UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at November 11, 2005
----- ---------------------------------------
Common Stock, $0.10 Par Value 6,267,832 (excluding 659,900 shares held as
treasury stock)
FORM 10-Q September 30, 2005
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2005 2005
--------------- -----------
ASSETS (UNAUDITED)
Current Assets
Cash $ 21,483 $ 321,423
Accounts receivable - net 32,167,650 34,694,811
Note receivable - current portion 500,000 ---
Inventories - net 35,210,983 37,056,949
Prepaid expenses and other 1,183,590 1,035,633
Deferred income taxes 3,217,000 3,269,000
--------- ---------
Total current assets 72,300,706 76,377,816
Property, plant and equipment - net 2,073,160 2,280,809
Deferred income taxes 3,393,500 3,125,000
Excess of cost over net assets acquired - net 25,416,087 25,416,087
Note receivable 2,250,000 2,750,000
Other assets 2,228,535 2,272,701
----------- -----------
Total assets $107,661,988 $112,222,413
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2005
Page 3
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2005 2005
--------------- -------------
LIABILITIES & SHAREHOLDERS' EQUITY (UNAUDITED)
Current Liabilities
Accounts payable and accrued expenses $ 28,274,500 $ 27,426,106
Current maturities of long-term debt and
capitalized lease obligations 29,967,668 33,266,185
Unearned revenue 6,344,800 8,285,200
Income taxes payable --- 66,354
------------ ------------
Total current liabilities 64,586,968 69,043,845
Long-term debt and capitalized lease obligations 40,876 57,451
Deferred compensation 1,062,500 1,050,000
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 shares issued
and 6,267,832 shares outstanding 692,773 692,773
Additional paid-in capital 26,990,374 26,990,374
Retained earnings 16,603,063 16,702,536
Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566)
---------- -----------
Total shareholders' equity 41,971,644 42,071,117
---------- ----------
Total liabilities and shareholders' equity $107,661,988 $112,222,413
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2005
Page 4
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2005 2004
-------------- -------------
Net sales $ 52,461,032 $ 60,236,637
Cost of goods sold 45,343,614 52,635,265
---------- ----------
Gross profit 7,117,418 7,601,372
Selling, general and administrative expenses 6,842,344 8,688,497
------------ ------------
Operating profit (loss) 275,074 (1,087,125)
Interest expense 565,613 361,905
------------ ------------
Loss from continuing operations
before income taxes (290,539) (1,449,030)
Income tax benefit (191,066) (434,700)
------------ ------------
Loss from continuing operations (99,473) (1,014,330)
Discontinued operations:
Loss from discontinued operations, net of income
tax benefit of $39,800 --- (63,652)
Gain on sale of net assets of subsidiary, net of income
tax provision of $518,500 --- 830,575
-------- -------
Earnings from discontinued operations 766,923
-------- -------
NET LOSS $ (99,473) $ (247,407)
============ ============
PER SHARE INFORMATION
Basic and diluted (loss) earnings per common share:
Loss from continuing operations $(0.02) $(0.16)
Earnings from discontinued operations --- $ 0.12
--------- -----------
Net loss $(0.02) $(0.04)
======= =======
Weighted-average common shares and common equivalent shares outstanding:
Basic and Diluted 6,267,832 6,203,403
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2005
Page 5
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
Additional Total
Common stock paid-in Retained Treasury shareholders'
Shares Amount capital earnings stock equity
--------------- -------------- ---------------- ---------------- --------------- -----------------
Balance at July 1, 2005 6,927,732 $ 692,773 $ 26,990,374 $ 16,702,536 $ (2,314,566) $ 42,071,117
Net loss (99,473) (99,473)
--------------- -------------- ---------------- ---------------- --------------- -----------------
Balance at September 30, 2005 6,927,732 $ 692,773 $ 26,990,374 $ 16,603,063 $ (2,314,566) $ 41,971,644
=============== ============== ================ ================ =============== =================
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2005
Page 6
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2005 2004
-------------- --------------
Cash flows from operating activities
Net loss $ (99,473) $ (247,407)
Loss from discontinued operations - 63,652
Gain on sale of subsidiary - (830,575)
-------------- --------------
Loss from continuing operations (99,473) (1,014,330)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 270,919 283,055
Deferred compensation 12,500 12,500
Deferred income tax benefit (216,500) (102,000)
Provision for doubtful accounts - 197,800
Changes in operating assets and liabilities
Decrease (increase) in operating assets - net 4,226,579 (3,968,782)
Decrease in operating liabilities - net (1,158,360) (456,997)
-------------- --------------
Net cash provided by (used in) continuing operations 3,035,665 (5,048,754)
Net cash used in discontinuing operations - (447,716)
-------------- --------------
Net cash provided by (used in) operating activities 3,035,665 (5,496,470)
-------------- --------------
Cash flows from investing activities
Purchase of marketable securities - (1,912)
Capital expenditures (20,513) (51,057)
Proceeds from sale of assets of a subsidiary
net of transaction costs - 9,070,000
-------------- --------------
Net cash (used in) provided by continuing operations (20,513) 9,017,031
Net cash used in discontinuing operations - (57,855)
-------------- --------------
Net cash (used in) provided by investing activities (20,513) 8,959,176
-------------- --------------
Cash flows from financing activities
Borrowings under line of credit 50,659,893 65,966,491
Repayments under line of credit (53,960,466) (69,930,263)
Principal payments under equipment financing
and term loans (14,519) (16,781)
Proceeds from exercise of stock options - 168,750
-------------- --------------
Net cash used in continuing operations (3,315,092) (3,811,803)
Net cash used in discontinuing operations - (102,893)
-------------- --------------
Net cash used in financing activities (3,315,092) (3,914,696)
-------------- --------------
NET DECREASE IN CASH (299,940) (451,990)
-------------- --------------
Cash at beginning of period 321,423 552,655
-------------- --------------
Cash at end of period $ 21,483 $ 100,665
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 589,000 $ 477,000
Income taxes 94,000 11,000
Supplemental schedule of non-cash financing and
investing activities:
Note receivable, received in conjunction with the
sale of assets of a subsidiary $ 2,750,000
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2005
Page 7
JACO ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) The accompanying condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring accrual adjustments, which are,
in the opinion of management, necessary for a fair presentation of the
consolidated financial position and the results of operations of Jaco
Electronics, Inc. and its subsidiaries ("Jaco" or the "Company") at the end of
and for all the periods presented. Such financial statements do not include all
the information or footnotes necessary for a complete presentation. Therefore,
they should be read in conjunction with the Company's audited consolidated
financial statements for the fiscal year ended June 30, 2005 and the notes
thereto included in the Company's Annual Report on Form 10-K, as amended, for
the fiscal year ended June 30, 2005. The results of operations for the interim
periods are not necessarily indicative of the results for the entire year. There
have been no changes to the Company's significant accounting policies subsequent
to June 30, 2005, except as disclosed in Note 7.
2) The Company incurred net losses of approximately $99,000 and $247,000 during
the three months ended September 30, 2005 and 2004, respectively. The Company
incurred a net loss of approximately $4,860,000 during the fiscal year ended
June 30, 2005. The Company also utilized approximately $5,035,000 of cash in
operations during the fiscal year ended June 30, 2005. At September 30, 2005,
the Company had cash of approximately $21,000 and working capital of
approximately $7,714,000, as compared to cash of approximately $321,000 and
working capital of approximately $7,334,000 at June 30, 2005.
As discussed further in Note 4, 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. As of
September 30, 2005, we were in compliance will all of our covenants. Starting
with the week ended October 28, 2005, we failed to be in compliance with our
four week sales covenant. On November 14, 2005, we received a waiver from our
lenders to waive our non-compliance. In recent periods, the Company has had
difficulty remaining in compliance with certain of its financial covenants and
has been required to obtain waivers and make further amendments to the credit
agreement to cure such non-compliance.
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,
decrease operating costs and improve trade support levels consistent with this
plan, and remain in compliance with its bank covenants. The Company's future
operating performance will be subject to financial, economic and other factors
beyond its control, and there can be no assurance that the Company will be able
to achieve these goals. The Company's failure to achieve these goals or remain
in compliance with its bank covenants would have a material adverse effect upon
its business, financial condition and results of operations.
3) 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 4). 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
FORM 10-Q September 30, 2005
Page 8
$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 provided for in the agreement, which has been recorded in the
Company's 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.
Since this dispute remains unresolved, there has to date been no purchase price
adjustment between the Company and Sagamore. 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 September 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
Company's sales to Nexus were approximately $88,000 for the three months ended
September 30, 2005, as compared to $17,000 for the three months ended September
30, 2004, subsequent to the date of sale.
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.
A summary of operating results of Nexus for the three months ended September 30,
2004 were as follows:
Three Months Ended
September 30,
-------------------
2004
Net sales $5,208,184
Loss before income taxes $ (103,452)
4) 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
September 30, 2005, the outstanding balance on this revolving line of credit
facility was $29.9 million, with an additional $3.1 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 September 30,
2005 was approximately 7.45%.
Under the credit agreement, as amended, the Company is required to
comply with the following financial covenants: maintain a Fixed Charge Coverage
Ratio (as defined therein) of 1.0 to 1.0 for the six months ending December 31,
2005, 1.2 to 1.0 for the nine months ending March 31, 2006, and 1.3 to 1.0 for
the twelve months ending June 30, 2006 and for each of the twelve months ending
each quarterly period thereafter; maintain Operating Cash Flow (as defined
therein) for the quarterly period ending September 30, 2005 of not less than
$475,000; maintain minimum Net Worth (as defined therein), commencing August 31,
2005, of not less than $40,500,000, increasing as of the end of each fiscal
quarter thereafter by 65% of the net profit for such quarter, if any, reduced by
the amount of specified Special Charges and Write-offs (as defined therein);
maintain actual sales of not less than 85% of projected sales for each four-
week period on a rolling basis for the previous four calendar weeks; and a
limitation on capital
FORM 10-Q September 30, 2005
Page 9
expenditures of $300,000 for the fiscal year ending June 30, 2006 and for each
fiscal year thereafter. The credit agreement also 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.
On September 28, 2005, the Company's credit facility was amended to waive
its non-compliance with certain bank covenants, including minimum Earnings
Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and minimum Net
Worth, for the quarter ended June 30, 2005. The Company's credit facility was
also amended to reduce the maximum loan amount from $50,000,000 to $40,000,000,
and modify the existing covenants and add additional covenants, including, among
other things, (i) modify the Availability Formula, (ii) reset existing covenants
for Fixed Charge Coverage Ratio, minimum Net Worth and Capital Expenditures
(each as defined therein), and (iii) and add a new covenant regarding
maintenance of Operating Cash Flow, which replaced its former bank covenant
regarding minimum EBITDA.
As of September 30, 2005, the Company was in compliance with all of
its bank covenants. Commencing with the week ended October 28, 2005, the Company
failed to be in compliance with its four week minimum sales covenant. On
November 14, 2005, the Company received a waiver from its lenders to cure its
non-compliance.
In the event that in the future we were to fail to remain in compliance
with our bank covenants and were not able to obtain an amendment or waiver with
respect to such noncompliance, the lenders under our credit facility could
declare us to be in default under the facility, requiring all amounts
outstanding under the facility to be immediately due and payable and/or limit
the Company's ability to borrow additional amounts under the facility. If we did
not have sufficient available cash to pay all such amounts that become due and
payable, we would have to seek additional debt or equity financing through other
external sources, which may not be available on acceptable terms, or at all.
Failure to maintain financing arrangements on acceptable terms would have a
material adverse effect on our business, results of operations and financial
condition.
5) On September 18, 2001, the Company's 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
from November 5, 2002 through February 21, 2003 for aggregate consideration of
$110,051. However, no such repurchases of common stock were made during the
three months ended September 30, 2005.
6) Total comprehensive loss and its components for the three months ended
September 30, 2005 and 2004 are as follows:
Three Months Ended
September 30,
-------------------------------
2005 2004
-------------- -------------
Net loss $ (99,473) $ (247,407)
Unrealized loss
on marketable securities (11,147)
Deferred tax benefit 4,000
-------------- -------------
Comprehensive loss $ (99,473) $ (254,554)
========== ===========
FORM 10-Q September 30, 2005
Page 10
7) 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 the
Compensation Committee of the Board 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 issuance under the
1993 plan to 900,000 from 440,000, of which there are no outstanding options at
September 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 issuance
under the 2000 plan to 1,200,000. The Board of Directors or the Compensation
Committee of the Board 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 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
September 30, 2005.
Through June 30, 2005, the Company accounted for our two stock option plans
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations. Under APB No. 25, compensation expense was only recognized when
the market value of the underlying stock at the date of grant exceeded the
amount an employee must pay to acquire the stock. Since all stock options
granted under our plans were to employees, officers or independent directors,
and since all stock options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of the
grant, no compensation expense had been recognized in the Company's consolidated
financial statements in connection with employee stock option grants.
Effective July 1, 2005, the Company adopted SFAS No. 123R, "Share Based
Payment" ("SFAS 123(R)"), which requires that the Company measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award, and recognize that cost over the
vesting period. The Company used the modified-prospective-transition method.
Under this transition method, stock-based compensation cost to be recognized in
the quarter ended September 30, 2005 includes: (a) compensation cost for all
unvested stock-based awards as of July 1, 2005 that were granted prior to July
1, 2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all stock-based
awards to be granted subsequent to July 1, 2005, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R).
Since no stock options were granted during the quarter ended September
30, 2005, no previously issued stock options were modified during the quarter
ended September 30, 2005 and there were no unvested stock options outstanding as
of July 1, 2005, the adoption of SFAS 123(R) had no current impact on the
Company's financial position, results of operations or cash flows. To the extent
that new stock options are granted or previously issued stock options are
modified in the future, the adoption of SFAS 123(R) will have an impact on the
Company's financial position, results of operations or cash flows.
Determining Fair Value
Valuation and Amortization Method--The Company estimates the fair value of stock
options granted using the Black-Scholes option-pricing formula and a single
option award approach. This fair value is then amortized on a straight-line
basis over the requisite service periods of the awards, which is generally the
vesting period.
FORM 10-Q September 30, 2005
Page 11
Expected Term--The Company's expected term represents the period that the
Company's stock-based awards are expected to be outstanding and was determined
based on historical experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules and expectations
of future employee behavior as influenced by changes to the terms of its
stock-based awards.
Expected Volatility--Stock-based payments made prior to July 1, 2005 were
accounted for using the intrinsic value method under APB 25. The fair value of
stock based payments made subsequent to June 30, 2005 will be valued using the
Black-Scholes valuation method with a volatility factor based on the Company's
historical stock trading history.
Risk-Free Interest Rate--The Company bases the risk-free interest rate used in
the Black-Scholes valuation method on the implied yield currently available on
U.S. Treasury securities with an equivalent term. Estimated Forfeitures--When
estimating forfeitures, the Company considers voluntary termination behavior as
well as analysis of actual option forfeitures.
Fair Value-- The weighted average fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model.
There were no stock options granted during the three months ended September 30,
2005 and 2004.
Prior to the adoption of SFAS 123(R), the Company presented all tax
benefits of deductions resulting from the exercise of stock options as operating
cash flows in its statement of cash flows. In accordance with guidance in SFAS
123(R), the cash flows resulting from excess tax benefits (tax benefits related
to the excess of proceeds from employee's exercises of stock options over the
stock-based compensation cost recognized for those options) will be classified
as financing cash flows. During the three months ended September 30, 2005, the
Company did not record any tax benefits from deductions resulting from the
exercise of stock options.
For the three months ended September 30, 2005, there were no stock
options granted and no stock option expense for stock options vesting during the
period reported in net loss.
Pro-forma Disclosures
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123R to
stock-based employee compensation for the prior period presented:
Three Months Ended
September 30,
--------------------------
2004
--------------
Net loss, as reported $ (247,407)
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (71,911)
--------------
Pro forma net loss $(319,318)
==============
Net loss per common share:
Basic - as reported $(0.04)
==============
Basic - pro forma $(0.05)
==============
Diluted - as reported $(0.04)
==============
Diluted - pro forma $(0.05)
==============
FORM 10-Q September 30, 2005
Page 12
Summary of Stock Option Activity
The Company issues new shares of common stock upon exercise of stock options.
The following is a summary of option activity for our stock option plans:
Weighted-
Weighted- Average
Average Remaining
Options Exercise Contractual
Outstanding Price Term(months)
-------------------------------- --------------
Employee Stock Option Plans:
Shares outstanding at June 30, 2005 532,000 $4.97
Granted
Exercised
Canceled
-------------------------------- -----------------
Shares outstanding at September 30, 2005 532,000 $4.97 78
-------------------------------- -----------------
Shares exercisable at September 30, 2005 532,000 $4.97 78
8) The weighted average common shares outstanding, net of treasury shares, used
in the Company's basic and diluted loss per share computations on its condensed
consolidated statements of operations were 6,267,832 and 6,203,403 for the three
months ended September 30, 2005 and 2004, respectively. Excluded from the
calculation of loss per share are outstanding options to purchase 532,000 and
677,250 shares of the Company's common stock, representing all outstanding
options for the three months ended September 30, 2005 and 2004, respectively, as
their inclusion would have been antidilutive. Common stock equivalents for stock
options are calculated using the treasury stock method.
9) The Company is a party to various 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 position.
10) During the three months ended September 30, 2005 and 2004, the Company
recorded sales of $6,037 and $1,040,127, respectively, from a customer,
Frequency Electronics, Inc. ("Frequency"). The Company's Chairman of the Board
of Directors and President 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 September 30, 2005 and June
30, 2005 aggregate $2,294 and $206, respectively.
A law firm of which one of our directors is a partner provides legal
services on behalf of the Company. Fees paid to such firm amounted to $59,974
for the three months ended September 30, 2005. There were no fees paid to such
firm for the three months ended September 30, 2004.
The son-in-law of the Company's Chairman and President is a partner of
a law firm which provides legal services on behalf of the Company. Fees paid to
such firm amounted to $58,013 and $62,077 for the three months ended September
30, 2005 and 2004, respectively.
The Company leases office and warehouse facilities lease from a
partnership owned by two officers and directors of the Company. As of September
30, 2005, the Partnership advanced the Company $125,000 to fund the construction
of a new LCD Integration Center, which amount the Company has accrued as a
liability in the accompanying balance sheet.
FORM 10-Q September 30, 2005
Page 13
11) At September 30, 2005, the Company had approximately $6,345,000 of unearned
revenue recorded as a current liability in the accompanying condensed
consolidated financial statements. The Company purchased inventory to fulfill an
existing sales order with a certain 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 September 30, 2005. The Company will recognize revenue as
the product is shipped to the customer and title is transferred.
12) 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
adoption of SFAS No. 151 did not have a material impact on the Company's
consolidated financial statements.
13) 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 adoption of SFAS No. 153
did not have a material impact on the Company's consolidated financial
statements.
14) 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.
FORM 10-Q September 30, 2005
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion 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 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 written or oral
statements made by us from time to time, 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", "intends", "plans" or similar
language. Although we believe that the expectations in these forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to be correct. These forward-looking statements are subject to numerous
assumptions, risks and uncertainties, which are subject to change and/or beyond
our control, that could cause our actual results and the timing of certain
events to differ materially from those expressed in the forward-looking
statements. Consequently, the inclusion of the forward-looking statements should
not be regarded as a representation by us of results that actually will be
achieved. For a discussion of certain potential factors that could cause our
actual results to differ materially from those contemplated by the
forward-looking statements, see "Forward-Looking Statements" in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2005, as amended, and our
other periodic reports and documents filed with the Securities and Exchange
Commission.
GENERAL
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. We have expanded our flat panel display value-added capabilities,
through the completion of our new in-house integration center in February 2005.
This new in-house integration center allows us to provide optimized and
efficient design solutions, optical enhancements, and touchscreen integrations,
as well as the manufacture of flat panel display sub-assemblies and complete
displays for commercial, industrial, and military applications.
Critical Accounting Policies and Estimates
We have disclosed in Note A to our consolidated financial statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2005, as amended, those accounting policies that we consider to be
significant in determining our results of operations and financial position.
There have been no material changes to the critical accounting policies
previously identified and described in our 2005 Form 10-K, except for the
adoption of SFAS 123(R) as disclosed in Note 7 of the Notes to Condensed
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.
FORM 10-Q September 30, 2005
Page 15
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.
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 effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of SFAS No. 151 did not have a material impact on the Company's
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 adoption of
SFAS No. 153 did not 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.
FORM 10-Q September 30, 2005
Page 16
Results of Operations
The following table sets forth certain items in our statements of operations as
a percentage of net sales for the periods shown:
Three Months Ended
September 30,
------------------------------
2005 2004
---------- ----------
Net sales 100.0% 100.0%
Cost of goods sold 86.4 87.4
---------- ----------
Gross profit 13.6 12.6
Selling, general and
administrative expenses 13.1 14.4
---------- ----------
Operating profit (loss) 0.5 (1.8)
Interest expense 1.1 0.6
---------- ----------
Loss from continuing operations
before income taxes (0.6) (2.4)
Income tax benefit (0.4) (0.7)
---------- ----------
Loss from continuing operations (0.2) (1.7)
Loss from discontinued operations, net of
income taxes (0.1)
Gain on sale of net assets of subsidiary,
net of income taxes 1.4
---------- ----------
Net loss (0.2) % (0.4) %
========== ==========
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
Results from Continuing Operations:
Net sales for the three months ended September 30, 2005 were $52.5
million, a decrease of $7.8 million, or 12.9%, compared to $60.2 million for the
three months ended September 30, 2004. The decrease was primarily due to an
approximate $5.2 million reduction in semiconductor sales for the three months
ended September 30, 2005, as compared to the same period last fiscal year.
Semiconductors are price sensitive. They tend to be volatile as to pricing in
the U.S. and off-shore. Recently, pricing has been more competitive off-shore
making us less competitive. We have seen our customers outsource their
manufacturing requirements to the Far East to benefit from lower costs.
Accordingly, we have changed our marketing plan to support the business in the
United States and have made changes to better serve our existing customer base.
We have been increasing our quote group, which enables us to be more responsive
to the mid-level contract manufacturers. We have changed our marketing efforts
to focus on those core lines where we believe we can increase our sales. This
includes products such as flat panel displays ("FPD"), semiconductors, power
supplies and printer heads. To further enhance our value-added
FORM 10-Q September 30, 2005
Page 17
capabilities, during the quarter ended March 31, 2005, we opened in our
Hauppauge, New York facility an in-house FPD integration center. With its
technologically advanced design capabilities, we believe this facility enables
us to offer a full solution sell to our customers. Our ability to grow sales
will be partially dependent on our ability to increase FPD sales. In addition to
the integration center, we have made other efforts to increase this business,
such as increasing our design capabilities. FPD product represented 23.6% of our
net sales for the three months ended September 30, 2005, as compared to
approximately 21.4% for the three months ended September 30, 2004. Semiconductor
sales represented 52.1% of our net sales for the three months ended September
30, 2005, as compared to 53.9% for the three months ended September 30, 2004.
Passive components, which are primarily capacitors and resistors, represented
15.7% of our net sales for the three months ended September 30, 2005, as
compared to 17.1% for the three months ended September 30, 2004.
Electromechanical products, including relays, printer heads and power supplies,
represented 8.6% of our net sales for the three months ended September 30, 2005,
as compared to 7.6% for the three months ended September 30, 2004. We believe
the electromechanical product line, with its higher selling prices, still has a
viable market in the United States. Primarily through our logistics programs
with global contract manufacturers, which consist of inventory management and
warehousing capabilities, our export sales represented approximately 32% of our
net sales for the three months ended September 30, 2005, as compared to 22% for
the three months ended September 30, 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 believe we can 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.
Gross profit was $7.1 million, or 13.6% of net sales, for the
three months ended September 30, 2005, as compared to $7.6 million, or 12.6% of
net sales, for the three months ended September 30, 2004. Management considers
gross profit to be a key performance indicator in managing our business. Gross
product margins are usually a factor of the product mix and demand for product.
We believe the increase in gross profit margin percentage is a result of our
re-focused marketing efforts and the fact that pricing for many of our products
has not decreased as readily as in recent periods. As discussed above, the
Company conducts a large amount of business through its logistic programs that
support global contract manufacturers. This business constitutes lower-end
value-added services that tend to be at lower margins. 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 $6.8
million, or 13.1% of net sales, for the three months ended September 30, 2005,
as compared to $8.7 million, or 14.4% of net sales, for the three months ended
September 30, 2004, representing a $1.8 million, or 21.2% decrease also.
Management considers SG&A as a percentage of net sales to be a key performance
indicator in managing our business. We have continued to reduce our costs by
focusing our costs on our core business areas while reducing them in
non-strategic areas. This approach has allowed us to lower SG&A while
maintaining the necessary infrastructure to support our customers. We have also
been able to reduce payroll and payroll related costs by approximately $1.2
million for the three months ended September 30, 2005, as compared to the same
period last fiscal year. We continue to carefully review all spending.
Interest expense was $0.6 million for the three months ended September
30, 2005, as compared to $0.4 million for the same period last fiscal year.
While we have been able to reduce our bank borrowings compared to last fiscal
year, interest expense has increased as a result of higher borrowing rates
primarily due to continuing increases in the federal lending rates during the
last four quarters. Continuing increases in borrowing rates would increase our
interest expense, which would have a negative effect on our results of
operations.
Net loss from continuing operations for the three months ended
September 30, 2005 was $0.1 million, or $0.02 per diluted share, as compared to
a net loss from continuing operations of $1.0 million, or $0.16 per diluted
share, for the three months ended September 30, 2004. Our net loss for the three
months ended September 30, 2005 was significantly reduced as compared to the
same period of the prior fiscal year primarily because of our ability to reduce
SG&A and increase gross profit margins.
FORM 10-Q September 30, 2005
Page 18
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. 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.
Net earnings from these discontinued operations for the three months
ended September 30, 2004 was $767,000, or $0.12 per diluted share. The earnings
from these discontinued operations for the three months ended September 30,
2004, was primarily due to the gain on sale of our Nexus subsidiary of $831,000.
This was patially offset by loss from operations of our Nexus subsidiary of
$64,000 through the date of sale.
Combined Net Loss:
The net loss from both the continuing and discontinued operations for
the three months ended September 30, 2005 was $0.1 million, or $0.02 per diluted
share, as compared to $0.2 million, or $0.04 per diluted share for the three
months ended September 30, 2004.
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 September 30, 2005, the outstanding balance on this revolving
line of credit facility was $29.9 million, with an additional $3.1 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 September 30, 2005 was approximately 7.45%.
Under the credit agreement, as amended, the Company is required to
comply with the following financial covenants: maintain a Fixed Charge Coverage
Ratio (as defined therein) of 1.0 to 1.0 for the six months ending December 31,
2005, 1.2 to 1.0 for the nine months ending March 31, 2006, and 1.3 to 1.0 for
the twelve months ending June 30, 2006 and for each of the twelve months ending
each quarterly period thereafter; maintain Operating Cash Flow (as defined
therein) for the quarterly period ending September 30, 2005 of not less than
$475,000; maintain minimum Net Worth (as defined therein), commencing August 31,
2005, of not less than $40,500,000, increasing as of the end of each fiscal
quarter thereafter by 65% of the net profit for such quarter, if any, reduced by
the amount of specified Special Charges and Write-offs (as defined therein);
maintain actual sales of not less than 85% of projected sales for each four week
period on a rolling basis for the previous four calendar weeks; and a limitation
on capital expenditures of $300,000 for the fiscal year ending June 30, 2006 and
for each fiscal year thereafter. The credit agreement also restricts the
Company's ability to pay dividends.
FORM 10-Q September 30, 2005
Page 19
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.
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 reduce the maximum loan amount from $50,000,000 to
$40,000,000, and modify the existing covenants and add additional covenants,
including, among other things, (i) modify the Availability Formula, (ii) reset
existing covenants for Fixed Charge Coverage Ratio, minimum Net Worth and
Capital Expenditures (each as defined therein), and (iii) and add a new covenant
regarding maintenance of Operating Cash Flow, which replaced its former bank
covenant regarding minimum EBITDA.
As of September 30, 2005, the Company was in compliance with all of
its bank covenants. Commencing with the week ended October 28, 2005, the Company
failed to be in compliance with its four week minimum sales covenant. On
November 14, 2005, the Company received a waiver from its lenders to cure its
non-compliance.
At September 30, 2005, the Company had cash of approximately $21,000
and working capital of approximately $7,714,000, as compared to cash of
approximately $321,000 and working capital of approximately $7,334,000 at June
30, 2005. 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.
For the three months ended September 30, 2005, our net cash provided by
operating activities was approximately $3.0 million, as compared to net cash
used in operating activities of $5.5 million for the three months ended
September 30, 2004. The increase in net cash provided by operating activities is
primarily attributable to a decrease in our accounts receivable and inventory
for the three months ended September 30, 2005, as compared to an increase in our
accounts receivable for the three months ended September 30, 2004. Net cash used
in investing activities was approximately $0.1 million for the three months
ended September 30, 2005 as compared to net cash provided by investing
activities of $9.0 million for the three months ended September 30, 2004. The
decrease in net cash provided by is primarily attributable to $9.1 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 $3.3
million for the three months ended September 30, 2005 as compared to $3.9
million for the three months ended September 30, 2004. The decrease in net cash
used is primarily attributable to the increase in net borrowings under our
credit facility of approximately $0.7 million.
For the three months ended September 30, 2005 and 2004, our inventory
turnover was 5.0 times and 5.7 times, respectively. The average days outstanding
of our accounts receivable at September 30, 2005 was 58 days, as compared to 57
days at September 30, 2004. Inventory turnover and average days outstanding are
key ratios that management relies on to monitor our business.
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 partially on our ability to achieve anticipated levels of
revenue, while continuing to control costs, and remaining in compliance with our
bank covenants. 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 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. In the event that in the future we are unable to
obtain such an amendment or waiver of our non-compliance with our financial
covenants, the lenders under our credit facility could declare us to be in
default under the facility, requiring all amounts outstanding under the facility
to be immediately due and payable and/ or limit the Company's ability to borrow
additional amounts under the facility. If we did not have sufficient available
cash to pay all such amounts that become due and payable, we would have to seek
additional debt or equity financing through other external sources, which may
not be available on acceptable terms, or at all. Failure to maintain financing
arrangements on acceptable terms would have a material adverse effect on our
business, results of operations and financial condition.
FORM 10-Q September 30, 2005
Page 20
Contractual Obligations
This table summarizes our known contractual obligations and commercial
commitments at September 30, 2005.
Total < 1 Year 1 to 3 Years 3 to 5 Years > 5 Years
--------------- --------------- --------------- ---------------- --------------
Bank Debt 29,904,538 29,904,538
Capital Lease 115,929 73,218 42,711
Operating Lease 8,248,355 1,486,845 2,282,188 1,616,776 2,862,546
--------------- --------------- --------------- ---------------- --------------
Total 38,268,822 31,464,601 2,324,899 1,616,776 2,862,546
=============== =============== =============== ================ ==============
Inflation
Inflation has not had a significant impact on our operations during the
last three fiscal years.
Item 3. 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
October 31, 2005, $25.1 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 the amount of outstanding borrowings at
October 31, 2005. The impact of interest rate fluctuations on our other floating
rate debt is not material.
Item 4. Controls and Procedures.
An evaluation was performed, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation 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 September 30, 2005. Based upon that evaluation, the Company's
management, including its Chief Executive Officer and Chief 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 Securities and Exchange Commission's rules and forms, and is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure. There have been no 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 September 30,
2005 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
FORM 10-Q September 30, 2005
Page 21
PART II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibit 10.23.6 - Waiver #6 to Third Restated and
Amended Loan and Security Agreement dated November
14 , 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.
Exhibit 31.1 - Rule 13a-14 (a) / 15d-14 (a)
Certification of Principal Executive Officer.
Exhibit 31.2 - Rule 13a-14 (a) / 15d-14 (a)
Certification of Principal Financial Officer.
Exhibit 32.1 - Section 1350 Certification of Principal
Executive Officer.
Exhibit 32.2 - Section 1350 Certification of Principal
Financial Officer.
S I G N A T U R E
Pursuant to the requirements 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.
November 14, 2005
JACO ELECTRONICS, INC.
(Registrant)
BY: /s/ Jeffrey D. Gash
---------------------------------------
Jeffrey D. Gash, Executive Vice President,
Finance and Secretary
(Principal Financial Officer)