, or 12.7% of net sales for Fiscal 2003, an increase
of 34.9%. Management considers gross profit to be a key performance indicator in
managing our business. Gross profit margins are usually a factor of product mix
and demand for product. As discussed above, our passive component sales are
decreasing. Historically, we have realized higher gross profit margins on
passive components than semiconductors. As a result, unless demand for passive
components increase, we do not anticipate any material increase in our overall
margins, and we do not anticipate any significant change in demand for the
foreseeable future. In addition, demand for our products may be adversely
affected by events beyond our control.
Selling, general and administrative expenses ("SG&A") were $35.0
million, or 14.1% of net sales, for Fiscal 2004, as compared to $28.2 million,
or 13.9% of net sales for Fiscal 2003. The acquisition of Reptron increased our
SG&A by $7.0 million.
We continue to monitor all discretionary spending, without reducing
personnel to the point that we cannot support sales growth. Our variable costs
are primarily those costs associated with increases in gross profit dollars,
such as sales commissions and bonuses. Management considers SG&A as a percentage
of net sales to be a key performance indicator in managing our business. We
believe that we already have in place the infrastructure to sustain our sales
growth for the foreseeable future. Therefore, an increase in our net sales
should result in a decrease in SG&A as a percentage of net sales.
Interest expense increased to $1.5 million for Fiscal 2004 compared to
$1.0 million for Fiscal 2003. The increase is attributable to higher borrowing
as a result of cash expended due to the acquisition of Reptron and cash required
due to the higher accounts receivable and inventory as a result of the growth in
sales. Slightly higher interest rates also contributed to the increase. Any
significant increase in our borrowing rates could significantly increase our
interest expense, which would have a negative impact on our results of
operations.
Net loss from continuing operations for Fiscal 2004 was $1.3 million,
or $0.22 per diluted share, as compared to $2.3 million, or $0.40 per diluted
share, for Fiscal 2003. The improved performance is attributable to the increase
in our net sales and resulting increase in gross profit dollars, partially
offset by the increase in SG&A and interest expense. We believe we have
benefited during Fiscal 2004 from the improved demand in the electronics
industry and the integration of the Reptron distribution business.
Discontinued Operations:
As described in Item 1. "Business-Discontinued Operations," on
September 20, 2004, we completed the sale of substantially all of the assets of
our contract manufacturing subsidiary, Nexus, for total consideration of up to
$13.0 million, consisting primarily of $9.25 million paid in cash at closing and
a $2.75 million subordinated note from the purchaser payable in quarterly
installments over the next five years.
Net income from these discontinued operations was $0.7 million, or
$0.13 per diluted share, for Fiscal 2004. For Fiscal 2003, there was a net loss
from these discontinued operations of $0.7 million, or $0.12 per diluted share.
Increase in sales resulted in improved utilization of our fixed costs, resulting
in increased gross profit.
Combined Net Loss:
The net loss from both continuing and discontinued operations for
Fiscal 2004 was $0.6 million, or $0.09 per diluted share, compared to $3.0
million, or $0.52 per diluted share, for Fiscal 2003. The
21
improved performance was attributable to the increase in gross profit dollars in
excess of the increased SG&A during Fiscal 2004 as compared to Fiscal 2003.
Liquidity and Capital Resources
To provide additional liquidity and flexibility in funding its
operations, the Company borrows amounts under credit facilities and other
external sources of financing. On December 22, 2003, the Company entered into a
Third Restated and Amended Loan and Security Agreement with GMAC Commercial
Finance LLC and PNC Bank, National Association providing for a $50,000,000
revolving secured line of credit. This credit facility has a maturity date of
December 31, 2006. Borrowings under the credit facility are based principally on
eligible accounts receivable and inventories of the Company, as defined in the
credit agreement, and are collateralized by substantially all of the assets of
the Company. At June 30, 2005, the outstanding balance on this revolving line of
credit facility was $33.2 million, with an additional $1.5 million available.
The Company has outstanding a $1.5 million stand-by letter of credit on behalf
of a certain vendor. The interest rate on the outstanding borrowings at June 30,
2005 was approximately 6.97%. The credit agreement contains certain financial
covenants, including, among others, provisions for maintenance of specified
levels of EBITDA and Minimum Net Worth, and restricts the Company's ability to
pay dividends
The credit agreement also includes a subjective acceleration clause and
requires the deposit of customer receipts to be directed to a blocked account
and applied directly to the repayment of indebtedness outstanding under the
credit facility. Accordingly, this debt is classified as a current liability.
At June 30, 2005, the Company was not in compliance with certain bank
covenants, including Minimum EDITDA and Minimum Net Worth. On September 28,
2005, the Company's credit facility was amended to waive its non-compliance with
certain bank covenants, including Minimum EBITDA and Minimum Net Worth, for the
quarter ended June 30, 2005. The Company's credit facility was also amended to
restate the existing covenants and to add additional covenants, including, among
other things, to (i) reduce the maximum loan amount from $50,000,000 to
$40,000,000, (ii) modify the Availability Formula, (iii) reset existing
covenants for Fixed Charge Coverage Ratio, Minimum Net Worth and Capital
Expenditures as defined in the agreement, and (iv) define and add a new covenant
regarding Operating Cash Flow. As a result of the modification of the
Availability Formula, the Company would still have an additional $1.5 million
available for future borrowing as of June 30, 2005. Failure to remain in
compliance with the Company's bank covenants could trigger an acceleration of
the Company's obligation to repay all outstanding borrowings under its credit
facility and/or limit the Company's ability to borrow additional amounts under
the line of credit. This would have a material adverse effect on the Company's
financial condition.
On May 10, 2005, the Company's credit facility was amended to waive our
compliance with certain bank covenants, including Minimum EBITDA and Minimum Net
Worth, for the quarter ended March 31, 2005.
On February 11, 2005, the Company's credit facility was amended to
retroactively restate the existing covenants and to add additional covenants,
including, among other things, to (i) modify the Availability Formula, (ii)
require the Company to maintain Un-drawn Availability of not less than
$1,500,000 at all times, (iii) define and reset existing covenants for Minimum
EBITDA, Fixed Charge Coverage Ratio, Capital Expenditures and Minimum Net Worth,
(iv) add a new covenant regarding
22
minimum sales, (v) establish additional reporting requirements, (vi) modify
interest provisions, and (vii) permit certain of the Company's domestic and
foreign receivables to qualify as Eligible Receivables for a period of time.
On November 23, 2004, the Company's credit facility was amended to
exclude, effective as of October 1, 2004, any extraordinary gains, including any
gains derived from the sale of assets of Nexus, from the calculation of EBITDA
and Fixed Charge Coverage Ratio covenants.
On September 20, 2004, the Company's credit facility was amended to
provide the lenders' consent to the Company's sale of it's contract
manufacturing subsidiary, Nexus, and to (i) change it's EBITDA, Fixed Charge
Coverage Ratio and Minimum Net Worth covenants, (ii) eliminate the remaining
portion of the additional $732,000 of the additional available amount under the
facility to zero, (iii) require the cash proceeds from the sale of Nexus to be
used to repay indebtedness outstanding under the facility, and (iv) and add a
requirement that the Company maintain an aggregate un-drawn availability of $1.5
million until certain financial requirements are achieved, which would reduce
the un-drawn availability requirement to $500,000.
At June 30, 2005, we had cash of approximately $321,000 and working
capital of approximately $7,334,000, as compared to cash of approximately
$553,000 and working capital of approximately $17,459,000 at June 30, 2004. As
described above, our credit agreement requires our cash generated from
operations to be applied directly to the prepayment of indebtedness under our
credit facility. Our working capital at June 30, 2004 included approximately
$10,110,000 from discontinued operations.
For Fiscal 2005, our net cash used in operating activities was
approximately $5.0 million, as compared to $1.7 million for Fiscal 2004. The
increase in net cash used is primarily attributable to an increase in our loss
from continuing operations and a decrease in our accounts payable. The increase
in net cash used was partially offset by an $8.3 million cash in advance payment
from a specific customer during the third quarter of Fiscal 2005 as part of a
"bill and hold" arrangement in which the related inventory has not yet been
shipped and the revenue has not been recognized. Net cash provided by investing
activities was approximately $8.6 million for Fiscal 2005 as compared to net
cash used in investing activities of $0.6 million for Fiscal 2004. The increase
in net cash provided by investing activities is primarily attributable to $9.0
million in proceeds we received from our sale of substantially all of the assets
of Nexus in September 2004. Net cash used in financing activities was
approximately $3.8 million for Fiscal 2005 as compared to net cash provided by
financing activities of $2.7 million for Fiscal 2004. The increase in net cash
used is primarily attributable to a decrease in net borrowings under our credit
facility of approximately $5.3 million.
For Fiscal 2005 and Fiscal 2004, our inventory turnover was 5.1 times
and 5.8 times, respectively. The average days outstanding of our accounts
receivable at June 30, 2005 was 57 days compared to 52 days at June 30, 2004.
Inventory turnover and average days outstanding are key ratios that management
relies on to monitor our business.
In February 2005, we completed certain leasehold improvements to construct
an FPD facility that now allows us to vertically integrate our entire FPD
operation. The completed facility offers customers a one-stop source for their
FPD supply and integration needs. The cost of this project was approximately
$570,000.
Based upon our present plans, including no anticipated material capital
expenditures, we believe that cash flow from operations and funds available
under our credit facility will be sufficient to fund our capital needs for the
next twelve months. However, our ability to maintain sufficient liquidity
depends
23
partially on our ability to achieve anticipated levels of revenue while
continuing to control costs. Our cash expenditures may vary significantly from
current levels based on a number of factors, including, but not limited to,
future acquisitions and capital expenditures, if any. Historically, we have,
when necessary, been able to obtain amendments to our credit facilities to
satisfy instances of non-compliance with financial covenants. While we cannot
assure you that any such future amendments, if needed, will be available,
management believes we will be able to continue to obtain financing on
acceptable terms under our existing credit facility or through other external
sources. Failure to maintain financing arrangements on acceptable terms would
have a material adverse effect on our business, results of operations and
financial condition.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt, nor do we have any
transactions, arrangements or relationships with any special purpose entities.
Contractual Obligations
This table summarizes our known contractual obligations and commercial
commitments at June 30, 2005.
Total < 1 Year 1 to 3 Years 3 to 5 Years > 5 Years
------------- --------------- --------------- ---------------- --------------
Long-Term Debt $33,205,111 $33,205,111
Capital Lease 134,234 73,218 $61,016
Operating Lease 8,424,554 1,577,403 2,179,157 $1,604,434 $3,063,560
------------- --------------- --------------- ---------------- --------------
Total $41,763,899 $34,855,732 $2,240,173 $1,604,434 $3,063,560
============= =============== =============== ================ ==============
Inflation
Inflation has not had a significant impact on our operations during the
last three fiscal years.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate changes with respect to borrowings under
our credit facility, which bears interest at a variable rate dependent upon
either the prime rate, federal funds rate or the LIBOR rate ("rates"). At August
31, 2005, $25.0 million was outstanding under the credit facility. Changes in
any of the rates during the current fiscal year will have a positive or negative
effect on our interest expense. Each 1.0% fluctuation in the rate will increase
or decrease our interest expense under the credit facility by approximately $0.3
million based on outstanding borrowings at August 31, 2005.
The impact of interest rate fluctuations on other floating rate debt is
not material.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are provided under Item
15 of this report.
24
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
No response to this item is required.
Item 9A. Controls and Procedures.
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Company's Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2005. Based
upon that evaluation, the Company's management, including its Principal
Executive Officer and Principal Financial Officer, has concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. There have been no significant changes in the Company's internal control
over financial reporting or in other factors identified in connection with this
evaluation that occurred during the three months ended June 30, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information
No response to this item is required.
25
PART III
Item 10. Directors and Executive Officers of the Registrant.
Code of Ethics
We have adopted a code of ethics within the meaning of Item 406(b) of
SEC Regulation S-K, called the "Jaco Electronics, Inc. Code of Business
Conduct," which applies to our chief executive officer, chief financial officer,
controller and all our other officers, directors and employees. This document is
available free of charge on our website at www.jacoelectronics.com.
The other information required by this item is incorporated herein by
reference from the Company's definitive proxy statement for its Annual Meeting
of Shareholders to be held on December 15 2005, which will be filed with the SEC
not later than October 28, 2005 (the "Proxy Statement").
Item 11. Executive Compensation.
The information required by this item is incorporated herein by
reference from the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Equity Compensation Plan Disclosure
The following table summarizes equity compensation plans approved by
security holders and equity compensation plans that were not approved by
security holders as of June 30, 2005:
(a) (b) (C)
Number of Securities
Number of Securities Remaining Available for
To be Issued Upon Weighted-Average Future Issuance Under Equity
Exercise of Outstanding Exercise Price of Compensation Plans (Excluding
Options, Warrants and Outstanding Options, Securities
Plan category Rights Warrants and Rights Reflected in Column (a))
- ----------------------------------- ------------------------- ------------------------ ----------------------------------
Equity compensation plans (stock
options) approved by stockholders 532,000 $4.97 653,500
------------------------- ------------------------ ----------------------------------
Total 532,000 $4.97 653,500
The other information required by this item is incorporated herein by
reference from the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by
reference from the Proxy Statement.
26
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated herein by
reference from the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
Page
----
(a) (1) Financial Statements included in Part II, Item 8, of this Report:
Index to Consolidated Financial Statements and Schedule F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-33
(2) Financial Statement Schedule included in Part IV of this
Report:
Report of Independent Registered Public Accounting Firm on supplemental
schedule F-34
Schedule II - Valuation and Qualifying Accounts F-35
(b) See Exhibit Index on pages 28 through 33 of this report for
a list of the exhibits filed, furnished or incorporated by
reference as part of this report.
27
Exhibit No. Exhibit
3.1 Restated Certificate of Incorporation adopted November, 1987, incorporated by reference to the
Company's definitive proxy statement distributed in connection with the Company's annual
meeting of shareholders held in November, 1987, filed with the SEC on November 3, 1986, as set
forth in Appendix A to the aforesaid proxy statement.
3.1.1 Certificate of Amendment of the Certificate of Incorporation,
adopted December, 1995, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June
30, 1996 ("the Company's 1996 10-K"), Exhibit 3.1.1.
3.2 Restated By-Laws adopted June 18, 1987, incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended June 30, 1987 ("the Company's 1987 10-K"), Exhibit
3.2.
4.1 Form of Common Stock Certificate, incorporated by reference
to the Company's Registration Statement on Form S-1,
Commission File No. 2-91547, filed June 9, 1984, Exhibit 4.1.
10.1 Sale and leaseback with Bemar Realty Company (as
assignee of Hi-Tech Realty Company), incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1983, Exhibit 10(1), pages 48-312.
10.2 Amendment No. 1 to Lease between the Company and Bemar Realty
Company (as assignee of Hi-Tech Realty Company), incorporated
by reference to the Company's Registration Statement on Form
S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit
10.2. 10.2.2 Lease between the Company and Bemar Realty
Company, dated January 1, 1996, incorporated by reference to
the Company's 1996 10-K, Exhibit 10.2.2.
10.6 1993 Non-Qualified Stock Option Plan, incorporated by
reference to the Company's 1993 10-K, Exhibit 10.6.
10.6.1 1993 Non-Qualified Stock Option Plan, as amended (filed as
Exhibit A to the Company's Definitive Proxy Statement, dated
November 3, 1997 for the Annual Meeting of Shareholders held
on December 9, 1997.
10.6.2 1993 Non-Qualified Stock Option Plan, as amended (filed as
Exhibit A to the Company's Definitive Proxy Statement, dated
November 2, 1998 for the Annual Meeting of Shareholders held
on December 7, 1998.
10.7 Stock Purchase Agreement, dated as of February 8, 1994 by
and among the Company and Reilrop, B.V. and Guaranteed by
Cray Electronics Holdings PLC, incorporated by reference
to the Company's Current Report on Form 8-K, dated
March 11, 1994.
10.8 1993 Stock Option Plan for Outside Directors, incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1994, Exhibit 10.8.
28
10.10 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and
between AVX and the Company, incorporated by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 1995, Exhibit 10.10.
10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between KEMET
and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended June 30, 1995, Exhibit 10.11.
10.12 Restricted Stock Plan (filed as Exhibit B to the Company's Definitive Proxy Statement, dated
November 3, 1997 for the Annual Meeting of Shareholders held on December 9, 1997).
10.12.1 Form of Escrow Agreement under the Restricted Stock Plan,
incorporated by reference to the Company's Registration
Statement on Form S-8/S-3, Commission File No. 333 -49877,
filed April 10, 1998 Exhibit 4.2.
10.12.2 Form of Stock Purchase Agreement under the Restricted Stock Plan, incorporated by reference to
the Company's Registration Statement on Form S-8/S-3, Commission File No. 333 - 49877, filed
April 10, 1998 Exhibit 4.3.
10.12.3 Form of Stock Option Agreement, incorporated by reference to the Company's Registration
Statement on Form S-8/S-3, Commission File No. 333 -49877, filed April 10, 1998 Exhibit 4.4.
10.12.4 Restricted Stock Plan (filed as Exhibit B to the Company's
Definitive Proxy Statement, dated November 2, 1998 for the
Annual Meeting of Shareholders held on December 7, 1998).
10.13 Employment agreement between Joel Girsky and the Company,
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, Exhibit
10.13.
10.13.1 Amendment No. 1 to Employment Agreement between Joel Girsky and the Company, incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit
10.13.1.
10.14 Employment agreement between Charles Girsky and the Company, incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit
10.14.
10.15 Employment agreement between Jeffrey D. Gash and the Company, incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit
10.15.
10.15.1 Amendment No. 1 to the Employment Agreement between Jeffrey D. Gash and the Company,
incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June
30, 2001, Exhibit 10.15.1.
10.16 Employment Agreement, dated June 6, 2000, between the Company
and Joseph Oliveri, incorporated by reference to the Company's
Current Report on Form 8-K, filed June 12, 2000, Exhibit
10.16.
29
10.16.1 Amendment No. 1 to the Employment Agreement between Joseph Oliveri and the Company,
incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 2001, Exhibit 10.16.1.
10.17 Stock Purchase Agreement by and among Jaco Electronics, Inc. and all of the Stockholders of
Interface Electronics Corporation as of May 4, 2000, incorporated by reference to the Company's
Current Report on Form 8-K, filed May 15, 2000, Exhibit 2.1.
10.17.1 Amendment No. 1 to the Stock Purchase Agreement by and among Jaco Electronics, Inc. and all of
the Stockholders of Interface Electronics Corp. as of May 4, 2000, dated June 6, 2000,
incorporated by reference to the Company's Current Report on Form 8-K, filed June 12, 2000,
Exhibit 2.2.
10.18 Agreement between the Company and Gary Giordano, incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.18.
10.19 Employment Agreement between Joel H. Girsky and the Company,
incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 2001, Exhibit 10.19.
10.20 Employment Agreement between Charles Girsky and the Company,
incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 2001, Exhibit 10.20.
10.21 Asset Purchase Agreement dated as of May 19, 2003 by and between the Company and Reptron
Electronics, Inc., incorporated by reference to the Company's Current Report on Form 8-K, filed
June 26, 2003, Exhibit 2.1.
10.21.1 First Amendment to the Asset Purchase Agreement dated as of
June 2, 2003 by and between the Company and Reptron
Electronics, Inc., incorporated by reference to the Company's
Current Report on Form 8-K, filed June 26, 2003, Exhibit 2.2.
10.22 Second Restated and Amended Loan and Security Agreement dated
September 13, 1995 among the Company, Nexus Custom
Electronics, Inc., BNYCC and NatWest Bank, N.A. ("Second
Restated and Amended Loan and Security Agreement"),
incorporated by reference to the Company's Registration
Statement on Form S-2, Commission File No. 33-62559, filed
October 13, 1995, Exhibit 99.8.
10.22.1 Amendment to the Second Restated and Amended Loan and Security
Agreement, dated as of April 10, 1996, incorporated by
reference to the Company's 1996 10-K, Exhibit 99.8.1.
10.22.2 Amendment to the Second Restated and Amended Loan and Security
Agreement, dated as of August 1, 1997, incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998, Exhibit 99.8.2.
10.22.3 Amendment to Second Restated and Amended Loan and Security Agreement dated July 1, 1998,
incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, Exhibit 99.8.3.
30
10.22.4 Amendment to Second Restated and Amended Loan and Security
Agreement dated September 21, 1998 incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, Exhibit 99.8.4.
10.22.5 Amendment to Second Restated and Amended Loan and Security
Agreement dated October 26, 1999, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, Exhibit 99.8.5.
10.22.6 Amendment to Second Restated and Amended Loan and Security
Agreement dated December 31, 1999, incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999, Exhibit 99.8.6.
10.22.7 Amendment to Second Restated and Amended Loan and Security
Agreement dated June 6, 2000, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2000, Exhibit 99.8.7.
10.22.8 Amendment to Second Restated and Amended Loan and Security
Agreement dated September 28, 2000, incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, Exhibit 99.8.8.
10.22.9 Amendment to Second Restated and Amended Loan and Security
Agreement dated January 29, 2001, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2000, Exhibit 99.8.9.
10.22.10 Amendment to Second Restated and Amended Loan and Security
Agreement dated June 12, 2001, incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
June 30, 2001, Exhibit 99.8.10.
10.22.11 Amendment to Second Restated and Amended Loan and Security
Agreement dated July 1, 2001, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June
30, 2001, Exhibit 99.8.11.
10.22.12 Amendment to Second Restated and Amended Loan and Security
Agreement dated November 14, 2001, incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001, Exhibit 99.8.12.
10.22.13 Amendment to Second Restated and Amended Loan and Security
Agreement dated February 6, 2002, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2001, Exhibit 99.8.13.
10.22.14 Amendment to Second Restated and Amended Loan and Security
Agreement dated September 23, 2002, incorporated by reference
to the Company's Annual Report on Form 10K for the year ended
June 30, 2002, Exhibit 99.8.14.
10.22.15 Amendment to Second Restated and Amended Loan and Security
Agreement dated May 12, 2003, incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003, Exhibit 99.8.15.
10.22.16 Amendment to Second Restated and Amended Loan and Security Agreement dated June 5, 2003,
incorporated by reference to the Company's Current Report on Form 8-K, filed June 26, 2003,
Exhibit 99.8.16.
31
10.22.17 Amendment to Second Restated and Amended Loan and Security
Agreement dated September 19, 2003, incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
June 30, 2003, Exhibit 99.8.17.
10.22.18 Amendment to Second Restated and Amended Loan and Security
Agreement dated November 7, 2003, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, Exhibit 99.8.18.
10.23 Third Restated and Amended Loan and Security Agreement dated
as of December 22, 2003, by and among GMAC Commercial Finance
LLC as Lender and as Agent, PNC Bank, National Association, as
Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom
Electronics, Inc., Interface Electronics Corp. and Jaco de
Mexico, Inc. ("Third Restated and Amended Loan and Security
Agreement"), incorporated by reference to the Company's
Current Report on Form 8-K, filed January 8, 2004, Exhibit
10.23.
10.23.1 Amendment to Third Restated and Amended Loan and Security Agreement dated September 20, 2004,
by and among GMAC Commercial Finance LLC, as Lender and as Agent, PNC Bank, National
Association, as Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom Electronics, Inc. and
Interface Electronics Corp., incorporated by reference to the Company's Annual Report on Form
10-K for the year ended June 30, 2004, Exhibit 10.23.1.
10.23.2 Amendment to Third Restated and Amended Loan and Security Agreement dated November 23, 2004, by
and among GMAC Commercial Finance LLC, as Lender and as Agent, PNC Bank, National Association,
as Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom Electronics, Inc. and Interface
Electronics Corp., incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2004, Exhibit 10.23.2.
10.23.3 Amendment to Third Restated and Amended Loan and Security Agreement dated February 11, 2005, by
and among GMAC Commercial Finance LLC, as Lender and as Agent, PNC Bank, National Association,
as Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom Electronics, Inc. and Interface
Electronics Corp., incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2004, Exhibit 10.23.3.
10.23.4 Amendment to Third Restated and Amended Loan and Security Agreement dated May 10, 2005, by and
among GMAC Commercial Finance LLC, as Lender and as Agent, PNC Bank, National Association, as
Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom Electronics, Inc. and Interface
Electronics Corp., incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005, Exhibit 10.23.4.
10.23.5 Amendment to Third Restated and Amended Loan and Security Agreement dated September 28, 2005, by
and among GMAC Commercial Finance LLC, as Lender and as Agent, PNC Bank, National Association,
as Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom Electronics, Inc. and Interface
Electronics Corp.
32
10.24 Asset Purchase Agreement made and entered into as of September 20, 2004 among Sagamore
Holdings, Inc., NECI Acquisition, Inc., Nexus Custom Electronics, Inc. and Jaco Electronics,
Inc., incorporated by reference to the Company's Current Report on Form 8-K, filed September
23, 2004, Exhibit 10.24.
10.25 2000 Stock Option Plan, incorporated by reference to Exhibit A to the Company's Definitive
Proxy Statement on Schedule 14A, dated November 17, 2000, for the Company's Annual Meeting of
Shareholders held on December 12, 2000.
10.26 2000 Stock Option Plan, as amended.
21.1 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
32.1 Section 1350 Certification of Principal Executive Officer.
32.2 Section 1350 Certification of Principal Financial Officer.
33
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Registered Public Accounting Firm F-2
Financial Statements
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-33
Report of Independent Registered Public Accounting Firm on
Supplemental Schedule F-34
Schedule II - Valuation and Qualifying Accounts F-35
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Jaco Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Jaco
Electronics, Inc. (a New York Corporation) and subsidiaries (the "Company") as
of June 30, 2005 and June 30, 2004, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended June 30, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis of designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Jaco
Electronics, Inc. and subsidiaries as of June 30, 2005 and June 30, 2004, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended June 30, 2005 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
----------------------
GRANT THORNTON LLP
Melville, New York
September 7, 2005 (except for Notes A and F(a),
as to which the date is September 28, 2005)
F-2
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 2005 2004
-------------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 321,423 $ 552,655
Marketable securities 770,283
Accounts receivable, less allowance for doubtful accounts
of $554,000 in 2005 and $695,000 in 2004 34,694,811 35,926,553
Inventories, net 37,056,949 37,017,390
Prepaid expenses and other 1,035,633 1,513,657
Deferred income taxes 3,269,000 2,725,000
Current assets of discontinued operations 12,910,801
------------------- --------------
Total current assets 76,377,816 91,416,339
PROPERTY, PLANT AND EQUIPMENT - NET 2,280,809 2,003,137
DEFERRED INCOME TAXES 3,125,000 416,000
GOODWILL 25,416,087 25,416,087
NOTE RECEIVABLE 2,750,000
OTHER ASSETS 2,272,701 2,530,269
--------- ---------
$112,222,413 $121,781,832
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
June 30,
LIABILITIES AND
SHAREHOLDERS' EQUITY 2005 2004
-------------- ---------
CURRENT LIABILITIES
Accounts payable $ 24,717,114 $ 31,533,041
Current maturities of long-term debt and
capitalized lease obligations 33,266,185 37,088,743
Accrued compensation 1,289,212 1,581,922
Accrued expenses and other current liabilities 1,419,780 953,169
Unearned revenue 8,285,200
Income taxes payable 66,354
Current liabilities of discontinued operations 2,800,664
------------------- -------------
Total current liabilities 69,043,845 73,957,539
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 57,451 118,525
DEFERRED COMPENSATION 1,050,000 1,000,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 100,000 shares, $10
par value; none issued
Common stock - authorized, 20,000,000 shares,
$.10 par value; 6,927,732 and 6,855,232 shares
issued, respectively, and 6,267,832 and 6,195,332
shares outstanding, respectively 692,773 685,523
Additional paid-in capital 26,990,374 26,735,295
Retained earnings 16,702,536 21,562,396
Accumulated other comprehensive income 37,120
Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566)
------------- -------------
42,071,117 46,705,768
------------ ------------
$112,222,413 $121,781,832
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
2005 2004 2003
------------- ------------- ---------
Net sales $231,824,516 $249,100,345 $202,656,281
Cost of goods sold 205,924,065 214,389,155 176,918,022
----------- ------------ ------------
Gross profit 25,900,451 34,711,190 25,738,259
Selling, general and administrative expenses 32,112,561 35,016,383 28,184,534
------------ ------------ ------------
Operating loss (6,212,110) (305,193) (2,446,275)
Interest expense 2,028,631 1,539,007 1,025,067
------------- ------------- -------------
Loss from continuing operations before income taxes (8,240,741) (1,844,200) (3,471,342)
Income tax benefit (2,813,575) (553,131) (1,180,105)
------------- ------------ -------------
Loss from continuing operations (5,427,166) (1,291,069) (2,291,237)
---------- ----------- -----------
Discontinued operations:
(Loss) earnings from discontinued operations, net of
income tax provision (benefit) of $(39,312), $400,359
and $(329,895) in 2005, 2004 and 2003, respectively (64,140) 735,498 (693,424)
Gain on sale of net assets of subsidiary, net of income tax
provision of $449,048 631,446
--------- ---------- --------
Earnings (loss) from discontinued operations 567,306 735,498 (693,424)
--------- --------- ------------
NET LOSS $ (4,859,860) $ (555,571) $ (2,984,661)
============ =========== =============
PER SHARE INFORMATION
Basic (loss) earnings per common share:
Loss from continuing operations $(0.87) $(0.22) $(0.40)
Earnings (loss) from discontinued operations $ 0.09 $ 0.13 $(0.12)
------ ------ -------
Net loss $(0.78) $(0.09) $(0.52)
===== ===== =====
Diluted (loss) earnings per common share:
Loss from continuing operations $(0.87) $(0.22) $(0.40)
Earnings (loss) from discontinued operations $ 0.09 $ 0.13 $(0.12)
------ ------ -------
Net loss $(0.78) $(0.09) $(0.52)
===== ===== =====
Weighted-average common shares and common
equivalent shares outstanding:
Basic 6,249,622 5,974,844 5,783,275
========= ========= =========
Diluted 6,249,622 5,974,844 5,783,275
========= ========= =========
The accompanying notes are an integral part of these statements.
F-5
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Years ended June 30, 2005, 2004 and 2003
Additional Accumulated
Common stock paid-in other
Retained comprehensive
Shares Amount capital Earnings income (loss)
-------- -------- ---------- ----------- ----------------
Balance at July 1, 2002 6,425,732 $642,573 $25,152,010 $25,102,628 $(24,554)
Net loss (2,984,661)
Unrealized loss on marketable
securities - net of deferred taxes
of $2,218 (5,773)
Purchase of treasury stock
---------- -------- ----------- ----------- --------
Comprehensive loss
Balance at June 30, 2003 6,425,732 642,573 25,152,010 22,117,967 (30,327)
Net loss (555,571)
Unrealized loss on marketable
securities - net of deferred taxes
of $41,339 67,447
Exercise of stock options 429,500 42,950 932,258
Stock options income tax benefits 651,027
---------- -------- ----------- ----------- --------
Comprehensive loss
Balance at June 30, 2004 6,855,232 685,523 26,735,295 21,562,396 37,120
Net loss (4,859,860)
Unrealized gain on marketable
securities - net of deferred taxes
of $19,254 31,415
Reclassification adjustment for gains
on
marketable securities recognized
included
in net loss - net of deferred taxes
of $42,005 (68,535)
Exercise of stock options 72,500 7,250 173,250
Stock options income tax benefits 81,829
---------- -------- ----------- ----------- --------
Comprehensive loss
Balance at June 30, 2005 6,927,732 $692,773 $26,990,374 $16,702,536 $ --
======== ======== =========== =========== ========
Total
Treasury shareholders' Comprehensive
stock equity loss
--------- ----------- --------
Balance at July 1, 2002 (2,204,515) $ 48,668,142
Net loss (2,984,661) $ (2,984,661)
Unrealized loss on marketable
securities - net of deferred taxes
of $2,218 (5,773) $ (5,773)
Purchase of treasury stock (110,051) (110,051)
---------- ------------ -----------
$ (2,990,434)
Comprehensive loss ============
Balance at June 30, 2003 (2,314,566) 45,567,657
Net loss (555,571) $ (555,571)
Unrealized loss on marketable
securities - net of deferred taxes
of $41,339 67,447 $ 67,447
Exercise of stock options 975,208
Stock options income tax benefits 651,027
---------- ------------ ------------
Comprehensive loss $ (488,124)
============
Balance at June 30, 2004 (2,314,566) 46,705,768
Net loss (4,859,860) (4,859,860)
Unrealized gain on marketable
securities - net of deferred taxes
of $19,254 31,415 31,415
Reclassification adjustment for gains
on
marketable securities recognized
included
in net loss - net of deferred taxes
of $42,005 (68,535) $ (68,535)
Exercise of stock options 180,500
Stock options income tax benefits 81,829
------------ ------------ ------------
Comprehensive loss $ (4,896,980)
============
Balance at June 30, 2005 $ (2,314,566) $ 42,071,117
========== ============
The accompanying notes are an integral part of these statements.
F-6
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
2005 2004 2003
------------ ------------ --------
Cash flows from operating activities
Net loss $ (4,859,860) $ (555,571) $ (2,984,661)
Loss (earnings) from discontinued operations 64,140 (735,498) 693,424
Gain on sale of net assets of subsidiary (631,446)
--------- ---------- ---------
Loss from continuing operations (5,427,166) (1,291,069) (2,291,237)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 1,162,019 1,275,745 1,292,565
Deferred compensation 50,000 50,000 50,000
Deferred income tax benefit (3,230,249) (196,339) (532,783)
Stock options income tax benefits 81,829 651,027
Gain on disposal/sale of equipment (49,159) (5,000)
Gain on sale of marketable securities (110,540)
Provision for doubtful accounts 366,100 623,850 822,500
Changes in operating assets and liabilities, net of
effects of acquisitions
Decrease (increase) in accounts receivable 865,642 (6,428,438) (4,583,646)
(Increase) decrease in inventories (39,559) (2,458,536) 6,072,329
Decrease (increase) in prepaid expenses and other 728,024 (403,230) 127,503
Decrease in prepaid and refundable income taxes 1,059,897 1,380,158
(Increase) decrease in other assets (39,043) 1,007,404 (60,820)
(Decrease) increase in accounts payable (6,815,927) 4,907,297 4,280,375
Increase in unearned revenue 8,285,200
Decrease in income taxes payable (387,469)
(Decrease) increase in accrued compensation (292,710) 370,536 310,769
Increase (decrease) in accrued expenses and other 207,776 (583,750) (906,874)
current liabilities ----------- ------------- -------------
Net cash (used in) provided by continuing operations (4,596,073) (1,464,765) 5,955,839
Net cash (used in) provided by discontinued operations (439,405) (192,076) 1,955,191
------- ------- ---------
Net cash (used in) provided by operating activities (5,035,478) (1,656,841) 7,911,030
----------- ----------- ------------
Cash flows from investing activities
Purchase of marketable securities (8,470) (8,889) (10,331)
Proceeds from sale of marketable securities 829,422
Capital expenditures (1,143,080) (313,461) (135,562)
Proceeds from the sale of equipment 2,100 5,000
Proceeds from sale of assets of a subsidiary, net of
transaction costs
Business acquisition 8,990,254 (5,577,002)
Deferred payments on business acquisitions (2,099,563)
---------- ----------- ------------
Net cash provided by (used in) continuing operations 8,668,126 (320,250) (7,817,458)
Net cash used in discontinued operations (57,855) (300,909) (113,193)
-------- --------- ---------
Net cash provided by (used in) investing activities 8,610,271 (621,159) (7,930,651)
----------- ----------- -----------
Cash flows from financing activities
Borrowings from line of credit 250,582,387 266,318,190 207,569,803
Repayments of line of credit (254,376,969) (264,801,418) (205,894,585)
Release of compensating balance 800,000
Funding of compensating balance (800,000)
Principal payments under equipment financing (53,498) (159,094) (203,691)
Payments under term loan (35,552) (33,022) (116,628)
Purchase of treasury stock (110,051)
Proceeds from exercise of stock options 180,500 975,208
------- --------------
Net cash (used in) provided by continuing operations (3,703,132) 3,099,864 444,848
Net cash used in discontinued operations (102,893) (426,676) (592,207)
--------- --------- ---------
Net cash (used in) provided by financing activities (3,806,025) 2,673,188 (147,359)
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH (231,232) 395,188 (166,980)
Cash and cash equivalents at beginning of year 552,655 157,467 324,447
------- --------------- ---------------
Cash and cash equivalents at end of year $ 321,423 $ 552,655 $ 157,467
================ ================ ================
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 2,100,000 $ 1,841,000 $ 1,341,000
Income taxes 101,000 117,000 35,000
Supplemental schedule of non-cash financing and investing activities:
Liabilities assumed in connection with a business
acquisition $ 3,608,784
Equipment acquired capital leases $ 130,669
The accompanying notes are an integral part of these statements.
F-7
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005, 2004 and 2003
NOTE A - DESCRIPTION OF BUSINESS AND LIQUIDITY MATTERS
Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily
engaged, principally in the United States, in the distribution of
electronic components, including semiconductors, capacitors, resistors,
electromechanical devices, flat panel displays and monitors, and power
supplies, which are used in the manufacture and assembly of electronic
products. In addition, the Company previously provided contract
manufacturing services. During the first quarter of fiscal 2005, the
Company sold its contract manufacturing subsidiary. The results of
operations for the contract manufacturing subsidiary have been reclassified
to discontinued for all periods presented herein (See Note C).
The Company incurred net losses of approximately $4,860,000, $555,000 and
$2,985,000 during the year ended June 30, 2005, 2004 and 2003,
respectively. The Company also utilized approximately $5,035,000 of cash in
operations during the year ended June 30, 2005. At June 30, 2005, the
Company had cash of approximately $321,000 and working capital of
approximately $7,334,000.
As discussed further in Note F, the Company maintains a secured revolving
line of credit, which provides the Company with bank financing based upon
eligible accounts receivable and inventory, as defined. At June 30, 2005,
the Company was in violation of certain financial covenants contained in
the credit agreement. On September 28, 2005, the Company received a waiver
of these covenants from its lenders for the quarter ended June 30, 2005 and
amended the terms of the financial covenants for the remaining term of the
agreement. The Company has recently had difficulty in achieving certain
financial covenants and was required to secure a waiver and make further
amendments to the line of credit.
Management believes that the implementation of its plan for cost
containment, improved operating controls, paring back of unprofitable
product lines, and a focused sales and marketing effort should improve
results from operations and cash flows in the near term. Achievement of
this plan, however, will be dependent upon the Company's ability to
generate sufficient revenues, improve operating costs and trade support
levels consistent with management's plan, and remain in compliance with its
bank covenants. Such operating performance will be subject to financial,
economic and other factors beyond the Company's control, and there can be
no assurance that the Company will be able to achieve these goals. If these
goals are not achieved or if the Company is unable to remain in compliance
with its bank covenants, it would have a material adverse effect upon the
Company.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
F-8
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Jaco Electronics, Inc. and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions
have been eliminated.
2. Revenue Recognition
The Company derives revenue from the shipment of finished products to
its customers when title is transferred. In general, revenue is
recognized when it is realized or realizable and earned. The Company
considers revenue realized or realizable and earned when it has
persuasive evidence of an arrangement, the product has been shipped to
the customer, the sales price is fixed or determinable, and
collectibility is reasonably assured. The Company reduces revenue for
rebates and estimated customer returns and other allowances. The
Company offers rebates to certain customers based on the volume of
products purchased.
The Company's products are sold on a stand alone basis and are not part
of sales arrangements with multiple deliverables. Revenue from product
sales is recognized generally when the product is shipped as the
Company does not have any obligations beyond shipment to its customers.
A portion of the Company's business involves shipments directly from
its suppliers to its customers. In these transactions, the Company is
responsible for negotiating price both with the supplier and customer,
payment to the supplier, establishing payment terms with the customer,
product returns, and has risk of loss if the customer does not make
payment. As the principal with the customer, the Company recognizes
revenue when, the Company is notified by the supplier that the product
has been shipped. The Company also maintains a consignment inventory
program, which provides for certain components to be shipped on-site to
a consignee so that such components are available for the consignee's
use when they are required. The consignee maintains a right of return
related to unused parts that are shipped under the consignment
inventory program. Revenue is not recognized from products shipped on
consignment until notification is received from the Company's customer
that they have accepted title of the inventory that was shipped
initially on consignment. The items shipped on consignment in which
title has not been accepted are included in the Company's inventories.
At June 30, 2005, the Company had approximately $8,285,000 of unearned
revenue recorded as a current liability in the accompanying
consolidated balance sheet. The Company purchased inventory to fulfill
an existing sales order with a specific customer under an arrangement
whereby the Company has collected the amount due related to this order,
however, at the customer's request, shipment has not been made and the
inventory remains in the Company's warehouse for future delivery, and
is included on the Company's balance sheet as of June 30, 2005. The
Company will recognize revenue as the product is shipped to the
customer and title is transferred.
3. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
cash instruments with original maturities of less than three months to
be cash equivalents.
F-9
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Investments in Marketable Securities
Investments in marketable securities consisted of investments in mutual
funds. Such investments had been classified as "available-for-sale
securities" and were reported at fair market value, which was inclusive
of a gross unrealized gain of $59,871 for the fiscal year ended June
30, 2004. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis. Changes
in the fair value of available-for-sale securities were included in
accumulated other comprehensive loss, net of the related deferred tax
effects. During the year ended June 30, 2005, the Company sold all of
its marketable securities for an aggregate amount of $829,422. The
Company recognized a net gain of $110,540, in connection with these
sales.
The cost, gross unrealized gains and losses and aggregate fair value of
available-for-sale securities as of June 30, 2004 is as follows:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
Mutual Funds $710,412 $90,395 $(30,524) $770,283
======== ======= ========= ========
5. Accounts Receivable
The Company's accounts receivable are due from a broad range of
customers in the computer, computer-related, telecommunications, data
transmission, defense, aerospace, medical equipment and other
industries. The Company extends credit based upon ongoing evaluations
of a customer's financial condition and payment history and generally,
collateral is not required. Accounts receivable are generally due
within 30 days and are stated at amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including
the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay
its obligation to the Company, and the condition of the general economy
and the industry as a whole. The Company writes-off accounts receivable
when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts.
While such uncollectible amounts have historically been within the
Company's expectations and provisions established, if a customer's
financial condition were to deteriorate, additional reserves may be
required.
F-10
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following is a roll-forward of the allowance for doubtful accounts:
2005 2004
--------- -------
Beginning balance $695,000 $1,288,000
Provision for doubtful accounts 366,000 624,000
Other 89,000 10,000
Write-offs of un-collectible accounts (596,000) (1,227,000)
------- ---------
Ending balance $554,000 $695,000
======== ========
6. Inventories
Inventories, which consist of goods held for resale, are stated at the
lower of cost or estimated market value. Cost is determined using the
first-in, first-out and average cost methods. A provision of $6,875,000
and $4,732,000 to reduce inventories to their estimated market value as
of June 30, 2005 and 2004, respectively, has been provided for. The
Company, with most vendor agreements, receives price protection on
certain product. The Company accounts for price protection received
from its vendors in accordance with the provisions of EITF 02-16
"Accounting for Consideration Given By a Vendor to a Customer." The
Company records cash consideration or credits received from a vendor
for inventory price protection as a result of the vendor lowering its
prices as a reduction of product cost, which is therefore reported as a
reduction of cost of goods sold in the statement of operations.
7. Properties, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided for using the straight-line method over the estimated useful
life of the assets. The Company capitalizes costs incurred for
internally developed software where economic and technological
feasibility has been established. These capitalized software costs are
being amortized on a straight-line basis over the estimated useful life
of seven years. Significant improvements are capitalized if they extend
the useful life of the asset. Routine repairs and maintenance are
expensed when incurred.
8. Goodwill And Other Intangible Assets
Goodwill represents the excess of the aggregate price paid by the
Company over the fair market value of the tangible assets acquired in
business acquisitions accounted for as a purchase.
During the fiscal year ended June 30, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." The standards require that all business
combinations
F-11
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
initiated after June 30, 2001 be accounted for under the purchase method.
In addition, all intangible assets acquired that are obtained through
contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset
apart from goodwill. Goodwill and intangibles with indefinite lives will no
longer be subject to amortization, but will be subject to at least an
annual assessment for impairment by applying a fair value-based test. The
Company performed its annual impairment test as of June 30, 2005 and
reviewed seven reporting units, and determined that no impairment exists
with respect to the recorded amount of goodwill.
Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. Those intangible assets are reviewed for
impairment under SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." Included in other assets on the accompanying balance
sheets are the costs of identifiable intangible assets, net of accumulated
amortization of $1,067,000 and $770,000, aggregating $1,368,000 and
$1,665,000 at June 30, 2005 and 2004, respectively. Such assets consist of
franchise agreements and a non-compete agreement and are being amortized on
a straight-line basis over ten and five years, respectively. Amortization
expense on intangible assets aggregated approximately $297,000, $308,000
and $137,000 for the fiscal years ended June 30, 2005, 2004 and 2003,
respectively.
Expected amortization expense related to intangible assets for the next
five years is as follows:
Year ending June 30,
2006 $171,000
2007 171,000
2008 171,000
2009 171,000
2010 171,000
F-12
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including identifiable
intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future expected
undiscounted cash flows attributable to that asset. The amount of any
impairment is measured as the difference between the carrying value and
the fair value of the impaired asset. Fair value is determined
generally based on discounted cash flows. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
10. Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
net operating loss carry forwards for which income tax expenses or
benefits are expected to be realized in future years. A valuation
allowance is established when necessary to reduce deferred tax assets
to the amount more likely than not to be realized.
11. Earnings (Loss) Per Common Share
Basic earnings (loss) per share are determined by dividing the
Company's net earnings (loss) by the weighted average shares
outstanding. Diluted earnings (loss) per share include any dilutive
effects of outstanding stock options.
Excluded from the calculation of earnings (loss) per share are stock
options to purchase 532,000, 744,750 and 1,117,250 common shares in
fiscal 2005, 2004 and 2003, respectively, as their inclusion would have
been antidilutive.
12. Financial Instruments and Business Concentrations
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of accounts
receivable. Concentration of credit risk with respect to accounts
receivable is generally mitigated due to the large number of entities
comprising the Company's customer base, their dispersion across
geographic areas and industries, along with the Company's policy of
maintaining credit insurance. The Company routinely addresses the
financial strength of its customers and, historically, its accounts
receivable credit risk exposure is limited. Two customers of the
Company accounted for approximately 21% and 13%, 14% and 11%, and 17%
and 11% of our total net sales for the fiscal years ended June 30,
2005, 2004 and 2003, respectively. The loss of anyone of these
customers could have an adverse impact on the Company's financial
position or results of operations.
Statement of Financial Accounting Standards No. 107 "Fair Value of
Financial Instruments" ("SFAS No. 107"), requires disclosure of the
estimated fair value of an entity's financial instrument
F-13
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
assets and liabilities. The Company's principal financial instrument
consists of a revolving credit facility, expiring on December 31, 2006,
with two participating banks. The Company believes that the carrying
amount of such debt approximates the fair value as the variable
interest rate approximates the current prevailing interest rate. The
carrying amount of marketable securities, accounts receivable and
accounts payable approximate fair value due to the short term
maturities of the instruments. The carrying amount of the note
receivable approximates fair value as the current interest rate
approximates current market interest rates on similar instruments.
The Company generally purchases products from manufacturers pursuant to
nonexclusive distributor agreements. During the fiscal year ended June
30, 2005, products purchased from two suppliers accounted for 29% and
12%, respectively, of net sales, as compared to 26% and 12% for the
fiscal year ended June 30, 2004. As is common in the electronics
distribution industry, from time to time the Company has experienced
terminations of relationships with suppliers. There can be no assurance
that, in the event a supplier cancelled its distributor agreement with
the Company, the Company would be able to replace the sales associated
with such supplier with sales of other products.
13. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates made by management in preparing the
consolidated financial statements include the allowance for doubtful
accounts, the provision for obsolete or slow moving inventories, the
valuation of goodwill and other intangible assets and the valuation of
deferred income taxes.
14. Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS No. 130"), establishes rules for
reporting and display of comprehensive income (loss) and its
components in financial statements. Comprehensive income (loss)
consists of net earnings (loss) and unrealized gains and losses on
available-for-sale securities and is presented in the consolidated
statement of changes in shareholders' equity, net of applicable taxes.
15. Shipping and Handling Fees
Shipping and handling fees charged to customers are included in net
sales. Shipping and handling expenses paid are included as a component
of cost of good sold.
16. Advertising
Advertising costs, which are incurred primarily for print advertising
in trade and leisure publications, are expensed as incurred and totaled
$16,296, $17,175 and $95,213 for the fiscal years ended June 30, 2005,
2004 and 2003, respectively.
F-14
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
17. Stock Compensation
As described more fully in Note I, the Company maintained two stock
option plans during the fiscal years ended June 30, 2005, 2004 and
2003. The Company accounts for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations ("APB No. 25") and has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,
an Amendment of FASB Statement No. 123" ("SFAS No. 148"). Under APB No.
25, compensation expense is only recognized when the market value of
the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock. Accordingly, no compensation
expense has been recognized in the Company's condensed consolidated
financial statements in connection with employee stock option grants.
During the fiscal year ended June 30, 2004, 85,000 stock options were
granted to certain employees or directors of the Company. These stock
options had exercise prices ranging from $6.70 to $8.31 and are due to
expire ten years from the date of grant. The weighted-average fair
value of these options of $4.83, which was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumption: expected volatility of 80%; risk-free
interest rate of 3.27%; expected term of 5 years and expected dividend
yield of 0%.
During the fiscal year ended June 30, 2003, 290,000 stock options were
granted to certain employees or directors of the Company. These stock
options had an exercise price of $2.35 and are due to expire ten years
from the date of grant. The weighted-average fair value of these
options of $1.55, which was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumption: expected volatility of 81%; risk-free interest rate of
2.85%; expected term of 5 years and expected dividend yield of 0%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the use of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
F-15
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table illustrates the effect on net loss and loss per
share for the fiscal years ended June 30, 2005, 2004 and 2003 had the
Company applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to stock-based employee compensation.
2005 2004 2003
-------------- -------------- -------
Net loss, as reported $(4,859,860) $(555,571) $(2,984,661)
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all
awards, net of related tax effects (134,997) (263,201) (206,957)
--------- --------- ---------
Pro forma net loss $(4,994,857) $(818,772) $(3,191,618)
============ ========== ============
Net loss per common share:
Basic - as reported $(0.78) $(0.09) $(0.52)
======= ======= =======
Basic - pro forma $(0.80) $(0.14) $(0.55)
======= ======= =======
Diluted - as reported $(0.78) $(0.09) $(0.52)
======= ======= =======
Diluted - pro forma $(0.80) $(0.14) $(0.55)
======= ======= =======
18. Reclassifications
Certain prior year balances have been reclassified to conform with the
current year's presentation.
19. Impact of Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43"
("SFAS No. 151"), which is the result of its efforts to converge U.S.
accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires idle facility expenses, freight,
handling costs, and wasted material (spoilage) costs to be recognized
as current-period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 will be effective
for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of this
standard on its consolidated financial statements.
F-16
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In December 2004, the FASB issued SFAS No. 123 (Revised 2004)
"Share-Based Payment" (SFAS No. 123R"). SFAS No. 123R addresses all
forms of share-based payment ("SBP") awards, including shares issued
under employee stock purchase plans, stock options, restricted stock
and stock appreciation rights. SFAS No. 123R will require the Company
to expense SBP awards with compensation cost for SBP transactions
measured at fair value. The FASB originally stated a preference for a
lattice model because it believed that a lattice model more fully
captures the unique characteristics of employee stock options in the
estimate of fair value, as compared to the Black-Scholes model which
the Company currently uses for its footnote disclosure. The FASB
decided to remove its explicit preference for a lattice model and not
require a single valuation methodology. SFAS No. 123R requires the
Company to adopt the new accounting provisions beginning in the first
quarter of fiscal 2006. The Company has not yet determined the impact
of applying the various provisions of SFAS No. 123R will have on its
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets-an amendment of APB Opinion No. 29" ("SFAS No.
153") SFAS No. 153 amends Opinion 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of non-monetary assets that do
not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective
for fiscal periods after June 15, 2005. The Company does not expect the
adoption of SFAS No. 153 to have a material impact on the Company's
consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB
Statement No. 3" ("SFAS No. 154"). Opinion 20 previously required that
most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. SFAS No. 154
requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not expect the
adoption of SFAS No. 154 to have an impact on the consolidated
financial statements.
F-17
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE C - DISCONTINUED OPERATIONS
On September 20, 2004, the Company completed the sale of substantially all of
the assets of its contract manufacturing subsidiary, Nexus Custom Electronics,
Inc. ("Nexus"), to Sagamore Holdings, Inc. for consideration of up to
$13,000,000, subject to closing adjustments, and the assumption of certain
liabilities. The divestiture of Nexus allows the Company to focus its resources
on its core electronics distribution business. Under the terms of the purchase
agreement relating to this transaction, the Company received $9,250,000 of the
purchase consideration in cash on the closing date. Such cash consideration was
used to repay a portion of the outstanding borrowings under the Company's line
of credit (See Note F). The balance of the purchase consideration was satisfied
through the delivery of a $2,750,000 subordinated note issued by the purchaser.
This note has a maturity date of September 1, 2009 and bears interest at the
lower of the prime rate or 7%. The note is payable by the purchaser in quarterly
cash installments ranging from $156,250 to $500,000 commencing September 2006
and continuing for each quarter thereafter until maturity. Prepayment of the
principal of and accrued interest on the note is permitted. In accordance with
the purchase agreement, the Company determined that it was owed an additional
$500,000 pursuant to a working capital adjustment, as defined in the agreement
and has been recorded in the financial statements. The Purchaser has disputed
the Company's claim to the working capital adjustment and has informed the
Company that it believes that the Company owes a $500,000 working capital
adjustment to the purchaser. This matter is being discussed between the parties
and no assurance can be given as to the outcome of this dispute. Additionally,
the Company is entitled to receive additional consideration in the form of a
six-year earn-out based on 5% of the annual net sales of Nexus after the closing
date, up to $1,000,000 in the aggregate. As of June 30, 2005, the Company has
not earned any of the additional consideration.
Pursuant to the purchase agreement, the purchaser has also entered into a
contract that designates the Company as a key supplier of electronic components
to Nexus for a period of five years following the closing date. The gain on the
sale of net assets of Nexus, net of transaction costs and applicable taxes was
approximately $631,000.
As a result of the sale of Nexus, the Company no longer engages in contract
manufacturing. In accordance with the provisions of SFAS No, 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), the
Company has accounted for the results of operations of Nexus as discontinued in
the accompanying consolidated statements of operations. The Company has also
classified the assets sold and liabilities assumed of Nexus (the disposal group)
as part of assets and liabilities of discontinued operations in the accompanying
consolidated balance sheets.
F-18
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE C - DISCONTINUED OPERATIONS (continued)
A summary of the assets and liabilities included in the disposal group is as
follows:
2004
Assets
Accounts receivable, net $ 2,407,527
Inventories 7,923,578
Prepaid expenses and other 75,429
Property, plant and equipment, net 2,504,267
Other assets
-----------
Total assets 12,910,801
-----------
Liabilities
Accounts payable 2,240,314
Accrued compensation 218,209
Accrued expenses 27,942
Long-term debt and capitalized lease obligations 314,199
-----------
Total liabilities 2,800,664
-----------
Net assets of the disposal group $10,110,137
===========
A summary of operating results of Nexus were as follows:
2005 2004 2003
---- ---- ----
Net sales $ 5,208,184 $22,427,191 $15,328,634
Income (loss) from operations before income taxes $ (103,452) $ 1,135,857 $(1,023,319)
Gain on sale of net assets before income taxes $ 1,080,494
F-19
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
Useful
Life June 30,
---------------------
in years 2005 2004
------------- ------------- --------
Machinery and equipment 3 to 7 $ 8,312,493 $ 7,210,070
Internally developed software costs 7 2,213,035 2,172,378
Transportation equipment 3 to 5 76,942 76,942
Leasehold improvements 5 to 10 601,218 601,218
--------- --------
11,203,688 10,060,608
Less accumulated depreciation and amortization (including
$65,334 in 2005 and $21,778 in 2004 of capitalized
lease amortization) 8,922,879 8,057,471
--------- ---------
$ 2,280,809 $ 2,003,137
=========== ===========
Included in machinery and equipment are assets recorded under capitalized
leases at June 30, 2005 and 2004 for $130,669. Accumulated amortization of
internally developed software costs at June 30, 2005 and 2004 aggregated
$1,831,999 and $1,518,815, respectively.
F-20
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE E - INCOME TAXES
The components of the Company's benefit for income taxes are as follows:
Year Ended June 30,
------------------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Federal
Current $ (443,067) $ (394,000) $ (680,000)
Deferred (2,431,201) (196,000) (533,000)
--------------- ------------- -------------
(2,874,268) (590,000) (1,213,000)
State 60,693 37,000 33,000
--------- --------- ---------
$ (2,813,575) $ (553,000) $(1,180,000)
========== ======== ==========
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
Year Ended June 30,
--------------------------------------------
2005 2004 2003
-------- --------- ------
Statutory U.S. Federal tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal tax benefit (1.4) 1.4 (0.7)
Sales expense for which no tax benefit arises 1.0 3.6 0.9
Other 0.3 (1.0) (0.2)
------ -------- --------
Effective tax rate (34.1)% (30.0)% (34.0)%
===== ===== =====
F-21
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE E - INCOME TAXES (continued)
Deferred income tax assets and liabilities resulting from differences
between accounting for financial statement purposes and tax purposes are
summarized as follows:
2005 2004
----------- -----------
Deferred tax assets
Net operating loss and other carryforwards $ 2,773,000 $ 511,000
Allowance for bad debts 210,000 304,000
Inventory valuation 2,855,000 2,215,000
Deferred compensation 649,000 572,000
Other deferred tax assets 172,000 182,000
---------- ----------
Total deferred tax assets 6,659,000 3,784,000
Deferred tax liabilities
Depreciation (265,000) (620,000)
Unrealized gain on marketable securities
available for sale (23,000)
----------- ----------
Total deferred tax liabilities (265,000) (643,000)
--------- ---------
Net deferred tax assets 6,394,000 3,141,000
Less: Current portion (3,269,000) (2,725,000)
----------- -----------
Long term deferred tax asset $ 3,125,000 $ 416,000
========== =======
At June 30, 2005, the Company, has available Federal net operating loss
carry-forwards of approximately $6,560,000 which expire in 2024 and 2025.
In addition, the Company has various state net operating loss carry
forwards that expire in varying amounts during the fiscal years 2007
through 2025.
Realization of the net deferred tax assets will require the Company to
achieve earnings before taxes of approximately $17,000,000 during the carry
forward periods. We have considered all positive and negative factors in
determining that the deferred tax asset is realizable. In the event that
the weight of evidence changes in the future, the Company may be required
to record a valuation allowance. The recording of a valuation allowance
would have an adverse impact on results of operations.
F-22
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS
Debt and capitalized lease obligations are as follows:
June 30,
2005 2004
-------------- ---------
Revolving line of credit (a) $33,205,111 $36,999,693
Other term loan (b) 35,552
Capitalized lease obligations (c) 134,234 530,979
------- ---------
33,339,345 37,566,224
Less amounts representing interest on capitalized
lease obligations 15,709 44,757
------ -----------
33,323,636 37,521,467
Less current maturities 33,266,185 37,088,743
---------- ----------
57,451 432,724
Less amounts reclassified to liabilities of discontinued operations 314,199
$ 57,451 $ 118,525
====== =======
(a) Revolving Line of Credit Facility
To provide additional liquidity and flexibility in funding its
operations, the Company borrows amounts under credit facilities and
other external sources of financing. On December 22, 2003, the
Company entered into a Third Restated and Amended Loan and Security
Agreement with GMAC Commercial Finance LLC and PNC Bank, National
Association providing for a $50,000,000 revolving secured line of
credit. This credit facility has a maturity date of December 31,
2006. Borrowings under the credit facility are based principally on
eligible accounts receivable and inventories of the Company, as
defined in the credit agreement, and are collateralized by
substantially all of the assets of the Company. At June 30, 2005, the
outstanding balance on this revolving line of credit facility was
$33.2 million, with an additional $1.5 million available. The Company
has outstanding a $1.5 million stand-by letter of credit on behalf of
a certain vendor. The interest rate on the outstanding borrowings at
June 30, 2005 was approximately 6.97%. The credit agreement contains
certain financial covenants, including, among
F-23
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)
others, provisions for maintenance of specified levels of EBITDA and
Minimum Net Worth, and restricts the Company's ability to pay
dividends.
The credit agreement also includes a subjective acceleration clause and
requires the deposit of customer receipts to be directed to a blocked
account and applied directly to the repayment of indebtedness
outstanding under the credit facility. Accordingly, this debt is
classified as a current liability.
At June 30, 2005, the Company was not in compliance with certain bank
covenants, including Minimum EDITDA and Minimum Net Worth. On September
28, 2005, the Company's credit facility was amended to waive its non-
compliance with certain bank covenants, including Minimum EBITDA and
Minimum Net Worth, for the quarter ended June 30, 2005. The Company's
credit facility was also amended to restate the existing covenants and
to add additional covenants, including, among other things, to (i)
reduce the maximum loan amount from $50,000,000 to $40,000,000, (ii)
modify the Availability Formula, (iii) reset existing covenants for
Fixed Charge Coverage Ratio, Minimum Net Worth and Capital Expenditures
as defined in the agreement, and (iv) define and add a new covenant
regarding Operating Cash Flow. As a result of the modification of the
Availability Formula, the Company would still have an additional $1.5
million available for future borrowing as of June 30, 2005. Failure to
remain in compliance with the Company's bank covenants could trigger an
acceleration of the Company's obligation to repay all outstanding
borrowings under its credit facility and/or limit the Company's ability
to borrow additional amounts under the line of credit. This would have
a material adverse effect on the Company's financial condition.
On May 10, 2005, the Company's credit facility was amended to waive our
compliance with certain bank covenants, including Minimum EBITDA and
Minimum Net Worth, for the quarter ended March 31, 2005.
On February 11, 2005, the Company's credit facility was amended to
retroactively restate the existing covenants and to add additional
covenants, including, among other things, to (i) modify the
Availability Formula, (ii) require the Company to maintain Un-drawn
Availability of not less than $1,500,000 at all times, (iii) define and
reset existing covenants for Minimum EBITDA, Fixed Charge Coverage
Ratio, Capital Expenditures and Minimum Net Worth, (iv) add a new
covenant regarding minimum sales, (v) establish additional reporting
requirements, (vi) modify interest provisions, and (vii) permit certain
of the Company's domestic and foreign receivables to qualify as
Eligible Receivables for a period of time.
On November 23, 2004, the Company's credit facility was amended to
exclude, effective as of October 1, 2004, any extraordinary gains,
including any gains derived from the sale of assets of Nexus, from the
calculation of EBITDA and Fixed Charge Coverage Ratio covenants.
F-24
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)
On September 20, 2004, the Company's credit facility was amended to
provide the lenders' consent to the Company's sale of it's contract
manufacturing subsidiary, Nexus, and to (i) change it's EBITDA, Fixed
Charge Coverage Ratio and Minimum Net Worth covenants, (ii) eliminate
the remaining portion of the additional $732,000 of the additional
available amount under the facility to zero, (iii) require the cash
proceeds from the sale of Nexus to be used to repay indebtedness
outstanding under the facility, and (iv) and add a requirement that the
Company maintain an aggregate un-drawn availability of $1.5 million
until certain financial requirements are achieved, which would reduce
the un-drawn availability requirement to $500,000.
(b) Other Term Loan
The Company previously had a term loan which initially required
monthly payments of $9,829 through January 31, 2004. During fiscal
2004, this loan was amended to extend the maturity date through
August 31, 2006. As a result of the disposition of Nexus in September
2004, the Company repaid this balance in its entirety. As such, this
balance was classified as current at June 30, 2004. The loan, which
bore interest at 1% per annum, was collateralized by the related
equipment acquired, which had carrying value of approximately
$112,000 at June 30, 2004. The agreement contained, among other
things, restrictive covenants on one of the Company's subsidiaries,
which placed limitations on significant changes in its business and
incurrence of additional indebtedness.
(c) Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for
as capital leases. The aggregate obligations for the equipment
require the Company to make monthly payments through April 1, 2007,
with implicit interest rates from 7.07% to 13.3%. As a result of the
disposition of Nexus in September 2004, the obligations, under one
capital lease were assumed by the purchaser. Such obligation amounted
to $314,199 at June 30, 2004 and is classified as a component of
liabilities of discontinued operations in the accompanying
consolidated balance sheet.
F-25
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)
The following is a summary of the aggregate annual maturities of debt and
capitalized lease obligations as of June 30, 2005:
Capitalized
Debt Leases
---- ------
Year ending June 30,
2006 33,205,111 73,218
2007 61,016
------------- ----------
$33,205,111 $ 134,234
========== =========
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company leases certain office and warehouse facilities under
noncancellable operating leases. The leases also provide for the
payment of real estate taxes and other operating expenses of the
buildings. The minimum annual lease payments under such leases are as
follows:
Year ending June 30,
2006 $1,452,962
2007 1,067,305
2008 952,312
2009 805,468
2010 784,913
Thereafter 3,063,560
------------
$8,126,520
==========
Included in the above are office and warehouse facilities leased from a
partnership owned by two officers and directors of the Company. The
lease expires in December 2013 and requires minimum lease payments of
$645,750 during the fiscal year ended June 30, 2006. The Company's rent
expense was approximately $755,000, $678,000 and $602,000 for the years
ended June 30, 2005, 2004 and 2003, respectively, in connection with
this lease.
Rent expense on all office and warehouse facilities leases for the
years ended June 30, 2005, 2004 and 2003 was approximately $1,791,000,
$1,874,000 and $1,857,000, respectively.
F-26
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE G - COMMITMENTS AND CONTINGENCIES (continued)
2. Other Leases
The Company also leases various office equipment and automobiles under
noncancellable operating leases expiring through June 2009. The minimum
rental commitments required under these leases at June 30, 2005 are as
follows:
Year ending June 30,
2006 $124,441
2007 99,303
2008 60,237
2009 14,053
---------
$298,034
========
3. Employment Agreements
The Company has entered into employment agreements with three executive
officers, which provide for annual base salaries aggregating $785,000
through June 30, 2008 and contain provisions for severance payments in
the event of change of control as defined in the agreements. The
Company's agreements with its Chairman and Executive Vice President
provide for cash bonuses equal to 4% and 2%, respectively, of the
Company's earnings before income taxes for each fiscal year in which
such earnings are in excess of $1,000,000, or 6% and 3%, respectively,
of the Company's earnings before income taxes if such earnings are in
excess of $2,500,000 up to a maximum annual cash bonus of $720,000 and
$360,000, respectively. In addition, the Company's agreement with its
Chairman provides for deferred compensation which accrues at a rate of
$50,000 per year and becomes payable in its entirety no later than
January 15 of the year next following his cessation of employment for
any reason.
The Company is obligated to provide health insurance to its Chairman
and Executive Vice President, and their respective spouses, commencing
upon their termination of employment with Jaco and ending on the later
to occur of (i) their death or (ii) the death of their respective
spouses. The Company has adopted Statement of Financial Accounting
Standards No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pension," which requires the Company to recognize the cost
of providing postretirement benefits over the employees' service
periods. The recorded liabilities for these postretirement benefits,
none of which has been funded, amounted to $195,600 at June 30, 2005.
The weighted-average discount rate used in determining the liability
was 5.5%, and the annual percentage increase in health costs was 7%.
F-27
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE G - COMMITMENTS AND CONTINGENCIES (continued)
4. Other Matters
The Company is a party to legal matters arising in the general conduct
of business. The ultimate outcome of such matters is not expected to
have a material adverse effect on the Company's business, results of
operations or financial condition.
5. Guarantees
The Company has not entered into any third-party guarantees subsequent
to December 31, 2002, nor has the Company modified any existing
third-party guarantees subsequent to that date.
NOTE H - RETIREMENT PLAN
The Company maintains a 401(k) Plan that is available to all employees, to
which the Company contributes up to a maximum of 1% of each employee's
salary. For the years ended June 30, 2005, 2004 and 2003, the Company
contributed to this plan approximately $108,000, $139,000 and $78,000,
respectively.
NOTE I - SHAREHOLDERS' EQUITY
In December 1992, the Board of Directors approved the adoption of a
nonqualified stock option plan, known as the "1993 Non-Qualified Stock
Option Plan," hereinafter referred to as the "1993 Plan." The Board of
Directors or Compensation Committee is responsible for the granting and
pricing of options under the 1993 Plan. Such price shall be equal to the
fair market value of the common stock subject to such option at the time of
grant. The options expire five years from the date of grant and are
exercisable over the period stated in each option. In December 1997, the
shareholders of the Company approved an increase in the amount of shares
reserved for the 1993 plan to 900,000 from 440,000, of which there are no
outstanding options at June 30, 2005.
In October 2000, the Board of Directors approved the adoption of the "2000
Stock Option Plan," hereinafter referred to as the "2000 Plan." The 2000
Plan provided for the grant of up to 600,000 incentive stock options
("ISOs") and nonqualified stock options ("NQSOs") to employees, officers,
directors, consultants and advisers of the Company. In December 2004, the
shareholders of the Company approved an increase in the amount of shares
reserved for the 2000 plan to 1,200,000. The Board of Directors or
Compensation Committee is responsible for the granting and pricing of these
options. Such price shall be equal to the fair market value of the common
stock subject to such option at the time of grant. In the case of ISOs
granted to shareholders owning more than 10% of the
F-28
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE I - SHAREHOLDERS' EQUITY (continued)
Company's voting securities, the exercise price shall be no less than 110%
of the fair market value of the Company's common stock on the date of
grant.
All options shall expire ten years from the date of grant of such option
(five years in the case of an ISO granted to a 10% shareholder) or on such
earlier date as may be prescribed by the Committee and set forth in the
option agreement, and are exercisable over the period stated in each
option. Under the 2000 Plan, 1,200,000 shares of the Company's common stock
are reserved, of which 532,000 are outstanding at June 30, 2005.
Outstanding options granted to employees, directors and officers for the
last three fiscal years are summarized as follows:
Weighted-
Nonqualified average
stock options exercise
--------------------------------
Price range Shares price
----------- ------ -----
Outstanding at July 1, 2002 $1.79 - $13.71 844,548 $4.52
Granted $2.35 290,000 2.35
Expired $4.17 - $8.00 (17,298) 5.65
--------
Outstanding at June 30, 2003 $1.79 - $13.71 1,117,250 3.94
Granted $6.70 - $8.31 85,000 6.98
Expired $2.75 - $13.71 (28,000) 6.05
Exercised $1.79 - $3.25 (429,500) 2.27
---------
Outstanding at June 30, 2004 $2.35 - $13.71 744,750 5.17
Expired $3.25 - $13.71 (140,250) 7.31
Exercised $2.35 - $2.50 (72,500) 2.49
--------
Outstanding at June 30, 2005 $2.35 - $8.31 532,000 $4.97
=======
Options exercisable at June 30, 2005 532,000 $4.97
=======
Options exercisable at June 30, 2004 659,750 $4.93
=======
Options exercisable at June 30, 2003 827,250 $4.49
=======
F-29
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE I - SHAREHOLDERS' EQUITY (continued)
The following table summarizes information concerning currently outstanding
and exercisable nonqualified stock options:
Options outstanding Options exercisable
---------------------------------------- -----------------------------
Weighted- Weighted-
Average Weighted- average Weighted-
Remaining average remaining average
Number contractual exercise Number contractual exercise
Range of exercise prices outstanding life (months) price exercisable life (months) Price
------------------------ ----------- ------------- ---------- ----------- ------------- ---------
$2.35 272,500 88 $2.35 272,500 88 $2.35
$6.01 - $8.31 259,500 74 $7.71 259,500 74 $7.71
The Board of Directors of the Company had authorized the purchase of up to
375,000 shares of its common stock under a stock repurchase program. In
fiscal 1998, the Board of Directors authorized the repurchase of up to an
additional 600,000 shares of the Company's common stock. The purchases were
made by the Company from time to time on the open market at the Company's
discretion and were dependent on market conditions. The Company had made
purchases of 618,300 shares of its common stock from July 31, 1996 through
September 13, 2000 for aggregate consideration of $2,204,515. On September
14, 2000, the Board of Directors passed a resolution to terminate the stock
repurchase program.
On September 18, 2001, the Company announced that its Board of Directors
authorized the repurchase of up to 250,000 shares of its outstanding common
stock. Purchases may be made from time to time in market or private
transactions at prevailing market prices. The Company made purchases of
41,600 shares of its common stock for aggregate consideration of $110,051
during fiscal 2003. The Company made no such purchases of shares of its
common stock during fiscal 2005 and 2004.
NOTE J - RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 2005, 2004 and 2003, the Company
recorded sales of $1,065,391, $5,515,450 and $1,910,201, respectively, from
a customer, Frequency Electronics, Inc. ("Frequency"). The Company's
Chairman of the Board of Directors and President also serves on the Board
of Directors of Frequency. Such sales transactions with Frequency are in
the normal course of business. Amounts included in accounts receivable from
Frequency at June 30, 2005 and 2004 aggregate $206 and $188,720,
respectively.
F-30
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE J - RELATED PARTY TRANSACTIONS (continued)
A law firm of which one of our directors is a partner in provies legal
services on behalf of the Company. Fees paid to such firm amounted to
$101,949, $116,411 and $59,200 for the fiscal years ended June 30, 2005,
2004 and 2003.
The Company leases office and warehouse facilities lease from
a partnership owned by two officers and directors of the Company (See Note
G). As of June 30, 2005, the Partnership advanced the Company $125,000 to
fund the construction of a new LCD Integration Center. This amount is
included as a component of accrued expenses and other current liabilities
in the accompanying balance sheet.
NOTE K - ACQUISITION
On June 13, 2003, the Company acquired certain assets of the electronics
distribution business of Reptron Electronics, Inc. ("Reptron"), located in
Florida. The Company believes that this acquisition has expanded the
Company's customer and supplier base. In addition, the Company has
recognized certain benefits relating to the synergies in operations and the
improved quality of the management team. The total purchase price,
including transaction costs, was approximately $9,536,000, of which
approximately $5,577,000 was paid in cash and the remaining portion
resulted in the Company's assumption of certain liabilities of Reptron. A
portion of the purchase price was held in escrow pending the satisfaction
of certain conditions, which occurred during fiscal 2004.
The acquisition has been accounted for as a purchase and the operations of
Reptron have been included in the Company's Statement of Operations since
the date of acquisition. Included in other assets are the costs of the
identifiable intangible assets acquired, principally franchise agreements
which are being amortized on a straight-line basis over ten years. The
excess of the purchase price and related expenses over the net tangible and
identifiable intangible assets acquired initially amounted to approximately
$3,236,000, all of which is expected to be tax deductible. During fiscal
2004, the purchase price was $9,536,000 and an adjustment to decrease
goodwill by $183,000 was recorded. The purchase price of $9,353,000 and the
allocation thereof is now final.
NOTE L - GEOGRAPHIC AND PRODUCT INFORMATION
Electronic components distribution sales include exports made
principally to customers located in Western Europe, Canada, Mexico, and
the Far East. For the years ended June 30, 2005, 2004 and 2003, export
sales amounted to approximately $80,584,000, $58,028,000 and
$57,787,000, respectively. Information pertaining to the Company's
operations in individual geographic areas for fiscal years 2005, 2004
and 2003 is not considered material to the financial statements.
F-31
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE L - GEOGRAPHIC AND PRODUCT INFORMATION (continued)
The following table provides information regarding product sales to external
customers:
Year ended June 30,
2005 2004 2003
---- ---- ----
---------- (in thousands) ----------
Electronic components distribution:
Semiconductors $ 133,532 $132,259 $116,616
Flat Panel Displays 38,946 51,533 20,334
Passive components 40,106 47,395 53,069
Electromechanical devices 19,241 17,913 12,637
------ ------ ------
Total $ 231,825 $249,100 $202,656
======= ======= =======
F-32
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2005, 2004 and 2003
NOTE M - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
On September 20, 2004, the assets and certain liabilities of the contract
manufacturing segment were sold (See Note C). Accordingly,
the quarterly information provided below has been restated to reflect the
results of the discontinued operations for all periods indicated.
Quarter ended
-------------
June 30, March 31, December 31, September June 30,
30,
2005 2005 2004 2004 2004
---- ---- ---- ---- ----
Net sales $59,083,327 $60,537,075 $51,967,477 $60,236,637 $57,063,560
Gross profit $5,051,526(a) $6,666,541 $6,581,012 $7,601,372 $8,933,213
Loss from continuing operations $(1,784,523) $(1,092,847) $(1,535,466) $(1,014,330) $(145,573)
(Loss) earnings from discontinued
operations $(199,617) $766,923 $322,089
Net (loss) earnings $(1,984,140) $(1,092,847) $(1,535,466) $(247,407) $176,516
Loss from continuing operations
Basic $(0.29) $(0.17) $(0.25) $(0.16) $(0.02)
Diluted $(0.29) $(0.17) $(0.25) $(0.16) $(0.02)
(Loss) earnings from
discontinued operations
Basic $(0.03) $0.12 $0.05
Diluted $(0.03) $0.12 $0.05
(Loss) Earnings Per Share
Basic $(0.32) $(0.17) $(0.25) $(0.04) $0.03
Diluted $(0.32) $(0.17) $(0.25) $(0.04) $0.03
Basic 6,267,832 6,264,954 6,262,832 6,203,403 6,185,008
Diluted 6,267,832 6,264,954 6,262,832 6,203,403 6,185,008
March 31, December 31, September 30,
2004 2003 2003
---- ---- ----
Net sales $63,119,859 $61,488,811 $67,425,307
Gross profit $8,805,490 $8,294,491 $8,677,996
Loss from continuing operations $(28,682) $(592,213) $(524,600)
(Loss) earnings from discontinued $157,403 $154,976 $101,029
operations
Net (loss) earnings $128,721 $(437,237) $(423,571)
Loss from continuing operations
Basic $(0.01) $(0.10) $(0.09)
Diluted $(0.01) $(0.10) $(0.09)
(Loss) earnings from
discontinued operations
Basic $0.03 $0.03 $0.02
Diluted $0.03 $0.03 $0.02
(Loss) Earnings Per Share
Basic $0.02 $(0.07) $(0.07)
Diluted $0.02 $(0.07) $(0.07)
Basic 5,997,409 5,928,169 5,792,123
Diluted 5,997,409 5,928,169 5,792,123
(a) During the fourth quarter of fiscal 2005, an adjustment to increase the
reserve for slow-moving and obsolete inventory of $2,182,660 was recorded. The
adjustment primarily relates to products that sell due to changes in the U.S.
market conditions, and our change in business model, which focuses on core
product, that we do not expect to sell at the previous carrying values.
F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SUPPLEMENTAL SCHEDULE
Board of Directors and Shareholders
Jaco Electronics, Inc.
We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial statements
of Jaco Electronics, Inc. and subsidiaries referred to in our report dated
September 7, 2005 (except for Notes A and F(a), as to which the date is
September 28, 2005), which is included in this annual report on Form10-K. Our
audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Grant Thornton LLP
----------------------
GRANT THORNTON LLP
Melville, New York
September 7, 2005
F-34
Jaco Electronics, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 2005, 2004 and 2003
Column A Column B Column C Column D Column E
-------- -------- ---------------------------- -------- --------
Additions
------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts - Deductions - at end of
Description of period expenses describe describe period
----------- ------------------ ---------- ------------ ----------- --------
Allowance for doubtful accounts
Year ended June 30, 2005 $ 695,000 $ 366,000 $89,000 (a) $ 596,000 (b) $ 554,000
========== ========== ====== ========== = =========
Year ended June 30, 2004 $1,288,000 $ 624,000 $10,000 (a) $ 1,227,000 (b) $ 695,000
========= ========== ====== ========== = =========
Year ended June 30, 2003 $1,536,000 $ 822,000 $444,000 (a) $ 1,514,000 (b) $1,288,000
========= ========== ======= ========== = =========
Reserve for slow-moving and
obsolete inventory
Year ended June 30, 2005 $4,732,000 $2,416,000 $ 273,000 (c) $6,875,000
========= ========= ========== =========
Year ended June 30, 2004 $4,632,000 $1,532,000 $1,432,000 (c) $4,732,000
========= ========= ========= = =========
Year ended June 30, 2003 $2,762,000 $2,849,000 $ 979,000 (c) $4,632,000
========= ========= ========== =========
(a) Recoveries of accounts.
(b) Represents write-offs of uncollectible accounts.
(c) Disposal and sale of slow-moving and obsolete inventory.
F-35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JACO ELECTRONICS, INC.
By:/s/ Joel H. Girsky
----------------------
Joel H. Girsky, Chairman of the
Board, President and Treasurer
Dated: September 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Joel H. Girsky Chairman of the Board, September 28, 2005
- -------------------------------------
Joel H. Girsky President and Treasurer
(Principal Executive Officer)
/s/ Jeffrey D. Gash Executive Vice President- September 28, 2005
- -------------------------------------
Jeffrey D. Gash Finance and Secretary
(Principal Financial and
Accounting Officer)
/s/ Joseph F. Oliveri Vice Chairman of the Board September 28, 2005
- -------------------------------------
Joseph F. Oliveri and Executive Vice President
/s/ Charles B. Girsky Executive Vice President and September 28, 2005
- -------------------------------------
Charles B. Girsky Director
/s/ Stephen A. Cohen September 28, 2005
- -------------------------------------
Stephen A. Cohen Director
/s/ Edward M. Frankel Director September 28, 2005
- -------------------------------------
Edward M. Frankel
/s/ Joseph F. Hickey, Jr. Director September 28, 2005
- -------------------------------------
Joseph F. Hickey, Jr.
/s/ Neil Rappaport Director September 28, 2005
- -------------------------------------
Neil Rappaport
/s/ Robert J. Waldman Director September 28, 2005
- -------------------------------------
Robert J. Waldman