-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SxY+Ikg2fZC6UyIUDpe0ZdIMVJFljD5Ibw3URI6GZlY6eWSKi1BGwxd20xDH4pCX xv6WgbkNNihxJxqm4th57Q== 0000052971-02-000012.txt : 20020930 0000052971-02-000012.hdr.sgml : 20020930 20020930111620 ACCESSION NUMBER: 0000052971-02-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACO ELECTRONICS INC CENTRAL INDEX KEY: 0000052971 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 111978958 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-34664 FILM NUMBER: 02775781 BUSINESS ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 6312735500 MAIL ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 jaco10k2002.txt JACO ELECTRONICS, INC. FORM 10-K JUNE 30, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended..........................................June 30, 2002 [ ] 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 incorporation or organization) (I.R.S. Employer Identification No.) 145 Oser Avenue, Hauppauge, New York 11788 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (631) 273-5500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates of the Company, computed by reference to the closing price on September 23, 2002 was $15,496,307. Number of shares outstanding of each class of Common Stock, as of September 23, 2002: 5,807,432 shares (excluding 618,300 treasury shares). DOCUMENTS INCORPORATED BY REFERENCE: Part III: Definitive Proxy Statement to be filed on or before October 28, 2002, under Regulation 14A, in connection with the Company's 2002 Annual Meeting of Shareholders. Forward-Looking Statements This report contains forward-looking statements with respect to the financial condition, results of operations and business of Jaco Electronics, Inc. You can find many of these statements by looking for words like "believes," "expects," "anticipates," "estimates" or similar expressions in this document or in documents incorporated by reference. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following: o Dependence on a limited number of suppliers for products which generate a significant portion of our sales. o Absence of long-term contracts. o Strikes or delays in air or sea transportation and possible future United States legislation with respect to pricing and/or import quotas on products imported from foreign countries. o Terrorist attacks may create instability and uncertainty in the electronic components industry. o General economic downturns in the electronic components industry which may have an adverse economic effect upon manufacturers, end-users of electronic components and electronic components distributors. o Volatile pricing of electronic components. o Competitive pressures in the industry may increase significantly through industry consolidation and entry of new competitors. o Costs or difficulties related to the integration of newly-acquired businesses may be greater than expected. o Limited allocation of products by suppliers may reduce availability of certain products. o Adverse changes may occur in the securities markets. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by them. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this Report. We do not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. 2 PART I Item 1. Business. Jaco Electronics, Inc. was organized in the State of New York in 1961. Our principal executive offices are located at 145 Oser Avenue, Hauppauge, New York 11788, and our telephone number is (631) 273-5500. Our Company We are a leading distributor of electronic components to industrial OEMs and contract manufacturers throughout North America. We also provide contract manufacturing services to our industrial OEM customers. We distribute products such as semiconductors, capacitors, resistors, electromechanical devices, flat panel displays and monitors and power supplies, which are used in the manufacture and assembly of electronic products, including: o telecommunications equipment o computers and office equipment o medical devices and instrumentation o industrial equipment and controls o military/aerospace systems o automotive and consumer electronics We have two distribution centers and 16 strategically located sales offices throughout the United States. We distribute more than 35,000 products from over 75 vendors, including such market leaders as Kemet Electronics Corporation, Samsung Semiconductor, Inc. and Vishay Intertechnology, Inc., to a base of over 6,000 customers through a dedicated and highly motivated sales force. To enhance our ability to distribute electronic components, we provide a variety of value-added services including automated inventory management services, integrating and assembling various custom components with flat panel displays to customer specifications, assembling stock items for our customers into pre-packaged kits and providing contract manufacturing services. Our core customer base consists primarily of small and medium-sized manufacturers that produce electronic equipment used in a wide variety of industries. Our Industry The electronic components distribution industry has become an increasingly important sales channel for component manufacturers. Electronic components distributors relieve component manufacturers of a portion of the costs and personnel needed to warehouse and sell their products. Distributors market manufacturers' products to a broader range of OEMs than such manufacturers could economically serve with their direct sales forces. Today, distributors have become an integral part of their customers' purchasing and inventory process. Distributors offer their customers the ability to outsource their purchasing and warehousing responsibilities. Electronic Data Interchange ("EDI") permits distributors to receive timely scheduling of component requirements from customers enabling them to provide these value-added services. Distributors also work with their suppliers to ensure that manufacturers' components are integrated into the design of new products. 3 Products We currently distribute over 35,000 stock items. Our management believes that it is necessary for us to carry a wide variety of items in order to fully service our customers' requirements. Our products fall into two broad categories: "active" and "passive" components. Historically active components and passive components each represented approximately 50% of our net distribution sales. With the additional suppliers added as a result of the acquisition of Interface Electronics Corp., active components represented approximately 59% of our net distribution sales, and passive components represented approximately 41% during the fiscal years ended June 30, 2002 and 2001. Active components principally include semiconductors. Semiconductors consist of such items as integrated circuits, microprocessors, transistors, diodes, dynamic random access memory ("RAM"), static RAMs, video RAMs and metal oxide field effect transistors. Computer subsystems are an integral part of personal computers and computer workstations and incorporate such items as flat panels and flat panel monitors, touchscreens and controllers. Passive components consist primarily of capacitors, electromechanical devices, and resistors. Value-Added Services We also provide a number of value-added services which are intended to attract new customers, to maintain and increase sales to existing customers and, in the case of flat panel system integration and contract manufacturing, to generate revenues from new customers. Value-added services include: o Automated Inventory Management Services. We offer comprehensive, state-of-the-art solutions that effectively manage our customers' inventory reordering, stocking and administration functions. These services reduce paperwork, inventory, cycle time, and the overall cost of doing business for our customers. o Flat Panel Systems Integration. Our display sales specialists and corporate product engineers configure highly customized solutions to meet specific flat panel display requirements. We provide technical services and integrate, test and deliver complete flat panel display products for both business and consumer applications. o Kitting. Kitting consists of assembling to a customer's specifications two or more of our 35,000 stock items into pre-packaged kits ready for use in the customer's assembly line. Kitting services allow us to provide a partial or complete fill of a customer's order and enable the customer to more efficiently manage its inventory. o Contract Manufacturing. We also provide contract manufacturing services to our OEM customers which include procurement of customer specified components and raw materials from our network of suppliers and other suppliers, assembly of components on printed circuit boards ("PCBs"), and post assembly testing. Our manufacturing process consists of both advanced surface mount technology ("SMT") as well as conventional pin-through-hole ("PTH") interconnection technologies. The SMT process allows for more miniaturization, cost savings and shorter lead paths between components (which results in greater signal speed). 4 Sales and Marketing We believe we have developed valuable long-term customer relationships and an in-depth understanding of our customers' needs and purchasing patterns. Our sales personnel are trained to identify our customers' requirements and to actively market our entire product line to satisfy those needs. We serve a broad range of customers in the computer, computer-related, telecommunications, data transmission, defense, aerospace, medical equipment and other industries. We have established specific sales and marketing programs to address the unique needs of the contract manufacturing sector. None of our customers individually represented more than eight percent of net sales in any of the fiscal years ended June 30, 2002, 2001 and 2000. As an authorized distributor for key manufacturers, we are able to offer our customers engineering support as well as a variety of supply chain management programs. Engineering, support and supply chain management services enhance our ability to attract new customer contracts. Many of today's services revolve around the use of software automation and computer to computer transactions through EDI and internet based solutions and through technically competent product managers and a team of display sales specialists. We provide design support and technical assistance to our customers with detailed data solutions employing the latest technologies. Sales are made throughout North America from the sales departments maintained at our two distribution facilities located on the East and West Coasts of the United States in New York and California and from 16 strategically located sales offices. Sales are made primarily through personal visits by our employees and by a staff of trained telephone sales personnel who answer inquiries and receive and process orders from customers. In addition, we utilize the services of independent sales representatives whose territories include parts of North America and several foreign countries. These independent sales representatives operate under agreements which are terminable by either party upon 30 days' notice and prohibit them from representing competing product lines. Independent sales representatives are authorized to solicit sales of all of our product lines. Suppliers Manufacturers of electronic components are increasingly relying on the marketing, customer service and other resources of distributors who market their product lines to customers not normally served by the manufacturer, and to supplement the manufacturer's direct sales efforts in other accounts often by providing value-added services not offered by the manufacturer. Manufacturers seek distributors who have strong relationships with desirable customers, are financially strong, have the infrastructure to handle large volumes of products and can assist customers in the design and use of the manufacturers' products. Currently, we have non-exclusive distribution or master inventory agreements with many manufacturers, including Dallas Semiconductor Corporation, Johanson Dielectrics, Inc., Kemet Electronics Corporation, LG Philips LCD, North American Capacitor Company, Samsung Semiconductor, Inc., TDK Corporation of America, 3 M Touch Systems, Inc., Vishay Intertechnology, Inc. and Vitesse Semiconductor Corporation. We continuously seek to identify potential new suppliers and obtain additional distributorships for new lines of products. We believe that such expansion and diversification will increase our sales and market share. 5 We generally purchase products from manufacturers pursuant to non-exclusive distributor agreements. As an authorized distributor, we are able to offer our suppliers marketing support. Most of our distributor agreements are cancelable by either party, typically upon 30 to 90 days' notice. These agreements typically provide for price protection, stock rotation privileges and the right to return inventory. Price protection is typically in the form of a credit to us for any inventory in our possession for which the manufacturer reduces its prices. Stock rotation privileges typically allow us to exchange inventory in an amount up to five percent of a prior period's purchases. Upon termination of a distributor agreement, the right of return typically requires the manufacturer to repurchase our inventory at our adjusted purchase price. We believe that the above-described provisions of our distributorship agreements generally have served to reduce our exposure to loss from unsold inventory. Because price protection, stock rotation privileges and the right to return inventory are limited in scope, there can be no assurances that we will not experience significant losses from unsold inventory in the future. Acquisitions In June 2000, we acquired Interface Electronics Corp. ("Interface"). We paid $15.4 million in cash and assumed $3.3 million in bank debt and were obligated to make deferred payments during the two year period following June 2000, which totaled $5.0 million. Interface is a distributor of electronic components, primarily in the Northeast and Southeast United States. As a result of the Interface acquisition, we have acquired distribution rights for certain significant vendor lines in the United States. Operations Component Distribution. Inventory management is critical to a distributor's business. We constantly focus on a high number of resales or "turns" of existing inventory to reduce exposure to product obsolescence and changing customer demand. Our central computer system facilitates the control of purchasing and inventory, accounts payable, shipping and receiving, and invoicing and collection information of our distribution business. Our distribution software system includes financial systems, EDI, customer order entry, purchase order entry to manufacturers, warehousing and inventory control. Each of our sales departments and offices is electronically linked to our central computer systems which provides fully integrated on-line real-time data with respect to our inventory levels. Our inventory management system was developed internally and is considered proprietary. We track inventory turns by vendor and by product, and our inventory management system provides immediate information to assist in making purchasing decisions and decisions as to which inventory to exchange with suppliers under stock rotation programs. Our inventory management system also uses bar-code technology along with scanning devices, which we supply to certain customers, and is networked to the facilities of such customers. In some cases, customers use computers that interface directly with our computers to identify available inventory and rapidly process orders. Our computer system also tracks inventory turns by customer. We also monitor supplier stock rotation programs, inventory price protection, rejected material and other factors related to inventory quality and quantity. This system enables us to more effectively manage our inventory and to respond more quickly to customer requirements for timely and reliable delivery of components. Our inventory turnover was approximately three times for the fiscal year ended June 30, 2002. 6 Contract Manufacturing. We conduct our contract manufacturing operations through our wholly owned subsidiary Nexus Custom Electronics, Inc., at two locations. The first location is an approximately 32,000 square foot facility located in Brandon, Vermont. The second location is an approximately 30,000 square foot facility located in Woburn, Massachusetts. Nexus provides contract manufacturing services to our OEM customers, which includes procurement of customer specified components and raw materials from our network of suppliers and other suppliers, assembly of components on PCBs and post-assembly testing. OEMs then incorporate the PCBs into finished products. In assembling PCBs, Nexus is capable of employing both PTH and SMT. PTH is a method of assembling PCBs in which component leads are inserted and soldered into plated holes in the board. SMT is a method of assembling PCBs in which components are fixed directly to the surface of the board, rather than being inserted into holes. Both Nexus' Brandon, Vermont and Wooburn, Massachusetts manufacturing facilities are ISO 9002 certified by the Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. Management believes sophisticated customers increasingly are requiring their manufacturers to be ISO 9002-certified for purposes of quality assurance. Competition The electronic components distribution industry is highly competitive, primarily with respect to price and product availability. We believe that the breadth of our customer base, services and product lines, our level of technical expertise and the quality of our services generally are also particularly important. We compete with large national distributors such as Arrow Electronics, Inc. and Avnet, Inc., as well as regional and specialty distributors, such as All American Semiconductor, Inc. and Reptron Electronics, Inc., many of whom distribute the same or competitive products. Many of our competitors have significantly greater name recognition and greater financial and other resources than we do. The electronics contract manufacturing industry is highly fragmented and is characterized by relatively high levels of volatility, competition and pricing and margin pressure. Many large contract manufacturers operate high-volume facilities and primarily focus on high-volume product runs. In contrast, certain contract manufacturers, such as Nexus, focus on low-to-medium volume and service-intensive products. Backlog As the trend toward outsourcing increases, customers have been entering into just-in-time contracts with distributors, instead of placing orders with long lead times. Orders constituting our backlog are subject to delivery rescheduling, price negotiations and cancellations by the customer, sometimes without penalty or notice. Therefore, our backlog is not necessarily indicative of future sales for any particular period. Employees At June 30, 2002, we had a total of 363 employees, of which 114 were employed by Nexus. Of our total employees, nine were engaged in administration, 48 were managerial and supervisory employees, 150 were in sales and 156 performed warehouse, manufacturing and clerical functions. Of these employees, Nexus employed two in administration, 15 in management and supervisory positions, two in sales and 95 in warehouse, manufacturing and clerical functions. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory. 7 Item 2. Properties. All of our facilities are leased except for the Brandon, Vermont property which is owned by Nexus. We currently lease 19 facilities strategically located throughout the United States, two of which are multipurpose facilities used principally as administrative, sales, and purchasing offices, as well as warehouses, one of which is used for contract manufacturing and the remainder of which are used principally by us as sales offices. Our satellite sales offices range in size from approximately 500 square feet to approximately 4,000 square feet. Base rents for such properties range from approximately $1,300 per month to approximately $10,000 per month. Depending on the terms of each particular lease, in addition to base rent, we may also be responsible for portions of real estate taxes, utilities and operating costs, or increases in such costs over certain base levels. The lease terms range from two years to as long as five years. All facilities are linked by computer terminals to our Hauppauge, New York headquarters. The following table sets forth certain information regarding our four principal leased facilities: Lease Base Rent Expiration Location Per Month Square Feet Use Date -------- --------- ----------- --- ---- Hauppauge, NY (1) $56,300 72,000 Administrative, 12/31/03 Sales and Warehouse Franklin, MA $18,600 11,700 Sales 3/31/05 Woburn, MA $14,300 30,000 Manufacturing 7/31/05 Westlake Village, CA $11,500 11,000 Administrative, 4/30/03 Sales and Warehouse
(1) Leased from a partnership owned by Joel H. Girsky and Charles B. Girsky at a current monthly rent which the Company believes represents the fair market value for such space. Nexus owns and occupies an approximately 32,000 square foot facility located in Brandon, Vermont, that is used for manufacturing, storage and office space. We believe that our present facilities will be adequate to meet our needs for the foreseeable future. 8 Item 3. Legal Proceedings. We are a party to legal matters arising in the general conduct of business. The ultimate outcome of such matters is not expected to have a material adverse effect on our results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders. No response to this Item is required. 9 PART II Item 5. Market For the Company's Common Stock and Related Security Holder Matters. (a) Our common stock is traded on the Nasdaq National Market under the symbol "JACO." The stock prices listed below represent the high and low sale prices of the common stock, as reported by the Nasdaq National Market, for each fiscal quarter beginning with the first fiscal quarter of the fiscal year ended June 30, 2001. Stock prices prior to July 25, 2000 have been adjusted to give effect to a 3-for-2 stock split which was effective on July 24, 2000. High Low Fiscal Year 2001: First quarter ended September 30, 2000..................... $19.67 $10.75 Second quarter ended December 31, 2000..................... 16.88 6.13 Third quarter ended March 31, 2001......................... 10.75 5.69 Fourth quarter ended June 30, 2001......................... 8.09 4.66 Fiscal Year 2002: Fiscal quarter ended September 30, 2001.................... $ 6.39 $ 3.25 Second quarter ended December 31, 2001..................... 5.98 3.51 Third quarter ended March 31, 2002......................... 6.74 4.66 Fourth quarter ended June 30, 2002......................... 6.56 4.70 Fiscal Year 2003: (through September 23, 2002)............................... $5.39 $3.30
(b) On September 23, 2002, the last reported sale price of our common stock on the Nasdaq National Market was $3.36 per share (which gives effect to the 3-for-2 stock split which was effective on July 24, 2000). As of September 9, 2002, there were approximately 142 holders of record of our common stock. We believe our stock is held by more than 3,500 beneficial owners. (c) We have never declared or paid any cash dividends on our common stock. We intend for the foreseeable future to retain future earnings for use in our business. The amount of dividends we pay in the future, if any, will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results and other factors as the Board of Directors, in its discretion, deems relevant. In addition, our credit facility prohibits us from paying cash dividends on our common stock. 10 Equity Compensation Plan Disclosure The following table summarizes equity compensation plans approved by security holders and equity compensation plans that were not approved by security holders as of June 30, 2002: (c) (a) Number of Securities Number of Securities (b) Remaining Available for To be Issued Upon Weighted-Average Future Issuance Under Equity Exercise of Outstanding Exercise Price of Compensation Plans (Excluding Options, Warrants and Outstanding Options, Securities Plan category Rights Warrants and Rights Reflected in Column (a)) - ----------------------------------- ------------------------- ------------------------ ---------------------------------- Equity compensation plans (stock options) approved by stockholders 822,048 $4.57 364,250 Equity compensation plans not approved by stockholders 22,500 $2.75 -0- ------------------------- ------------------------ ---------------------------------- Total 844,548 $4.52 364,250 ======= ===== =======
Item 6. Selected Consolidated Financial Data. The selected consolidated financial data set forth below contains only a portion of our financial statements and should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report. The historical results are not necessarily indicative of results to be expected for any future period. The share and per share data have been adjusted to give effect to a 3-for-2 stock split which was effective on July 24, 2000. Year Ended June 30, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (in thousands, except per share data) Consolidated Statement of Operations Data: Net sales......................................... $194,106 $350,222 $209,325 $140,711 $153,674 Cost of goods sold................................ 166,133 283,382 162,443 113,335 121,796 ------- ------- ------- ------- ------- Gross profit...................................... 27,973 66,840 46,882 27,376 31,878 Selling, general and administrative expenses...... 33,562 46,098 34,523 27,642 28,707 ------ ------ ------ ------ ------ Operating (loss) profit......................... (5,589) 20,742 12,359 (266) 3,171 Interest expense.................................. 2,223 4,120 1,559 1,309 1,140 ----- ----- ----- ----- ----- (Loss) earnings before income taxes............. (7,812) 16,622 10,801 (1,575) 2,031 Income tax (benefit) provision (2,768) 6,772 4,425 (418) 847 ------ ----- ----- ---- --- Net (loss) earnings............................... $(5,044) $ 9,850 $ 6,376 $ (1,157) $ 1,184 ====== ======= ======= ======== ======= Net (loss) earnings per common share Basic........................................... $ (0.88) $ 1.74 $ 1.16 $ (0.21) $ 0.21 ======= ====== ====== ======= ====== Diluted......................................... $ (0.88) $ 1.59 $ 1.11 $ (0.21) $ 0.20 ======= ====== ====== ======= ====== Weighted average number of common and common equivalent shares outstanding Basic............................................. 5,713 5,670 5,498 5,547 5,755 Diluted........................................... 5,713 6,179 5,766 5,547 5,882 11 At June 30, -------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (in thousands) Consolidated Balance Sheet: Working capital ......... $ 52,134 $ 78,308 $ 58,384 $ 41,998 $ 42,481 Total assets ............ 110,635 136,315 126,329 72,931 73,419 Short-term debt ......... 897 1,082 807 792 663 Long-term debt .......... 34,880 56,128 40,941 18,886 17,037 Shareholders' equity .... 48,668 53,251 42,790 34,868 36,625
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. --------------------------------------------------------------------------- Critical Accounting Policies Financial Reporting Release No. 60 recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. The Securities and Exchange Commission defines critical accounting policies as those that are, in management's view, most important to the portrayal of the Company's financial condition and results of operations and those that require significant judgments and estimates. The Company continuously evaluates a combination of historical results and anticipated future events to make assumptions and estimates related to its consolidated financial statements. The Company believes that given the current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimates methodologies would cause a material effect on the Company's financial statements. Actual results may differ from those estimates. The accounting policies identified as critical are as follows: Valuation of Receivables - The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness. The Company continuously monitors payments from customers and a provision for estimated uncollectable amounts is maintained based upon historical experience and any specific customer collection issues, which have been identified. While such uncollectable amounts have historically been within the Company's expectations and provisions established, if a customer's financial condition were to deteriorate, additional reserves may be required. Concentration of credit risk with respect to accounts receivable is generally mitigated due to the large number of entities comprising the Company's customer base, their dispersion across geographic areas and industries, along with the Company's policy of maintaining credit insurance. Valuation of Inventories - Inventories are valued at the lower of cost or market. Cost is determined by using the first-in, first-out and average cost methods. The Company's inventories are comprised of high technology components sold to rapidly changing and competitive markets whereby such inventories may be subject to early technological obsolescence. The Company evaluates inventories for excess, obsolescence, or other factors rendering inventories as unsellable at normal gross profit margins. Write-downs are recorded so that inventories reflect the approximate market value and take into account the Company's contractual provisions with its suppliers governing price protections and stock rotations. Due to the large number of transactions and complexity of managing the process around price protections and stock rotations, estimates are made regarding the valuation of inventory at market value. 12 In addition, assumptions about future demand, market conditions, and decisions to discontinue certain product lines can impact the decision to write-down inventories. If assumptions about future demand change and/or actual market conditions are different than those projected by management, additional write-downs of inventories may be required. In any case, actual results may be different than those estimated. Goodwill and Other Intangible Assets - The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the excess of the purchase price over the fair value of identifiable net assets of acquired companies allocated to goodwill. Other intangible assets primarily represent a franchise agreement and non-compete covenants. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to additional impairment tests whenever indicators of impairment are present, and at least annually. Other intangible assets with finite lives are amortized over those useful lives. We implemented SFAS 142 on July 1, 2001. SFAS 142 requires that the first of two impairment tests be completed within six months of adoption. We performed a transitional fair value-based impairment test during the second quarter of fiscal 2002 and determined that no impairment existed as of July 1, 2001. We evaluate long-lived assets used in operations, including goodwill and purchased intangible assets. The allocation of the acquisition cost to intangible assets and goodwill has a significant impact on our future operating results as the allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, and significant industry or economic trends. When impairment indicators are identified with respect to previously recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques. Significant management judgment is required in the forecasting of future operating results which are used in the preparation of the projected discounted cash flows and should different conditions prevail, material write downs of net intangible assets and goodwill could occur. 13 Results of Operations The following table sets forth certain items in our statement of operations as a percentage of net sales for the periods shown: 2002 2001 2000 ---- ---- ---- Net Sales ....................................... 100.0% 100.0% 100.0% Cost of goods sold .............................. 85.6 80.9 77.6 ---- ---- ---- Gross profit .................................... 14.4 19.1 22.4 Selling, general and administrative expenses .... 17.3 13.2 16.5 ---- ---- ---- Operating (loss) profit ......................... (2.9) 5.9 5.9 Interest expense ................................ 1.1 1.2 0.8 --- --- --- (Loss) earnings before income taxes ............. (4.0) 4.7 5.1 Income tax (benefit) provision .................. (1.4) 1.9 2.1 ---- --- --- Net (loss) earnings ............................. (2.6)% 2.8% 3.0% ==== === === Comparison of Fiscal Year Ended June 30, 2002 ("Fiscal 2002") with Fiscal Year Ended June 30, 2001("Fiscal 2001") Net sales for Fiscal 2002 were $194.1 million, a decrease of 44.6%, as compared to $350.2 million for Fiscal 2001. The electronics industry continues to be impacted by weak demand for components worldwide. Our customers have not increased their production to levels that will utilize the excess inventory maintained by such customers. For Fiscal 2002 flat panel display ("FPD") sales represented approximately 14% of our total distribution sales. Passive components represented approximately 41% of our distribution sales and active components, including FPD's, represented approximately 59% of our distribution sales during Fiscal 2002. Gross profit was $28.0 million, or 14.4% for Fiscal 2002, as compared to $66.8 million, or 19.1% for Fiscal 2001. The Fiscal 2002 gross profit includes inventory write-downs of approximately $2.1 million, of which approximately $1.1 million was provided for in the fourth quarter of Fiscal 2002. The gross profit margin decrease reflects both the continued pressure on component pricing due to weak demand throughout the industry allowing customers to negotiate lower prices and a higher percentage of sales of product that historically sells at lower margins. We do not anticipate any material increase in our gross profit margin for the foreseeable future. Selling, general and administrative ("SG&A") expenses were $33.6 million in Fiscal 2002, a decrease of $12.5 million, or 27.2% compared to $46.1 million in Fiscal 2001. The decrease is attributable to a reduction in the number of employees, discretionary spending and a decrease in variable costs. We have implemented a plan to reduce costs while business conditions do not improve. Variable costs have been reduced as a result of the reduction in sales and gross profit since most of our sales personnel receive a portion of their compensation based upon a percentage of gross profit. Interest expense decreased to $2.2 million in Fiscal 2002, as compared to $4.1 million in Fiscal 2001, representing a decrease of $1.9 million, or 46%. The reduction reflects lower borrowing levels as a result of decreases in accounts receivable and inventory. Additionally, interest rates declined during the fiscal year. We do not expect any substantial increase in borrowings for the foreseeable future to support operations. Net loss for Fiscal 2002 was $5.0 million, or $.88 per diluted share, compared to net earnings during Fiscal 2001 of $9.9 million, or $1.59 per diluted share. The net loss was primarily attributable to the weak condition of the electronics industry resulting in a decrease in net sales. The reduction in net sales was partially offset by a decrease in SG&A expenses and interest expense. 14 Comparison of Fiscal Year Ended June 30, 2001 with Fiscal Year Ended June 30, 2000 ("Fiscal 2000") Net sales for Fiscal 2001 were $350.2 million, an increase of 67.3%, as compared to $209.3 million for Fiscal 2000. Our net sales benefited from both a strong demand for components throughout the electronics industry for the first six months and additional sales generated from the acquisition of Interface Electronics Corp. (Interface). Interface brought a new customer base as well as additional suppliers to sell to our existing customers. During the last two quarters of Fiscal 2001, the demand for components was greatly reduced. As a result, we experienced a decrease in sales sequentially. Gross Profit was $66.8 million in Fiscal 2001, an increase of $19.9 million, or 42.6%, compared to Fiscal 2000. Gross profit margins as a percentage of net sales were 19.1% during Fiscal 2001 compared to 22.4% during Fiscal 2000. The decrease in gross profit margins was as a result of the weakening in demand for electronic components toward the end of Fiscal 2001 and an increase in semiconductor sales due to the new suppliers that were added by the acquisition of Interface. Selling, general and administrative ("SG&A") expenses were $46.1 million in Fiscal 2001, an increase of $11.6 million, or 33.5%, compared to $34.5 million in Fiscal 2000. As a percentage of net sales, SG&A, expenses decreased in Fiscal 2001 to 13.2% compared to 16.5% in Fiscal 2000. The increase in spending is attributable to higher staffing levels that was required to support the increase in net sales, an increase in variable costs such as commissions paid to sales personnel, and the additional costs associated with the acquisition of Interface. The decrease in SG&A expenses as a percentage of net sales reflects operating efficiencies realized by higher sales. Interest expense increased to $4.1 million in Fiscal 2001, as compared to $1.6 million in Fiscal 2000. The increase was primarily attributable to the additional borrowings needed for the acquisition of Interface, and capital required due to the increase in accounts receivable and inventory that were necessary to support the growth in sales. Net earnings for Fiscal 2001 were $9.9 million, or $1.59 per share diluted compared to net earnings for Fiscal 2000 of $6.4 million, or $1.11 per share diluted. The increase in net earnings was attributable to the increase in net sales, the operating efficiencies realized by the increase in net sales, and the successful integration of Interface during the fiscal year. Liquidity and Capital Resources Our agreement with our banks, as amended, expires on March 14, 2004. As part of the amendment, the line of credit facility was reduced from $70 million to $45 million. This reflects our lower borrowing requirements. The credit facility is based principally on eligible accounts receivable and inventories as defined in the agreement. The interest rate on the credit facility was based on the average 30-day LIBOR rate plus 1.00% to 2.25% for the fiscal year ended June 30, 2002. As amended, effective October 1, 2002, the rate will convert to the average 30-day LIBOR rate plus 2.25% to 2.75%. The agreement, as amended as of September 23, 2002, contains provisions for the maintenance of certain financial covenants and prohibits the payment of cash dividends. The agreement also provided a waiver for non-compliance on one of the financial covenants. The outstanding balance on the credit facility was $33.8 million at June 30, 2002. For Fiscal 2002, our net cash provided by operating activities was approximately $21.9 million, as compared to net cash used in operating activities of $8.7 million for the same period last fiscal year. The increase in 15 net cash provided is primarily attributable to a decrease in accounts receivable and inventory. The decrease in accounts receivable and inventory was the result of the decrease in net sales for the fiscal year ended June 30, 2002, as compared to the same period last year. Net cash used in investing activities decreased to $0.3 million for the fiscal year ended June 30, 2002, as compared to $6.2 million for the fiscal year ended June 30, 2001. The decrease is primarily attributable to deferred payments related to the acquisition of Interface Electronics Corp. of $0.2 million for the fiscal year ended June 30, 2002, as compared to $3.8 million for the fiscal year ended June 30, 2001. Net cash used in financing activities was $21.3 million for the fiscal year ended June 30, 2002 as compared to net cash provided by financing activities of $14.4 million for the comparable period last fiscal year. The increase in net cash used is primarily attributable to the decrease in the outstanding balance on the revolving line of credit facility from $54.6 million as of June 30, 2001 to $33.8 million as of June 30, 2002, which was a result of the decreases in accounts receivable and inventory. For Fiscal 2002 and Fiscal 2001, our inventory turnover was 3.2x and 4.9x, respectively. The average days outstanding of our accounts receivable at June 30, 2002 was 58 days, as compared to 42 days at June 30, 2001. We believe that cash flow from operations and funds available under our credit facility will be sufficient to fund our capital needs for the foreseeable future. However, our cash expenditures may vary significantly from current levels, based on a number of factors, including, but not limited to future acquisitions, if any. Historically, we have been able to obtain amendments to our existing credit facility to satisfy financial covenants. While there can be no assurances that such financing or future amendment if needed, will be available, management believes we will be able to continue to obtain financing on acceptable terms. Inflation Inflation has not had a significant impact on our operations during the last three fiscal years. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to interest rate changes with respect to our credit facility which bears interest at the higher of the prime rate or the federal funds rate plus 0.5%, or at our option, at a rate equal to the average 30-day LIBOR rate plus 2.25% to 2.75% depending on our performance for the immediately preceding four fiscal quarters measured by a certain financial ratio, and may be adjusted quarterly. At August 31, 2002, $32.2 million was outstanding under the credit facility. Changes in the LIBOR interest rate during Fiscal 2003 will have a positive or negative effect on our interest expense. Each 1.0% fluctuation in the LIBOR interest rate will increase or decrease interest expense for us by approximately $0.3 million based on outstanding borrowings at August 31, 2002. The impact of interest rate fluctuations on other floating rate debt is not material. Item 8. Financial Statements and Supplementary Data. For an index to the financial statements and supplementary data, see Item 14(a). 16 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. No response to this Item is required. 17 PART III Item 10. Directors and Executive Officers of the Registrant. Incorporated herein by reference is the information to appear under the caption "Election of Directors" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 2002. Item 11. Executive Compensation. Incorporated herein by reference is the information to appear under the caption "Executive Compensation" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 2002. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated herein by reference is the information to appear under the caption "Principal Shareholders; Share Held by Management" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 2002. Item 13. Certain Relationships and Related Transactions. Incorporated herein by reference is the information to appear under the caption "Certain Transactions" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 2002. Item 14. Controls and Procedures. There have been no significant changes in the Company's internal controls or other factors that could significantly affect those controls since the date of the Company's last evaluation of its internal controls, and there have been no corrective actions with regard to significant deficiencies and material weaknesses in such controls. 18 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. Page (a) (1) Financial Statements included in Part II, Item 8, of this Report: Index to Consolidated Financial Statements and Schedule F-1 Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Operations F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-32 (2) Financial Statement Schedule included in Part IV of this Report: Report of Independent Certified Public Accountant on Schedule II F-33 Schedule II - Valuation and Qualifying Accounts F-34
19 Exhibit No. Exhibit 3.1 Restated Certificate of Incorporation adopted November, 1987, incorporated by reference to the Company's definitive proxy statement distributed in connection with the Company's annual meeting of shareholders held in November, 1987, filed with the SEC on November 3, 1986, as set forth in Appendix A to the aforesaid proxy statement. 3.1.1Certificate of Amendment of the Certificate of Incorporation, adopted December, 1995, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 ("the Company's 1996 10-K"), Exhibit 3.1.1. 3.2 Restated By-Laws adopted June 18, 1987, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1987 ("the Company's 1987 10-K"), Exhibit 3.2. 4.1 Form of Common Stock Certificate, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 4.1. 10.1 Sale and leaseback with Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1983, Exhibit 10(1), pages 48-312. 10.2 Amendment No. 1 to Lease between the Company and Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.2. 10.2.2 Lease between the Company and Bemar Realty Company, dated January 1, 1996, incorporated by reference to the Company's 1996 10-K, Exhibit 10.2.2. 10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference to the Company's 1993 10-K, Exhibit 10.6. 10.6.1 1993 Non-Qualified Stock Option Plan, as amended (filed as Exhibit A to the Company's Definitive Proxy Statement, dated November 3, 1997 for the Annual Meeting of Shareholders held on December 9, 1997. 10.6.2 1993 Non-Qualified Stock Option Plan, as amended (filed as Exhibit A to the Company's Definitive Proxy Statement, dated November 2, 1998 for the Annual Meeting of Shareholders held on December 7, 1998. 10.7 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. 10.10Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.10. 10.11Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between KEMET and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.11. 10.12Restricted Stock Plan (filed as Exhibit B to the Company's Definitive Proxy Statement, dated November 3, 1997 for the Annual Meeting of Shareholders held on December 9, 1997). 10.12.1 Form of Escrow Agreement under the Restricted Stock Plan, incorporated by reference to the Company's Registration Statement on Form S-8/S-3, Commission File No. 333 -49877, filed April 10, 1998 Exhibit 4.2. 10.12.2 Form of Stock Purchase Agreement under the Restricted Stock Plan, incorporated by reference to the Company's Registration Statement on Form S-8/S-3, Commission File No. 333 - 49877, filed April 10, 1998 Exhibit 4.3. 10.12.3 Form of Stock Option Agreement, incorporated by reference to the Company's Registration Statement on Form S-8/S-3, Commission File No. 333 -49877, filed April 10, 1998 Exhibit 4.4. 10.12.4 Restricted Stock Plan (filed as Exhibit B to the Company's Definitive Proxy Statement, dated November 2, 1998 for the Annual Meeting of Shareholders held on December 7, 1998). 10.13Employment agreement between Joel Girsky and the Company, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.13. 10.13.1 Amendment No. 1 to Employment Agreement between Joel Girsky and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.13.1. 10.14Employment agreement between Charles Girsky and the Company, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.14. 10.15Employment agreement between Jeffrey D. Gash and the Company, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.15. 10.15.1 Amendment No. 1 to the Employment Agreement between Jeffrey D. Gash and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.15.1 10.16Employment Agreement, dated June 6, 2000, between the Company and Joseph Oliveri, incorporated by reference to the Company's Current Report on Form 8-K, filed June 12, 2000, Exhibit 10.16. 10.16.1 Amendment No. 1 to the Employment Agreement between Joseph Oliveri and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.16.1 10.17Stock Purchase Agreement by and among Jaco Electronics, Inc. and all of the Stockholders of Interface Electronics Corporation as of May 4, 2000, incorporated by reference to the Company's Current Report on Form 8-K, filed May 15, 2000, Exhibit 2.1. 10.17.1 Amendment No. 1 to the Stock Purchase Agreement by and among Jaco Electronics, Inc. and all of the Stockholders of Interface Electronics Corp. as of May 4, 2000, dated June 6, 2000, incorporated by reference to the Company's Current Report on Form 8-K, filed June 12, 2000, Exhibit 2.2. 10.18Agreement between the Company and Gary Giordano, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.18. 10.19Employment Agreement between Joel H. Girsky and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.19. 10.20Employment Agreement between Charles Girsky and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.20. 21.1 Subsidiaries of the Company. 23.1 Consent of Grant Thornton LLP. 99.1 General Loan and Security Agreement dated January 20, 1989, between the Company as borrower and The Bank of New York Commercial Corporation ("BNYCC") as secured party, incorporated by reference to the Company's Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1). 99.2 Loan and Security Agreement - Accounts Receivable and Inventory, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(2). 99.3 Letter of Credit and Security Agreement, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(3). 99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company in favor of BNYCC dated January 13, 1992, together with Letters from R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and Distel, Inc., each a subsidiary of the Company and a guarantor of the obligations evidenced by the Term Notes, to BNYCC acknowledging the amendment to the Term Notes for the extension of the maturity date of each such note, incorporated by reference to the Company's 1992 10-K, Exhibit 28.4. 99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the Company and BNYCC, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994. Exhibit 99.5. 99.6 $1,500,000 Additional Term Loan Note, executed by the Company in favor of BNYCC, dated March 11, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5. 99.7 Restated and Amended Loan and Security Agreement, dated April 25, 1995, among the Company, Nexus and BNYCC, together with an Amendment to Term Loan Note executed by the Company in favor of BNYCC and Letter executed by R.C. Components, Inc., Quality Components, Inc., Micatron, Inc., Distel, Inc. and Jaco Overseas, Inc., incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 99.7. 99.8 Second Restated and Amended Loan and Security Agreement dated September 13, 1995 among the Company, Nexus Custom Electronics, Inc., BNYCC and NatWest Bank, N.A. ("Second Restated and Amended Loan and Security Agreement"), incorporated by reference to the Company's Registration Statement on Form S-2, Commission File No. 33-62559, filed October 13, 1995, Exhibit 99.8. 99.8.1 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of April 10, 1996, incorporated by reference to the Company's 1996 10-K, Exhibit 99.8.1. 99.8.2 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of August 1, 1997, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1998, Exhibit 99.8.2 99.8.3 Amendment to Second Restated and Amended Loan and Security Agreement dated July 1, 1998, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 99.8.3. 99.8.4 Amendment to Second Restated and Amended Loan and Security Agreement dated September 21, 1998 incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 99.8.4. 99.8.5 Amendment to Second Restated and Amended Loan and Security Agreement dated October 26, 1999, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, Exhibit 99.8.5. 99.8.6 Amendment to Second Restated and Amended Loan and Security Agreement dated December 31, 1999, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, Exhibit 99.8.6. 99.8.7 Amendment to Second Restated and Amended Loan and Security Agreement dated June 6, 2000, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Exhibit 99.8.7. 99.8.8 Amendment to Second Restated and Amended Loan and Security Agreement dated September 28, 2000, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Exhibit 99.8.8 99.8.9 Amendment to Second Restated and Amended Loan and Security Agreement dated January 29, 2001, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2000, Exhibit 99.8.9 99.8.10 Amendment to Second Restated and Amended Loan and Security Agreement dated June 12, 2001, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 99.8.10 99.8.11 Amendment to Second Restated and Amended Loan and Security Agreement dated July 1, 2001, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 99.8.11 99.8.12 Amendment to Second Restated and Amended Loan and Security Agreement dated November 14, 2001, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 99.8.12 99.8.13 Amendment to Second Restated and Amended Loan and Security Agreement dated February 6, 2002, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, Exhibit 99.8.13 99.8.14 Amendment to Second Restated and Amended Loan and Security Agreement dated September 23, 2002. 99.9 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.10Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE PAGE ---- Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Operations F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-32 Report of Independent Certified Public Accountants on Schedule F-33 Schedule II - Valuation and Qualifying Accounts F-34 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Jaco Electronics, Inc. We have audited the accompanying consolidated balance sheets of Jaco Electronics, Inc. and Subsidiaries (the "Company") as of June 30, 2002 and 2001 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jaco Electronics, Inc. and Subsidiaries as of June 30, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Melville, New York September 19, 2002 F-2
Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, ASSETS 2002 2001 ------------- ------- CURRENT ASSETS Cash and cash equivalents $ 324,447 $ 89,523 Marketable securities 650,267 771,406 Accounts receivable, less allowance for doubtful accounts of $1,609,000 in 2002 and $1,695,000 in 2001 29,095,269 37,820,946 Inventories 42,611,225 62,212,121 Prepaid expenses and other 1,183,043 824,121 Prepaid and refundable income taxes 2,440,055 486,325 Deferred income taxes 2,017,000 2,190,000 ------------- ------------- Total current assets 78,321,306 104,394,442 PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 6,708,828 8,389,651 DEFERRED INCOME TAXES 434,000 436,000 GOODWILL, less accumulated amortization of $2,121,000 in 2002 and 2001 22,363,296 20,095,844 OTHER ASSETS 2,807,451 2,998,902 ------------- ------------- $110,634,881 $136,314,839 =========== =========== The accompanying notes are an integral part of these statements.
F-3
Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (continued) June 30, LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001 ------------ ------- CURRENT LIABILITIES Accounts payable $ 20,818,256 $ 21,035,641 Current maturities of long-term debt and capitalized lease obligations 897,419 1,081,905 Accrued compensation 998,927 2,335,614 Accrued expenses 1,372,808 1,407,803 Deferred acquisition costs 2,099,563 225,000 ------------- ------------- Total current liabilities 26,186,973 26,085,963 LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS 34,879,766 56,128,243 DEFERRED COMPENSATION 900,000 850,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued Common stock - authorized, 20,000,000 shares, $.10 par value; issued, 6,425,732 and 6,315,759 shares, respectively, and 5,807,432 and 5,697,459 shares outstanding, respectively 642,573 631,576 Additional paid-in capital 25,152,010 24,615,866 Retained earnings 25,102,628 30,146,599 Accumulated other comprehensive (loss) income (24,554) 61,107 Treasury stock - 618,300 shares at cost (2,204,515) (2,204,515) ------------- ------------- 48,668,142 53,250,633 ------------ ------------ $110,634,881 $136,314,839 =========== =========== The accompanying notes are an integral part of these statements.
F-4
Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended June 30, 2002 2001 2000 ----------- ----------- ------- Net sales $194,106,208 $350,222,202 $209,325,180 Cost of goods sold 166,132,892 283,382,288 162,443,001 ------------ ----------- ----------- Gross profit 27,973,316 66,839,914 46,882,179 Selling, general and administrative expenses 33,562,394 46,098,155 34,522,667 ------------ ------------ ------------ Operating (loss) profit (5,589,078) 20,741,759 12,359,512 Interest expense 2,222,893 4,119,362 1,558,558 ------------- ------------- ------------- (Loss) earnings before income taxes (7,811,971) 16,622,397 10,800,954 Income tax (benefit) provision (2,768,000) 6,772,000 4,425,000 ------------- ------------- ------------- NET (LOSS) EARNINGS $ (5,043,971) $ 9,850,397 $ 6,375,954 ============= ============ ============ Net (loss) earnings per common share: Basic $(0.88) $1.74 $1.16 ===== ==== ==== Diluted $(0.88) $1.59 $1.11 ===== ==== ==== Weighted-average common shares and common equivalent shares outstanding: Basic 5,713,365 5,669,560 5,497,866 ========= ========= ========= Diluted 5,713,365 6,178,653 5,766,086 ========= ========= ========= The accompanying notes are an integral part of these statements.
F-5
Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 2002, 2001 and 2000 Additional Common stock paid-in Retained Shares Amount capital earnings -------- -------- -------------- ------------- Balance at July 1, 1999 4,065,721 $406,572 $22,801,295 $13,920,807 Net earnings 6,375,954 Unrealized loss on marketable securities - net of deferred taxes Exercise of stock options 102,482 10,248 860,760 Stock options income tax benefits 431,840 Restricted stock plan income tax benefits 155,812 Effect of 3-for-2 stock split 2,084,056 208,406 (208,406) Deferred compensation expense -------------- ------------ ---------------- --------------- Balance at June 30, 2000 6,252,259 625,226 24,041,301 20,296,761 Net earnings 9,850,397 Unrealized loss on marketable securities - net of deferred taxes Exercise of stock options 63,500 6,350 430,275 Stock options income tax benefits 111,890 Restricted stock plan income tax benefits 32,400 Payment of fractional shares (559) Deferred compensation expense -------------- ------------ ---------------- --------------- Balance at June 30, 2001 6,315,759 631,576 24,615,866 30,146,599 Net loss (5,043,971) Unrealized loss on marketable securities - net of deferred taxes Exercise of stock options 109,973 10,997 480,564 Stock options income tax benefits 55,580 -------------- ------------ ----------- --------------- Balance at June 30, 2002 6,425,732 $642,573 $25,152,010 $25,102,628 ========= ======= ========== ========== Accumulated other Deferred Total comprehensive Treasury compen- shareholders' income (loss) stock sation equity ---------------- --------- --------- --------- Balance at July 1, 1999 $213,707 $(2,204,515) $(270,000) $34,867,866 Net earnings 6,375,954 Unrealized loss on marketable securities - net of deferred taxes (47,038) (47,038) Exercise of stock options 871,008 Stock options income tax benefits 431,840 Restricted stock plan income tax benefits 155,812 Effect of 3-for-2 stock split Deferred compensation expense 135,000 135,000 ---------- --------------- -------- ------------ Balance at June 30, 2000 166,669 (2,204,515) (135,000) 42,790,442 Net earnings 9,850,397 Unrealized loss on marketable securities - net of deferred taxes (105,562) (105,562) Exercise of stock options 436,625 Stock options income tax benefits 111,890 Restricted stock plan income tax benefits 32,400 Payment of fractional shares (559) Deferred compensation expense 135,000 135,000 ---------- --------------- -------- ------------ Balance at June 30, 2001 61,107 (2,204,515) - 53,250,633 Net loss (5,043,971) Unrealized loss on marketable securities - net of deferred taxes (85,661) (85,661) Exercise of stock options 491,561 Stock options income tax benefits 55,580 ---------- ------------ ---------- ------------- Balance at June 30, 2002 $(24,554) $(2,204,515) $ - $48,668,142 ======== ========== =========== ========== The accompanying notes are an integral part of this statement
F-6
Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30, 2002 2001 2000 ------------ ----------- -------- Cash flows from operating activities Net (loss) earnings $ (5,043,971) $ 9,850,397 $ 6,375,954 Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities Depreciation and amortization 2,331,684 3,223,205 1,868,420 Deferred compensation 50,000 185,000 185,000 Deferred income tax expense (benefit) 225,402 (803,402) (996,963) Stock options income tax benefits 55,580 111,890 431,840 Restricted stock plan income tax benefits 32,400 155,812 Gain on sale of equipment (3,100) Provision for doubtful accounts 418,300 1,397,601 597,694 Changes in operating assets and liabilities, net of effects of acquisitions Decrease (increase) in accounts receivable 8,307,377 2,736,517 (14,659,938) Decrease (increase) in inventories 19,451,304 (8,951,107) (15,356,153) Increase in prepaid expenses and other (329,215) (9,558) (57,057) Increase in prepaid and refundable income taxes (1,953,730) (486,325) (Decrease) increase in accounts payable (217,385) (14,310,658) 10,630,824 (Decrease) increase in accrued compensation (1,336,687) 143,921 1,299,706 (Decrease) increase in accrued expenses (34,995) (244,216) 540,639 (Decrease) increase in income taxes payable (1,575,319) 2,566,174 ------------------- -------------- ------------ Net cash provided by (used in) operating activities 21,920,564 (8,699,654) (6,418,048) ------------- -------------- ------------ Cash flows from investing activities Purchase of marketable securities (14,924) (56,692) (73,407) Capital expenditures (205,256) (1,997,194) (892,149) Proceeds from the sale of equipment 61,473 128,892 Business acquisitions, net of cash acquired (14,877,230) Business acquisitions - deferred payments (243,297) (3,810,000) Decrease (increase) in other assets 54,451 (327,264) 2,342,542 ----------------- -------------- ------------ Net cash used in investing activities (347,553) (6,191,150) (13,371,352) ---------------- -------------- ----------- Cash flows from financing activities Borrowings from line of credit 161,505,349 324,090,871 95,831,956 Payments of line of credit (182,254,268) (309,269,516) (76,391,130) Principal payments under equipment financing (941,242) (733,983) (612,792) Payments under term loan (139,487) (160,714) (214,286) Payment of fractional shares (559) Proceeds from exercise of stock options 491,561 436,625 871,008 ---------------- --------------- ------------- Net cash (used in) provided by financing activities (21,338,087) 14,362,724 19,484,756 --------------- ------------- ----------- NET INCREASE (DECREASE) IN CASH 234,924 (528,080) (304,644) Cash and cash equivalents at beginning of year 89,523 617,603 922,247 ----------------- --------------- ------------ Cash and cash equivalents at end of year $ 324,447 $ 89,523 $ 617,603 ================ ================ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 2,223,000 $ 4,120,000 $ 1,559,000 Income taxes 275,000 9,493,000 2,267,000 Supplemental schedule of non-cash financing and investing activities: Deferred acquisition costs $ 2,099,563 $ 225,000 Equipment under capital leases and note payable 396,685 1,535,169 $ 126,229 The accompanying notes are an integral part of these statements.
F-7 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily engaged in the distribution of electronic components, including semiconductors, capacitors, resistors, electromechanical devices, flat panel displays and monitors and power supplies, which are used in the manufacture and assembly of electronic products. In addition, the Company provides contract manufacturing services. Electronic components distribution sales include exports made principally to customers located in Western Europe, Canada, Mexico, and the Far East. For the years ended June 30, 2002, 2001 and 2000, export sales amounted to approximately $32,211,000, $52,358,000 and $8,170,000, respectively. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Jaco Electronics, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. 2. Revenue Recognition The Company recognizes revenue as products are shipped and title passes to customers. 3. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers cash instruments with original maturities of less than three months to be cash equivalents. 4. Investments in Marketable Securities Investments in marketable securities consist of investments in mutual funds. Such investments have been classified as "available-for-sale securities" and are reported at fair market value, which is inclusive of an unrealized loss of $40,924 in 2002, and an unrealized gain of $95,139 in 2001. Changes in the fair value of available-for-sale securities are included in accumulated other comprehensive income (loss), net of the related deferred tax effects. F-8 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Inventories Inventories are stated at the lower of cost or estimated market value. Cost is determined using the first-in, first-out and average cost methods. A provision to reduce inventories to their estimated market value has been provided for. 6. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful life of the assets. The Company capitalizes costs incurred for internally developed software where economic and technological feasibility has been established. These capitalized software costs are being amortized on a straight-line basis over the estimated useful life of seven years. Significant improvements are capitalized if they extend the useful life of the asset. Routine repairs and maintenance are expensed when incurred. 7. Goodwill And Other Intangible Assets Goodwill and other intangible assets represent the excess of the aggregate price paid by the Company over the fair market value of the tangible assets acquired in business acquisitions accounted for as a purchase. During the year ended June 30, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The new standards require that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value-based test. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Those intangible assets are reviewed for impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." F-9 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 8. Income Taxes Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and net operating loss carryforwards for which income tax expenses or benefits are expected to be realized in future years. A valuation allowance had been established to reduce deferred tax assets attributable to net operating losses of a subsidiary of the Company. During fiscal 2001, the Company utilized a significant portion of the net operating loss carryforwards and thus eliminated the valuation allowance. 9. Earnings (Loss) Per Common Share Basic earnings per share are determined by dividing the Company's net earnings by the weighted average shares outstanding. Diluted earnings per share include the dilutive effects of outstanding stock options. 10. Financial Instruments and Business Concentrations Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of accounts receivable. Concentration of credit risk with respect to accounts receivable is generally mitigated due to the large number of entities comprising the Company's customer base, their dispersion across geographic areas and industries, along with the Company's policy of maintaining credit insurance. The Company routinely addresses the financial strength of its customers and, historically, its accounts receivable credit risk exposure is limited. Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Fair Value of Financial Instruments," requires disclosure of the estimated fair value of an entity's financial instrument assets and liabilities. The Company's principal financial instrument consists of a revolving credit facility, F-10 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) expiring on March 14, 2004, with two participating banks. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rate approximates the current prevailing interest rate. The Company generally purchases products from manufacturers pursuant to nonexclusive distributor agreements. During the year ended June 30, 2002, products purchased from three suppliers accounted for 15%, 12% and 9%, respectively, of net sales. As is common in the electronics distribution industry, from time to time the Company has experienced terminations of relationships with suppliers. There can be no assurance that, in the event a supplier cancelled its distributor agreement with the Company, the Company will be able to replace the sales with sales of other products. 11. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. During the fourth quarter of the year ended June 30, 2002, the Company recorded an additional provision for excess and slow moving inventory of approximately $1,100,000 based upon management's current estimate of the estimated market value of such inventory. Actual results could differ from those estimates. 12. Comprehensive Income Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," establishes rules for reporting and display of comprehensive income and its components in financial statements. Comprehensive income consists of net earnings and unrealized gains and losses on available-for-sale securities and is presented in the consolidated statement of changes in shareholders' equity, net of applicable taxes. F-11 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 13. Segment Reporting Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information," requires that the Company disclose certain information about its operating segments defined as "components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance." Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company has two reportable segments as defined by the provisions of SFAS No. 131. 14. Shipping and Handling Fees Shipping and handling fees charged to customers are included in net sales. Shipping and handling expenses paid are included as a component of cost of good sold. 15. Advertising Advertising costs are expensed as incurred and totaled $158,791, $175,954 and $109,308 for the years ended June 30, 2002, 2001 and 2000, respectively. 16. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the fiscal 2002 presentation. 17. Impact of Recently Issued Accounting Pronouncements In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement is effective for fiscal years beginning after December 15, 2001 and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining many of the requirements of such statement. Management believes that the adoption of SFAS No. 144 will not have a material impact on its results of operations or financial position. F-12 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This statement eliminates the current requirements that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent, in accordance with the current GAAP criteria for extraordinary classifications. In addition, SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that modifications of capital leases that result in reclassification as operating leases be accounted for consistent with sales-leaseback accounting rules. The statement also contains other nonsubstantive corrections to authoritative accounting literature. The rescission of SFAS No. 4 is effective in fiscal years beginning after May 15, 2002. The amendment and technical corrections of SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. Management believes that the adoption of SFAS No. 145 will not have a material impact on its results of operations or financial position. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. SFAS no. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Management believes that the adoption of SFAS No. 146 will not have a material impact on its results of operations or financial position. F-13
Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE B - INVENTORY Inventories consist of the following: June 30, --------------------------------------- 2002 2001 -------------- ------------- Finished goods and goods held for resale $36,382,922 $52,841,604 Work-in-process 502,936 1,401,102 Raw materials 5,725,367 7,969,415 ------------ ----------- $42,611,225 $62,212,121 ========== ==========
NOTE C - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of: Useful June 30, life ---------------------------------- in years 2002 2001 -------- ------------ ------------- Land, building and improvements 10 to 30 $ 1,513,446 $ 1,482,419 Machinery and equipment 3 to 7 12,030,190 11,573,339 Internally developed software costs 7 1,977,583 1,952,319 Transportation equipment 3 to 5 126,676 162,707 Leasehold improvements 5 to 10 1,293,424 1,293,424 ----------- ----------- 16,941,319 16,464,208 Less accumulated depreciation and amortization (including $1,440,944 in 2002 and $1,378,070 in 2001 of capitalized lease amortization) 10,232,491 8,074,557 ---------- ----------- $ 6,708,828 $ 8,389,651 =========== =========== Included in machinery and equipment are assets recorded under capitalized leases at June 30, 2002 and 2001 for $3,502,364 and $3,967,825, respectively. Accumulated amortization of internally developed software costs at June 30, 2002 and 2001 aggregated $934,959 and $654,010, respectively.
F-14 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS The Company has adopted, as of July 1, 2001, the provisions of SFAS Nos. 141 and 142. Accordingly, annual and quarterly amortization of goodwill and franchise agreements of $1,234,000 and $308,000, respectively, are no longer recognized. The Company has performed a transitional fair value-based impairment test and has determined that no impairment of goodwill or franchise agreements existed as of July 1, 2001. The following table presents a reconciliation of net earnings (loss) and earnings (loss) per share amounts, as reported in the financial statements, to those amounts adjusted for goodwill and intangible asset amortization determined in accordance with the provisions of SFAS No. 142. June 30, ---------------------------------------------- 2002 2001 2000 ----------- ----------- --------- Reported net (loss) earnings $(5,043,971) $ 9,850,397 $6,375,954 Add back: goodwill amortization 980,092 246,332 Add back: franchise agreement amortization 36,667 3,056 ----------------- ------------- ------------ Adjusted net (loss) earnings $(5,043,971) $10,867,156 $6,625,342 ========== ========== ========= Basic (loss) earnings per share Reported net (loss) earnings $(0.88) $1.74 $ 1.16 Goodwill amortization 0.17 0.05 Franchise agreement amortization 0.01 -------- ---- ---- Adjusted net (loss) earnings $(0.88) $1.92 $1.21 ===== ==== ==== Diluted (loss) earnings per share Reported net (loss) earnings $(0.88) $1.59 $1.11 Goodwill amortization 0.16 0.04 Franchise agreement amortization 0.01 -------- ---- ----- Adjusted net (loss) earnings $(0.88) $1.76 $1.15 ===== ==== ====
F-15
Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE E - INCOME TAXES The components of the Company's (benefit) provision for income taxes are as follows: June 30, ------------------------------------------------------- 2002 2001 2000 ------------ ----------- ---------- Federal Current $(2,737,000) $5,853,000 $3,448,000 Deferred 225,000 (803,000) (67,000) ----------- ---------- ----------- (2,512,000) 5,050,000 3,381,000 State (256,000) 1,722,000 1,044,000 ------------ --------- --------- $(2,768,000) $6,772,000 $4,425,000 ========== ========= ========= The Company's effective income tax rate differs from the statutory U.S. Federal income tax rate as a result of the following: June 30, -------------------------------------------- 2002 2001 2000 -------- ----------- ----- Statutory Federal tax rate (34.0)% 34.0% 34.0% State income taxes, net of Federal tax benefit (3.3) 6.7 5.5 Sales expense for which no tax benefit arises 0.8 1.0 0.9 Other 1.1 (1.0) 0.6 ------- ----- ----- Effective tax rate (35.4)% 40.7% 41.0% ===== ==== ====
F-16
Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE E - INCOME TAXES (continued) Deferred income tax assets and liabilities resulting from differences between accounting for financial statement purposes and tax purposes are summarized as follows: 2002 2001 ----------- -------- Deferred tax assets Net operating loss carryforwards $ 424,000 $ 187,000 Allowance for bad debts 611,000 619,000 Inventory valuation 1,554,000 1,820,000 Deferred compensation 346,000 310,000 Unrealized loss on marketable securities available for sale 16,000 Other deferred tax assets 331,000 364,000 ---------- ---------- 3,282,000 3,300,000 Deferred tax liabilities Depreciation (758,000) (594,000) Unrealized gain on marketable securities available for sale (34,000) Other (73,000) (46,000) ----------- ----------- Net deferred tax asset $2,451,000 $2,626,000 ========= ========= At June 30, 2002, the Company, through an acquisition, has available a Federal net operating loss carryforward of approximately $313,000. Such net operating loss is subject to certain limitations and expires in varying amounts during the fiscal years 2007 through 2010. In addition, the Company has current year net operating losses of approximately $6,600,000 that will be carried back for a two-year period for Federal tax refund purposes. Since most states do not permit loss carrybacks, the state effect of the current year loss is included in the deferred tax asset.
F-17 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE F - (LOSS) EARNINGS PER COMMON SHARE Year ended June 30, -------------------------------------------------------------------------------------- 2002 2001 ---------------------------------------- -------------------------------------- Loss Shares Per Income Shares Per (numer- (denomi- share (numer- (denomi- share ator) nator) amount ator) nator) amount --------- --------- ------- --------- --------- ------- Basic (loss) earnings per share; income available to common shareholders $(5,043,971) 5,713,365 $(0.88) $9,850,397 5,669,560 $1.74 Effect of dilutive securities Stock options 509,093 --------------- -------------- --------------- ---------- Diluted (loss) earnings per share; income available to common shareholders plus assumed conversions $(5,043,971) 5,713,365 $(0.88) $9,850,397 6,178,653 $1.59 ========== ========= ========= ========= 2000 ---------------------------------------- Income Shares Per (numer- (denomi- share ator) nator) amount --------- --------- ------- Basic (loss) earnings per share; income available to common shareholders $6,375,954 5,497,866 $1.16 Effect of dilutive securities Stock options 268,220 ------------- ---------- Diluted (loss) earnings per share; income available to common shareholders plus assumed conversions $6,375,954 5,766,086 $1.11 ========= ========= Excluded from the calculation of earnings (loss) per share are options to purchase 844,548, 90,688 and 45,000 common shares in fiscal 2002, 2001 and 2000, respectively, as their inclusion would have been antidilutive.
F-18
Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE G - DEBT AND CAPITALIZED LEASE OBLIGATIONS Debt and capitalized lease obligations are as follows: June 30, --------------------------------- 2002 2001 ------------- ------------- Term loan and revolving line of credit (a) $33,807,703 $54,556,622 Other term loan (b) 185,202 324,689 Equipment note 30,634 Capitalized lease obligations (c) 1,947,496 2,561,909 ----------- ----------- 35,940,401 57,473,854 Less amounts representing interest on capitalized lease obligations 163,216 263,706 ------------ ------------ 35,777,185 57,210,148 Less current maturities 897,419 1,081,905 ------------ ----------- $34,879,766 $56,128,243 ========== ========== (a) Term Loan and Revolving Line of Credit Facility The Company's agreement with its banks, as amended, provides the Company with a $45,000,000 revolving line of credit facility. The credit facility is based principally on eligible accounts receivable and inventories of the Company as defined in the agreement. The agreement was amended to (i) extend the maturity date to March 14, 2004, (ii) reduce the credit facility line from $70 million to $45 million, and (iii) change the requirements of certain financial covenants. The interest rate was based on the average 30-day LIBOR plus 1% to 2-1/4% depending on the Company's performance for the immediately preceding four fiscal quarters measured by a certain financial ratio. Effective October 1, 2002, the rate will convert to the average 30-day LIBOR plus 2-3/4% and is subject to quarterly decreases, to the average 30-day LIBOR plus 2-1/4%, based upon future financial performance. Borrowings under this facility are collateralized by substantially all of the assets of the Company. In addition, the agreement prohibits the payment of cash dividends. The outstanding balance on the revolving line of credit facility was $33,807,703 at June 30, 2002, with an associated interest rate of 4.09%. The agreement also provided a waiver for non-compliance of a certain financial covenant.
F-19 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE G - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued) (b) Other Term Loan The Company has a term loan which requires monthly payments $9,829 through January 31, 2004. The loan, which bears interest at 1% per annum, is collateralized by the related equipment acquired, having a carrying value of approximately $261,000 at June 30, 2002 and $344,000 at June 30, 2001. The agreement contains, among other things, restrictive covenants on one of the Company's subsidiaries, which place limitations on significant changes in the business and additional indebtedness. (c) Capitalized Lease Obligations The Company leases certain equipment under agreements accounted for as capital leases. The aggregate obligations for the equipment require the Company to make monthly payments through March 2005, with implicit interest rates from 7.0% to 8.4%. The following is a summary of the aggregate annual maturities of debt and capitalized lease obligations as of June 30, 2002: Capitalized Debt leases ---- ------ Year ending June 30, 2003 $ 116,628 $ 882,558 2004 33,876,277 677,768 2005 387,170 ----------- ---------- $33,992,905 $1,947,496 ========== ========= F-20 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE H - COMMITMENTS AND CONTINGENCIES 1. Leases The Company leases certain office and warehouse facilities under noncancellable operating leases. The leases also provide for the payment of real estate taxes and other operating expenses of the buildings. The minimum annual lease payments under such leases are as follows: Year ending June 30, 2003 $1,899,386 2004 1,187,459 2005 574,695 2006 86,548 ----------- $3,748,088 ========== In addition, the Company leases office and warehouse facilities from a partnership owned by two officers and directors of the Company. The lease expires in December 2003 and requires minimum annual lease payments as follows: Year ending June 30, 2003 $ 692,293 2004 354,589 ---------- $1,046,882 ========== The Company's rent expense was approximately $602,000 for each of the years ended June 30, 2002, 2001 and 2000, respectively, in connection with the above lease. Rent expense on office and warehouse facilities leases for the years ended June 30, 2002, 2001 and 2000 was approximately $2,049,000 , $1,826,000 and $1,235,000, respectively, net of sublease income of approximately $115,000 and $127,000, for the years ended June 30, 2001 and 2000, respectively. F-21 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE H - COMMITMENTS AND CONTINGENCIES (continued) 2. Other Leases The Company also leases various office equipment and automobiles under noncancellable operating leases expiring through June 2006. The minimum rental commitments required under these leases at June 30, 2002 are as follows: Year ending June 30, 2003 $214,732 2004 95,450 2005 58,393 2006 2,948 --------- $371,523 ======== 3. Employment Agreements The Company has entered into employment agreements with three executive officers which provide for annual base salaries aggregating $785,000 through June 30, 2005 and contain provisions for severance payments in the event of change of control as defined in the agreements. The Company's agreements with its Chairman and Executive Vice President provide for cash bonuses equal to 4% and 2%, respectively, of the Company's earnings before income taxes for each fiscal year in which such earnings are in excess of $1,000,000 or 6% and 3%, respectively, of the Company's earnings before income taxes if such earnings are in excess of $2,500,000 up to a maximum annual cash bonus of $720,000 and $360,000, respectively. In addition, the Company's agreement with its Chairman provides for deferred compensation which accrues at a rate of $50,000 per year and becomes payable in its entirety no later than January 15 of the year next following his cessation of employment for any reason. Effective July 1, 2001, the Company is obligated to provide health insurance to the Chairman, Executive Vice President, and their respective spouses commencing upon their termination of employment with Jaco and ending on the later to occur of (i) their death or (ii) the death of their respective spouses. The Company has adopted Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pension," which requires the Company to recognize the cost of providing postretirement benefits over the employees' service periods. The recorded liabilities for these postretirement benefits, none of which has been funded, amounted to $48,900 at June 30, 2002. The weighted-average discount rate used in determining the liability was 5.5%, and the annual percentage increase in health costs was 7%. F-22 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE H - COMMITMENTS AND CONTINGENCIES (continued) On June 6, 2000, the Company entered into an employment agreement with an Executive Vice President which provides for an annual base of $300,000 through May 30, 2003. The employment agreement also provides for an annual cash bonus equal to 2% of certain gross profit dollars, as defined. 4. Other Matters The Company is a party to legal matters arising in the general conduct of business. The ultimate outcome of such matters is not expected to have a material adverse effect on the Company's results of operations or financial position. NOTE I - RETIREMENT PLAN The Company maintains a 401(k) Plan that is available to all employees, to which the Company contributes up to a maximum of 1% of each employee's salary. For the years ended June 30, 2002, 2001 and 2000, the Company contributed to this plan approximately $144,000, $175,000 and $116,000, respectively. F-23 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE J - SHAREHOLDERS' EQUITY On June 26, 2000, the Company announced a 3-for-2 stock split which was in the form of a 50% common stock dividend payable on July 24, 2000 to shareholders of record on July 10, 2000. All references to the number of weighted-average common shares outstanding and earnings per share have been restated to reflect the 3-for-2 stock split. 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 Plan Committee is responsible for the granting and pricing of these options. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. The options expire five years from the date of grant and are exercisable over the period stated in each option. In December 1997, the shareholders of the Company approved an increase in the amount of shares reserved for the 1993 plan to 900,000 from 440,000, of which 577,500 are outstanding at June 30, 2002. In October 1993, the Board of Directors approved the adoption of a stock option plan for outside directors, known as the "1993 Stock Option Plan for Outside Directors," hereinafter referred to as the "Outside Directors Plan." Each outside director who was serving as of December 31, 1993 was granted a nonqualified stock option to purchase 22,000 shares of the Company's common stock at the fair market value on the date of grant. Each outside director who was serving on December 31 of each calendar year subsequent to 1993 was granted options to purchase 4,399 shares of the Company's common stock annually. The Outside Directors Plan expired on January 1, 1998, with a total of 8,798 options outstanding at June 30, 2002. Granted options shall expire upon the earlier of five years after the date of grant or one year following the date on which the outside director ceases to serve in such capacity. In June 1997, the Company appointed an additional outside director to the Board of Directors who received 15,000 options to purchase the Company's common stock at the fair market value on the date of grant. In September 1998, two outside directors were each granted 11,250 options to purchase the Company's common stock at the fair market value on the date of grant. These 37,500 options, of which 22,500 are outstanding at June 30, 2002, were not granted pursuant to any of the Company's existing stock option plans. F-24 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE J - SHAREHOLDERS' EQUITY (continued) 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 provides for the grant of incentive stock options ("ISOs") and nonqualified stock options ("NQSOs") to employees, officers, directors, consultants and advisers of the Company. The Board of Directors or Plan Committee is responsible for the granting and pricing of these options. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. In the case of ISOs granted to shareholders owning more than 10% of the 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. The 2000 Plan reserves 600,000 shares of the Company's common stock, of which 235,750 are outstanding at June 30, 2002. Outstanding options granted to employees, directors and officers for the last three fiscal years are summarized as follows:
Nonqualified Weighted- stock options average -------------------------------- exercise Price range Shares price ----------- ------ ----- Outstanding at June 30, 1999 $1.79 - $8.50 727,943 $3.79 -------- Granted $2.50 - $13.71 258,000 4.70 Exercised $1.79 - $8.50 (153,723) 5.67 Expired $2.50 - $4.67 (41,800) 3.44 --------- Outstanding at June 30, 2000 $1.79 - $13.71 790,420 3.74 -------- Granted $6.01 - $8.00 238,250 7.91 Exercised $2.50 - $8.50 (63,500) 6.88 --------- Outstanding at June 30, 2001 $1.79 - $13.71 965,170 4.56 ------- Exercised $2.50 - $4.67 (109,973) 4.47 Expired $8.00 - $13.71 (10,649) 9.05 --------- Outstanding at June 30, 2002 $1.79 - $13.71 844,548 4.52 ======== Amounts exercisable at June 30, 2002 $1.79 - $13.71 844,548 4.52 ========
F-25 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE J - SHAREHOLDERS' EQUITY (continued) The following table summarizes information concerning currently outstanding and exercisable nonqualified stock options: Options outstanding Options exercisable -------------------------------------- -------------------------------------- Weighted- Weighted- average Weighted- average Weighted- remaining average remaining average Number contractual exercise Number contractual exercise Range of exercise prices outstanding life (months) price exercisable life (months) price ------------------------ ----------- --------------- ---------- ----------- --------------- --------- $1.79 - $4.67 567,548 21 $ 2.44 567,548 21 $ 2.44 $6.01 - $8.00 235,750 101 $ 7.91 235,750 101 $ 7.91 $13.71 41,250 35 $13.71 41,250 35 $13.71
The weighted-average option fair value on the grant date was $4.82 and $4.97 for options issued during the years ended June 30, 2001 and 2000, respectively. There were no options issued during the year ended June 30, 2002. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation"; it applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the 2000 Plan and does not recognize compensation expense for such 2000 Plan. If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under the 2000 Plan consistent with the methodology prescribed by SFAS No. 123, the Company's reported net earnings (loss) and earnings (loss) per share would be reduced (increased) to the pro forma amounts indicated below for the years ended June 30: 2002 2001 2000 ------------- -------------- -------- Net (loss) earnings As reported $(5,043,971) $9,850,397 $6,375,954 Pro forma (5,568,933) 8,732,958 6,098,272 Net (loss) earnings per common share - basic As reported $(0.88) $1.74 $1.16 Pro forma (0.97) 1.54 1.11 Net (loss) earnings per common share - diluted As reported $(0.88) $1.59 $1.11 Pro forma (0.97) 1.41 1.06
F-26 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE J - SHAREHOLDERS' EQUITY (continued) These pro forma amounts may not be representative of future disclosures because they do not take into account pro forma compensation expense related to grants made before fiscal 1996. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the fiscal years ended June 30, 2001 and 2000, respectively: expected volatility of 93% and 109%; risk-free interest rates of 5.33% and 6.25%; and expected term of 3 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Board of Directors of the Company had authorized the purchase of up to 375,000 shares of its common stock under a stock repurchase program. In fiscal 1998, the Board of Directors authorized the repurchase of up to an additional 600,000 shares of the Company's common stock. The purchases were made by the Company from time to time on the open market at the Company's discretion and were dependent on market conditions. The Company had made purchases of 618,300 shares of its common stock from July 31, 1996 through September 13, 2000 for aggregate consideration of $2,204,515. On September 14, 2000, the Board of Directors passed a resolution to terminate the stock repurchase program. On September 18, 2001, the Company announced that its Board of Directors authorized the repurchase of up to 250,000 shares of its outstanding common stock. Purchases may be made from time to time in market or private transactions at prevailing market prices. No purchases were made in fiscal 2002. In June 1997, the Company's Board of Directors approved the adoption of a restricted stock plan, which was subsequently ratified by shareholders during the Company's December 1997 annual meeting. The plan enables the Board of Directors or Plan Committee to have sole discretion and authority to determine who may purchase restricted stock, the number of shares, the price to be paid and the restrictions placed upon the stock. Pursuant to this plan, the Company issued 135,000 shares of common stock to certain employees at a purchase price of $.67 per share. Shares purchased are subject to a four-year vesting period and the Company recognized $135,000 of compensation expense during fiscal 2001 and 2000 in connection with this plan. F-27 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE K - COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) and its components for the years ended June 30, 2002, 2001 and 2000 are as follows: 2002 2001 2000 ------------- ------------- ----------- Net (loss) earnings $(5,043,971) $9,850,397 $6,375,954 Unrealized loss on marketable securities (136,063) (166,240) (74,076) Deferred tax benefit 50,402 60,678 27,038 ----------- ----------- ----------- Comprehensive (loss) income $(5,129,632) $9,744,835 $6,328,916 ========== ========= =========
Accumulated other comprehensive income (loss) is comprised of unrealized gains and losses on marketable securities, net of the related tax effect. NOTE L - ACQUISITIONS On June 6, 2000, the Company acquired all of the issued and outstanding shares of common stock, no par value, of Interface Electronics Corp. ("Interface"), a distributor of electronic parts, components and equipment, located in Massachusetts. The purchase price was $15,400,000 payable in cash at closing, plus the assumption of certain liabilities and a deferred payment of $5,002,860, of which $2,099,563 is outstanding at June 30, 2002. The acquisition has been accounted for as a purchase and the operations of Interface have been included in the Company's statement of operations since the date of acquisition. Included in other assets are the costs of the identifiable intangible assets acquired, principally an employment agreement which is being amortized on a straight-line basis over five years and a franchise agreement which was F-28 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE L - ACQUISITIONS (continued) being amortized on a straight-line basis over fifteen years until the Company's adoption of SFAS No. 142. The excess of the purchase price and related expenses over the net tangible and identifiable intangible assets acquired amounted to approximately $19,703,000 at June 30, 2002 and was being amortized on a straight-line basis over twenty years until the Company's adoption of SFAS No. 142. A summary of the allocation of the assets and liabilities acquired follows: Operating assets acquired $ 13,157,365 Employment agreement 685,000 Franchise agreement 550,000 ------- 14,392,365 Liabilities assumed (13,464,389) Transaction costs (228,241) -------- (13,692,630) ----------- Goodwill 19,703,125 ----------- Total purchase price $ 20,402,860 =========== On February 25, 2000, the Company purchased the operating assets of PGI, Industries, Inc., ("PGI") an exporter of electronic components, located in Ronkonkoma, New York. The purchase price was $1,200,000 paid in cash, plus a deferred payment of $100,000, which has been paid. The acquisition has been accounted for as a purchase and the operations of PGI have been included in the Company's statement of operations since the date of acquisition. The excess of the purchase price over the fair value of the assets acquired, approximately $310,000 at June 30, 2002, was being amortized on a straight-line basis over twenty years until the Company's adoption of SFAS No. 142. F-29 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE M - BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION The Company has two reportable segments: electronics parts distribution and contract manufacturing. The Company's primary business activity is conducted with small and medium size manufacturers, located in North America, that produce electronic equipment used in a variety of industries. Information pertaining to the Company's operations in different geographic areas for fiscal years 2002, 2001 and 2000, is not considered material to the financial statements. The Company's chief operating decision maker utilizes net sales and net earnings (loss) information in assessing performance and making overall operating decisions and resource allocations. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company accounts for intersegment sales as if the sales were to third parties, that is, at current market prices. Information about the Company's segments is as follows: Year ended June 30, ------------------------------------------------------- 2002 2001 2000 --------- --------- ------- ----------------------(in thousands)-------------------- Net sales from external customers Electronics components distribution $175,949 $321,124 $193,111 Contract manufacturing 18,157 29,098 16,214 --------- --------- --------- $194,106 $350,222 $209,325 ======= ======= ======= Intersegment net sales Electronics components distribution $ 268 $ 992 $ 324 Contract manufacturing 10 --------- ---------- ----------- $ 278 $ 992 $ 324 ========= ========== ========== Operating (loss) profit Electronics components distribution $ (5,380) $ 19,167 $ 12,012 Contract manufacturing (209) 1,575 348 --------- --------- ---------- $ (5,589) $ 20,742 $ 12,360 ======== ======== ========
F-30 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE M - BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION (continued) Year ended June 30, ------------------------------------------------------- 2002 2001 2000 --------- --------- ------- ----------------------(in thousands)-------------------- Interest expense Electronics components distribution $ 1,683 $ 3,457 $ 1,053 Contract manufacturing 540 662 506 ---------- ---------- ---------- $ 2,223 $ 4,119 $ 1,559 ========= ========= ========= Income tax (benefit) provision Electronics components distribution $ (2,503) $ 6,400 $ 4,489 Contract manufacturing (265) 372 (64) ---------- ---------- ---------- $ (2,768) $ 6,772 $ 4,425 ========= ========= ========= Identifiable assets Electronics components distribution $ 97,412 $117,069 $115,109 Contract manufacturing 13,223 19,246 10,995 --------- -------- -------- $110,635 $136,315 $126,104 ======= ======= ======= Capital expenditures Electronics components distribution $ 174 $ 1,238 $ 612 Contract manufacturing 31 759 280 ---------- ---------- --------- $ 205 $ 1,997 $ 892 ========= ========= ========= Depreciation and amortization Electronics components distribution $ 1,439 $ 2,297 $ 1,209 Contract manufacturing 893 926 659 ---------- ---------- ---------- $ 2,332 $ 3,223 $ 1,868 ========= ========= =========
F-31 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2002, 2001 and 2000 NOTE N - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Quarter ended ------------- June 30, March 31, December 31, September 30, June 30, 2002 2002 2001 2001 2001 ----------- ----------- ----------- ----------- ----------- Net sales $52,972,961 $49,297,412 $42,405,312 $49,430,523 $72,146,768 Gross profit 6,159,286 7,196,967 6,601,562 8,015,501 10,777,533 Net (loss) earnings (1,545,878) (674,550) (1,320,995) (1,502,548) (437,625) Net (loss) earnings per common share Basic $(0.27) $(0.12) $(0.23) $(0.26) $(0.08) Diluted (0.27) (0.12) (0.23) (0.26) (0.08) Quarter ended ------------- March 31, December 31, September 30, 2001 2000 2000 ----------- ----------- ----------- Net sales $83,680,954 $100,235,652 $94,158,828 Gross profit 15,367,532 20,077,191 20,617,658 Net (loss) earnings 1,585,493 4,044,662 4,657,867 Net (loss) earnings per common share Basic $0.28 $0.72 $0.83 Diluted 0.26 0.65 0.75
F-32 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors and Shareholders Jaco Electronics, Inc. In connection with our audits of the consolidated financial statements of Jaco Electronics, Inc. and Subsidiaries for the years ended June 30, 2002 and 2001 referred to in our report dated September 19, 2002, which is included in this annual report on Form 10-K, we have also audited Schedule II for each of the three years in the period ended June 30, 2002. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Melville, New York September 19, 2002 F-33 Jaco Electronics, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 2002, 2001 and 2000 Column A Column B Column C Column D Column E -------- -------- ---------------------------- -------- -------- Additions ---------------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts - Deductions - at end of Description of period expenses describe describe period ----------- ----------- ---------- ------------ ----------- -------- Allowance for doubtful accounts Year ended June 30, 2002 $1,695,000 $ 418,000 $ 79,000 (a) $ 583,000 (b) $ 1,609,000 ========= ========== ======== ========== ========== Year ended June 30, 2001 $1,111,000 $1,398,000 $ 25,000 (a) $ 839,000 (b) $1,695,000 ========= ========= ======== ========== ========= Year ended June 30, 2000 $ 440,000 $ 598,000 $178,000 (a)(c) $ 105,000 (b) $1,111,000 ========== ========== ======= ========== ========= Reserve for slow-moving and obsolete inventory Year ended June 30, 2002 $2,291,000 $2,098,000 $1,298,000 (d) $ 3,091,000 ========= ========= ========= ========== Year ended June 30, 2001 $2,406,000 $ 865,000 $ 980,000 (d) $2,291,000 ========= ========== ========== ========= Year ended June 30, 2000 $1,526,000 $1,266,000 $ 386,000 (d) $2,406,000 ========= ========= ========== ========= (a) Recoveries of accounts. (b) Represents write-offs of uncollectible accounts. (c) Includes balance attributable to acquired subsidiary. (d) Disposal and sale of slow-moving and obsolete inventory.
F-34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JACO ELECTRONICS, INC. By:/s/ Joel H Girsky ---------------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date Chairman of the Board, September 27, 2002 /s/ Joel H. Girsky President and Treasurer ----------------- (Principal Executive Officer) Joel H. Girsky Executive Vice President- September 27, 2002 /s/ Jeffrey D. Gash Finance and Secretary --------------- (Prinicpal Financial and Jeffrey D. Gash Accounting Officer) Vice Chairman of the Board September 27, 2002 /s/ Joseph F. Oliveri and Executive Vice President ----------------- Joseph F. Oliveri Executive Vice President and September 27, 2002 /s/ Charles B. Girsky Director --------------------- Charles B. Girsky /s/ Stephen A. Cohen Director September 27, 2002 ------------------- Stephen A. Cohen /s/ Edward M. Frankel Director September 27, 2002 -------------------- Edward M. Frankel /s/ Joseph F. Hickey, Jr. Director September 27, 2002 -------------------- Joseph F. Hickey, Jr CERTIFICATION I, Joel H. Girsky, certify that: 1. I have reviewed this annual report on Form 10-K of Jaco Electronics, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ Joel H. Girsky --------------------------------- Chairman, President and Treasurer (Principal Executive Officer) CERTIFICATION I, Jeffrey D. Gash, certify that: 1. I have reviewed this annual report on Form 10-K of Jaco Electronics, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ Jeffrey D. Gash ---------------------------------------------- Executive Vice President, Finance and Secretary (Principal Financial Officer) EX-21.1 3 exhibit211.txt SUBSIDIARIES OF THE COMPANY Exhibit 21.1 State or Jurisdiction Name of Subsidiary of Incorporation - ------------------------------------- --------------------------------- Distel, Inc. California RC Components, Inc. Massachusetts Quality Components, Inc. Texas Jaco Overseas, Inc. Virgin Islands Nexus Custom Electronics, Inc. Delaware Jaco Electronics Canada, Inc. Canada Corona Electronics, Inc. California Interface Electronics Corp. Massachusetts Jaco De Mexico, Inc. Texas EX-23.1 4 gtconsent.txt CONSENT OF GRANT THORNTON Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated September 19, 2002 accompanying the consolidated financial statements and schedule included in the Annual Report of Jaco Electronics, Inc. and Subsidiaries on Form 10-K for the year ended June 30, 2002. We hereby consent to the incorporation by reference of said reports in the Registration Statement of Jaco Electronics, Inc. and Subsidiaries on Form S-8/S-3 (File No. 33-89994, effective March 3, 1995), as amended by Post-Effective Amendment No. 1 to the Registration Statement of Jaco Electronics, Inc. and Subsidiaries on Form S-8/S-3 (File No. 333-49873, effective April 10, 1998) and the Registration Statement of Jaco Electronics, Inc. and Subsidiaries on Form S-8/S-3 (File No. 333-49877, effective April 10, 1998). /s/ Grant Thornton LLP ------------------------ GRANT THORNTON LLP Melville, New York September 19, 2002 EX-99.8.14 5 bankamend902.txt BANK AMENDMENT GMAC Commercial Credit LLC 1290 Avenue of the Americas New York, NY 10104 September 23, 2002 JACO ELECTRONICS, INC. ("Jaco") 145 Oser Avenue Hauppauge, NY 11788 NEXUS CUSTOM ELECTRONICS, INC. ("Nexus") Prospect Street Brandon, VT 05733 INTERFACE ELECTRONICS CORP. ("Interface") 124 Grove Street Franklin, MA 02028 Gentlemen: Reference is made to the Second Restated and Amended Loan and Security Agreement in effect between us as successor by merger to BNY Financial Corporation ("GMAC") as Agent and Lender, and Fleet Bank, N.A., f/k/a Natwest Bank, N.A ("Fleet") as Lender, and Jaco, Nexus and Interface, dated September 13, 1995, as supplemented and amended from time to time, (the "Agreement"). Both GMAC and Fleet may hereinafter be referred to jointly as the "Lenders", and individually, as a "Lender" and GMAC may also be herein referred to as "Agent" when acting in such capacity, as the case may be. Initially capitalized terms not defined herein shall have the meanings ascribed to such terms in the Agreement. Jaco, Nexus and Interface may hereinafter and in the Agreement, be referred to jointly and severally as "Debtors", and each individually as a "Debtor". WHEREAS, the Lenders and Jaco, Nexus, and Interface have requested and agreed to certain changes and amendments to the Agreement, as here and after described; and WHEREAS, pursuant to such amendments the Maximum Loan Amount for each Lender will be reduced from $35,000,000 to $22,500,000, for a total amount of $45,000,000; NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS: 1. Effective as of the date hereof, the Agreement shall be amended by replacing the phrase (as previously amended) "$35,000,000" appearing next to the phrase "Maximum Loan Amount" underneath the signature of each Lender, with the phrase "$22,500,000". 2. The phrase (as previously amended) of "$30,000,000" appearing on the 8th line of Section 4(a) of the Agreement shall be deleted in its entirety, and replaced with the phrase "$25,000,000". 3. The definition of "Contract Rate" as set forth in paragraph 1 of the Agreement, as amended by Amendment letters dated August 1, 1997, June 6, 2000 and November 14, 2001, is hereby deleted and replaced with the following: " 'Contract Rate' means an interest rate per annum equal to the applicable LIBO Rate plus the margin ("LIBO Margin") stated opposite the ratio range of Funded Debt to net earnings before interest, taxes, depreciation, amortization, extraordinary gains and non-cash losses and all other non-cash charges on a consolidated basis ("EBITDA") during the immediately preceding four fiscal quarters as stated in the table immediately below: Funded Debt/EBITDA LIBO Margin ------------------ ----------- greater than 3.0 to 1 2 3/4% 2.0 to 2.99 to 1 2 1/2% less than 2.0 to 1 2 1/4% The Contract Rate applicable to LIBO Rate Loans shall be adjusted quarterly. " 4. The definition of "Inventory Borrowing Base" appearing in Section 1 of the Agreement, shall be amended, as of the date hereof, so that the percentage (as previously amended) of "55%" appearing in the first line of such definition, shall be replaced with the percentage "50%". 5. You hereby agree to pay us a closing fee of $22,500 on the date of closing of this amendment. 6. Section 4(a) of the Agreement shall be amended by deleting the following phrase stated on the eighth and ninth lines of such Section 4(a) of the Agreement "plus (C), the lesser of (x) the Equipment Borrowing Base or (y) $500,000;" . It is the intent of this amendment that the Lenders will not make any additional loans based on or calculated with respect to the Equipment Borrowing Base. 7. Section 5(b)(i) of the Agreement is hereby amended by deleting the phrase "2/10 of one percent (.2%)" appearing on the third line of such Section 5(b)(i) and replacing it with the phrase "4/10 of one percent (.4%)". 8. Section 17(d) of the Agreement as amended shall be deleted in its entirety and replaced by the following: "(d) INTENTIONALLY LEFT BLANK." 9. Section 17(e) of the Agreement shall be amended to read in its entirety as follows: "(e) Maintain at all times consolidated net worth (all amounts which would be included under shareholder's equity on a consolidated balance sheet of Debtor, determined in accordance with generally accepted accounting principles), in an amount not less than those set forth on the table below opposite the corresponding calendar quarter: Quarter Ending Net Worth -------------- --------- 9/30/02 $47,000,000 12/31/02 $45,750,000 3/31/03 and anytime thereafter $45,000,000 For purposes of calculating this covenant, any writedown for impairment of goodwill, will not be taken into account in making the calculation under this covenant." 10. Section 17(f) of the Agreement as amended shall be deleted in its entirety and replaced by the following: "(f) INTENTIONALLY LEFT BLANK." 11. Section 18(g) of the Agreement as amended shall be deleted in its entirety and replaced by the following: "(g) The Debtors shall attain at the end of each quarter, on a consolidated basis, EBITDA for such quarter, in amounts of no less than the amounts stated opposite the fiscal quarters stated below: Fiscal Quarter Minimum EBITDA Amount ----------------- --------------------- 9/30/02 ($800,000) 12/31/02 ($400,000) 3/31/03 $300,000 6/30/03 and at the end of each Fiscal Quarter thereafter at least $600,000" 12. Section 18(e) of the Agreement as amended shall be deleted in its entirety and replaced by the following: "(e) INTENTIONALLY LEFT BLANK." 13. Inconsideration of the execution and delivery of this amendment and compliance with the terms hereof by the Debtors, the Lenders hereby agree to waive a default by the Debtors of the EBITDA covenant of the Debtors under Section 18(g) of the Agreement for the fiscal quarter ending June 30, 2002. This waiver is and shall be effective only with respect to the specific waiver described herein above and only for the fiscal quarter ending June 30, 2002 and shall not be deemed a waiver of any other covenant, representation, warranty or Event of Default under the Agreement. 14. The Debtors shall hire or retain a financial consultant, acceptable to the Lenders in all respects, by October 31, 2002. 15. As an additional condition precedent to the execution of the amendment, Debtors shall provide and deliver to the Agent $800,000 in cash or cash equivalent as collateral for the payment of six months interest for the pro-rata benefit of the Lenders to be maintained in an account (if in cash) open in the name of the Agent with Fleet. 16. Additionally, the Debtors shall also deliver, to the Agent and the Lenders, ratifications and consents by the Guarantors of the amendment to the Agreement and ratification of the security interests of the Lenders in form and substance satisfactory to the Lenders. 17. It is hereby agreed by and between us that as of the date hereof, the first sentence of Section 21 of the Agreement as amended is hereby deleted, and replaced with the following sentence: "This Second Restated and Amended Loan and Security Agreement shall (subject to compliance with Conditions Precedent) become effective on the closing date hereof, without any interruption or break in continuity (as more fully described in the second paragraph hereof) and shall continue until March 31, 2004." 18. By their signatures below, Jaco, Nexus and Interface hereby ratify the Agreement and agree to be jointly and severally liable for all Obligations under the Agreement and agree that all of the outstanding amounts of the Loans under the Agreement, as of the date hereof, shall be valid and binding Obligations of each of them, and shall be deemed Obligations outstanding under the Agreement, and hereby agree and promise to repay to the Agent, for the benefit of the Lenders, such Obligations (including but not limited to all applicable interest) in accordance with the terms of the Agreement, but in no event, later than the Termination Date (for purposes hereof, "Termination Date" shall mean March 31, 2004 (which for all purposes of the Agreement shall be deemed to be the last date of the Term), or any extended termination date, or any earlier termination date, whether by acceleration or otherwise). 19. By their signatures below, Jaco, Nexus and Interface hereby ratify and affirm to the Agent that as of the date hereof, they are in full compliance with all covenants under the Agreement and certify that all representations and warranties of the Agreement are true and accurate as of the date hereof, with the same effect as if they had been made as of the date hereof. Except as herein specifically amended, the Agreement shall remain in full force and effect in accordance with its original terms, except as previously amended. If the foregoing accurately reflects our understanding, kindly sign the enclosed copy of this letter and return it to our office as soon as practicable. Very truly yours, GMAC COMMERCIAL CREDIT LLC (as Agent and Lender) By: /s/ Frank Imperto ---------------------- Frank Imperto Title:Senior Vice Presidnet AGREED AND ACCEPTED: JACO ELECTRONICS, INC. FLEET BANK, N.A. By:/s/ Jeffrey D. Gash By: /s/ Stephen Hill ---------------------- ---------------------- Jeffrey D. Gash Stephen Hill Title: Executive Vice President Title: Vice President NEXUS CUSTOM ELECTRONICS, INC. INTERFACE ELECTRONICS CORP. By:/s/ Jeffrey D. Gash By:/s/ Jeffrey D. Gash ---------------------- ---------------------- Jeffrey D. Gash Jeffrey D. Gash Title: Executive Vice President Title: Executive Vice President RATIFICATION OF GUARANTOR By its signature below, Jaco Overseas, Inc. hereby ratifies its guaranty of the Agreement, as such Agreement has been amended from time to time, including but not limited to certain amendments dated June 6, 2000, September 28, 2000, January 31, 2001, June 12, 2001, July 1, 2001, November 14, 2001 and February 6, 2002, (the "Amendments") and hereby agrees to be liable for all of the Obligations under the Guaranty with respect to the Agreement as amended from time to time, including but not limited to by this amendment and the Amendments, and hereby agrees that the said Guaranty shall continue to apply and remain in full force and effect with respect to the amended Agreement and hereby agrees and consents that a certain General Loan and Security Agreement dated January 20, 1989, shall continue to be in full force and effect and apply to the amended Agreement, and it further hereby agrees to make all payments of all its Obligations under the said Guaranty and General Loan and Security Agreement to GMAC Commercial Credit LLC as Agent and Lender, and to Fleet Bank, N.A. as Lender, as successors in interest to the previous Agent and Lenders respectively. RATIFIED, ACCEPTED AND CONSENTED: JACO OVERSEAS, INC. By:/s/ Jeffrey D. Gash ---------------------- Jeffrey D. Gash Title: Executive Vice President EX-99.10 6 exhibit991gash.txt SECTION 906 CERTIFICATION - GASH Exhibit 99.10 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Jaco Electronics, Inc. (the "Company") on Form 10-K for the fiscal year ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey D. Gash, Executive Vice President, Finance and Secretary of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Jeffrey D. Gash ---------------------------------------- Jeffrey D. Gash Executive Vice President, Finance and Secretary September 27, 2002 EX-99.9 7 exhibit999.txt SECTION 906 CERTIFICATION - GIRSKY Exhibit 99.09 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Jaco Electronics, Inc. (the "Company") on Form 10-K for the fiscal year ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joel Girsky, Chairman, President and Treasurer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Joel Girsky ---------------------------- Joel Girsky Chairman, President and Treasurer September 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----