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 March 31, 2006
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
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and larger accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<Table>
<Caption>
Class Shares Outstanding at May 12, 2006
----- ----------------------------------
Common Stock, $0.10 Par Value 6,294,332 (excluding 659,900 shares
held as treasury stock)
</Table>
FORM 10-Q March 31, 2006
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2006 2005
------------ ------------
ASSETS (UNAUDITED)
Current Assets
Cash $ 27,992 $ 321,423
Accounts receivable - net 35,074,212 34,694,811
Note receivable - current portion 812,500 --
Inventories - net 36,926,113 37,056,949
Prepaid expenses and other 1,166,568 1,035,633
Deferred income taxes 3,269,000
------------ ------------
Total current assets 74,007,385 76,377,816
Property, plant and equipment - net 1,830,067 2,280,809
Deferred income taxes -- 3,125,000
Excess of cost over net assets acquired - net 25,416,087 25,416,087
Note receivable 1,937,500 2,750,000
Other assets 2,061,760 2,272,701
------------ ------------
Total assets $105,252,799 $112,222,413
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q March 31, 2006
Page 3
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2006 2005
------------- -------------
(UNAUDITED)
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 31,646,423 $ 27,426,106
Current maturities of long-term debt and
capitalized lease obligations 36,721,598 33,266,185
Unearned revenue 1,016,400 8,285,200
Income taxes payable 20,002 66,354
------------- -------------
Total current liabilities 69,404,423 69,043,845
Long-term debt and capitalized lease obligations 6,035 57,451
Deferred compensation 1,087,500 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; issued 6,954,232 and 6,927,732
shares, respectively, and 6,294,332 and
6,267,832 shares outstanding, respectively 695,423 692,773
Additional paid-in capital 27,049,997 26,990,374
Retained earnings 9,323,987 16,702,536
Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566)
------------- -------------
Total shareholders' equity 34,754,841 42,071,117
------------- -------------
Total liabilities and shareholders' equity $ 105,252,799 $ 112,222,413
============= =============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q March 31, 2006
Page 4
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2006 2005
------------ ------------
Net sales $ 60,905,905 $ 60,537,075
Cost of goods sold 53,124,309 53,870,534
------------ ------------
Gross profit 7,781,596 6,666,541
Selling, general and administrative expenses 7,062,146 7,633,583
------------ ------------
Operating profit (loss) 719,450 (967,042)
Interest expense 621,580 594,005
------------ ------------
Earnings (Loss) before income taxes 97,870 (1,561,047)
Income tax provision (benefit) 14,337 (468,200)
------------ ------------
Net Earnings (Loss) $ 83,533 $ (1,092,847)
============ ============
PER SHARE INFORMATION
Basic and diluted loss per common share:
NET EARNINGS (LOSS) $ 0.01 $ (0.17)
============ ============
Weighted-average common shares and common
equivalent shares outstanding:
Basic 6,293,115 6,264,954
============ ============
Diluted 6,387,780 6,264,954
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q March 31, 2006
Page 5
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31,
(UNAUDITED)
2006 2005
------------- -------------
Net sales $ 161,474,478 $ 172,741,189
Cost of goods sold 139,910,804 151,892,264
------------- -------------
Gross profit 21,563,674 20,848,925
Selling, general and administrative expenses 20,749,685 24,620,289
------------- -------------
Operating profit (loss) 813,989 (3,771,364)
Interest expense 1,740,068 1,432,279
------------- -------------
Loss from continuing operations
before income taxes (926,079) (5,203,643)
Income tax provision (benefit) 6,452,470 (1,561,000)
------------- -------------
Loss from continuing operations (7,378,549) (3,642,643)
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 $ (7,378,549) $ (2,875,720)
============= =============
PER SHARE INFORMATION
Basic and diluted (loss) earnings per common share:
Loss from continuing operations $ (1.18) $ (0.58)
Earnings from discontinued operations -- $ 0.12
------------- -------------
Net loss $ (1.18) $ (0.46)
============= =============
Weighted-average common shares and common
equivalent shares outstanding:
Basic and Diluted 6,278,705 6,243,575
============= =============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q March 31, 2006
Page 6
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2006
(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 (7,378,549) (7,378,549)
Exercise of stock options 26,500 2,650 59,623 62,273
--------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2006 6,954,232 $ 695,423 $27,049,997 $ 9,323,987 $(2,314,566) $34,754,841
========= =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q March 31 2006
Page 7
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31,
(UNAUDITED)
2006 2005
------------- -------------
Cash flows from operating activities
Net loss $ (7,378,549) (2,875,720)
Loss from discontinued operations -- 63,652
Gain on sale of subsidiary -- (830,575)
------------- -------------
Loss from continuing operations (7,378,549) (3,642,643)
Adjustments to reconcile net loss to net
cash (used in) operating activities
Depreciation and amortization 719,928 864,914
Deferred compensation 37,500 37,500
Deferred income taxes 6,394,000 (1,234,249)
Gain on sale of marketable securities (110,540)
Provision for doubtful accounts (97,825) 385,650
Changes in operating assets and liabilities
(Increase) in operating assets - net (199,007) (11,099,412)
Increase (decrease) in operating liabilities - net (3,094,835) 7,945,657
------------- -------------
Net cash (used in) continuing operations (3,618,788) (6,853,123)
Net cash (used in) discontinuing operations -- (447,716)
------------- -------------
Net cash (used in) operating activities (3,618,788) (7,300,839)
------------- -------------
Cash flows from investing activities
Purchase of marketable securities -- (8,470)
Proceeds from sale of marketable securities 829,422
Capital expenditures (140,914) (1,138,513)
Proceeds from sale of assets of a subsidiary, net of transaction costs 9,070,000
------------- -------------
Net cash provided by (used in) continuing operations (140,914) 8,752,439
Net cash (used in) discontinuing operations -- (57,855)
------------- -------------
Net cash provided by (used in) investing activities (140,914) 8,694,584
------------- -------------
Cash flows from financing activities
Borrowings under line of credit 158,499,902 189,303,669
Repayments under line of credit (155,056,093) (191,222,987)
Principal payments under equipment financing
and term loans (39,811) (75,004)
Proceeds from exercise of stock options 62,273 180,500
------------- -------------
Net cash provided by (used in) continuing operations 3,466,271 (1,813,822)
Net cash (used in) discontinuing operations -- (102,893)
------------- -------------
Net cash provided by (used in) financing activities 3,466,271 (1,916,715)
------------- -------------
NET DECREASE IN CASH (293,431) (522,970)
------------- -------------
Cash at beginning of period 321,423 552,655
------------- -------------
Cash at end of period $ 27,992 29,685
============= =============
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
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,732,000 $ 1,479,000
Income taxes 104,000 61,000
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q March 31, 2006
Page 8
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 earnings (losses) of approximately $84,000 and
($7,379,000) during the three and nine months ended March 31, 2006,
respectively, compared to net losses of $1,093,000 and $2,876,000 during the
three and nine months ended March 31, 2005, 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 March 31, 2006, the Company had cash of
approximately $28,000 and working capital of approximately $4,603,000, 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, the Company was in compliance with all of its covenants
contained in the credit agreement. Starting with the week ended October 28,
2005, the Company failed to be in compliance with its four week sales covenant.
On November 14, 2005, the Company received a waiver from its lenders to waive
its non-compliance with this covenant. At December 31, 2005, the Company was in
violation of its Fixed Charge Coverage Ratio covenant contained in the credit
agreement. On February 13, 2006, the Company entered into an amendment to its
credit agreement that, among other things, retroactively established new minimum
amounts for the Fixed Charge Coverage Ratio, with which the Company is currently
in 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.
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 generate sufficient revenues,
decrease operating costs and improve trade support levels to continue to improve
results from operations and cash flows, and remain in compliance with its bank
covenants.. 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 has allowed 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
FORM 10-Q March 31, 2006
Page 9
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 $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 that has
been agreed to. 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
March 31, 2006, 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 $117,000 and $248,000 for the three
and nine months ended March 31, 2006, respectively, as compared to $241,000 and
$465,000 for the three and nine months ended March 31, 2005, respectively,
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 nine months ended March 31, 2005
were as follows:
Nine Months Ended
March 31,
---------
2005
----
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 originally 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 March 31, 2006, the outstanding balance on this revolving line of
credit facility was $36.7 million, with an additional $0.9 million available. At
March 31, 2006, the Company had outstanding $1.75 million of stand-by letters of
credit on behalf of certain vendors ($2.5 million as of May 12, 2006). The
interest rate on the outstanding borrowings at March 31, 2006 was approximately
8.88%.
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 1.1 to 1.0 for the three months ending March 31,
2006, and 1.2 to 1.0 for the six months ending June 30, 2006, nine months ending
September 30, 2006 and for each of the twelve months ending each quarterly
period thereafter; 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,
FORM 10-Q March 31, 2006
Page 10
reduced by the amount of specified Special Charges and Write-offs (as defined
therein); 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. In addition,
the credit agreement 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 available loan amount from $50,000,000 to
$40,000,000, and modify the existing covenants and add additional covenants,
including, among other things, to (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) add a new covenant
regarding maintenance of Operating Cash Flow, which replaced its former bank
covenant regarding minimum EBITDA.
Commencing with the week ended October 28, 2005, the Company failed to
be in compliance with its four week minimum sales covenant (to which it is no
longer subject). On November 14, 2005, the Company received a waiver from its
lenders to cure its non-compliance.
At December 31, 2005, the Company was in violation of its Fixed Charge
Coverage Ratio covenant contained in the credit agreement. On February 13, 2006,
the Company's credit facility was amended, among other things, to (i)
retroactively reset the amounts under its existing Fixed Charge Coverage Ratio
covenant (as described above), (ii) increase the interest rates on outstanding
borrowings by 0.25%, (iii) modify the Availability Formula, (iv) provide for a
temporary additional availability amount of up to $1,500,000 from February 13,
2006 through and including February 20, 2006, of up to $800,000 from February
21, 2006 through and including March 20, 2006, and $0 thereafter, and (v)
require the Company's inventory to be appraised on a semi-annual (rather than
annual) basis by an appraiser designated by its lenders at the cost of the
Company.
As of March 31, 2006, the Company was in compliance with all of its
covenants contained in the credit agreement. On March 31, 2006, PNC Bank,
National Association, one of the original lenders under the credit agreement,
assigned all of its rights and interest in the credit agreement to The CIT
Group/Business Credit, Inc. On May 2, 2006, effective April 24,2006, the
Company's credit agreement was further amended to increase the sublimit on the
aggregate amount of letters of credit permitted to be outstanding from
$2,000,000 to $3,000,000.
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 or nine months ended March 31, 2006.
FORM 10-Q March 31, 2006
Page 11
6) Total comprehensive earnings ( loss) and its components for the three and
nine months ended March 31, 2006 and 2005 are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
2006 2005 2006 2005
---- ---- ---- ----
Net earnings (loss) $83,538 $(1,092,847) $(7,378,549) $(2,875,720)
Unrealized (loss) gain on marketable
securities, net of deferred taxes of $1,746
and ($39,000), respectively (2,780) 31,415
Reclassification adjustment for gains
on marketable securities recognized
included in net loss, net of deferred
tax expense of $42,005 (68,535) (68,535)
------- ----------- ----------- -----------
Comprehensive earnings (loss) $83,538 $(1,164,162) $(7,378,549) $(2,912,840)
======= =========== =========== ===========
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 were no outstanding options at
March 31, 2006.
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 500,500 were outstanding at March
31, 2006.
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
FORM 10-Q March 31, 2006
Page 12
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 uses the
modified-prospective-transition method. Under this transition method,
stock-based compensation cost to be recognized in the three and nine months
ended March 31, 2006 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 three and nine months
ended March 31, 2006, no previously issued stock options were modified during
the three and nine months ended March 31, 2006 and there were no unvested stock
options outstanding as of July 1, 2005, the adoption of SFAS 123(R) has 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.
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 -- 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 and nine months ended March
31, 2006 and 2005.
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 and nine months ended March 31, 2006,
the Company did not record any tax benefits from deductions resulting from the
exercise of stock options.
For the three and nine months ended March 31, 2006, 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 123(R) to
stock-based employee compensation for the prior period presented:
FORM 10-Q March 31, 2006
Page 13
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
2005 2005
---- ----
Net loss, as reported $(1,092,847) $(2,875,720)
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (6,410) (141,252)
----------- -----------
Pro forma net loss $(1,099,257) $(3,016,972)
=========== ===========
Net loss per common share:
Basic - as reported $(017) $(0.46)
=========== ===========
Basic - pro forma $(0.18) $(0.48)
=========== ===========
Diluted - as reported $(0.17) $(0.46)
=========== ===========
Diluted - pro forma $(0.18) $(0.48)
=========== ===========
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 (26,500) $2.35
Canceled (5,750) $8.00
------- ----- ----------
Shares outstanding at March 31, 2006 499,750 $5.07 72
------- ----- ----------
Shares exercisable at March 31, 2006 499,750 $5.07 72
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 6,293,115 and 6,278,705 for the three
and nine months ended March 31, 2006, respectively, compared to 6,264,954 and
6,243,575 for the three and nine months ended March 31, 2005, respectively.
Excluded from the calculation of earnings (loss) per share are outstanding
options to purchase 499,750 and 569,500 shares of the Company's common stock,
representing all outstanding options for the nine months ended
FORM 10-Q March 31, 2006
Page 14
March 31, 2006 and for the three and nine months ending March 31,2005,
respectively, as their inclusion would have been antidilutive. For the three
months ending March 31, 2006, Common Stock equivalents were 94,665 shares.
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 and nine months ended March 31, 2006, the Company recorded
sales of $62,825 and $119,739, respectively, compared to $3,133 and $39,178, for
the three and nine months ended March 31, 2005, 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 March 31, 2006 and June 30,
2005 aggregate $7,790 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 $22,644
and $106,352 for the three and nine months ended March 31, 2006, respectively,
compared to $0 and $168,575 for the three and nine months ended March 31, 2005.
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 $41,004 and $116,350 for the three and nine months ended
March 31, 2006, respectively, compared to $60,255 and $139,300 for the three and
nine months ended March 31, 2005, respectively.
The Company leases office and warehouse facilities from a
partnership owned by two officers and directors of the Company. As of March 31,
2006, 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.
11) At March 31, 2006, the Company had approximately $1,016,000 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 of this order has not been fully made and the
related inventory remains in the Company's warehouse for future delivery, and is
included on the Company's balance sheet as of March 31, 2006. The Company will
recognize revenue as the remaining product is shipped to the customer and title
is transferred.
12) At September 30, 2005, the Company had recorded deferred tax assets of
$6,610,500 related to the anticipated recovery of tax loss carry forwards.
Management evaluates, on a quarterly basis, the weight of available evidence and
whether it is more likely than not that the amount of future tax benefit would
not be realized. While the Company still believes that it is positioned for
long-term growth, the volatility in our industry and markets has made it
increasingly difficult to predict sales and operating results on a short-term
basis, and when coupled with the cumulative losses reported over the last four
fiscal years and the first two quarters of the current fiscal year, the Company
can no longer conclude that, based upon the weight of available evidence, it is
"more likely than not" that the deferred tax asset of $6,610,500 will be
realized, and therefore added $6,610,500 to the income tax provision to bring
the carrying value of the deferred tax asset to zero.
Prior to December 31, 2005, the Company believed 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 would improve results from operations and cash flows in the near term.
The "more likely than not" standard is subjective, and was based upon
management's estimate of a greater than 50% probability that its long range
business plan could be realized. During the three months ended December 31,
2005, we recorded a provision for income taxes of $6,629,000 consisting mainly
of the $6,610,500 deferred tax write-off.
FORM 10-Q March 31, 2006
Page 15
13) 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 was 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.
14) 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.
15) 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 adoption of
SFAS No. 154 is not expected to have a material impact on the Company's
consolidated financial statements.
FORM 10-Q March 31, 2006
Page 16
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
Consolidated 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 March 31, 2006
Page 17
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 was 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 adoption of
SFAS No. 154 is not expected to have a material impact on the Company's
consolidated financial statements.
FORM 10-Q March 31, 2006
Page 18
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 Nine Months Ended
March 31, March 31,
--------- ---------
2006 2005 2006 2005
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 87.2 89.0 86.6 87.9
------ ------- ------- -------
Gross profit 12.8 11.0 13.4 12.1
Selling, general and
administrative expenses 11.6 12.6 12.9 14.3
------ ------- ------- -------
Operating profit (loss) 1.2 (1.6) 0.5 (2.2)
Interest expense 1.0 1.0 1.1 0.8
------ ------- ------- -------
Earnings (Loss) from continuing operations
before income taxes 0.2 (2.6) (0.6) (3.0)
Income tax provision (benefit) 0.0 (0.8) 4.0 (0.9)
------ ------ ------- -------
Gain (Loss) from continuing operations 0.1 (1.8) (4.6 (2.1)
Loss from discontinued
Operations, net of taxes (0.1)
Gain on sale of subsidiary, net of taxes 0.5
------ ------- ------- -------
NET EARNINGS (LOSS) 0.1% (1.8)% (4.6)% (1.7)%
====== ======= ======= =======
COMPARISON OF THE THREE AND NINE MONTHS ENDED MARCH 31,2006 AND MARCH 31,2005
RESULTS FROM CONTINUING OPERATIONS:
Net sales for the three and nine months ended March 31, 2006 were $60.9
million and $161.5 million, respectively, compared to $60.5 million and $172.7
million for the three and nine months ended March 31, 2005. This represents a
0.6% increase for the three months ended March 31,2006 and a 6.5% decrease for
the nine months ended March 31, 2006. Our sales to off-shore contract
manufacturers, to whom we provide inventory management services, has declined
14.8% for the nine months of this fiscal year compared to the comparable period
last fiscal year. This decline was due to the contract manufacturers holding
excess inventory. However, we have seen an increase in activity toward the end
of the current quarter. Our flat panel display (FPD) net sales increased by
100.8% for the three months ended March 31, 2006 and 34.1% for the nine months
ended March 31, 2006 compared to the same periods of last fiscal year. We have
had success in selling FPD as a separate component or as part of a value-added
project where we integrate components into sub-assemblies that are used in such
products as voting election equipment, electronic Kiosk, and multi media
equipment. Our net sales for FPD product for the three and nine months ended
March 31, 2006,
FORM 10-Q March 31, 2006
Page 19
respectively, were $16.5 million and $42.8 million compared to $8.3 million and
$32.0 million, respectively, for the same periods of last fiscal year. Our
growth in FPD sales is partially attributable to our in-house FPD integration
center with design capabilities that we opened in February 2005 in our
Hauppauge, New York facility. This provides "full-solution" capability enabling
us to offer our customers an expanded range of services. FPD product represented
27.1% and 26.5% of our net sales for the three and nine months ended March 31,
2006, respectively, as compared to 13.7% and 18.5% for the same periods of last
fiscal year. Semiconductors sales represented 50.4% and 49.6% of our net sales
for the three and nine months ended March 31, 2006, respectively, as compared to
60.9% and 55.6% for the same periods of last fiscal year. Additionally, we
continue to support our off-shore global contract manufacturers, primarily in
the Far East with value-added inventory programs. We have also increased our
quote group to enable us to be more responsive to the mid-level contract
manufacturers in the United States. In addition to the foregoing, we are
continuing to focus on core product lines, such as semiconductors, power
supplies, printer heads and passive military components, where we believe we can
increase our sales. Passive components, which are primarily capacitors and
resistors, represented 15.3% and 16.0% of our net sales for the three and nine
months ended March 31, 2006, respectively, as compared to 16.7% and 17.5% for
the same periods of last fiscal year. Electromechanical products, including
relays, printer heads and power supplies, represented 7.3% and 7.9% of our net
sales for the three and nine months ended March 31, 2006, respectively, as
compared to 8.7% for each of the same periods of last fiscal year. We have fully
integrated the sale of our FPD product into our sales force and anticipate sales
of these products to remain strong. We believe that our continued focus on FPD
product sales and our core vendors will allow us to best service the available
market in the United States. We continue to seek to expand our Far East presence
primarily through marketing our value-added logistical inventory programs to
support global contract manufacturers. In addition, as part of our long-term
growth plans, we continue to search for a potential strategic alliance or
partner in the Far East.
Gross profit was $7.8 million, or 12.8% of net sales, and $21.6
million, or 13.4% of net sales, for the three and nine months ended March 31,
2006,respectively, as compared to $6.7 million, or 11.0% of net sales, and $20.8
million, or 12.1% of net sales, for the same periods of last fiscal year.
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. The increase in our gross profit margins is primarily due to
the increase in our sales of higher margin FPD products and a decrease in sales
associated with our logistical programs with global contract manufacturers,
which usually operate at lower margins. We do not anticipate any material change
in our gross profit margin for the foreseeable future unless we experience an
increase in sales associated with our logistical programs. 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 events beyond our control.
Selling, general and administrative ("SG&A") expenses were $7.1
million, or 11.6%, of net sales, and $20.7 million, or 12.9%, of net sales, for
the three and nine months ended March 31, 2006, respectively, as compared to
$7.6 million, or 12.6% of net sales, and $24.6 million, or 14.3% of net sales,
for the same periods of last fiscal year, representing a $0.6 million and $3.9
million decrease for the three and nine months ended March 31, 2006,
respectively. 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 spending on our core business areas while reducing
spending in non-strategic areas. This has allowed us to lower SG&A while
maintaining the necessary infrastructure to support our customers.
However, we expect SG&A to remain constant during the current quarter
as we require the current level of spending to support our business as sales
increase. We continue to carefully review all spending and seek to eliminate any
SG&A considered non-essential.
Interest expense was $0.6 million and $1.7 million for the three and
nine months ended March 31, 2006, respectively, as compared to $0.6 million and
$1.4 million for the same periods of last fiscal year. Interest expense has
increased for the nine months ended March 31, 2006 as a result of higher
borrowing
FORM 10-Q March 31, 2006
Page 20
rates primarily due to continued increases in federal lending rates. Continued
increases in borrowing rates would increase our interest expense, which would
have a negative effect on our results of operations.
During the three months ended December 31, 2005, we recorded a provision for
income taxes of $6,629,000 consisting mainly of a $6,610,500 deferred tax
write-off. While the Company still believes that it is positioned for long-term
growth, the volatility in our industry and markets has made it increasingly
difficult to predict sales and operating results on a short-term basis and, when
coupled with the cumulative losses reported over the last four fiscal years and
the first two quarters of the current fiscal year, the Company can no longer
conclude that based on the weight of available evidence, it is "more likely than
not" that the deferred tax asset of $6,610,500 will be realized, and added
$6,610,500 to the income tax provision to bring the carrying value of the
deferred tax asset to zero.
Net income (loss) from continuing operations for the three and nine
months ended March 31, 2006 was $0.1 million, or $0.01 per diluted share, and $
(7.4) million, or $(1.17) per diluted share, respectively, as compared to $(1.1)
million, or $(0.17) per diluted share, and $(3.6) million, or ($0.58) per
diluted share for the same periods of last fiscal year. Our net income for the
quarter increased as compared to our net loss for the same quarter of last
fiscal year due to the increase in gross profit dollars and the reduction in
SG&A expenses. Our net losses for the nine months have increased as compared to
the same period of last year due to our write off of $6.6 million in deferred
tax assets during the quarter ending December 31, 2005 for the reasons described
above and in Note 12 of the Notes to Condensed Consolidated Financial
Statements. This increase was partially offset by our ability to reduce SG&A and
increase gross profit margins, as discussed above.
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 has allowed 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 and accrued interest on
the note is permitted.
Net earnings from these discontinued operations for the nine months
ended March 31, 2005 was $0.8 million, 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 partially offset by a loss from operations of our Nexus subsidiary of
$64,000 through the date of sale.
COMBINED NET LOSS
The combined net income (loss) from both the continuing and
discontinued operations for the three and nine months ended March 31, 2006 was $
0.1 million, or $0.01 per diluted share, and $ (7.4) million, or $ (1.17) per
diluted share, respectively, compared to a combined net loss from both the
continuing and discontinued operations for the three and nine months ended March
31, 2005 of $(1.1) million, or $ (0.17) per diluted share, and $ (2.9) million,
or $ (0.46) per diluted shares for the reasons discussed above.
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
FORM 10-Q March 31, 2006
Page 21
Commercial Finance LLC and PNC Bank, National Association originally 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 March 31, 2006, the
outstanding balance on this revolving line of credit facility was $36.7 million,
with an additional $0.9 million available. At March 31, 2006, the Company had
outstanding $1.75 million of stand-by letters of credit on behalf of certain
vendors ($2.5 million as of May 12, 2006). The interest rate on the outstanding
borrowings at March 31, 2006 was approximately 8.88%.
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 1.1 to 1.0 for the three months ending March 31,
2006, and 1.2 to 1.0 for the six months ending June 30, 2006, nine months ending
September 30, 2006 and for each of the twelve months ending each quarterly
period thereafter; 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); 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. In addition,
the 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 available loan amount from $50,000,000 to
$40,000,000, and modify the existing covenants and add additional covenants,
including, among other things to (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) add a new covenant
regarding maintenance of Operating Cash Flow, which replaced its former bank
covenant regarding minimum EBITDA.
Commencing with the week ended October 28, 2005, the Company failed to
be in compliance with its four week minimum sales covenant (to which it is no
longer subject). On November 14, 2005, the Company received a waiver from its
lenders to cure its non-compliance.
At December 31, 2005, the Company was in violation of its Fixed Charge
Coverage Ratio covenant contained in the credit agreement. On February 13, 2006,
the Company's credit facility was amended, among other things, to (i)
retroactively reset the amounts under its existing Fixed Charge Coverage Ratio
covenant (as described above), (ii) increase the interest rates on outstanding
borrowings by 0.25%, (iii) modify the Availability Formula, (iv) provide for a
temporary additional availability amount of up to $1,500,000 from February 13,
2006 through and including February 20, 2006, of up to $800,000 from February
21, 2006 through and including March 20, 2006, and $0 thereafter, and (v)
require the Company's inventory to be appraised on a semi-annual (rather than
annual) basis by an appraiser designated by its lenders at the cost of the
Company.
As of March 31, 2006, the Company was in compliance with all of its
covenants contained in the credit agreement. On March 31, 2006, PNC Bank,
National Association, one of the original lenders under the credit agreement,
assigned all of its rights and interest in the credit agreement to The CIT
Group/Business Credit, Inc. On May 2, 2006, the Company's credit agreement was
further amended to increase the sublimit on the aggregate amount of letters of
credit permitted to be outstanding from $2,000,000 to $3,000,000, effective as
of April 24, 2006.
At March 31, 2006, the Company had cash of approximately $28,000 and
working capital of approximately $4,603,000, 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 nine months ended March 31, 2006, our net cash used in
operating activities was approximately $3.6 million, as compared to net cash
used in operating activities of $7.3 million for the
FORM 10-Q March 31, 2006
Page 22
nine months ended March 31, 2005. The decrease in net cash used in operating
activities is primarily attributable to the net decrease in current liabilities
for the nine months ended March 31, 2006, as compared to a substantial increase
in our accounts receivable and inventory for the nine months ended March 31,
2005. Net cash used in investing activities was approximately $0.1 million for
the nine months ended March 31, 2006 as compared to net cash provided by
investing activities of $8.7 million for the nine months ended March 31, 2005.
The decrease in net cash provided by investing activities is primarily
attributable to $9.1 million in net proceeds we received from our sale of
substantially all of the assets of Nexus in September 2004. Net cash provided by
financing activities was approximately $3.5 million for the nine months ended
March 31, 2006 as compared to net cash used in financing activities of $1.9
million for the nine months ended March 31, 2005. The increase in net cash
provided by financing activities is primarily attributable to an increase in net
borrowings under our credit facility of approximately $5.3 million.
For the nine months ended March 31, 2006 and 2005, our inventory
turnover was 5.3 and 5.0 times, respectively. The average days outstanding of
our accounts receivable at March 31, 2006 were 54 days, as compared to 58 days
at March 31, 2005. 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. Based on preliminary discussions with our lenders, we
believe we will be able to renew our credit facility on terms similar to those
currently in effect prior to its scheduled maturity on December 31, 2006,
although we cannot assure that this renewal will occur. 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.
CONTRACTUAL OBLIGATIONS
This table summarizes our known contractual obligations and commercial
commitments at March 31, 2006.
TOTAL < 1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS > 5 YEARS
----- -------- ------------ ------------ ---------
Bank Debt $36,648,919 $36,648,919
Capital Lease 73,219 67,117 $6,102
Operating Lease 7,654,654 1,368,910 2,154,962 $1,590,317 $2,540,465
----------- ----------- ---------- ---------- ----------
Total $44,376,792 $38,084,946 $2,161,064 $1,590,317 $2,540,465
=========== =========== ========== ========== ==========
FORM 10-Q March 31, 2006
Page 23
INFLATION AND SEASONALITY
Inflation and seasonality have 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
April 30, 2006, $34.1 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
April 30, 2006. 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 March 31, 2006. 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 March 31, 2006
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits.
a) Exhibit 10.23.8 - Amendment to Third Restated and
Amended Loan and Security Agreement dated May 2,
2006, by and among GMAC Commercial Finance LLC, as
Lender and as Agent, The CIT Group /Business Credit,
Inc., 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.
May 15, 2006
JACO ELECTRONICS, INC.
(Registrant)
BY: /s/ Jeffrey D. Gash
---------------------------------------
Jeffrey D. Gash, Executive Vic President,
Finance and Secretary
(Principal Financial Officer)