-----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, AFsP0eV3IKxv67whMAdTUEA3dadqXXGyzfJOqcD3wV1tdsXJLrwM8b9R79UdzPyC 987QaWoolNB817eGHzCIrg== 0000052971-06-000006.txt : 20060214 0000052971-06-000006.hdr.sgml : 20060214 20060214162008 ACCESSION NUMBER: 0000052971-06-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060214 DATE AS OF CHANGE: 20060214 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-34664 FILM NUMBER: 06615484 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-Q 1 jaco10q123105.txt JACO ELECTRONICS, INC FORM 10-Q 12-31-05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2005 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ________________________ Commission File Number 0-5896 JACO ELECTRONICS, INC. (Exact name of registrant as specified in its charter) NEW YORK 11-1978958 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 145 OSER AVENUE, HAUPPAUGE, NEW YORK 11788 ------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 273-5500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares Outstanding at February 10, 2006 ----- --------------------------------------- Common Stock, $0.10 Par Value 6,292,832 (excluding 659,900 shares held as treasury stock) FORM 10-Q December 31, 2005 Page 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS December 31, June 30, 2005 2005 --------------- ----------- ASSETS (UNAUDITED) Current Assets Cash $ 15,102 $ 321,423 Accounts receivable - net 26,553,230 34,694,811 Note receivable - current portion 656,250 --- Inventories - net 31,132,467 37,056,949 Prepaid expenses and other 1,050,430 1,035,633 Deferred income taxes 3,269,000 --------- --------- Total current assets 59,407,479 76,377,816 Property, plant and equipment - net 1,916,270 2,280,809 Deferred income taxes --- 3,125,000 Excess of cost over net assets acquired - net 25,416,087 25,416,087 Note receivable 2,093,750 2,750,000 Other assets 2,084,215 2,272,701 ----------- ----------- Total assets $90,917,801 $112,222,413 =========== ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2005 Page 3 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS December 31, June 30, 2005 2005 -------------- ------------- (UNAUDITED) LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses $ 25,124,444 $ 27,426,106 Current maturities of long-term debt and capitalized lease obligations 28,178,828 33,266,185 Unearned revenue 1,848,000 8,285,200 Income taxes payable --- 66,354 ------------ ------------ Total current liabilities 55,151,272 69,043,845 Long-term debt and capitalized lease obligations 23,744 57,451 Deferred compensation 1,075,000 1,050,000 SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued --- --- Common stock - authorized, 20,000,000 shares, $.10 par value; issued 6,952,732 and 6,927,732 shares, respectively, and 6,292,832 and 6,267,832 shares outstanding, respectively 695,273 692,773 Additional paid-in capital 27,046,624 26,990,374 Retained earnings 9,240,454 16,702,536 Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566) ---------- ----------- Total shareholders' equity 34,667,785 42,071,117 ---------- ---------- Total liabilities and shareholders' equity $90,917,801 $112,222,413 =========== ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2005 Page 4 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, (UNAUDITED) 2005 2004 -------------- ------------- Net sales $ 48,107,541 $ 51,967,477 Cost of goods sold 41,442,881 45,386,465 ---------- ---------- Gross profit 6,664,660 6,581,012 Selling, general and administrative expenses 6,845,195 8,298,209 ------------ ------------ Operating loss (180,535) (1,717,197) Interest expense 552,875 476,369 ------------ ------------ Loss before income taxes (733,410) (2,193,566) Income tax provision (benefit) 6,629,199 (658,100) ------------ ------------ NET LOSS $(7,362,609) $(1,535,466) ============ ============ PER SHARE INFORMATION Basic and diluted loss per common share: Net loss $(1.17) $(0.25) ======= ======= Weighted-average common shares and common equivalent shares outstanding: Basic and Diluted 6,275,480 6,262,832 ============ ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2005 Page 5 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, (UNAUDITED) 2005 2004 -------------- ------------- Net sales $100,568,573 $112,204,114 Cost of goods sold 86,786,495 98,021,730 ---------- ---------- Gross profit 13,782,078 14,182,384 Selling, general and administrative expenses 13,687,539 16,986,706 ------------ ------------ Operating profit (loss) 94,539 (2,804,322) Interest expense 1,118,488 838,274 ------------ ------------ Loss from continuing operations before income taxes (1,023,949) (3,642,596) Income tax provision (benefit) 6,438,133 (1,092,800) ------------ ------------ Loss from continuing operations (7,462,082) (2,549,796) Discontinued operations: Loss from discontinued operations, net of income tax benefit of $39,800 --- (63,652) Gain on sale of net assets of subsidiary, net of income tax provision of $518,500 --- 830,575 ---------- ------- Earnings from discontinued operations ______ 766,923 ------- ------- NET LOSS $(7,462,082) $(1,782,873) ============ ============ PER SHARE INFORMATION Basic and diluted (loss) earnings per common share: Loss from continuing operations $(1.19) $(0.41) Earnings from discontinued operations --- $ 0.12 ------- ------- Net loss $(1.19) $(0.29) ======= ======= Weighted-average common shares and common equivalent shares outstanding: Basic and Diluted 6,271,656 6,233,117 ============ ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2005 Page 6 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 (UNAUDITED) Additional Common stock paid-in Retained Shares Amount capital earnings --------------- -------------- ---------------- ------------------- Balance at July 1, 2005 6,927,732 $ 692,773 $ 26,990,374 $ 16,702,536 Net loss (7,462,082) Exercise of stock options 25,000 2,500 56,250 --------------- -------------- ---------------- ------------------- Balance at December 31, 2005 6,952,732 $ 695,273 $ 27,046,624 $ 9,240,454 =============== ============== ================ =================== Total Treasury shareholders' stock equity --------------- ----------------- Balance at July 1, 2005 $ (2,314,566) $ 42,071,117 Net loss (7,462,082) Exercise of stock options 58,750 --------------- ----------------- Balance at December 31, 2005 $ (2,314,566) $ 34,667,785 =============== ================= See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2005 Page 7 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, (UNAUDITED) 2005 2004 -------------- -------------- Cash flows from operating activities Net loss $ (7,462,082) $ (1,782,873) Loss from discontinued operations - 63,652 Gain on sale of subsidiary - (830,575) -------------- -------------- Loss from continuing operations (7,462,082) (2,549,796) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 543,636 578,649 Deferred compensation 25,000 25,000 Deferred income tax expense (benefit) 6,394,000 (714,000) Provision for doubtful accounts 48,200 250,750 Changes in operating assets and liabilities Decrease (increase) in operating assets - net 14,106,038 (4,376,141) Decrease in operating liabilities - net (8,805,216) (2,850,079) -------------- -------------- Net cash provided by (used in) continuing operations 4,849,576 (9,635,617) Net cash used in discontinuing operations - (447,716) -------------- -------------- Net cash provided by (used in) operating activities 4,849,576 (10,083,333) -------------- -------------- Cash flows from investing activities Purchase of marketable securities - (8,470) Capital expenditures (93,583) (501,482) Proceeds from sale of assets of a subsidiary, 9,070,000 net of transaction costs -------------- ------------- Net cash (used in) provided by continuing operations (93,583) 8,560,048 Net cash used in discontinuing operations - (57,855) -------------- -------------- Net cash (used in) provided by investing activities (93,583) 8,502,193 -------------- -------------- Cash flows from financing activities Borrowings under line of credit 98,196,822 130,236,649 Repayments under line of credit (103,288,360) (129,177,493) Principal payments under equipment financing and term loans (29,526) (29,927) Proceeds from exercise of stock options 58,750 168,750 -------------- -------------- Net cash (used in) provided by continuing operations (5,062,314) 1,197,979 Net cash used in discontinuing operations - (102,893) -------------- -------------- Net cash (used in) provided by financing activities (5,062,314) 1,095,086 -------------- -------------- NET DECREASE IN CASH (306,321) (486,054) -------------- -------------- Cash at beginning of period 321,423 552,655 -------------- -------------- Cash at end of period $ 15,102 $ 66,601 ============== ============== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,145,000 $ 945,000 Income taxes 110,000 40,000 Supplemental schedule of non-cash financing and investing activities: Note receivable, received in conjunction with the sale of assets of a subsidiary $ 2,750,000 See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2005 Page 8 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1) The accompanying condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring accrual adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and the results of operations of Jaco Electronics, Inc. and its subsidiaries ("Jaco" or the "Company") at the end of and for all the periods presented. Such financial statements do not include all the information or footnotes necessary for a complete presentation. Therefore, they should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended June 30, 2005 and the notes thereto included in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2005. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. There have been no changes to the Company's significant accounting policies subsequent to June 30, 2005, except as disclosed in Note 7. 2) The Company incurred net losses of approximately $7,363,000 and $7,462,000 during the three and six months ended December 31, 2005, respectively, compared to net losses of $1,535,000 and $1,783,000 during the three and six months ended December 31, 2004. The Company incurred a net loss of approximately $4,860,000 during the fiscal year ended June 30, 2005. The Company also utilized approximately $5,035,000 of cash in operations during the fiscal year ended June 30, 2005. At December 31, 2005, the Company had cash of approximately $15,000 and working capital of approximately $4,256,000, as compared to cash of approximately $321,000 and working capital of approximately $7,334,000 at June 30, 2005. As discussed further in Note 4, the Company maintains a secured revolving line of credit, which provides the Company with bank financing based upon eligible accounts receivable and inventory, as defined. At June 30, 2005, the Company was in violation of certain financial covenants contained in the credit agreement. On September 28, 2005, the Company received a waiver of these covenants from its lenders for the quarter ended June 30, 2005 and amended the terms of the financial covenants for the remaining term of the agreement. As of September 30, 2005, the Company was in compliance with all of its covenants contained in the credit agreement. Starting with the week ended October 28, 2005, the Company failed to be in compliance with its four week sales covenant. On November 14, 2005, the Company received a waiver from its lenders to waive its non-compliance with this covenant. At December 31, 2005, the Company was in violation of its Fixed Charge Coverage Ratio covenant contained in the credit agreement. On February 13, 2006, the Company entered into an amendment to its credit agreement that, among other things, retroactively established new minimum amounts for the Fixed Charge Coverage Ratio, with which the Company is currently in compliance. In recent periods, the Company has had difficulty remaining in compliance with certain of its financial covenants and has been required to obtain waivers and make further amendments to the credit agreement to cure such non-compliance. Management continues to believe that the implementation of its plan for cost containment, improved operating controls, paring back of unprofitable product lines, and a focused sales and marketing effort should improve results from operations and cash flows in the near term. Achievement of this plan, however, will be dependent upon the Company's ability to generate sufficient revenues, decrease operating costs and improve trade support levels consistent with this plan, and remain in compliance with its bank covenants. The Company's future operating performance will be subject to financial, economic and other factors beyond its control, and there can be no assurance that the Company will be able to achieve these goals. The Company's failure to achieve these goals or remain in compliance with its bank covenants would have a material adverse effect upon its business, financial condition and results of operations. 3) On September 20, 2004, the Company completed the sale of substantially all of the assets of its contract manufacturing subsidiary, Nexus Custom Electronics, Inc. ("Nexus"), to Sagamore Holdings, Inc. for consideration of up to $13,000,000, subject to closing adjustments, and the assumption of certain liabilities. The divestiture of Nexus has allowed the Company to focus its resources on its core electronics distribution business. Under the terms of the purchase agreement relating to this transaction, the Company received $9,250,000 of the purchase consideration in cash on the closing date. Such cash consideration was FORM 10-Q December 31, 2005 Page 9 used to repay a portion of the outstanding borrowings under the Company's line of credit (See Note 4). The balance of the purchase consideration was satisfied through the delivery of a $2,750,000 subordinated note issued by the purchaser. This note has a maturity date of September 1, 2009 and bears interest at the lower of the prime rate or 7%. The note is payable by the purchaser in quarterly cash installments ranging from $156,250 to $500,000 commencing September 2006 and continuing for each quarter thereafter until maturity. Prepayment of the principal of and accrued interest on the note is permitted. In accordance with the purchase agreement, the Company determined that it was owed an additional $500,000 pursuant to a working capital adjustment provided for in the agreement, which has been recorded in the Company's financial statements. The Purchaser has disputed the Company's claim to the working capital adjustment and has informed the Company that it believes that the Company owes a $500,000 working capital adjustment to the purchaser. Since this dispute remains unresolved, there has to date been no purchase price adjustment between the Company and Sagamore that has been agreed to. Additionally, the Company is entitled to receive additional consideration in the form of a six-year earn-out based on 5% of the annual net sales of Nexus after the closing date, up to $1,000,000 in the aggregate. As of December 31, 2005, the Company has not earned any of the additional consideration. Pursuant to the purchase agreement, the purchaser has also entered into a contract that designates the Company as a key supplier of electronic components to Nexus for a period of five years following the closing date. The Company's sales to Nexus were approximately $72,000 and $160,000 for the three and six months ended December 31, 2005, respectively, as compared to $225,000 and $242,000 for the three and six months ended December 31, 2004, respectively, subsequent to the date of sale. As a result of the sale of Nexus, the Company no longer engages in contract manufacturing. In accordance with the provisions of SFAS No, 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), the Company has accounted for the results of operations of Nexus as discontinued in the accompanying consolidated statements of operations. A summary of operating results of Nexus for the six months ended December 31, 2004 were as follows: Six Months Ended December 31, ------------------------------- 2004 -------------- Net sales $5,208,184 Loss before income taxes $ (103,452) 4) To provide additional liquidity and flexibility in funding its operations, the Company borrows amounts under credit facilities and other external sources of financing. On December 22, 2003, the Company entered into a Third Restated and Amended Loan and Security Agreement with GMAC Commercial Finance LLC and PNC Bank, National Association providing for a $50,000,000 revolving secured line of credit. This credit facility has a maturity date of December 31, 2006. Borrowings under the credit facility are based principally on eligible accounts receivable and inventories of the Company, as defined in the credit agreement, and are collateralized by substantially all of the assets of the Company. At December 31, 2005, the outstanding balance on this revolving line of credit facility was $28.1 million, with an additional $1.2 million available. The Company has outstanding a $1.5 million stand-by letter of credit on behalf of a certain vendor. The interest rate on the outstanding borrowings at December 31, 2005 was approximately 8.22%. Under the credit agreement, as amended, the Company is required to comply with the following financial covenants: maintain a Fixed Charge Coverage Ratio (as defined therein) of 0.4 to 1.0 for the six months ending December 31, 2005, 1.1 to 1.0 for the three months ending March 31, 2006, and 1.2 to 1.0 for the six months ending June 30, 2006, nine months ending September 30, 2006 and for each of the twelve months ending each quarterly period thereafter; maintain minimum Net Worth (as defined therein), commencing August 31, 2005, of not less than $40,500,000, increasing as of the end of each fiscal quarter FORM 10-Q December 31, 2005 Page 10 thereafter by 65% of the net profit for such quarter, if any, reduced by the amount of specified Special Charges and Write-offs (as defined therein); and a limitation on capital expenditures of $300,000 for the fiscal year ending June 30, 2006 and for each fiscal year thereafter. The credit agreement also restricts the Company's ability to pay dividends.The credit agreement also includes a subjective acceleration clause and requires the deposit of customer receipts to be directed to a blocked account and applied directly to the repayment of indebtedness outstanding under the credit facility. Accordingly, this debt is classified as a current liability. On September 28, 2005, the Company's credit facility was amended to waive its non-compliance with certain bank covenants, including minimum Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and minimum Net Worth, for the quarter ended June 30, 2005. The Company's credit facility was also amended to reduce the maximum loan amount from $50,000,000 to $40,000,000, and modify the existing covenants and add additional covenants, including, among other things, (i) modify the Availability Formula, (ii) reset existing covenants for Fixed Charge Coverage Ratio, minimum Net Worth and Capital Expenditures (each as defined therein), and (iii) add a new covenant regarding maintenance of Operating Cash Flow, which replaced its former bank covenant regarding minimum EBITDA. Commencing with the week ended October 28, 2005, the Company failed to be in compliance with its four week minimum sales covenant (to which it is no longer subject). On November 14, 2005, the Company received a waiver from its lenders to cure its non-compliance. At December 31, 2005, the Company was in violation of its Fixed Charge Coverage Ratio covenant contained in the credit agreement. On February 13, 2006, the Company's credit facility was amended, among other things, to (i) retroactively reset the amounts under its existing Fixed Charge Coverage Ratio covenant (as described above), (ii) increase the interest rates on outstanding borrowings by 0.25%, (iii) modify the Availability Formula, (iv) provide for a temporary additional availability amount of up to $1,500,000 from February 13, 2006 through and including February 20, 2006, of up to $800,000 from February 21, 2006 through and including March 20, 2006, and $0 thereafter, and (v) require the Company's inventory to be appraised on a semi-annual (rather than annual) basis by an appraiser designated by its lenders at the cost of the Company. In the event that in the future we were to fail to remain in compliance with our bank covenants and were not able to obtain an amendment or waiver with respect to such noncompliance, the lenders under our credit facility could declare us to be in default under the facility, requiring all amounts outstanding under the facility to be immediately due and payable and/or limit the Company's ability to borrow additional amounts under the facility. If we did not have sufficient available cash to pay all such amounts that become due and payable, we would have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition. 5) On September 18, 2001, the Company's Board of Directors authorized the repurchase of up to 250,000 shares of its outstanding common stock. Purchases may be made from time to time in market or private transactions at prevailing market prices. The Company made purchases of 41,600 shares of its common stock from November 5, 2002 through February 21, 2003 for aggregate consideration of $110,051. However, no such repurchases of common stock were made during the three or six months ended December 31, 2005. FORM 10-Q December 31, 2005 Page 11 6) Total comprehensive loss and its components for the three and six months ended December 31, 2005 and 2004 are as follows: Three Months Ended Six Months Ended December 31, December 31, --------------------------------- ---------------------------------- 2005 2004 2005 2004 -------------- -------------- ------------- --------------- Net loss $(7,362,609) $(1,535,466) $(7,462,082) $(1,782,873) Unrealized gain on marketable securities 66,342 55,195 Deferred tax expense (25,000) (21,000) -------------- -------------- ------------- --------------- Comprehensive loss $(7,362,609) $(1,494,124) $(7,462,082) $(1,748,678) ============== ============== ============= ===============
7) In December 1992, the Board of Directors approved the adoption of a nonqualified stock option plan, known as the "1993 Non-Qualified Stock Option Plan," hereinafter referred to as the "1993 Plan." The Board of Directors or the Compensation Committee of the Board is responsible for the granting and pricing of options under the 1993 Plan. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. The options expire five years from the date of grant and are exercisable over the period stated in each option. In December 1997, the shareholders of the Company approved an increase in the amount of shares reserved for issuance under the 1993 Plan to 900,000 from 440,000, of which there were no outstanding options at December 31, 2005. In October 2000, the Board of Directors approved the adoption of the "2000 Stock Option Plan," hereinafter referred to as the "2000 Plan." The 2000 Plan provided for the grant of up to 600,000 incentive stock options ("ISOs") and nonqualified stock options ("NQSOs") to employees, officers, directors, consultants and advisers of the Company. In December 2004, the shareholders of the Company approved an increase in the amount of shares reserved for issuance under the 2000 plan to 1,200,000. The Board of Directors or the Compensation Committee of the Board is responsible for the granting and pricing of these options. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. In the case of ISOs granted to shareholders owning more than 10% of the Company's voting securities, the exercise price shall be no less than 110% of the fair market value of the Company's common stock on the date of grant. All options shall expire ten years from the date of grant of such option (five years in the case of an ISO granted to a 10% shareholder) or on such earlier date as may be prescribed by the Committee and set forth in the option agreement, and are exercisable over the period stated in each option. Under the 2000 Plan, 1,200,000 shares of the Company's common stock are reserved, of which 502,000 were outstanding at December 31, 2005. Through June 30, 2005, the Company accounted for our two stock option plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations. Under APB No. 25, compensation expense was only recognized when the market value of the underlying stock at the date of grant exceeded the amount an employee must pay to acquire the stock. Since all stock options granted under our plans were to employees, officers or independent directors, and since all stock options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant, no compensation expense had been recognized in the Company's consolidated financial statements in connection with employee stock option grants. Effective July 1, 2005, the Company adopted SFAS No. 123R, "Share Based Payment"("SFAS 123(R)"), which requires that the Company measure the cost of employee services received in exchange for FORM 10-Q December 31, 2005 Page 12 an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the vesting period. The Company used the modified-prospective-transition method. Under this transition method, stock-based compensation cost to be recognized in the three and six months ended December 31, 2005 includes: (a) compensation cost for all unvested stock-based awards as of July 1, 2005 that were granted prior to July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all stock-based awards to be granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Since no stock options were granted during the three and six months ended December 31, 2005, no previously issued stock options were modified during the three and six months ended December 31, 2005 and there were no unvested stock options outstanding as of July 1, 2005, the adoption of SFAS 123(R) had no current impact on the Company's financial position, results of operations or cash flows. To the extent that new stock options are granted or previously issued stock options are modified in the future, the adoption of SFAS 123(R) will have an impact on the Company's financial position, results of operations or cash flows. Determining Fair Value Valuation and Amortization Method--The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Expected Term--The Company's expected term represents the period that the Company's stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. Expected Volatility--Stock-based payments made prior to July 1, 2005 were accounted for using the intrinsic value method under APB 25. The fair value of stock based payments made subsequent to June 30, 2005 will be valued using the Black-Scholes valuation method with a volatility factor based on the Company's historical stock trading history. Risk-Free Interest Rate--The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury securities with an equivalent term. Estimated Forfeitures--When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures. Fair Value-- The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. There were no stock options granted during the three and six months ended December 31, 2005 and 2004. Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in its statement of cash flows. In accordance with guidance in SFAS 123(R), the cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from employee's exercises of stock options over the stock-based compensation cost recognized for those options) will be classified as financing cash flows. During the three and six months ended December 31, 2005, the Company did not record any tax benefits from deductions resulting from the exercise of stock options. For the three and six months ended December 31, 2005, there were no stock options granted and no stock option expense for stock options vesting during the period reported in net loss. Pro-forma Disclosures The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123(R), to stock-based employee compensation for the prior period presented: FORM 10-Q December 31, 2005 Page 13 Three Months Ended Six Months Ended December 31, December 31, --------------------------------- --------------------------------- 2004 2004 -------------- -------------- Net loss, as reported $(1,535,466) $(1,782,873) Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (62,931) (134,842) -------------- -------------- Pro forma net loss $(1,598,397) $(1,917,715) ============== ============== Net loss per common share: Basic - as reported $(0.25) $(0.29) ============== ============== Basic - pro forma $(0.26) $(0.31) ============== ============== Diluted - as reported $(0.25) $(0.29) ============== ============== Diluted - pro forma $(0.26) $(0.31) ============== ============== Summary of Stock Option Activity The Company issues new shares of common stock upon exercise of stock options. The following is a summary of option activity for our stock option plans: Weighted- Weighted- Average Average Remaining Options Exercise Contractual Outstanding Price Term(months) -------------------------------- -------------- Employee Stock Option Plans: Shares outstanding at June 30, 2005 532,000 $4.97 Granted Exercised (25,000) $2.35 Canceled (5,000) $8.00 -------------------------------- ----------------- Shares outstanding at December 31, 2005 502,000 $5.07 75 -------------------------------- ----------------- Shares exercisable at December 31, 2005 502,000 $5.07 75
8) The weighted average common shares outstanding, net of treasury shares, used in the Company's basic and diluted loss per share computations on its condensed consolidated statements of operations were 6,275,480 and 6,271,656 for the three and six months ended December 31, 2005, respectively, compared to 6,262,832 and 6,233,117 for the three and six months ended December 31, 2004, respectively. Excluded from the calculation of loss per share are outstanding options to purchase 502,000 and 662,500 shares of the Company's common stock, representing all outstanding options for the three and six months ended December 31, 2005 and 2004, respectively, as their inclusion would have been antidilutive. Common stock equivalents for stock options are calculated using the treasury stock method. FORM 10-Q December 31, 2005 Page 14 9) The Company is a party to various legal matters arising in the general conduct of business. The ultimate outcome of such matters is not expected to have a material adverse effect on the Company's business, results of operations or financial position. 10) During the three and six months ended December 31, 2005, the Company recorded sales of $50,878 and $56,915, respectively, compared to $17,500 and $1,057,627, for the three and six months ended December 31, 2004, respectively, from a customer, Frequency Electronics, Inc. ("Frequency"). The Company's Chairman of the Board of Directors and President serves on the Board of Directors of Frequency. Such sales transactions with Frequency are in the normal course of business. Amounts included in accounts receivable from Frequency at December 31, 2005 and June 30, 2005 aggregate $22,344 and $206, respectively. A law firm of which one of our directors is a partner provides legal services on behalf of the Company. Fees paid to such firm amounted to $24,117 and $84,091 for the three and six months ended December 31, 2005, respectively, compared to $42,675 for the three and six months ended December 31, 2004. The son-in-law of the Company's Chairman and President is a partner of a law firm which provides legal services on behalf of the Company. Fees paid to such firm amounted to $37,264 and $95,276 for the three and six months ended December 31, 2005, respectively, compared to $67,649 and $104,386 for the three and six months ended December 31, 2004, respectively. The Company leases office and warehouse facilities from a partnership owned by two officers and directors of the Company. As of December 31, 2005, the Partnership advanced the Company $125,000 to fund the construction of a new LCD Integration Center, which amount the Company has accrued as a liability in the accompanying balance sheet. 11) At December 31, 2005, the Company had approximately $1,848,000 of unearned revenue recorded as a current liability in the accompanying condensed consolidated financial statements. The Company purchased inventory to fulfill an existing sales order with a certain customer under an arrangement whereby the Company has collected the amount due related to this order; however, at the customer's request, shipment of this order has not been fully made and the related inventory remains in the Company's warehouse for future delivery, and is included on the Company's balance sheet as of December 31, 2005. The Company will recognize revenue as the remaining product is shipped to the customer and title is transferred. 12) At September 30, 2005, the Company had recorded deferred tax assets of $6,610,500 related to the anticipated recovery of tax loss carry forwards. Management evaluates on a quarterly basis, the weight of available evidence and whether it is more likely than not that the amount of future tax benefit would not be realized. While the Company still believes that it is positioned for long-term growth, the volatility in our industry and markets has made it increasingly difficult to predict sales and operating results on a short-term basis, and when coupled with the cumulative losses reported over the last four fiscal years and the first two quarters of the current fiscal year, the Company can no longer conclude that, based upon the weight of available evidence, it is "more likely than not" that the deferred tax asset of $6,610,500 will be realized, and added $6,610,500 to the income tax provision to bring the carrying value of the deferred tax asset to zero. Prior to the current quarter, the Company believed that the implementation of its plan for cost containment, improved operating controls, paring back of unprofitable product lines, and a focused sales and marketing effort would improve results from operations and cash flows in the near term. The "more likely than not" standard is subjective, and was based upon management's estimate of a greater than 50% probability that its long range business plan could be realized. During the three months ended December 31, 2005, we recorded a provision for income taxes of $6,629,000 consisting mainly of the $6,610,500 deferred tax write-off. FORM 10-Q December 31, 2005 Page 15 13) In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43" ("SFAS No. 151"), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 was effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on the Company's consolidated financial statements. 14) In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets-an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on the Company's consolidated financial statements. 15) In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154"). Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on the Company's consolidated financial statements. FORM 10-Q December 31, 2005 Page 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Act of 1934, as amended, or the Exchange Act, which represent our management's beliefs and assumptions concerning future events. When used in this report and in other written or oral statements made by us from time to time, forward-looking statements include, without limitation, statements regarding our financial forecasts or projections, our expectations, beliefs, intentions or future strategies that are signified by the words "expects", "anticipates", "estimates", "intends", "plans" or similar language. Although we believe that the expectations in these forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, which are subject to change and/or beyond our control, that could cause our actual results and the timing of certain events to differ materially from those expressed in the forward-looking statements. Consequently, the inclusion of the forward-looking statements should not be regarded as a representation by us of results that actually will be achieved. For a discussion of certain potential factors that could cause our actual results to differ materially from those contemplated by the forward-looking statements, see "Forward-Looking Statements" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, as amended, and our other periodic reports and documents filed with the Securities and Exchange Commission. GENERAL Jaco is a leading distributor of active and passive electronic components to industrial OEMs that are used in the manufacture and assembly of electronic products in such industries as telecommunications, medical devices, computers and office equipment, military/aerospace, and automotive and consumer electronics. Products distributed by the Company include semiconductors, flat panel displays, capacitors, resistors, electromechanical devices and power supplies. We have expanded our flat panel display value-added capabilities through the completion of our new in-house integration center in February 2005. This new in-house integration center allows us to provide optimized and efficient design solutions, optical enhancements, and touchscreen integrations, as well as the manufacture of flat panel display sub-assemblies and complete displays for commercial, industrial, and military applications. Critical Accounting Policies and Estimates We have disclosed in Note A to our consolidated financial statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, as amended, those accounting policies that we consider to be significant in determining our results of operations and financial position. There have been no material changes to the critical accounting policies previously identified and described in our 2005 Form 10-K, except for the adoption of SFAS 123 (R) as disclosed in Note 7 of the Notes To Condensed Consolidated Financial Statements. The accounting principles we utilized in preparing our consolidated financial statements conform in all material respects to generally accepted accounting principles in the United States of America. FORM 10-Q December 31, 2005 Page 17 The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates on historical experience, actuarial valuations and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements. New Accounting Standards In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43" ("SFAS No. 151"), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 was effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on the Company's consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets-an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on the Company's consolidated financial statements. In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154"). Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on the Company's consolidated financial statements. FORM 10-Q December 31, 2005 Page 18 Results of Operations The following table sets forth certain items in our statements of operations as a percentage of net sales for the periods shown: Three Months Ended Six Months Ended December 31, December 31, ------------------------------ --------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 86.1 87.3 86.3 87.4 ---------- ---------- ---------- ---------- Gross Profit 13.9 12.7 13.7 12.6 Selling, general and administrative expenses 14.3 16.0 13.6 15.1 ---------- ---------- ---------- ---------- Operating (loss) profit (0.4) (3.3) 0.1 (2.5) Interest expense 1.1 0.9 1.1 0.7 ---------- ---------- ---------- ---------- Loss from continuing operations before income taxes (1.5) (4.2) (1.0) (3.2) Income tax provision (benefit) 13.8 (1.2) 6.4 (1.0) ---------- ---------- ---------- ---------- Loss from continuing operations (15.3) (3.0) (7.4) (2.2) Loss from discontinued Operations, net of taxes (0.1) Gain on sale of subsidiary, net of taxes 0.7 ---------- ---------- ---------- ---------- NET LOSS (15.3)% (3.0)% (7.4)% (1.6)% ============ ============ ============ ============
COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004 Results from Continuing Operations: Net sales for the three and six months ended December 31, 2005 were $48.1 million and $100.6 million, respectively, compared to $52.0 million and $112.2 million for the three and six months ended December 31, 2004, respectively, representing decreases of 7.4% and 10.4%, respectively. These decreases were primarily due to reductions in semiconductor sales of approximately $4.4 million and $9.5 million for the three and six months ended December 31, 2005, respectively, as compared to the same periods of last fiscal year. Semiconductors are price sensitive, and their pricing tends to be volatile. During the current fiscal year, semiconductor sales, specifically memory products, have been priced more competitively off-shore than in the United States making our sales of these products less competitive. We have seen our customers outsource their manufacturing requirements to the Far East to benefit from lower costs. Accordingly, we have modified our business plan to focus on those core areas where we believe we can most effectively compete in the current business environment. Specifically, we are aggressively pursuing flat panel display, or FPD, opportunities, supporting off-shore global contract manufacturers primarily in the Far East with our value-added inventory programs, and are focusing on core vendors where we believe there is still a market for their product to be competitive in North America. We have also increased our quote group to enable us to be more responsive to the mid-level contract manufacturers in the FORM 10-Q December 31, 2005 Page 19 United States. In addition to the foregoing, we are continuing to focus on core product lines, such as semiconductors, power supplies, printer heads and passive military components, where we believe we can increase our sales. We have recently seen positive results in our FPD sales. During the three months ended December 31, 2005, sales of FPD product were $14.1 million, a 31% increase compared to the three months ended December 31, 2004. This growth in our FPD business is directly attributable to our new in-house FPD integration facility with design capabilities we opened in February 2005 in our Hauppauge, New York facility, which provides "full-solution" capability. FPD product represented 29.2% and 26.2% of our net sales for the three and six months ended December 31, 2005, respectively, as compared to 20.5% and 21.0% for the same periods of last fiscal year. We continue to see strong demand for our FPD product. Semiconductor sales represented 45.8% and 49.1% of our net sales for the three and six months ended December 31, 2005, respectively, as compared to 50.7% and 52.4% for the same periods of last fiscal year. Passive components, which are primarily capacitors and resistors, represented 17.0% and 16.4% of our net sales for the three and six months ended December 31, 2005, respectively, as compared to 18.8% and 17.9% for the same periods of last fiscal year. Electromechanical products, including relays, printer heads and power supplies, represented 8.0% and 8.3% of our net sales for the three and six months ended December 31, 2005, respectively, as compared to 10.0% and 8.7% for the same periods of last year. We believe that our current product line focus will enable us to support the available market in the United States. We are also planning to prudently increase our efforts in the Far East. Currently, through our logistical programs with global contract manufacturers, which consist of inventory management and warehouse capabilities, our export sales were $13.8 million and $30.7 million for the three and six months ended December 31, 2005, respectively, as compared to $16.5 million and $30.4 million for the same periods of last fiscal year. The majority of our export sales is derived from business that we were able to maintain as it transitioned from the United States to the Far East. We are attempting to increase our penetration at these major contract manufacturers as well as expand our customer base, by marketing our logistical program capabilities that provide inherent benefits to our customers and vendors. As part of our long-term growth plans, we continue to search for a potential strategic alliance or partner in the Far East. Gross profit was $6.7 million, or 13.9% of net sales, and $13.8 million, or 13.7% of net sales, for the three and six months ended December 31, 2005, respectively, as compared to $6.6 million, or 12.7% of net sales, and $14.2 million, or 12.6% of net sales, for the same periods of last fiscal year. Management considers gross profit to be a key performance indicator in managing our business. Gross profit margins are usually a factor of product mix and demand for product. This increase in our gross profit margin is primarily due to our recent shift in focus in our core product lines, as our current mix of products on average has higher margins. Also, sales through our logistical programs, which are at lower margins, have decreased and therefore have indirectly contributed to the overall increase in gross profit margin. We do not anticipate any material change in our margin for the foreseeable future unless we experience a more pronounced shift in the product mix we sell or an increase in demand. In addition, demand and pricing for our products have been, and in the future may continue to be, adversely affected by industry-wide trends and other events beyond our control. Selling general and administrative ("SG&A") expenses were $6.8 million, or 14.3% of net sales, and $13.7 million, or 13.6% of net sales, for the three and six months ended December 31, 2005, respectively, as compared to $8.3 million, or 16.0% of net sales, and $17.0 million, or 15.1% of net sales, for the comparable periods of last fiscal year, representing a $1.5 million and $3.3 million decrease for the three and six months ended December 31, 2005, respectively. Management considers SG&A as a percentage of net sales to be a key performance indicator in managing our business. We have continued to reduce our costs by focusing our spending on our core business areas while reducing spending in non-strategic areas. This has allowed us to lower SG&A while maintaining the necessary infrastructure to support our customers. We have also been able to reduce payroll and payroll-related costs by approximately $1.2 million and $2.2 million for the three and six months ended December 31, 2005, respectively, as compared to the same periods of last fiscal year. We continue to carefully review all spending. Interest expense was $0.6 million and $1.1 million for the three and six months ended December 31, 2005, respectively, as compared to $0.5 million and $0.8 million for the same periods of last fiscal year. While we have been able to reduce our bank borrowings compared to last fiscal year, interest expense has increased as a result of higher borrowing rates primarily due to continued increases in federal lending rates. Continuing increases in borrowing rates would increase our interest expense, which would have a negative effect on our results of operations. FORM 10-Q December 31, 2005 Page 20 During the three months ended December 31, 2005, we recorded a provision for income taxes of $6,629,000 consisting mainly of the $6,610,500 deferred tax write-off. While the Company still believes that it is positioned for long-term growth, the volatility in our industry and markets has made it increasingly difficult to predict sales and operating results on a short-term basis, and when coupled with the cumulative losses reported over the last four fiscal years and the first two quarters of the current fiscal year, the Company can no longer conclude that, based upon the weight of available evidence, it is "more likely than not" that the deferred tax asset of $6,610,500 will be realized, and added $6,610,500 to the income tax provision to bring the carrying value of the deferred tax asset to zero. Net loss from continuing operations for the three and six months ended December 31, 2005 was $7.4 million, or $1.17 per diluted share, and $7.5 million, or $1.19 per diluted share, respectively, as compared to $1.5 million, or $0.25 per diluted share, and $2.5 million, or $0.41 per diluted share, for the same periods of last fiscal year. Our net losses for the current periods have increased as compared to the same periods of last fiscal year due to our write off of $6.6 million in deferred tax assets during the quarter ended December 31, 2005 for the reasons described in Note 12 of the Notes to Condensed Consolidated Financial Statements. This increase was partially offset by our ability to reduce SG&A and increase gross profit margins, as discussed above. Discontinued Operations: On September 20, 2004, the Company completed the sale of substantially all of the assets of its contract manufacturing subsidiary, Nexus Custom Electronics, Inc. ("Nexus"), to Sagamore Holdings, Inc. for consideration of up to $13,000,000, subject to closing adjustments, and the assumption of certain liabilities. The divestiture of Nexus has allowed the Company to focus its resources on its core electronics distribution business. Under the terms of the purchase agreement relating to this transaction, the Company received $9,250,000 of the purchase consideration in cash on the closing date. The balance of the purchase consideration was satisfied through the delivery of a $2,750,000 subordinated note issued by the purchaser. This note has a maturity date of September 1, 2009 and bears interest at the lower of the prime rate or 7%. The note is payable by the purchaser in quarterly cash installments ranging from $156,250 to $500,000 commencing September 2006 and continuing for each quarter thereafter until maturity. Prepayment of the principal of and accrued interest on the note is permitted. Net earnings from these discontinued operations for the six months ended December 31, 2004 was $767,000, or $0.12 per diluted share. The earnings from these discontinued operations for the three months ended September 30, 2004 was primarily due to the gain on sale of our Nexus subsidiary of $831,000. This was partially offset by loss from operations of our Nexus subsidiary of $64,000 through the date of sale. Combined Net Loss: The combined net loss from both the continuing and discontinued operations for the three and six months ended December 31, 2005 was $7.4 million, or $1.17 per diluted share, and $7.5 million, or $1.19 per diluted share, respectively, compared to $1.5 million, or $0.25 per diluted share, and $1.8 million, or $0.29 per diluted share, for the comparable periods of last fiscal year, for the reasons discussed above. LIQUIDITY AND CAPITAL RESOURCES To provide additional liquidity and flexibility in funding its operations, the Company borrows amounts under credit facilities and other external sources of financing. On December 22, 2003, the Company entered into a Third Restated and Amended Loan and Security Agreement with GMAC Commercial Finance LLC and PNC Bank, National Association providing for a $50,000,000 revolving secured line of credit. This credit facility has a maturity date of December 31, 2006. Borrowings under the credit facility are based principally on eligible accounts receivable and inventories of the Company, as defined in the credit agreement, and are collateralized by substantially all of the assets of the Company. At December 31, 2005, the outstanding balance on this revolving line of credit facility was $28.1 million, with FORM 10-Q December 31, 2005 Page 21 an additional $1.2 million available. The Company has outstanding a $1.5 million stand-by letter of credit on behalf of a certain vendor. The interest rate on the outstanding borrowings at December 31, 2005 was approximately 8.22%. Under the credit agreement, as amended, the Company is required to comply with the following financial covenants: maintain a Fixed Charge Coverage Ratio (as defined therein) of 0.4 to 1.0 for the six months ending December 31, 2005, 1.1 to 1.0 for the three months ending March 31, 2006, and 1.2 to 1.0 for the six months ending June 30, 2006, nine months ending September 30, 2006 and for each of the twelve months ending each quarterly period thereafter; maintain minimum Net Worth (as defined therein), commencing August 31, 2005, of not less than $40,500,000, increasing as of the end of each fiscal quarter thereafter by 65% of the net profit for such quarter, if any, reduced by the amount of specified Special Charges and Write-offs (as defined therein); and a limitation on capital expenditures of $300,000 for the fiscal year ending June 30, 2006 and for each fiscal year thereafter. The credit agreement also restricts the Company's ability to pay dividends. The credit agreement also includes a subjective acceleration clause and requires the deposit of customer receipts to be directed to a blocked account and applied directly to the repayment of indebtedness outstanding under the credit facility. Accordingly, this debt is classified as a current liability. On September 28, 2005, the Company's credit facility was amended to waive its non-compliance with certain bank covenants, including minimum EBITDA and minimum Net Worth, for the quarter ended June 30, 2005. The Company's credit facility was also amended to reduce the maximum loan amount from $50,000,000 to $40,000,000, and modify the existing covenants and add additional covenants, including, among other things, (i) modify the Availability Formula, (ii) reset existing covenants for Fixed Charge Coverage Ratio, minimum Net Worth and Capital Expenditures (each as defined therein), and (iii) add a new covenant regarding maintenance of Operating Cash Flow, which replaced its former bank covenant regarding minimum EBITDA. Commencing with the week ended October 28, 2005, the Company failed to be in compliance with its four week minimum sales covenant (to which it is no longer subject). On November 14, 2005, the Company received a waiver from its lenders to cure its non-compliance. At December 31, 2005, the Company was in violation of its Fixed Charge Coverage Ratio covenant contained in the credit agreement. On February 13, 2006, the Company's credit facility was amended, among other things, to (i) retroactively reset the amounts under its existing Fixed Charge Coverage Ratio covenant (as described above), (ii) increase the interest rates on outstanding borrowings by 0.25%, (iii) modify the Availability Formula, (iv) provide for a temporary additional availability amount of up to $1,500,000 from February 13, 2006 through and including February 20, 2006, of up to $800,000 from February 21, 2006 through and including March 20, 2006, and $0 thereafter, and (v) require the Company's inventory to be appraised on a semi-annual (rather than annual) basis by an appraiser designated by its lenders at the cost of the Company. At December 31, 2005, the Company had cash of approximately $15,000 and working capital of approximately $4,256,000 as compared to cash of approximately $321,000 and working capital of approximately $7,334,000 at June 30, 2005. As described above, our credit agreement requires our cash generated from operations to be applied directly to the prepayment of indebtedness under our credit facility. For the six months ended December 31, 2005, our net cash provided by operating activities was approximately $4.8 million, as compared to net cash used in operating activities of $10.1 million for the six months ended December 31, 2004. The increase in net cash provided by operating activities is primarily attributable to a decrease in our accounts receivable and inventory for the six months ended December 31, 2005, as compared to an increase in our inventory for the six months ended December 31, 2004. Net cash used in investing activities was approximately $0.1 million for the six months ended December 31, 2005 as compared to net cash provided by investing activities of $8.5 million for the six months ended December 31, 2004. The decrease in net cash provided by is primarily attributable to $9.1 million in proceeds we received from our sale of substantially all of the assets of Nexus in September 2004. Net cash used in financing activities was approximately $5.1 million for the six months ended December 31, 2005 as compared to net cash provided by financing activities of $1.1 million for the six months ended December 31, 2004. The increase in net cash used is primarily attributable to the decrease in net borrowings under our credit facility of approximately $6.2 million. For both the six months ended December 31, 2005 and 2004, our inventory turnover was 5.0 times. The average days outstanding of our accounts receivable at December 31, 2005 was 57 days, as FORM 10-Q December 31, 2005 Page 22 compared to 58 days at December 31, 2004. Inventory turnover and average days outstanding are key ratios that management relies on to monitor our business. Based upon our present plans, including no anticipated material capital expenditures, we believe that cash flow from operations and funds available under our credit facility will be sufficient to fund our capital needs for the next twelve months. However, our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs, and remaining in compliance with our bank covenants. Historically, we have, when necessary, been able to obtain amendments to our credit facilities to satisfy instances of non-compliance with financial covenants. While we cannot assure that any such future amendments, if needed, will be available, management believes we will be able to continue to obtain financing on acceptable terms under our existing credit facility or through other external sources. In the event that in the future we are unable to obtain such an amendment or waiver of our non-compliance with our financial covenants, the lenders under our credit facility could declare us to be in default under the facility, requiring all amounts outstanding under the facility to be immediately due and payable and/or limit the Company's ability to borrow additional amounts under the facility. If we did not have sufficient available cash to pay all such amounts that become due and payable, we would have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition. Contractual Obligations This table summarizes our known contractual obligations and commercial commitments at December 31, 2005. Total < 1 Year 1 to 3 Years 3 to 5 Years > 5 Years --------------- --------------- --------------- ---------------- -------------- Bank Debt $28,113,573 $28,113,573 Capital Lease 97,624 73,218 $24,406 Operating Lease 7,950,126 1,429,830 2,267,947 $1,590,819 $2,661,530 --------------- --------------- --------------- ---------------- -------------- Total $36,161,323 $29,616,621 $2,292,353 $1,590,819 $2,661,530 =============== =============== =============== ================ ==============
Inflation Inflation has not had a significant impact on our operations during the last three fiscal years. Item 3. Quantitative and Qualitative Disclosures about Market Risk. We are exposed to interest rate changes with respect to borrowings under our credit facility, which bears interest at a variable rate dependent upon either the prime rate, federal funds rate or the LIBOR rate ("rates"). At January 31, 2006, $25.7 million was outstanding under the credit facility. Changes in any of the rates during the current fiscal year will have a positive or negative effect on our interest expense. Each 1.0% fluctuation in the rate will increase or decrease our interest expense under the credit facility by approximately $0.3 million based on the amount of outstanding borrowings at January 31, 2006. The impact of interest rate fluctuations on our other floating rate debt is not material. FORM 10-Q December 31, 2005 Page 23 Item 4. Controls and Procedures. An evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2005. Based upon that evaluation, the Company's management, including its Chief Executive Officer and Chief Financial Officer, has concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There have been no changes in the Company's internal control over financial reporting or in other factors identified in connection with this evaluation that occurred during the three months ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. FORM 10-Q December 31, 2005 Page 24 PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. (c) On November 18, 2005, our Chairman and President, Joel H. Girsky, purchased 42,700 shares of our common stock at a price of $3.20 per share. Mr. Girsky's purchase of these shares was made in his personal capacity and not on behalf of the Company in any manner. Item 4. Submission of Matters to a Vote of Security Holders. Our Annual Meeting of Shareholders was held on December 15, 2005. At the Annual Meeting, our shareholders approved the following matters: ( i) The election of each of the nominees to the Board of Directors to hold office until the Company's next annual meeting of shareholders or until their successors are duly elected and qualified: Stephen A. Cohen For: 4,815,686 Withheld: 65,070 Edward M. Frankel For: 4,817,086 Withheld: 63,670 Charles B. Girsky For: 4,815,686 Withheld: 65,070 Joel H. Girsky For: 4,814,888 Withheld: 65,868 Joseph F. Oliveri For: 4,831,962 Withheld: 48,794 Neil Rappaport For: 4,810,111 Withheld: 70,645 Robert A. Waldman For: 4,819,145 Withheld: 61,611 Item 6. Exhibits. a) Exhibit 10.23.7 - Amendment to Third Restated and Amended Loan and Security Agreement dated February 13, 2006, by and among GMAC Commercial Finance LLC, as Lender and as Agent, PNC Bank, National Association, as Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom Electronics, Inc. and Interface Electronics Corp. Exhibit 31.1 - Rule 13a-14 (a) / 15d-14 (a) Certification of Principal Executive Officer. Exhibit 31.2 - Rule 13a-14 (a) / 15d-14 (a) Certification of Principal Financial Officer. Exhibit 32.1 - Section 1350 Certification of Principal Executive Officer. Exhibit 32.2 - Section 1350 Certification of Principal Financial Officer. S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. February 14, 2006 JACO ELECTRONICS, INC. (Registrant) BY: /s/ Jeffrey D. Gash --------------------------------------- Jeffrey D. Gash, Executive Vice President, Finance and Secretary (Principal Financial Officer) EX-10.23.7 2 bankamendmnt21406.txt AMENDMENT #7 TO THIRD RESTED LOAN AGREEMENT AMENDMENT #7 TO THIRD RESTATED AND AMENDED LOAN AND SECURITY AGREEMENT THIS AMENDMENT #7 TO THIRD RESTATED AND AMENDED LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of February 13, 2006, by and among GMAC COMMERCIAL FINANCE LLC, as successor by merger to GMAC Commercial Credit LLC, which was the successor in interest to BNY Financial Corporation ("GMAC CF"), as Agent and Lender, PNC BANK, NATIONAL ASSOCIATION ("PNC", and together with GMAC CF, "Lenders"), as Lender and Co-Agent, JACO ELECTRONICS, INC. ("Jaco"), NEXUS CUSTOM ELECTRONICS, INC. ("Nexus") and INTERFACE ELECTRONICS, INC. ("Interface", and together with Jaco and Nexus, "Borrowers"). W I T N E S S E T H : WHEREAS, Borrowers, GMAC CF, PNC and Jaco de Mexico, Inc. entered into that certain Third Restated and Amended Loan and Security Agreement, dated December 22, 2003 (the "Third Restated Agreement"), as amended by (i) Amendment #1 to the Third Restated Agreement, dated September 20, 2004, (ii) Amendment #2 to the Third Restated Agreement, dated November 23, 2004, (iii) Amendment #3 to the Third Restated Agreement, dated February 11, 2005, (iv) Waiver and Amendment #4 to the Third Restated Agreement, dated as of May 10, 2005, (v) Waiver and Amendment # 5 to the Third Restated Agreement, dated September, 2005, and (vi) Waiver #6 to the Third Restated Agreement, dated as of November 14, 2005 (as heretofore amended and as hereafter restated, supplemented, extended, renewed, amended and otherwise modified from time to time, the "Loan Agreement"), and into various instruments, agreements and other documents executed and/or delivered in connection therewith (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, restated, renewed, extended, substituted, modified or supplemented from time to time, collectively, the "Loan Documents"); and WHEREAS, Borrowers have requested that Lenders agree to amend certain terms of the Loan Agreement, and Lenders have agreed to accommodate Borrowers' request subject to the terms and conditions set forth herein, all as more particularly set forth below. NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Effective as of the date hereof, the definition of the term "Contract Rate" set forth in Section 1.2 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "Contract Rate" shall mean, with respect to Revolving Advances, an Interest Rate per annum equal to, as applicable: (A) the Base Rate, plus (x) if the Fixed Charge Coverage Ratio for the two consecutive full fiscal quarters immediately preceding the date of calculation was equal to or greater than 1.1 to 1.0, one (1.0%) percent, or (y) if the Fixed Charge Coverage Ratio for either of the two consecutive full fiscal quarters immediately preceding the date of calculation was less than 1.1 to 1.0, one and one-half (1.50%) percent ;or (B) the Eurodollar Rate, plus (x) if the Fixed Charge Coverage Ratio for the two consecutive full fiscal quarters immediately preceding the date of calculation was equal to or greater than 1.1 to 1.0, three and one-half (3.50%) percent, or (ii) if the Fixed Charge Coverage Ratio for either of the two consecutive full fiscal quarters immediately preceding the date of calculation was less than 1.1 to 1.0, four (4.0%) percent." (b) Effective as of the date hereof, the definition of the term "Inventory Availability" set forth in Section 1.2 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "Inventory Availability" shall mean the Revolving Advances against Eligible Inventory which Lenders may from time to time during the Term make available to Borrowers, in an amount up to the least of (a) $17,000,000 (the "Inventory Sublimit"), or (b) thirty-eight percent (38%) of the cost of Jaco Eligible Inventory, other than LCD Inventory, calculated on a first-in, first-out basis, or (c) eighty-five percent (85%) of the net orderly liquidation value of Jaco Eligible Inventory, calculated as of the date of calculation (the lesser of the foregoing clause (b) and clause (c), the "Inventory Advance Rate")." (c) Effective as of the date hereof, Section 1.2 of the Loan Agreement is hereby amended and restated in its entirety by the addition thereto, in the appropriate alphabetical sequence, of the definition of the term "Temporary Availability Advance", to read as follows: "Temporary Availability Advance" has the meaning set forth in Section 2.14(a)." (d) Effective as of the date hereof, Section 1.2 of the Loan Agreement is hereby amended and restated in its entirety by the addition thereto, in the appropriate alphabetical sequence, of the definition of the term "Temporary Availability Amount", to read as follows: "Temporary Availability Amount" shall mean an amount equal, in the sole and absolute discretion of Agent, to the lesser of: (A) (x) on February 13, 2006 and thereafter through and including February 20, 2006, up to $1,500,000, (y) on February 21, 2006 and thereafter through and including March 20, 2006, up to $800,000, and (z) on March 21, 2006 and at all times thereafter, $0, and (B) (x) on February 13, 2006 and thereafter through and including February 20, 2006, an amount equal to seven percent (7%) of the cost of Eligible Inventory (calculated on a first-in, first-out basis),(y) on February 21, 2006 and thereafter through and including March 20, 2006, an amount equal to four percent (4%) of the cost (calculated on a first-in, first-out basis) of Eligible Inventory, and (z) on March 21, 2006 and at all times thereafter, $0." 2. Formula Amount. Effective as of the date hereof, Clause (y) of Section 2.1(a) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "(y) an amount equal to the sum of: (i) Receivables Availability, plus (ii) Inventory Availability, plus, (iii) in the sole and absolute discretion of Agent, the Temporary Availability Amount, minus (iv) the amount of any outstanding Letters of Credit, minus (v) Reserves." 3. Advances. (a) Effective as of the date hereof, Section 2.14(a) of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "(a) Each borrowing of Revolving Advances shall be advanced according to the applicable Commitment Percentages of Lenders; provided, that any Revolving Advance, or portion thereof, that would have caused the aggregate balance of Revolving Advances to exceed the Formula Amount if Agent had not, in the exercise of its discretion, made the Temporary Availability Amount available ("Temporary Availability Advances") shall be advanced solely by GMAC CF." (b) Effective as of the date hereof, the first sentence of Section 2.14(b) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "Subject to Section11.2 hereof, each payment (including each prepayment) by Borrowers on account of the principal of the Revolving Advances shall be applied first, to outstanding Temporary Availability Advances, and then to the other Revolving Advances pro rata according to the applicable Commitment Percentages of Lenders." 4. Interest. Effective as of the date hereof, Section 3.1 of the Loan Agreement is amended and restated to add the following sentence at the end thereof: "Notwithstanding anything to the contrary set forth herein, interest payable by Borrowers hereunder with respect to any portion of the Revolving Advances constituting Temporary Availability Advances shall be payable solely for the account of GMAC CF." 5. Letter of Credit Fees. Effective as of the date hereof, the first sentence of Section 3.2(a) of the Loan Agreement is hereby amended to read in its entirety as follows: "(a) Borrowers shall pay (x) to Agent, for the benefit of Lenders, fees for each Letter of Credit for the period from and excluding the date of issuance of same to and including the date of expiration or termination, equal to the average daily face amount of each outstanding Letter of Credit multiplied, with respect to each monthly payment of fees, by (i) if the Fixed Charge Coverage Ratio for the two consecutive full fiscal quarters immediately preceding the date upon which such payment is due was equal to or greater than 1.1 to 1.0, three and one-half (3.50%) percent, or (ii) if the Fixed Charge Coverage Ratio for either of the two consecutive full fiscal quarters immediately preceding the date upon which such payment is due was less than 1.1 to 1.0, four (4.0%) percent, such fees to be calculated on the basis of a 360-day year for the actual number of days elapsed and to be payable monthly in arrears on the first day of each month and on the last day of the Term, and (y) to Agent for the benefit of the Issuer, any and all fees and expenses as agreed upon by the Issuer and the Borrowers in connection with any Letter of Credit, including, without limitation, in connection with the opening, amendment or renewal of any such Letter of Credit and shall reimburse Agent for any and all fees and expenses, if any, paid by Agent to the Issuer (all of the foregoing fees, the "Letter of Credit Fees")." 6. Inventory Appraisals. Effective as of the date hereof, Section 3.4(c) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "(c) Inventory Appraisals. Borrowers shall pay all costs and expenses relating to at least two inventory appraisals per year undertaken by an appraiser designated by Agent; provided, however, that after the occurrence of a Default or Event of Default, additional inventory appraisals may, at the request of the Lenders, be made by Agent at Borrowers' expense. Any Lender may request semi-annually that Agent perform, or cause to be performed, such inventory appraisals." 7. Financial Covenants. Effective as of December 31, 2005, Section 6.9(b) of the Loan Agreement is hereby amended to read in its entirety as follows: "(b) Fixed Charge Coverage Ratio. Maintain, as of the end of each period set forth below, a Fixed Charge Coverage Ratio for the Loan Parties on a Consolidated Basis of not less than the ratio set forth below opposite such period: Period Ratio six months ending 12/31/05` 0.4 to 1.0 three months ending 3/31/06 1.1 to 1.0 six months ending 6/30/06 1.2 to 1.0 nine months ending 9/30/06 1.2 to 1.0 as of the end of each quarterly period thereafter, on a four-quarter rolling basis for the previous four quarters 1.2 to 1.0 8. Application of Proceeds of Collateral. Effective as of the date hereof, Section 11.2 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "11.2 Application of Proceeds. Upon the exercise by Agent of any remedies of enforcement against the Collateral, the proceeds realized from any Collateral shall be applied as follows: first, to the reasonable costs, expenses and attorneys' fees and expenses incurred by Agent and each of the Lenders for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second, to interest due upon any of the Obligations other than, if an Event of Default has occurred and is continuing, outstanding Temporary Availability Advances; third, to fees payable in connection with this Agreement; fourth, to furnish to Agent cash collateral in an amount not less than 105% of the aggregate undrawn amount of all Letters of Credit, such cash collateral arrangements to be in form and substance satisfactory to Agent; fifth, to the principal of the Obligations other than, if an Event of Default has occurred and is continuing, outstanding Temporary Availability Advances; and sixth, if an Event of Default has occurred and is continuing, to the principal of outstanding Temporary Availability Advances and accrued but unpaid interest thereon. If any deficiency shall arise, Loan Parties shall remain liable to Agent and Lenders therefor. If it is determined by an authority of competent jurisdiction that a disposition by Agent of Collateral did not occur in a commercially reasonable manner, Agent may obtain a deficiency judgment for the difference between the amount of the Obligations and the amount that a commercially reasonable sale of the Collateral would have yielded. Agent will not be considered to have offered to retain the Collateral in satisfaction of the Obligations unless Agent has entered into a written agreement with the Loan Parties to that effect." 9. Borrowers' Acknowledgements and Reaffirmations. (a) Each Borrower hereby acknowledges, confirms and agrees that as of the date of Borrowers' execution hereof, none of the Obligations are subject to offset, defense or counterclaim of any kind, nature or description whatsoever. (b) Each Borrower hereby ratifies and confirms the Loan Agreement and each of the other Loan Documents as being legal, valid and binding joint and several obligations of Borrowers, enforceable against Borrowers in accordance with their respective terms as modified hereby. Each Borrower hereby confirms that there are no defenses to the performance of any of such Borrower's obligations under the Loan Agreement or any of the other Loan Documents. Each Borrower hereby ratifies and confirms such Borrower's grant to Agent, for the ratable benefit of Agent, Lenders and each Issuer, of first priority perfected liens upon, and security interests in, the properties and assets of such Borrower heretofore mortgaged, pledged, granted or assigned to Agent under the Loan Agreement and the other Loan Documents, and acknowledges and confirms that such first priority perfected liens and security interests secure, and shall continue to secure, the Obligations, subject only to such prior security interests as are expressly permitted under the Loan Documents. (c) By its signature below, each Borrower ratifies and affirms to the Agent and the Lenders that as of the date hereof, it is in full compliance with all covenants under the Loan Documents, and certifies (i) that all representations and warranties of Borrowers in the Loan Documents are true and accurate as of the date hereof, with the same effect as if they had been made as of the date hereof, (ii) no Default or Event of Default has occurred and is continuing, or would result from the execution, delivery and performance by Borrowers of this Amendment; (iii) each Borrower has full power, right and legal authority to execute, deliver and perform its obligations under this Amendment; (iv) each Borrower has taken all action necessary to authorize the execution and delivery of, and the performance of its obligations under, this Amendment; and (v) this Amendment does not constitute a breach of any other agreement or understanding to which such Borrower is a party or by which any property of such Borrower is bound. 10. Ratifications. By their signatures below, each Borrower hereby ratifies the Loan Agreement ( as hereby amended) and agrees (i) to be jointly and severally liable for all Obligations under the Loan Agreement, and (ii) that all of the outstanding amounts of the Loans under the Loan Agreement, as of the date hereof, are the valid and binding Obligations of each of them, and (iii) 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 Loan Agreement, but in no event later than the Termination Date. 11. No Other Modifications. Except as specifically set forth herein, no other changes or modifications to the Loan Agreement or the other Loan Documents are intended or implied, and, in all other respects the Loan Agreement and the other Loan Documents shall continue to remain in full force and effect in accordance with their respective original terms except as heretofore amended in writing. Nothing contained herein shall evidence a waiver by either Lender of any other provision of the Loan Agreement or any of the other Loan Documents. 12. No Third Party Beneficiaries. The terms and provisions of this Amendment shall be for the benefit of the parties hereto and their respective successors and assigns; no other person, firm, entity or corporation shall have any right, benefit or interest under this Amendment. 13. Condition to Effectiveness. The effectiveness of the terms and provisions of this Amendment shall be subject to the receipt by Agent of an original of this Amendment, duly authorized, executed and delivered by Borrowers. 14. Counterparts. This Amendment may be signed in counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart signed by the party to be charged. Delivery of an executed counterpart of this Amendment by electronically confirmed telefacsimile shall have the same force and effect as the delivery of an original executed counterpart of this Amendment. 15. Merger. This Agreement sets forth the entire agreement and understanding of the parties with respect to the matters set forth herein. This Amendment cannot be changed, modified, amended or terminated except in a writing executed by the party to be charged. 16. Amendment Fees. In consideration of the Lenders' agreement to the amendments effected hereby, Borrowers agree to pay to the Agent, for the ratable benefit of the Lenders, concurrently with their execution hereof, a non-refundable fee in the amount of $100,000. In addition, in consideration of the Temporary Availability Amount established hereby, Borrowers agree to pay to Agent, for the benefit of GMAC CF, a non-refundable fee in the amount of $5,750. Borrowers hereby authorize the Lenders to automatically charge to Borrowers' account the respective amounts of such fees. It is understood and agreed by the parties that the fees payable pursuant to this Paragraph 16 shall not be taken into account for the purposes of calculating either the Fixed Charge Coverage Ratio or EBITDA under the Loan Agreement. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment on the date hereinabove written. GMAC COMMERCIAL FINANCE LLC, as Agent and Lender By: /s/Daniel J Murray ---------------------- Title: 1st VP ------------------- AGREED AND ACCEPTED: PNC BANK, NATIONAL ASSOCIATION, as Lender By: /s/Sari J. Smith ---------------------- Title: Vice President --------------------- JACO ELECTRONICS, INC., Borrower By: /s/Jeffrey D. Gash ------------------------- Title: CFO ----------------------- NEXUS CUSTOM ELECTRONICS, INC., Borrower By: /s/Jeffrey D. Gash ------------------------- Title: CFO ----------------------- INTERFACE ELECTRONICS, INC., Borrower By: /s/Jeffrey D. Gash ------------------------- Title: CFO ----------------------- [Amendment #7 to Third Restated and Amended Loan and Security Agreement] EX-31.1 3 ex311jg21406.txt CERTIFICATION JOEL GIRSKY Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer I, Joel H. Girsky, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended December 31, 2005 of Jaco Electronics, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 14, 2006 /s/ Joel H. Girsky ---------------------------------------- Joel H. Girsky Chairman, President and Treasurer (Principal Executive Officer) EX-31.2 4 ex312jeff21406.txt CERTIFICATION JEFF GASH Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer I, Jeffrey D. Gash, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended December 31, 2005 of Jaco Electronics, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 14, 2006 /s/ Jeffrey D. Gash ------------------- Jeffrey D. Gash Executive Vice President, Finance and Secretary (Principal Financial Officer) EX-32.1 5 ex321joel21406.txt CERTIFICATION JOEL GIRSKY Exhibit 32.1 Section 1350 Certification of Principal Executive Officer The undersigned, Chairman, President and Treasurer, of Jaco Electronics, Inc. (the "Company"), hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended December 31, 2005 (the "Quarterly Report") accompanying this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented as required by such report. The foregoing certification is based upon, among other things, my responsibilities as principal executive officer of the Company, my own due diligence and representations made by certain other members of the Company's senior management. Date: February 14, 2006 /s/ Joel H. Girsky ---------------------------------------- Joel H. Girsky Chairman, President and Treasurer (Principal Executive Officer) EX-32.2 6 ex322jeff21406.txt CERTIFICATION JEFF GASH Exhibit 32.2 Section 1350 Certification of Principal Financial Officer The undersigned, Executive Vice President, Finance and Secretary, of Jaco Electronics, Inc. (the "Company"), hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended December 31, 2005 (the "Quarterly Report") accompanying this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented as required by such report. The foregoing certification is based upon, among other things, my responsibilities as principal financial officer of the Company, my own due diligence and representations made by certain other members of the Company's senior management. Date: February 14, 2006 /s/ Jeffrey D. Gash ---------------------------------------- Jeffrey D. Gash Executive Vice President, Finance and Secretary (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----