-----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, RjzcTt84tHZQfYtsfiCtybM2mm13Dt/w+FPAL2kd2rQxHFAjCaTbgdoR7nX02sYY tY2es197dyE7F7zHrdH/lQ== 0000052971-98-000018.txt : 19980929 0000052971-98-000018.hdr.sgml : 19980929 ACCESSION NUMBER: 0000052971-98-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACO ELECTRONICS INC CENTRAL INDEX KEY: 0000052971 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 111978958 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05896 FILM NUMBER: 98716438 BUSINESS ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162735500 MAIL ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 FORM 10-K JACO ELECTRONICS, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934] For the fiscal year ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________________to____________________ Commission File Number 0-5896 JACO ELECTRONICS, INC. (Exact name of registrant as specified in its charter) New York 11-1978958 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 145 Oser Avenue, Hauppauge, New York 11788 - ----------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (516) 273-5500 --------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.10 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates of the Company, computed by reference to the closing price on September 23, 1998 was $10,527,674. Number of shares outstanding of each class of Common Stock, as of September 23, 1998: 3,661,221 shares (excluding 404,500 shares of treasury stock). DOCUMENTS INCORPORATED BY REFERENCE: Part III: Definitive Proxy Statement to be filed on or before October 28, 1998, under Regulation 14A, in connection with the Company's 1998 Annual Meeting of Shareholders. 1 PART I Item 1. Business Jaco Electronics, Inc., a New York corporation organized in 1961 (collectively with all of its subsidiaries, unless otherwise noted, "Jaco" or the "Company"). General Jaco markets and distributes passive and active electronic components to original equipment manufacturers ("OEMs") throughout the United States and Canada from two distribution centers located on the East and West coasts and 14 sales offices located throughout the United States. The Company distributes products such as semiconductors, capacitors, resistors, electro-mechanical devices, flat panels, computers and computer subsystems, which are used in the manufacture and assembly of electronic products. The Company also provides a variety of value-added services including configuring complete computer systems to customers' specifications, kitting the component requirements of certain customers and furnishing contract manufacturing services. Value-added services are intended to attract new customers and increase sales to existing customers. In addition, these services are designed to respond to an industry trend of outsourcing, in which purchasing and warehousing functions are shifted by customers to the most efficient provider. The Company entered the contract manufacturing business in March 1994, when it acquired all of the outstanding capital stock of Nexus Custom Electronics, Inc. ("Nexus"), a Vermont-based turnkey contract manufacturer of printed circuit boards. Management believes the acquisition of Nexus has enabled, and will continue to enable, the Company to expand and broaden its range of value-added service capabilities (See Note K of the Notes to the Consolidated Financial Statements). The Company's core customer base consists primarily of small and medium-sized OEMs that produce electronic equipment used in a wide variety of industries, including manufacturers of telecommunication, computer, computer peripheral, medical and aerospace equipment and several Fortune 500 manufacturers. In the fiscal year ended June 30, 1998, the Company distributed electronic components to thousands of customers, none of which individually represented more than 4.1% of net sales. Jaco is a service-oriented company, built on strong customer and supplier relationships. The Company's inventory management and information systems assist its customers in controlling material costs, in reducing cycle times and in keeping pace with rapidly occurring technological developments. The Company utilizes a computerized inventory control system to assist in the marketing of its products and coordinate purchases from suppliers with sales to customers. During the fiscal year ended June 30 1998, Jaco also added 2 several strategic suppliers to its line card including Telefunken and Siliconix (subsidiaries of Vishay), Communications Instruments Inc. (CII), Samsung Electronics' and CTX Opto's LCD flat panel monitor lines, and Lambda Electronics' power supply line, a new product for Jaco. Lamda is one of the world's leading manufacturers of power supplies. The Company's computer system provides detailed on-line information regarding the availability of the Company's entire inventory located at its stocking facilities as well as on-line access to the inventories of some of the Company's major suppliers. Through the Company's integrated real-time information system, customers' orders can readily be tracked through the entire process of entering the order, reserving products to fill the order, ordering components from suppliers, if necessary, and shipping products to customers on scheduled dates. The Company is thus able to provide the type of distributor service required by its OEM customers that have adopted the "just-in-time" method of inventory procurement. The "just-in-time" method is utilized in an effort to operate more efficiently and profitably by relying on scheduled deliveries of such components at the time they are needed in the production process and thereby reducing inventories of components. The Company provides additional customer support through technically competent product managers, field engineers, value-added services and communication with customers from computer to computer or through electronic data interchange ("EDI"). Industry Overview The electronics distribution industry has become an increasingly important sales channel for the electronics industry because distributors can market component manufacturers' products to a broader range of OEMs than such manufacturers could economically serve with their direct sales forces. Historically, manufacturers of electronic components have sold directly to large OEMs and relied upon distributors to serve small customers. Today, distributors have become more of an extension of component manufacturers' product delivery channels by providing value-added services and technical support to customers, by stocking sufficient inventory to ensure timely delivery of components and by managing customer credit. Distributors also work with OEMs to ensure that manufacturers' components are integrated into the design of new products. According to the National Electronics Distributors Association, an industry trade association, in 1997 the electronics distribution industry recorded approximately $26.9 billion in sales. Of these sales, approximately $7.9 billion of industry sales consisted of sales of interconnect (connectors, sockets), electromechanical (relays, switches) and passive (resistors, capacitors) components, which products accounted for approximately $72.5 million of the Company's net distribution sales for the fiscal year ended June 30, 1998. Approximately $18.1 billion of industry sales consisted of sales of semiconductors and 3 computer products, which accounted for approximately $65.6 million of the Company's net distribution sales for the fiscal year ended June 30, 1998. Products The Company currently distributes over 60,000 stock items. Management believes that it is necessary for the Company to carry a wide variety of items in order to fully service its customers requirements and, in addition, many suppliers require the Company to carry their full product line. The components distributed by the Company are used in the assembly and manufacture of electronic equipment such as computers, data transmission and telecommunications equipment and transportation equipment, including electronic signals and aircraft, and a broad variety of other electronic products. The Company's products fall into two broad categories: "passive" components and "active" components. Passive components consist primarily of capacitors, electromechanical devices, and resistors. Passive products accounted for approximately 48%, 51% and 52% of the Company's net distribution sales in the fiscal years ended June 30, 1996, June 30, 1997 and June 30, 1998, respectively. Active components include semiconductors and computer subsystems. Semiconductors consist of such items as integrated circuits and discrete components, transistors, diodes, dynamic RAMs, static RAMs, video RAMs and MOSFETs. Computer subsystems are an integral part of personal computers and computer workstations and incorporate such items as disk drives, tape drives, flat panels and flat panel monitors, floppy disks and controllers. These products represented approximately 52%, 49% and 48% of the Company's net distribution sales in the fiscal years ended June 30, 1996, June 30, 1997 and June 30, 1998, respectively. Value-Added Services The Company provides a number of value-added services which are intended to attract new customers, to maintain and increase sales to existing customers and, where feasible, to generate additional revenues and improve margins from sales of components. Value-added services include: Configuring Computer Systems. Subsystem integration is a service offered by the Company where it offers turnkey solutions to customers' computer requirements by integrating such components as disks, tapes and floppy disk drives with other components, including power suppliers, enclosures, interface electronic cables and converters and active components to configure complete computer systems to customer specifications, both in tower and desktop configurations. 4 Kitting. Kitting of customer component product requirements is provided to fill a segment or a complete order of products to a select customer base. Kitting consists of assembling to a customer's specifications two or more of the Company's 60,000 stock items into pre-packaged kits ready for use in the customer's assembly line. Contract Manufacturing. The Company also furnishes turnkey contract manufacturing printed circuit boards ("PCBs") for OEMs using both conventional pin-through-hole and, on an increasing basis, more advanced surface mount technologies. Contract manufacturing operations involve assembling PCBs to customer specifications utilizing components from suppliers with whom the Company has distribution agreements and other suppliers. As a turnkey contract manufacturer of PCBs, the Company procures the required raw materials and components, manages the assembly and test operations, and supplies the PCBs in accordance with the customer's delivery schedule and quality requirements for the finished product. Sales and Marketing Management believes the Company has developed valuable long-term customer relationships and an in-depth understanding of its customers' needs and purchasing patterns. Jaco serves a broad range of customers in the computer, computer-related, telecommunications, data transmission, defense, aerospace, medical equipment and other industries. None of the Company's customers individually represented more than approximately 2%, 3% and 4% respectively, of net sales in the fiscal years ended June 30, 1996, June 30, 1997 and June 30, 1998, respectively. The Company's sales personnel are trained to identify the Company's customers' requirements and to actively market the Company's entire product line to satisfy those needs. For example, the Company's sales staff and field engineers regularly meet with customers' engineers and designers to discuss prospective needs and potential design or procurement problems and enable the sales personnel to understand which products will meet the customers' performance criteria, are cost-effective and target specifically identified problems. Sales are made throughout the United States and Canada from the sales departments maintained at the Company's two distribution facilities located on the East and West Coasts of the United States in California and New York and from 14 additional sales offices located in California, Florida, Maryland, Massachusetts, Minnesota, North Carolina, Oregon, Texas, Washington, Arizona, Alabama and Illinois. Sales are made primarily through personal visits by the Company's employees and by a staff of trained 5 telephone sales personnel who answer inquiries and receive and process orders from customers. In addition, the Company utilizes the services of independent sales representatives whose territories include parts of the United States, Canada, and several foreign countries. These sales representatives operate under agreements which are terminable by either party upon 30 days' notice. Independent sales representatives are authorized to solicit sales of all of the Company's product lines and are prohibited from representing competing product lines. In the fiscal year ended June 30, 1998, 94% of the Company's sales were produced by Company sales personnel and 6% by independent sales representatives. No one sales representative produced more than 2% of the Company's sales. The Company believes that the termination of any independent sales representative would not have a material adverse effect upon its business. Backlog As the trend toward outsourcing increases, customers have been entering into just-in-time contracts with distributors, instead of placing orders. The Company's backlog was $27.1 million at June 30, 1997, compared to $27.4 million at June 30, 1998. Backlog consists of purchase orders received from customers for products scheduled for delivery within the next twelve months. Orders constituting the Company's backlog are subject to delivery rescheduling, price negotiations and cancellations by the customer, sometimes without penalty or notice. Backlog is not necessarily indicative of future sales for any particular period and, therefore, the Company expects that in the normal course of business, less than all backlogged orders will be filled. Operations Component Distribution. Inventory management is critical to a distributor's business. The Company constantly focuses on a high number of resales or "turns" of existing inventory to reduce exposure to product obsolescence and changing customer demand. The Company's central computer system facilitates the control of purchasing and inventory, accounts payable, shipping and receiving, and invoicing and collection information of Jaco's distribution business. Jaco has completed the redesign and development of an entirely new Distribution Software System. All of the dates in this new database are 8 characters, including the century. The system has been tested and has been in place since September 1, 1998. The system includes financial systems, Electronic Data Interchange (EDI), customer order entry, purchase order entry to manufacturers, warehousing and inventory control. Each of the Company's sales departments and offices is electronically linked to the Company's central computer systems which provides fully integrated on-line real-time data with respect to the Company's inventory levels. The Company's inventory management system was developed internally by Jaco and is considered proprietary. Inventory turns are tracked by vendor, and the Company's inventory management system provides immediate information to assist in making purchasing decisions and decisions as to which inventory to exchange with suppliers under stock rotation programs. The Company's inventory management system also uses bar-code technology along 6 with scanning devices, which are supplied by Jaco to certain customers, and is networked to the facilities of such customers. In some cases, customers use computers that interface directly with the Company's computers to identify available inventory and rapidly process orders. This system enables the Company to more effectively manage its inventory and to respond more quickly to customer requirements for timely and reliable delivery of components. The Company's inventory turnover was approximately 3.5 times for the fiscal year ended June 30, 1998. Approximately 81% of the Company's component distribution inventory is maintained at its East Coast distribution center in Hauppauge, New York. Most of the remaining inventory is maintained at the Company's West Coast facility in Westlake Village, California. The Company also monitors supplier stock rotation programs, inventory price protection, rejected material and other factors related to inventory quality and quantity. Contract Manufacturing. The Company conducts its contract manufacturing operations through Nexus at an approximately 32,600 square foot facility located in Brandon, Vermont. Nexus provides turnkey and consigned contract manufacturing of PCBs for OEMs. "Turnkey" is an industry term that describes a contract manufacturer that buys customer-specified components from suppliers, assembles the components onto finished PCBs and performs post-assembly testing, while "consigned" refers to a contract manufacturer that provides the assembly and testing elements only. OEMs then incorporate the PCBs into finished products. In assembling PCBs, Nexus is capable of employing both pin-through-hole ("PTH") and surface mount technologies ("SMT"). PTH is a method of assembling PCBs in which component leads are inserted and soldered into plated holes in the board. SMT is a method of assembling PCBs in which components are fixed directly to the surface of the board, rather than being inserted into holes. The SMT process allows for more miniaturization, cost savings and shorter lead paths between components (which results in greater signal speed). In the fiscal year ended June 30, 1998, the Company invested approximately $681,000 primarily in SMT machinery and equipment, as part of the Company's ongoing program to expand Nexus' operations. Nexus maintains strict quality control procedures for its products, including use of total quality management ("TQM") systems. Incoming raw material and components are checked by the Nexus quality control personnel. During the production stage, quality control personnel check the work in process at several points in the production process. Finally, after the assembly stage, Nexus conducts random testing of finished products. Nexus' manufacturing facility has earned ISO 9002 certification by the Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. Nexus' receipt of ISO 9002 certification demonstrates that Nexus' manufacturing operations meet established world standards. Management believes sophisticated customers 7 increasingly are requiring their manufacturers to be ISO 9002-certified for purposes of quality assurance. Acquisition of Q.P.S. Electronics, Inc. On August 2, 1996, the Company acquired the operating assets of Q.P.S. Electronics, Inc. ("QPS"), a distributor of quality active and passive electronic components based in Schaumburg, Illinois. Management believes that the acquisition of QPS has contributed to the expansion of the Company's national, dedicated distribution network by firmly establishing the Company's presence in the Midwest marketplace. Acquisition of Corona Electronics, Inc. On January 21, 1997, the Company acquired all of the outstanding shares of capital stock of Corona Electronics, Inc. ("Corona"), an electronics component distributor located in Orange County, California. Management believes that the acquisition of Corona has strengthened the Company's presence in the Southern California marketplace. Suppliers Manufacturers of passive and active electronic components are increasingly relying on the marketing, customer service and other resources of distributors who market their product lines to customers not normally served by the manufacturer, and to supplement the manufacturer's direct sales efforts in other accounts often by providing value-added services not offered by the manufacturer. Manufacturers seek distributors who have strong relationships with desirable customers, are financially strong, have the infrastructure to handle large volumes of products and can assist customers in the design and use of the manufacturers' products. Currently, the Company has non-exclusive distribution agreements with many manufacturers, including Epson America, Inc., International Resistive Company, Inc., Johanson Dielectric Inc., Kemet Electronics Corporation, Mitel Inc., Rohm Company, Limited, Samsung Semiconductor, Inc., TDK Corporation of America, Vishay Intertechnology, Inc. and Zetex, Inc. Management continuously seeks to identify potential new suppliers and obtain additional distributorships for new lines of products. Management believes that such expansion and diversification will increase the Company's sales and market share. In the fiscal year ended June 30, 1998, of the Company's top ten suppliers, only Kemet and Samsung accounted for more than 10% of net sales and the remaining eight each accounted for between 8.7% and 1.5% of net sales. As is common in the electronics distribution industry, from time to time the Company has experienced termination of relationships with suppliers which may affect its results of operations in post-termination fiscal periods. The Company generally purchases products from manufacturers pursuant to non-exclusive distributor agreements. Selection as an authorized distributor is a valuable marketing tool for the 8 Company because customers receive warranty protection and support from manufacturers when they purchase products from the Company. As an authorized distributor, the Company is able to offer customers marketing and engineering support from the product manufacturers, which enhances the Company's ability to attract new customers and close sales. Most of the Company's distributor agreements are cancelable by either party, typically upon 30 to 90 days' notice. These agreements typically provide for price protection, stock rotation privileges and the right to return inventory. Price protection is typically in the form of a credit to the distributor for any inventory in the distributor's possession for which the manufacturer reduces its prices. Stock rotation privileges typically allow the Company to exchange inventory in an amount up to 5% of a prior period's purchases. Upon termination of a distributor agreement, the right of return typically requires the manufacturer to repurchase the Company's inventory at the Company's adjusted purchase price. The Company believes that the above-described provisions of its distributorship agreements generally have served to reduce the Company's exposure to loss from unsold inventory. As such price protection and stock rotation privileges are limited in scope, there can be no assurances that the Company will not experience significant losses from unsold inventory in the future. Competition The electronics distribution industry is highly competitive, primarily with respect to price and product availability. The Company believes that the breadth of customer base, services and product lines, its level of technical expertise and the quality of its services generally are also particularly important. The Company competes with large national distributors such as Arrow Electronics, Inc. and Avnet, Inc., as well as regional and specialty distributors, many of whom distribute the same or competitive products. Many of the Company's competitors have significantly greater name recognition and greater financial and other resources than those of the Company. The PCB contract manufacturing industry is highly fragmented and is characterized by relatively high levels of volatility, competition and pricing and margin pressure. Many large contract manufacturers operate high-volume facilities and primarily focus on high-volume product runs. In contrast, certain contract manufacturers, such as Nexus, focus on low-to-medium volume and service-intensive products, where the finished product often requires a greater amount of overall labor. The Company believes that contract manufacturers which are affiliated or integrated with electronics distributors have competitive advantages over comparably-sized, stand-alone contract manufacturers. Distributors can reduce the risk of inventory obsolescence through stock rotation privileges and inventory price protection and can also take advantage of material acquisition skills, just-in-time delivery expertise and broad supplier relationships. 9 Employees At August 31, 1998, the Company had a total of 392 employees, of which 122 were employed by Nexus. Of total employees, 11 were engaged in administration, 58 were managerial and supervisory employees, 125 were in sales and 198 performed warehouse, manufacturing and clerical functions. Of these employees, Nexus employed 1 in administration, 9 in management and supervisory positions, 2 in sales and 110 in warehouse, manufacturing and clerical functions. There are no collective bargaining contracts covering any of the Company's employees. The Company believes its relationship with its employees is satisfactory. Item 2. Properties All of the Company's facilities are leased except for the Brandon, VT property which is owned by Nexus. Jaco currently leases 16 facilities located in the States of Alabama, Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Minnesota, New York, North Carolina, Oregon, Texas and Washington, three of which are multipurpose facilities used principally as administrative, sales, and purchasing offices, as well as warehouses, and the remainder of which are used exclusively by Jaco as sales offices. Jaco's satellite sales offices range in size from approximately 185 square feet to approximately 4,000 square feet. Base rents for such properties range from approximately $400 per month to approximately $9,000 per month. Depending on the terms of each particular lease, in addition to base rent, Jaco may also be responsible for portions of real estate taxes, utilities and operating costs, or increases in such costs over certain base levels. The lease terms range from month-to-month to as long as five years. All facilities are linked by computer terminals to Jaco's Hauppauge, New York headquarters. The following paragraphs set forth certain information regarding Jaco's two principal leased facilities: (i) Jaco leases from Bemar Realty Company, a partnership consisting of Messrs. Joel H. Girsky and Charles B. Girsky, approximately 72,000 square feet of office and warehouse space at 145 Oser Avenue, Hauppauge, New York. The lease provides for a current monthly base rent of approximately $46,000 net of all expenses, including taxes, utilities, insurance, maintenance and repairs, and has a term which expires on December 31, 2003. In Fiscal 1996, Jaco negotiated a renewal of the lease and the current rental rate is similar to that currently being charged for comparable properties in the area. Approximately 26,000 square feet of space is sublet by Jaco to an unaffiliated third party. In addition to its headquarters, Jaco maintains purchasing and sales offices and warehouse facilities at its Hauppauge location. 10 (ii) Jaco leases through April 30, 2003, from an unaffiliated party, approximately 10,000 square feet of office and warehouse space in Westlake Village, California for a base rent of approximately $10,550 per month. Jaco maintains both a purchasing and sales office at this location, as well as warehouse facilities. Nexus currently owns and occupies a 32,000 square foot facility located in Brandon, Vermont, that is used for manufacturing, storage and office space. The building was acquired by the Company on March 11, 1994 as part of the acquisition of all of the outstanding shares of capital stock of Nexus. The Company believes that its present facilities will be adequate to meet its needs for the foreseeable future. Item 3. Legal Proceedings. The Company is a party to legal matters arising in the general conduct of business. The ultimate outcome of such matters is not expected to have a material adverse effect on the Company's results of operations or financial position. Item 4. Submission of Matters To A Vote of Security Holders. No response to this Item is required. 11 PART II Item 5.Market For the Company's Common Stock and Related Security Holder Matters.
(a) The Company's common stock (the "Common Stock") is traded on The Nasdaq National Market under the symbol "JACO". The stock prices listed below represent the high and low closing sale prices of the Common Stock, as reported by The Nasdaq National Market, for each fiscal quarter beginning with the first fiscal quarter of 1997. Fiscal Year 1997: High Low First quarter ended September 30, 1996 $10.38 $ 6.25 Second quarter ended December 31, 1996 $ 9.50 $ 7.75 Third quarter ended March 31, 1997 $ 9.12 $ 7.00 Fourth quarter ended June 30, 1997 $ 8.00 $ 6.38 Fiscal Year 1998: High Low First quarter ended September 30, 1997 $ 8.12 $ 7.25 Second quarter ended December 31, 1997 $ 7.31 $ 6.00 Third quarter ended March 31, 1998 $ 7.50 $ 6.12 Fourth quarter ended June 30, 1998 $ 7.00 $ 5.62
(b) As of September 23, 1998 there were approximately 160 holders of record of the Company's Common Stock who management believes held for more than 1,500 beneficial owners. (c) The Company has never declared or paid cash dividends on its Common Stock. The Company intends to retain its earnings, if any, for use in its business and to support growth and does not anticipate paying cash dividends in the foreseeable future. In addition, the agreement governing the Company's credit facility (the "Credit Facility") contains provisions that prohibit the Company from paying cash dividends on its Common Stock. 12 .
Year ended June 30, 1994 1995 1996 1997 1998 ------- -------- -------- -------- ------ (in thousands, except per share data) Statement of operations data Net sales $105,213 $138,683 $167,149 $155,098 $ 153,674 Cost of goods sold 83,038 109,902 133,105 122,993 121,796 -------- ------- ------- ------- --------- Gross profit 22,175 28,781 34,044 32,105 31,878 Selling, general and administrative expenses 19,155 23,552 26,247 27,640 28,707 -------- -------- -------- -------- ----------- Operating profit 3,020 5,229 7,797 4,465 3,171 Interest expense 1,117 2,010 1,347 971 1,140 --------- --------- --------- ---------- ------------ Earnings before income taxes and cumulative effect of a change in accounting for income taxes 1,903 3,219 6,450 3,494 2,031 Income tax expense 714 1,303 2,600 1,415 847 ---------- --------- --------- --------- ------------- Earnings before cumulative effect of a change in accounting for income taxes 1,189 1,916 3,850 2,079 1,184 Cumulative effect of a change in accounting for income taxes 241 NET EARNINGS $ 1,430 $ 1,916 $ 3,850 $ 2,079 $ 1,184 ========= ========= ========= ========= ============ Earnings per common share* Earnings per common share before cumulative effect of a change in accounting $.47 $.78 $1.11 $.53 $.31 Cumulative effect of a change in accounting .10 Net earnings per common share $.57 $.78 $1.11 $.53 $.31 === === ==== === === Earnings per common share - assuming dilution Earnings per common share before cumulative effect of a change in accounting $.47 $.78 $1.08 $.53 $.30 Cumulative effect of a change in accounting .09 Net earnings per common share $.56 $.78 $1.08 $.53 $.30 === === ==== === === Weighted average common and common equivalent shares outstanding Basic 2,505,409 2,440,841 3,479,707 3,899,181 3,836,700 ========= ========= ========= ========= ========= Diluted 2,551,173 2,461,091 3,554,018 3,947,687 3,921,518 ========= ========= ========= ========= ========= Balance sheet data Working capital $ 15,160 $ 30,741 $ 36,964 $ 41,146 $ 42,481 Total assets 45,685 56,323 61,143 69,996 73,419 Long-term obligations 9,694 23,666 8,791 15,553 17,037 Shareholders' equity 11,202 13,227 34,304 35,892 36,625
* All per share information has been restated to give effect to a 10% stock dividend paid on March 10, 1995 and a 4-for-3 stock split distributed to shareholders of record as of September 22, 1995. In addition, all earnings per common share amounts for all periods have been restated to conform to the SFAS No. 128 computation. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements in this filing, and elsewhere, which look forward in time involve risks and uncertainties which may effect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: dependence on a limited number of suppliers for products which generate a significant portion of the Company's sales, the effect upon the Company of increases in tariffs or duties, changes in trade treaties, strikes or delays in air or sea transportation and possible future United States legislation with respect to pricing and/or import quotas on products imported from foreign countries, and general economic downturns in the electronics distribution industry which may have an adverse economic effect upon manufacturers, end-users of electronic components and electronic component distributors. General Jaco is a distributor of electronic components and provider of contract manufacturing and value-added services. Products distributed by Jaco include semiconductors, capacitors, resistors, electromechanical devices flat panel displays and monitors, and power supplies used in the assembly and manufacturing of electronic equipment. The Company's customers are primarily small and medium sized manufacturers. The trend for these customers has been to shift certain manufacturing functions to third parties (outsourcing). The Company intends to seek to capitalize on this trend toward outsourcing by increasing sales of products enhanced by value-added services. Value-added services currently provided by Jaco consist of configuring complete computer systems to customer specifications both in tower and desktop configurations, kitting (e.g. supplying sets of specified quantities of products to a customer that are prepackaged for ease of feeding the customer's production lines), and contract manufacturing through Nexus. During August 1996 and January 1997, the Company acquired the operating assets of QPS Electronics, Inc. and all of the outstanding common stock of Corona Electronics, Inc., respectively, both of which are electronic component distributors. Aggregate consideration paid for the acquisitions approximated $4.7 million, of which $157,500 was paid through the issuance of 20,000 shares of the Company's common stock (See Note J of the Notes to the Consolidated Financial Statements). The addition of these two companies strengthens the Company's position in Southern California and the Midwest. The Company has consolidated the operations of these acquired companies in order to reduce operating costs and create a stronger sales organization. 14 The Company's sales from value-added services represented $18.2 million, or 11.8% of net sales in the fiscal year ended June 30, 1998, $15.7 million, or 10.1% of net sales in the fiscal year ended June 30, 1997 and $18.0 million, or 11% of net sales in the fiscal year ended June 30, 1996. Of these sales, sales from contract manufacturing were $16.4 million, or 10.7% of net sales in the fiscal year ended June 30, 1998, $10.0 million, or 6.4% of net sales in fiscal year ended June 30, 1997, and $10.8 million, or 6.5% of net sales in the fiscal year ended June 30, 1996. Results of Operations The following table sets forth certain items in the Company's statement of earnings as a percentage of net sales for the periods shown:
1996 1997 1998 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold 79.6 79.3 79.3 ---- ---- ---- Gross profit 20.4 20.7 20.7 Selling, general and administrative expenses 15.7 17.8 18.7 ---- ---- ---- Operating profit 4.7 2.9 2.0 Interest expense .8 .6 .7 ---- ---- ---- Earnings before income taxes 3.9 2.3 1.3 Income tax expense 1.6 1.0 .5 ---- ---- ---- NET EARNINGS 2.3% 1.3% .8% ==== ==== ====
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1998 ("FISCAL 1998") WITH FISCAL YEAR ENDED JUNE 30, 1997 ("FISCAL 1997") Net sales for the fiscal year ended June 30, 1998 decreased approximately 1.0% to $153,674,000 as compared to $155,098,000 reported for the same Fiscal 1997 period. Fiscal 1998 results reflect the continuing industry-wide pressures on pricing, compounded by the softening demand for electronic components. The decrease in component sales through the Company's distribution operations was partially offset by a $6.8 million, or 68%, increase in 15 sales from contract manufacturing. The Company's long term plan includes optimizing value-added services, such as Flat Panel Displays and contract manufacturing. Gross profit margins, as a percentage of net sales, remained constant at 20.7% in Fiscal 1998, compared to Fiscal 1997. While unit pricing continued to decline during Fiscal 1998, as a result of price protection and inventory rotation extended to the Company by its suppliers, the Company was able to maintain gross profit margins. Selling, General and Administrative expenses ("SG&A") were $28.7 million in Fiscal 1998, an increase of $1.1 million, or 3.9% from $27.6 million in Fiscal 1997. The Company's addition of sales and sales management personnel, the expansion of the Field Application Engineering (FAE) Program, and the addition of the Flat Panel Display Group have contributed to the increase in SG&A expenses. Due to the continuing weakness in the electronics industry, the Company is closely reviewing SG&A and anticipates implementing cost containment measures in the fiscal year ending June 30, 1999, which, it believes, will not have a negative impact on sales. Interest expense increased to approximately $1.1 million in Fiscal 1998, as compared to approximately $1.0 million in Fiscal 1997. The 17% increase in interest expense was primarily the result of additional borrowings under the credit facility for the acquisition of new inventory as further franchises were added in Fiscal 1998. The Company believes that the addition of such product lines will have a favorable impact on sales during future periods. The Company's acquisition of approximately $700,000 of new equipment to support the growth in contract manufacturing also contributed to the increase in interest expense. Net earnings for Fiscal 1998 were $1.2 million, or approximately $.30 per share diluted, as compared to $2.1 million, or approximately $.53 per share diluted for Fiscal 1997. During the last fiscal year, the decrease in net earnings was primarily attributable to the increase in SG&A. The Company believes it is better positioned for future growth and will benefit from expenditures made during the fiscal year ended June 30, 1998. 16 COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1997 WITH FISCAL YEAR ENDED JUNE 30, 1996 ("FISCAL 1996") Net sales for the fiscal year ended June 30, 1997 decreased 7.2% to $155,098,000, as compared to $167,149,000 reported for the same Fiscal 1996 period. During Fiscal 1997, the decrease in sales was primarily the result of an overall industry weakness as it relates to component pricing. The Company sold a greater number of components than were sold in its last fiscal year, but has been unable to offset the price reductions that have occurred. The Company completed two acquisitions during Fiscal 1997 (See Note J of the Notes to the Consolidated Financial Statements) that expanded its market penetration in the Midwest and Southern California. Additionally, the Company continued to expand its marketing efforts in flat panel devices and field application engineers ("FAE's"). FAE's assist in designing components for approval by customer's engineering departments. Sales from contract manufacturing decreased by approximately $.8 million during Fiscal 1997, compared to Fiscal 1996. During the Fiscal 1997 Nexus shifted its sales effort to surface mount technology, compared to the older pin-through-hole technology. The Company believed that the shift in technology should produce increases in contract manufacturing sales during future periods. Gross profit margins, as a percentage of net sales, increased slightly from 20.4% in Fiscal 1996 to 20.7% in Fiscal 1997. Though unit pricing of components declined during Fiscal 1997, both price protection provided to the Company by its suppliers and increases in the sale of passive components, which historically have maintained a slightly higher gross profit margin as compared to active components, resulted in the increase in gross profit margin. Selling, general and administrative expenses ("SG&A") were $27.6 million in Fiscal 1997, an increase of $1.4 million, or 5.3% from $26.2 million in Fiscal 1996. The Company's addition of sales and sales management personnel, the expansion of the FAE program and the addition of the flat panel display group have contributed to the increase in SG&A. Additionally, the Company acquired QPS Electronics, Inc. and Corona Electronics Inc. during the Fiscal 1997. Interest expense decreased to $1.0 million in Fiscal 1997, as compared to $1.3 million in Fiscal 1996. The 28% decrease was primarily the result of a reduction in borrowings, as a result of the reduction in indebtedness under the Company's credit facility by the application of the net proceeds of $17.1 million from the public offering completed during the second quarter of Fiscal 1996. Borrowings under the credit facility include funds used for the acquisition of Corona and QPS (See Note J of the Notes to the Consolidated Financial Statements) during Fiscal 1997. 17 Net earnings for Fiscal 1997 were $2.1 million, or $.53 per share, as compared to $3.8 million, or $1.08 per share diluted, during Fiscal 1996. The decrease in net earnings was attributable to the decrease in sales and the increase in SG&A. The Company believes that the additional expenses incurred during Fiscal 1997 will provide the infrastructure necessary for future increases in sales. Liquidity and Capital Resources On October 20, 1995, the Company completed a public offering of 1,600,000 shares of its common stock at $12.75 per share. The offering consisted of 1,325,000 shares offered by the Company and an aggregate of 275,000 shares offered by certain officers and directors of the Company. On December 8, 1995, the underwriters of the public offering exercised a portion of their overallotment option for an additional 160,000 shares at a price per share equal to that of the public offering. The Company's net proceeds from the public offering of approximately $17,140,000, after deducting the underwriters' commission and cost of the public offering, were used to reduce its bank indebtedness. In connection with the public offering, the Company also issued stock warrants, to the representative underwriters, to purchase up to 70,000 shares of common stock at an exercise price per share equal to 180% of the public offering price, which expire on October 20, 1999. The Company's agreement with its banks, as amended, provides the Company with a $30,000,000 term loan and revolving line of credit facility based principally on eligible accounts receivable and inventories of the Company as defined in the agreements expiring September 13, 2000. The interest rate of the credit facility is based on the average 30 day LIBOR rate plus 3/4% to 1-1/4% depending on the Company's performance for the immediately preceding four fiscal quarters measured by a certain financial ratio, and may be adjusted quarterly. The outstanding balance on the revolving line of credit facility was $15,308,260 at June 30, 1998. The term loan, with a remaining balance of $589,282 at June 30, 1998, requires monthly principal payments of $17,857, together with interest through September 13, 2000, with a final payment of $107,146 due on September 13, 2000. Borrowings under this facility are collateralized by substantially all of the assets of the Company. The agreement contains provisions for maintenance of certain financial ratios, all of which the Company is in compliance with at June 30, 1998, and prohibits the payment of cash dividends. 18 During Fiscal 1998, the Company's net cash provided by operating activities was approximately $1.6 million, as compared to net cash provided by operating activities of approximately $1.3 million for Fiscal 1997, an increase of approximately $.3 million. The increase is primarily attributable to the increase in accounts payable by $.8 million for Fiscal 1998, as compared to a $.6 million (net of liabilities acquired from business acquisitions) decrease during Fiscal 1997. In addition, inventory increased by $2.4 million for Fiscal 1998, as compared to a $1.8 million (net of assets acquired from business acquisitions) increase during Fiscal 1997. Net cash used in investing activities decreased to $1.3 million for Fiscal 1998, as compared to $5.9 million for Fiscal 1997, a decrease of $4.6 million. The two acquisitions completed during Fiscal 1997 required approximately $4.7 million, and were financed principally through the Company's line of credit. Additionally, in Fiscal 1998, the Company increased its borrowings by approximately $2.4 million principally to finance an increase in inventory. Fiscal 1996 reflects the proceeds of the Company's public offering, which reduced cash provided by financing activities by application of such proceeds against the Company's bank borrowings. The Company's cash expenditures may vary significantly from current levels, based on a number of factors, including, but not limited to, future acquisitions, if any. For Fiscal 1997 and Fiscal 1998, inventory turnover was 3.9x and 3.5x, respectively. The average of the Company's accounts receivable at both June 30, 1998 and June 30, 1997 was 52 days. The Company did not experience any significant trade collection difficulties during Fiscal 1998. The Board of Directors of the Company has authorized the purchase of up to 250,000 shares of its common stock under a stock repurchase program. Subsequent to year end, the Board of Directors authorized the repurchase of up to an additional 400,000 shares of the Company's common stock. The purchases may be made by the Company from time to time on the open market at the Company's discretion and will be dependent on market conditions. Through September 23, 1998, the Company has purchased 404,500 shares of its common stock for aggregate consideration of $2,176,342 under this program. 19 The Company believes that cash flow from operations and funds available under its credit facility will be sufficient to fund the Company's capital needs for at least the next twelve months. Year 2000 Compliance The year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Such computer systems will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. In April 1996, the Company developed a three-phase program for Y2K information systems compliance. Phase I was to identify those systems with which the Company has exposure to Y2K issues. Phase II was the development and implementation of action plans to be Y2K compliant in all areas by late 1998. Phase III, to be fully completed by mid 1999, is the final major area of exposure to ensure compliance. The Company has identified three major areas determined to be critical for successful Y2K compliance: (1) financial and informational system applications, (2) manufacturing applications and (3) third party relationships. As of September 1, 1998, Jaco has completed the redesign and development of an entirely new distribution software system. All of the dates in this new database are 8 characters, including the century. The system has been tested and has been in production as of September 1, 1998. The systems include customer order entry, purchase order entry to the Company's manufacturers, warehousing and inventory control. The financial systems, Accounts Payable and General Ledger have been Y2K compliant since April 1997. The Accounts Receivable system is Y2K compliant as of September 1, 1998. Jaco's distribution facilities: warehouse, shipping and other physical handling have been tested and are Y2K compliant. The Company, as it relates to the contract manufacturing operations in accordance with Phase I of the program, is in the process of conducting an internal review of all systems and contacting all software suppliers to determine major areas of exposure to Y2K issues. In the financial and information system area a number of applications have been identified as Y2K compliant due to their recent implementation. The contract manufacturing core financial and reporting systems are not Y2K compliant but are scheduled to be complete and fully tested by mid 1999. In the third party area, the Company has contacted most of its major third parties. These parties state that they intend to be Y2K compliant by the year 2000. The Company believes it will cost approximately $1.5 million to replace the core financial, reporting and distribution software systems. The Company utilized outside consultants to undertake a portion of the work. The Company does not expect the cost that will be incurred to be material in connection with the contract manufacturing area and the third party area. 20 Inflation Inflation has not had a significant impact on the Company's operations during the last three fiscal years. Item 8. Financial Statements and Supplementary Data. For an index to the financial statements and supplementary data, see Item 14(a). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No response to this Item is required. 21 PART III Item 10. Directors and Executive Officers of the Company. Incorporated herein by reference is the information to appear under the caption "Election of Directors" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1998. Item 11. Executive Compensation. Incorporated herein by reference is the information to appear under the caption "Executive Compensation" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated herein by reference is the information to appear under the caption "Principal Shareholders; Shares Held by Management" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1998. Item 13. Certain Relationships and Related Transactions. Incorporated herein by reference is the information to appear under the caption "Certain Transactions" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1998. 22
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. Page (a) (1) Financial Statements included in Part II, Item 8, of this Report: Index to Consolidated Financial Statements and Schedule F- 1 Report of Independent Certified Public Accountants F- 2 Consolidated Balance Sheets F- 3 Consolidated Statements of Earnings F- 5 Consolidated Statement of Changes in Shareholders' Equity F- 6 Consolidated Statements of Cash Flows F- 7 Notes to Consolidated Financial Statements F- 8 F-27 (a) (2) Financial Statement Schedule included in Part IV of this Report: Report of Independent Certified Public Accountant on Schedule II F-28 Schedule II - Valuation and Qualifying Accounts F-29
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. Exhibit No. 3.1 Restated Certificate of Incorporation adopted November, 1987, incorporated by reference to the Company's definitive proxy statement distributed in connection with the Company's annual meeting of shareholders held in November, 1987, filed with the SEC on November 3, 1986, as set forth in Appendix A to the aforesaid proxy statement. 3.1.1 Certificate of Amendment of the Certificate of Incorporation, adopted December, 1995, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 ("the Company's 1996 10-K"), Exhibit 3.1.1. 3.2 Restated By-Laws adopted June 18, 1987, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1987 ("the Company's 1987 10-K"), Exhibit 3.2. 4.1 Form of Common Stock Certificate, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 4.1. 23 10.1 Sale and leaseback with Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1983, Exhibit 10(1), pages 48-312. 10.2 Amendment No. 1 to Lease between the Company and Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.2. 10.2.2 Lease Between the Company and Bemar Realty Company, dated January 1, 1996, incorporated by reference to the Company's 1996 10-K, Exhibit 10.2.2. 10.3 Employment Agreement between Joel Girsky and the Company, dated December 29, 1989, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1990 ("the Company's 1990 10-K"), Exhibit 10.3 pages 47-52. 10.4 1980 Stock Incentive Plan, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.4, pages 168-172. 10.5 Restated 1981 Incentive Stock Option Plan, incorporated by reference to the Company's 1987 10-K, Exhibit 10.1. 10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference to the Company's 1993 10-K, Exhibit 10.6. 10.6.1 1993 Non-Qualified Stock Option Plan, as amended (filed as Exhibit A to the Company's Definitive Proxy Statement, dated November 3, 1997 for the Annual Meeting of Shareholders held on December 9, 1997). 10.7 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. 10.9 Employment Agreement between Joel Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.9. 10.10 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.10. 24 10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.11. 10.12 Restricted Stock Plan (filed as Exhibit B to the Company's Definitive Proxy Statement, dated November 3, 1997 for the Annual Meeting of Shareholders held on December 9, 1997). 10.12.1 Form of Escrow Agreement under the Restricted Stock Plan, incorporated by reference to the Company's Registration Statement on Form S-8/S-3, Commission File No. 333-49877, filed April 10, 1998 Exhibit 4.2. 10.12.2 Form of Stock Purchase Agreement under the Restricted Stock Plan, incorporated by reference to the Company's Registration Statement on Form S-8/S-3 Commission File No. 333-49877, filed April 10, 1998, Exhibit 4.3. 10.12.3 Form of Stock Option Agreement, incorporated by reference to the Company's Registration Statement on Form S-8/S-3, Commission File No333-49877, filed April 10, 1998, Exhibit 4.4. 21.1 Subsidiaries of the Company. 23.1 Consent of Grant Thornton LLP. 27. Financial Data Schedule. 99.1 General Loan and Security Agreement dated January 20, 1989, between the Company as borrower and The Bank of New York Commercial Corporation ("BNYCC") as secured party, incorporated by reference to the Company's Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1). 99.2 Loan and Security Agreement - Accounts Receivable and Inventory, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(2). 99.3 Letter of Credit and Security Agreement, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(3). 99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company in favor of BNYCC dated January 13, 1992, together with Letters from R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and Distel, Inc., each a subsidiary of the Company and a guarantor of the obligations evidenced by the Term Notes, to BNYCC 25 acknowledging the amendment to the Term Notes for the extension of the maturity date of each such note, incorporated by reference to the Company's 1992 10-K, Exhibit 28.4. 99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the Company and BNYCC, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5. 99.6 $1,500,000 Additional Term Loan Note, executed by the Company in favor of BNYCC, dated March 11, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5. 99.7 Restated and Amended Loan and Security Agreement, dated April 25, 1995, among the Company, Nexus and BNYCC, together with an Amendment to Term Loan Note executed by the Company in favor of BNYCC and Letter executed by R.C. Components, Inc., Quality Components, Inc., Micatron, Inc., Distel, Inc. and Jaco Overseas, Inc., incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 99.7. 99.8 Second Restated and Amended Loan and Security Agreement dated September 13, 1995 among the Company, Nexus Custom Electronics, Inc., BNYCC and NatWest Bank, N.A. ("Second Restated and Amended Loan and Security Agreement"), incorporated by reference to the Company's Registration Statement on Form S-2, Commission File No. 33-62559, filed October 13, 1995, Exhibit 99.8. 99.8.1 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of April 10, 1996, incorporated by reference to the Company's 1996 10-K, Exhibit 99.8.1. 99.8.2 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of August 1, 1997. (b) Reports on Form 8-K filed during last quarter of the period covered by this Report: None. 26 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Earnings F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-27 Report of Independent Certified Public Accountants on Schedule F-28 Schedule II - Valuation and Qualifying Accounts F-29
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Jaco Electronics, Inc. We have audited the accompanying consolidated balance sheets of Jaco Electronics, Inc. and Subsidiaries (the "Company") as of June 30, 1997 and 1998 and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jaco Electronics, Inc. and Subsidiaries as of June 30, 1997 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. GRANT THORNTON LLP Melville, New York August 21, 1998 F-2 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30,
ASSETS 1997 1998 ------------- -------- CURRENT ASSETS Cash $ 463,352 $ 562,556 Marketable securities 627,179 764,810 Accounts receivable, less allowance for doubtful accounts of $846,000 in 1997 and $1,268,000 in 1998 22,008,210 21,887,618 Inventories 33,311,201 35,737,288 Prepaid expenses and other 1,359,617 1,203,198 Prepaid income taxes 528,243 610,132 Deferred income taxes 750,000 772,500 ------------ ------------ Total current assets 59,047,802 61,538,102 PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 5,009,045 6,102,445 DEFERRED INCOME TAXES 244,000 333,000 EXCESS OF COST OVER NET ASSETS ACQUIRED, less accumulated amortization of $501,000 in 1997 and $719,000 in 1998 4,151,574 3,776,912 OTHER ASSETS 1,543,257 1,668,830 ----------- ----------- $69,995,678 $73,419,289 ========== ==========
The accompanying notes are an integral part of these statements. F-3 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (continued) June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998 ------------- --------- CURRENT LIABILITIES Accounts payable $15,833,198 $16,633,389 Current maturities of long-term debt and capitalized lease obligations 599,239 663,198 Accrued expenses 1,468,929 1,760,862 ----------- ----------- Total current liabilities 17,901,366 19,057,449 LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS 15,552,549 17,036,593 DEFERRED COMPENSATION 650,000 700,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued Common stock - authorized, 10,000,000 shares, $.10 par value; issued 3,975,721 and 4,065,721 shares, respectively, and 3,888,221 and 3,866,221 shares outstanding, respectively 397,572 406,572 Additional paid-in capital, net 22,180,295 22,396,295 Unrealized gain on marketable securities 120,200 164,385 Retained earnings 13,893,696 15,077,957 Treasury stock - 87,500 and 199,500 shares, respectively, at cost (700,000) (1,419,962) ------------ ----------- 35,891,763 36,625,247 ---------- ---------- $69,995,678 $73,419,289 ========== ==========
The accompanying notes are an integral part of these statements. F-4 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30,
1996 1997 1998 -------------- ------------- -------- Net sales $167,149,385 $155,097,745 $153,674,226 Cost of goods sold 133,105,227 122,993,172 121,796,083 ----------- ----------- ----------- Gross profit 34,044,158 32,104,573 31,878,143 Selling, general and administrative expenses 26,246,741 27,639,567 28,706,520 ------------ ------------ ------------ Operating profit 7,797,417 4,465,006 3,171,623 Interest expense 1,347,639 971,253 1,140,362 ------------- -------------- ------------- Earnings before income taxes 6,449,778 3,493,753 2,031,261 Income tax provision 2,600,000 1,415,000 847,000 ------------- ------------- -------------- NET EARNINGS $ 3,849,778 $ 2,078,753 $ 1,184,261 ============= ============= ============= Net earnings per common share Basic $1.11 $0.53 $0.31 ==== ==== ==== Diluted $1.08 $0.53 $0.30 ==== ==== ==== Weighted-average common shares and common equivalent shares outstanding Basic 3,479,707 3,899,181 3,836,700 ========= ========= ========= Diluted 3,554,018 3,947,687 3,921,518 ========= ========= =========
The accompanying notes are an integral part of these statements. F-5 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 1996, 1997 and 1998 Unrealized Additional gain on paid-in marketable Retained Shares Amount capital securities earnings -------- -------- ------------- ------------------- ---------------- Balance at July 1, 1995 2,464,384 $246,438 $ 5,013,663 $ 7,966,431 Issuance of common stock for cash 1,485,000 148,500 16,991,466 Exercise of stock options 6,415 642 19,658 Payment for fractional shares resulting from 4-for-3 stock split (78) (8) 8 (1,266) Unrealized gain on marketable securities $ 68,245 - - net Net earnings 3,849,778 --------------- ------------- ---------------- ------------- ----------- Balance at June 30, 1996 3,955,721 395,572 22,024,795 68,245 11,814,943 Issuance of common stock in connection with acquisition 20,000 2,000 155,500 Purchase of treasury stock Unrealized gain on marketable securities - net 51,955 Net earnings 2,078,753 --------------- ------------- --------------- -------------- ----------- Balance at June 30, 1997 3,975,721 397,572 22,180,295 120,200 13,893,696 Issuance of restricted stock 90,000 9,000 621,000 Deferred compensation expense Purchase of treasury stock Unrealized gain on marketable securities - net 44,185 Net earnings 1,184,261 --------------- ------------- ---------------- ------------- ----------- Balance at June 30, 1998 4,065,721 $406,572 $22,801,295 $164,385 $15,077,957 ========= ======= ========== ======= ==========
F-6 Deferred Total Treasury compen- shareholders' stock sation equity -------- -------- ---------------- Balance at July 1, 1995 $13,226,532 Issuance of common stock for cash 17,139,966 Exercise of stock options 20,300 Payment for fractional shares resulting from 4-for-3 stock split (1,266) Unrealized gain on marketable securities 68,245 - - net Net earnings 3,849,778 --------------- ------------- --------------- Balance at June 30, 1996 34,303,555 Issuance of common stock in connection with acquisition 157,500 Purchase of treasury stock $ (700,000) (700,000) Unrealized gain on marketable securities - net 51,955 Net earnings 2,078,753 --------------- ------------- ---------------- Balance at June 30, 1997 (700,000) 35,891,763 Issuance of restricted stock $(540,000) 90,000 Deferred compensation expense 135,000 135,000 Purchase of treasury stock (719,962) (719,962) Unrealized gain on marketable securities - net 44,185 Net earnings 1,184,261 --------------- ------------- ----------------- Balance at June 30, 1998 $(1,419,962) $(405,000) $36,625,247 ========= ======= =============
The accompanying notes are an integral part of this statement. F-7 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30,
1996 1997 1998 ------------ ------------- -------- Cash flows from operating activities Net earnings $ 3,849,778 $ 2,078,753 $ 1,184,261 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 719,899 1,050,666 1,356,457 Deferred compensation 50,000 50,000 185,000 Deferred income tax benefit (158,000) (119,000) 33,000 Loss on sale of equipment 8,793 9,941 2,717 Provision for doubtful accounts 761,190 255,931 475,816 Changes in operating assets and liabilities, net of effects of acquisitions (Increase) decrease in accounts receivable (2,540,656) 1,603,022 (355,660) Increase in inventories (3,435,627) (1,767,196) (2,426,087) Decrease (increase) in prepaid expenses and other 516,789 (615,364) 156,419 Increase (decrease) in accounts payable (1,237,895) (594,557) 800,191 Increase (decrease) in accrued expenses (124,638) 235,950 291,933 Decrease in income taxes payable (91,732) (902,545) (81,889) ---------------- --------------- ---------------- Net cash provided by (used in) operating activities (1,682,099) 1,285,601 1,622,158 -------------- -------------- -------------- Cash flows from investing activities Increase in marketable securities (379,036) (59,943) (68,049) Capital expenditures (789,635) (943,352) (1,068,775) Proceeds from the sale of equipment 12,047 42,867 120,515 Business acquisitions, net of cash acquired (4,742,249) Decrease in due from officers, net 309,808 Increase in other assets (6,328) (176,728) (258,905) ----------------- --------------- --------------- Net cash used in investing activities (853,144) (5,879,405) (1,275,214) --------------- -------------- -------------- Cash flows from financing activities Proceeds from public offering - net 17,139,966 Borrowings from line of credit 173,061,732 161,931,215 152,258,926 Payments of line of credit (179,449,087) (155,834,207) (151,076,073) Principal payments under equipment financing (251,626) (289,727) (586,345) Payments under term loans (8,214,286) (214,286) (214,286) Purchase of treasury stock (700,000) (719,962) Proceeds from issuance of restricted stock 90,000 Proceeds from exercise of stock option 20,300 Payments for fractional shares (1,266) -------------- -------------- ----------------- Net cash (used in) provided by financing activities 2,305,733 4,892,995 (247,740) -------------- -------------- --------------- NET INCREASE (DECREASE) IN CASH (229,510) 299,191 99,204 Cash at beginning of year 393,671 164,161 463,352 --------------- --------------- --------------- Cash at end of year $ 164,161 $ 463,352 $ 562,556 =============== =============== =============== Supplemental cash flow disclosures: Interest paid $ 1,472,000 $ 815,000 $ 1,301,000 Income taxes paid 2,882,000 2,502,000 929,000 Supplemental schedule of noncash financing and investing activities: Equipment under capital leases $ $ 531,561 $ 1,165,781 -
The accompanying notes are an integral part of these statements. F-8 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996, 1997 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily engaged in the distribution of semiconductors, capacitors, resistors, electromechanical devices, flat panel displays, power supplies, computers and computer subsystems, produced by others, for the manufacture and assembly of electronic products. In addition, the Company provides contract manufacturing services. Electronics parts distribution sales include exports made principally to customers located in Western Europe. For the years ended June 30, 1996, 1997 and 1998, export sales amounted to approximately $4,963,000, $4,102,000 and $4,537,000, respectively. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Jaco Electronics, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. 2. Revenue Recognition The Company recognizes revenue as products are shipped and title passes to customers. 3. Investments in Marketable Securities Investments in marketable securities consist of investments in mutual funds. Such investments have been classified as "available for sale securities" and are reported at fair market value which is inclusive of unrealized gains of approximately $188,200 and $257,782 in 1997 and 1998, respectively. Changes in the fair value of "available for sale securities" are classified as a separate component of shareholders' equity, net of any related deferred tax effects. 4. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and average cost methods. F-9 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful life of the assets. The Company capitalizes costs incurred for internally developed software where economic and technological feasibility has been established. These capitalized software costs will be amortized on a straight-line basis over the estimated useful life of the software, which will be five to seven years. Amortization will begin in the period in which the software is available for use. 6. Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired is amortized over periods of ten to forty years using the straight-line method. The Company periodically reviews and evaluates whether there has been a permanent impairment in the value of its intangibles. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. 7. Income Taxes Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and net operating loss carryforwards for which income tax expenses or benefits are expected to be realized in future years. A valuation allowance has been established to reduce deferred tax assets attributable to a subsidiary of the Company, as it is more likely than not that all, or some portion, of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 8. Earnings Per Common Share In fiscal 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No. 128 replaces the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects F-10 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and, where appropriate, restated to conform to the SFAS No. 128 computation. 9. Financial Instruments and Business Concentrations Financial instruments which potentially subject the Company to concentration of credit risk consist principally of accounts receivable. Concentration of credit risk with respect to accounts receivable is generally mitigated due to the large number of entities comprising the Company's customer base, their dispersion across geographic areas and industries, along with the Company's policy of maintaining credit insurance. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Fair Value of Financial Instruments," requires disclosure of the estimated fair value of an entity's financial instrument assets and liabilities. The Company's principal financial instrument consists of a revolving credit facility, expiring on September 13, 2000, with two participating banks. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rate approximates the current prevailing interest rate. The Company generally purchases products from manufacturers pursuant to nonexclusive distributor agreements. During the year ended June 30, 1998, the Company's top three suppliers accounted for 16%, 13% and 9%, respectively, of net sales. As is common in the electronics distribution industry, from time to time the Company has experienced terminations of relationships with suppliers. There can be no assurance that, in the event a supplier cancelled its distributor agreement with the Company, the Company will be able to replace the sales with sales of other products. F-11 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 10. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 11. Accounting Pronouncements Not Yet Adopted In July 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosure About Segments of an Enterprise and Related Information". Statement No.130, which must be adopted by the Company in fiscal year 1999, establishes standards for the reporting and display of comprehensive income and its components in a complete set of financial statements. Statement No. 131, which must also be adopted by the Company in fiscal year 1999, changes the way segment information is reported and establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of these new standards will not have a material impact on the Company's financial position or results of operations. NOTE B - INVENTORY
Inventories consist of the following: June 30, 1997 1998 Finished goods and goods held for resale $30,129,201 $30,490,288 Work-in-process 455,000 555,000 Raw materials 2,727,000 4,692,000 ----------- ----------- $33,311,201 $35,737,288 ========== ==========
F-12 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998
NOTE C - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of: Useful June 30, life --------------------- in years 1997 1998 ---------- ------------ -------- Land, building and improvements 10 to 30 $1,468,708 $1,468,708 Machinery and equipment 3 to 8 4,698,011 6,028,756 Internally developed software costs 5 to 7 549,159 1,123,897 Transportation equipment 3 to 5 51,050 32,063 Leasehold improvements 5 to 10 569,515 599,757 ---------- ---------- 7,336,443 9,253,181 Less accumulated depreciation and amortization (including $272,500 in 1997 and $326,134 in 1998 of capitalized lease amortization) 2,327,398 3,150,736 --------- --------- $5,009,045 $6,102,445 ========= =========
Included in machinery and equipment are assets recorded under capitalized leases at June 30, 1997 and 1998 for $949,695 and $1,789,913, respectively. NOTE D - INCOME TAXES The components of the Company's provision for income taxes is as follows:
June 30, 1996 1997 1998 ------------- ------------- ------- Federal Current $2,176,000 $1,262,000 $663,000 Deferred (158,000) (119,000) 33,000 ---------- ---------- -------- 2,018,000 1,143,000 696,000 State 582,000 272,000 151,000 ---------- ---------- ------- $2,600,000 $1,415,000 $847,000 ========= ========= =======
F-13 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE D - INCOME TAXES (continued) The Company's effective income tax rate differs from the statutory U.S. Federal income tax rate as a result of the following:
June 30, -------------------------------------------- 1996 1997 1998 ------ -------- ------ Statutory Federal tax rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 6.0 5.1 5.0 Sales expense for which no tax benefit arises .1 1.8 2.4 Other .2 (.4) .3 ------ ------ ------ Effective tax rate 40.3% 40.5% 41.7% ==== ==== ====
Deferred income tax assets and liabilities resulting from differences between accounting for financial statement purposes and tax purposes are summarized as follows:
1997 1998 ------------- ------------ Deferred tax assets Net operating loss carryforwards $ 409,000 $ 260,000 Allowance for bad debts 308,000 463,000 Inventory valuation 691,000 874,000 Deferred compensation 237,000 255,000 Other deferred assets 65,000 198,500 ----------- ---------- 1,710,000 2,050,500 Deferred tax liabilities Depreciation (104,000) (458,000) Other (50,000) (68,000) Unrealized gain on marketable securities available for sale (68,000) (94,000) ----------- ----------- 1,488,000 1,430,500 Valuation allowance (494,000) (325,000) ---------- ---------- Net deferred tax asset $ 994,000 $1,105,500 ========== =========
F-14 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE D - INCOME TAXES (continued) At June 30, 1998, the Company, through an acquisition, has available a Federal net operating loss carryforward of approximately $713,000. Such net operating loss is subject to certain limitations and expires in varying amounts during the fiscal years 2007 through 2009. Further, the Company has established a valuation allowance with respect to the net deferred tax assets attributable to this acquired subsidiary. During fiscal 1998, $169,000 of such net deferred tax asset was recognized as a reduction of the excess of cost over net assets acquired attributable to the acquired subsidiary. The subsequent realization of such deferred tax asset will result in the reduction of the excess of cost over net assets acquired. F-15 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998
NOTE E - EARNINGS PER COMMON SHARE For the year ended June 30, 1996 1997 ---------------------------------------- ---------------------------------------- Income Shares Per Income Shares Per (Numer- (Denomi- Share (Numer- (Denomi- Share ator) nator) Amount ator) nator) Amount --------- --------- ------- --------- --------- ------- Basic earnings per share; income available to common shareholders $3,849,778 3,479,707 $1.11 $2,078,753 3,899,181 $0.53 Effect of dilutive securities Stock options 74,311 48,506 --------------- ----------- ---------------- ----------- Diluted earnings per share; income available to common shareholders plus assumed conversions $3,849,778 3,554,018 $1.08 $2,078,753 3,947,687 $0.53 ========= ========= ========= =========
For the year ended June 30, 1998 ---------------------------------------- Income Shares Per (Numer- (Denomi- Share ator) nator) Amount --------- --------- ------- Basic earnings per share; income available to common shareholders $1,184,261 3,836,700 $0.31 Effect of dilutive securities Stock options 84,818 --------------- ----------- - Diluted earnings per share; income available to common shareholders plus assumed conversions $1,184,261 3,921,518 $0.30 ========= =========
Options to purchase 217,631 shares of common stock at a price range of $7.00 to $12.75 and warrants to purchase 70,000 shares of common stock at $22.95 were outstanding during the year. They were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares. F-16 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS Debt and capitalized lease obligations are as follows: June 30, 1997 1998 ------------ ----------- Term loans and revolving line of credit (a) $14,821,883 $15,897,542 Other term loans (b) 358,073 133,863 Equipment notes (c) 250,165 115,998 Capitalized lease obligations (d) 847,328 1,825,066 ------------ ----------- 16,277,449 17,972,469 Less amounts representing interest on capitalized leases 125,661 272,678 ------------ ------------ 16,151,788 17,699,791 Less current maturities 599,239 663,198 ------------ ------------ $15,552,549 $17,036,593 ========== ==========
(a) Term Loans and Revolving Line of Credit Facility The Company's agreement with its banks, as amended, provides the Company with a $30,000,000 term loan and revolving line of credit facility based principally on eligible accounts receivable and inventories of the Company as defined in the agreements. The agreement was amended to: (i) extend the maturity date to September 13, 2000, (ii) change the interest rate to a rate based on the average 30 day LIBOR rate plus 3/4% to 1-1/4% depending on the Company's performance for the immediately preceding four fiscal quarters measured by a certain financial ratio, and (iii) changed the requirements of certain financial covenants. The applicable interest rate may be adjusted quarterly and borrowings under this facility are collateralized by substantially all of the assets of the Company. The outstanding balance on the revolving line of credit facility was $15,308,260 at June 30, 1998, with an associated interest rate of 6.91%. Pursuant to the same agreement, at June 30, 1998, a term loan with a remaining balance of $589,282 requires monthly principal payments of $17,857, together with interest through September 13, 2000, with a final payment of $107,146 due on September 13, 2000. The agreement contains provisions for maintenance of certain financial ratios, all of which the Company is in compliance with, and prohibits the payment of cash dividends. F-17 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued) (b) Other Term Loans Other term loans as of June 30, 1998 are as follows: Monthly Date of loan Balance Term payment March 16, 1995 $ 23,070 60 months $1,160 March 16, 1995 110,793 84 months 2,730 ------- $133,863
The above loans are collateralized by the related equipment acquired, having a carrying value of approximately $331,000 at June 30, 1998 and $422,000 at June 30, 1997. The agreements contain, among other things, restrictive covenants on one of the Company's subsidiaries, which place limitations on: (i) consolidations, mergers and acquisitions, (ii) additional indebtedness, encumbrances and guarantees, (iii) loans to shareholders, officers or directors, (iv) dividends and stock redemptions, and (v) transactions with affiliates, all as defined in the agreements. The loans bear interest payable monthly, at 6% and 5.5%, respectively. (c) Equipment Notes The equipment notes are payable through September 1999, bearing implicit interest rates from 7.55% to 9.68%, and are collateralized by the related equipment. (d) Capitalized Lease Obligations The Company leases certain equipment under agreements accounted for as capital leases. During fiscal 1998, the Company acquired approximately $1,166,000 of equipment through capital leases. The obligations for the equipment require the Company to make monthly payments through July 2003, with implicit interest rates from 7.0% to 8.5%. F-18 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued) The following is a summary of the aggregate annual maturities of debt and capitalized lease obligations as of June 30, 1998: Capitalized Debt leases Year ending June 30, 1999 $ 357,850 $ 406,439 2000 261,211 407,189 2001 15,504,324 407,189 2002 24,018 366,828 2003 218,869 2004 18,552 ---------- --------- $16,147,403 $1,825,066 ========== =========
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Leases The Company leases certain office and warehouse facilities under noncancellable operating leases. The leases also provide for the payment of real estate taxes and other operating expenses of the buildings. The minimum annual lease payments under such leases are as follows: Year ending June 30, 1999 $1,117,447 2000 1,084,685 2001 949,898 2002 922,080 2003 897,361 Thereafter 354,589 ---------- $5,326,060 ==========
F-19 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE G - COMMITMENTS AND CONTINGENCIES (continued)
In addition, the Company leases office and warehouse facilities from a partnership owned by two officers and directors of the Company. The lease expires in December 2003 and requires minimum annual lease payments as follows: Year ending June 30, 1999 $ 569,550 2000 598,000 2001 627,900 2002 659,327 2003 692,293 Thereafter 354,589 ---------- $3,501,659 ==========
The Company's rent expense was approximately $528,000, $602,00 and $602,000 for the years ended June 30, 1996, 1997 and 1998, respectively, in connection with the above lease. Rent expense on office and warehouse facilities leases for the years ended June 30, 1996, 1997 and 1998 was approximately $846,000 $962,000 and $1,033,000, respectively, net of sublease income of approximately $120,000, $115,000 and $115,000, respectively. 2. Other Leases The Company also leases various office equipment and automobiles under noncancellable operating leases expiring through April 2003. The minimum rental commitments required under these leases at June 30, 1998 are as follows:
Year ending June 30, 1999 $219,448 2000 128,922 2001 29,613 2002 15,096 2003 8,659 --------- $401,738 =========
F-20 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE G - COMMITMENTS AND CONTINGENCIES (continued) 3. Employment Agreement Effective July 1, 1993, the Company entered into an employment agreement with its Chairman which expired July 1, 1997, pursuant to which the Chairman received a base annual salary of $325,000. In addition, the Chairman was entitled to an annual bonus equal to 4% of earnings before income taxes, if earnings for a particular fiscal year exceed $1,000,000 or 6% if earnings before income taxes are in excess of $2,500,000. The agreement also provided for the continuation of the deferred compensation arrangement first established in fiscal 1985, whereby $50,000 per year has been accrued and becomes payable in its entirety no later than January 15 of the year next following the last to occur of the following events: (1) the Chairman's attainment of age 60 (fiscal 1999) or (2) cessation of the Chairman's employment with or without cause after July 1, 1993. In the event of a change in control resulting in termination of the Chairman's employment, the Chairman will receive between $450,000 and $600,000 depending on the date of termination. For the years ended June 30, 1996, 1997 and 1998, bonuses of approximately $387,000, $210,000 and $81,000, respectively, were earned pursuant to the Chairman's employment agreement. Presently, the Company is operating pursuant to the terms of the expired agreement and is in negotiations with its Chairman to extend his employment agreement under terms substantially similar to the above. 4. Other Matters The Company is a party to legal matters arising in the general conduct of business. The ultimate outcome of such matters is not expected to have a material adverse effect on the Company's results of operations or financial position. F-21 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE H - RETIREMENT PLAN The Company maintains a 401(k) Plan that is available to all employees, to which the Company contributes up to a maximum of 1% of each employee's salary. For the years ended June 30, 1996, 1997 and 1998, the Company contributed to this plan approximately $104,000, $91,000 and $132,000, respectively. NOTE I - SHAREHOLDERS' EQUITY On October 20, 1995, the Company completed a public offering of 1,600,000 shares of its common stock at $12.75 per share. The offering consisted of 1,325,000 shares offered by the Company and 275,000 shares offered by certain officers and directors of the Company. On December 8, 1995, the underwriters of the public offering exercised a portion of their overallotment option for an additional 160,000 shares at a price per share equal to that of the public offering. The Company's net proceeds from the public offering of $17,139,966, after deducting the underwriters' commission and costs of the public offering, were used to reduce its bank indebtedness. In connection with the public offering, the Company also issued stock warrants, to the representative underwriters, to purchase up to 70,000 shares of common stock at an exercise price per share equal to 180% of the public offering price, which expire on October 20, 1999. The Company has stock option plans which provide for the granting of stock options to employees, directors and officers under the following stock option plans: In November 1981, the Company approved the adoption of a qualified incentive stock option plan, hereinafter referred to as the "1981 Plan." The stock options granted under the 1981 Plan were generally exercisable for a period of five years at a price not less than the market value on the date of grant. The 1981 Plan terminated in November 1991. Options granted prior to expiration of the 1981 Plan which, by their terms, do not expire until after November 1991 remain outstanding in accordance with their terms until their individual expiration dates. During fiscal 1996, all outstanding options under the 1981 Plan had been exercised. F-22 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE I - SHAREHOLDERS' EQUITY (continued) In December 1992, the Board of Directors approved the adoption of a nonqualified stock option plan, known as the "1993 Non-Qualified Stock Option Plan," hereinafter referred to as the "1993 Plan." The Board of Directors or Plan Committee is responsible for the granting of and price of these options. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. The options expire five years from the date of grant and are exercisable over the period stated in each option. In December 1997, the shareholders of the Company approved an increase in the amount of shares reserved for the 1993 plan to 600,000 from 293,333, of which 290,833 are outstanding. In October 1993, the Board of Directors approved the adoption of a stock option plan for outside directors, known as the "1993 Stock Option Plan for Outside Directors," hereinafter referred to as the "Outside Directors Plan." Each outside director who was serving as of December 31, 1993 was granted a nonqualified stock option to purchase 14,667 shares of the Company's common stock at the fair market value on the date of grant. Each outside director who was serving on December 31 of each calendar year subsequent to 1993 was granted options to purchase 2,933 shares of the Company's common stock annually. The Outside Directors Plan expired on January 1, 1998, with a total of 55,731 options outstanding. Granted options shall expire upon the earlier of five years after the date of grant or one year following the date on which the outside director ceases to serve in such capacity. In June 1997, the Company appointed an additional outside director to the Board of Directors who received 10,000 options to purchase the Company's common stock at the fair market value on the date of grant. These options were not granted pursuant to any of the Company's existing stock option plans. F-23 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE I - SHAREHOLDERS' EQUITY (continued) Outstanding options granted to employees, directors and officers for the last three fiscal years are summarized as follows:
Weighted Incentive Nonqualified average stock options stock options exercise Price range Shares Price range Shares price Outstanding at June 30, 1995 $1.02 2,750 $ 4.77 - 5.80 135,300 $ 5.06 Granted $ 11.50 - 12.75 68,366 12.64 Exercised $1.02 (2,750) $ 4.77 (3,666) 4.77 ------ --------- Outstanding at June 30, 1996 - $ 4.77 - 12.75 200,000 7.65 Granted $ 7.00 - 8.50 150,265 7.15 Exercised Outstanding at June 30, 1997 - $ 4.77 - 12.75 350,265 7.44 Granted $ 6.25 8,799 6.25 Expired $ 12.75 (2,500) 12.75 ------------ --------- ----- Outstanding at June 30, 1998 - $ 4.77 - 12.75 356,564 7.37 ============ ======= Amounts exercisable at June 30, 1998 - $ 4.77 - 12.75 356,564 7.37 ============ ======= The following table summarizes information concerning currently outstanding and exercisable nonqualified stock options:
Weighted- Number average Weighted- outstanding remaining average and contractual exercise Range of exercise prices exercisable life (months) price $4.77 - $ 9.00 290,698 29 months $ 6.18 $9.01 - $12.75 65,866 29 months $12.64
F-24 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE I - SHAREHOLDERS' EQUITY (continued) The weighted-average option fair value on the grant date was $3.10, $1.82 and $1.88 for options issued during the years ended June 30, 1996, 1997 and 1998, respectively. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"); it applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the Plan and does not recognize compensation expense for such Plan. If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company's reported net earnings and earnings per share would be reduced to the pro forma amount indicated below for the years ended June 30:
1996 1997 1998 --------------- --------------- --------- Net earnings As reported $3,849,778 $2,078,753 $1,184,261 Pro forma 3,639,117 1,805,602 1,167,761 Net earnings per common share - basic As reported $1.11 $.53 $.31 Pro forma 1.05 .46 .30 Net earnings per common share - diluted As reported $1.08 $.53 $.30 Pro forma 1.02 .46 .30
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before fiscal 1996. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the fiscal years ended June 30, 1996, 1997 and 1998, respectively: expected volatility of 25%, 25% and 35%; risk-free interest rates of 5.67%, 6.32% and 5.42% and expected term of 3 years for all years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-25 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE I - SHAREHOLDERS' EQUITY (continued) The Board of Directors of the Company has authorized the purchase of up to 250,000 shares of its common stock under a stock repurchase program. Subsequent to year-end, the Board of Directors authorized the repurchase of up to an additional 400,000 shares of the Company's common stock. The purchases may be made by the Company from time to time on the open market at the Company's discretion and will be dependent on market conditions. To date, the Company has purchased 404,500 shares of its common stock for aggregate consideration of $2,176,342 under this program. In June 1997, the Company's Board of Directors approved the adoption of a restricted stock plan, which was subsequently ratified by shareholders during the Company's December 1997 annual meeting. The plan enables the Board of Directors or Plan Committee to have sole discretion and authority to determine who may purchase restricted stock, the number of shares, the price to be paid and the restrictions placed upon the stock. Pursuant to this plan, the Company has issued 90,000 shares of common stock to certain employees at a purchase price of $1.00 per share. Shares purchased are subject to a four-year vesting period and the Company recognized $135,000 of compensation expense during fiscal 1998 in connection with this plan. NOTE J - ACQUISITIONS During August 1996 and January 1997, the Company purchased QPS Electronics, Inc. and Corona Electronics, Inc., respectively, both of which are electronic component distributors. Aggregate consideration paid for the acquisitions approximated $4,700,000, of which $157,500 was paid through the issuance of 20,000 shares of the Company's common stock. These acquisitions have been accounted for by the purchase method and, as such, the fair value of the assets and liabilities acquired have been recorded on the date of the respective acquisitions. The respective results of their operations are included with those of the Company from the date of acquisition. The excess of the purchase price over the fair value of the assets acquired, approximately $3,053,000, is being amortized using the straight-line method over a period of twenty years. Pro forma historical results of operations are not presented, as such results would not be materially different from the historical results of the Company. F-26 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE K - SEGMENT INFORMATION The Company has two business segments: electronics parts distribution and contract manufacturing. The following is a summary of selected consolidated information for the electronics components distribution and contract manufacturing segments.
Year ended June 30, ------------------------------------ 1996 1997 1998 --------- --------- ------- (in thousands) Sales Electronics components distribution $156,303 $145,091 $137,297 Contract manufacturing 10,846 10,007 16,377 -------- -------- -------- $167,149 $155,098 $153,674 ======= ======= ======= Operating profit Electronics components distribution $ 7,640 $ 3,994 $ 2,251 Contract manufacturing 157 471 921 ---------- ---------- ---------- $ 7,797 $ 4,465 $ 3,172 ========= ========= ========= Identifiable assets Electronics components distribution $ 53,600 $ 61,515 $ 60,929 Contract manufacturing 7,543 8,481 12,490 --------- --------- -------- $ 61,143 $ 69,996 $ 73,419 ======== ======== ======== Capital expenditures Electronics components distribution $ 524 $ 810 $ 1,002 Contract manufacturing 266 133 67 ---------- ---------- ----------- $ 790 $ 943 $ 1,069 ========== ========= ========= Depreciation and amortization Electronics components distribution $ 422 $ 742 $ 913 Contract manufacturing 298 309 443 ---------- ---------- ---------- $ 720 $ 1,051 $ 1,356 ========== ========= =========
F-27 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1996, 1997 and 1998 NOTE L - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter ended September 30, December 31, March 31, June 30, 1997 1997 1998 1998 Net sales $36,878,534 $39,787,894 $38,334,936 $38,672,862 Gross profit 7,817,154 8,198,631 7,913,643 7,948,715 Net earnings 398,030 463,183 262,859 60,189 Earnings per common share Net earnings per common share - basic and diluted $.10 $.12 $.07 $.02 === === === ===
Quarter ended September 30, December 31, March 31, June 30, 1996 1996 1997 1997 Net sales $38,321,790 $38,194,939 $38,661,610 $39,919,406 Gross profit 8,115,502 8,011,793 7,863,345 8,113,933 Net earnings 787,641 621,281 347,338 322,493 Earnings per common share Net earnings per common share - basic and diluted $.20 $.16 $.09 $.08 === === === ===
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors and Shareholders Jaco Electronics, Inc. In connection with our audit of the consolidated financial statements of Jaco Electronics, Inc. and Subsidiaries referred to in our report dated August 21, 1998, which is included in this annual report on Form 10-K, we have also audited Schedule II for each of the three years in the period ended June 30, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Melville, New York August 21, 1998 F-28 Jaco Electronics, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 1996, 1997 and 1998
Column A Column B Column C Column D Column E -------- -------- ---------------------------- -------- -------- Additions (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts - Deductions - at end of Description of period expenses describe describe period Allowance for doubtful accounts Year ended June 30, 1996 $610,000 $761,000 $153,000 (a) $766,000 (b) $ 758,000 ======= ======= ======= ======= ========== Year ended June 30, 1997 $758,000 $256,000 $ 95,000 (a)(c) $263,000 (b) $ 846,000 ======= ======= ======== ======= ========== Year ended June 30, 1998 $846,000 $476,000 $226,000 (a) $280,000 (b) $1,268,000 ======= ======= ======= ======== =========
(a) Recoveries of accounts. (b) Represents write-offs of uncollectible accounts. (c) Includes balance attributable to acquired subsidiary. F-29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JACO ELECTRONICS, INC. Date: September 28, 1998 By: Joel H. Girsky -------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: September 28, 1998 Joel H. Girsky --------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer (Principal Executive Officer) Date: September 28, 1998 Jeffrey D. Gash --------------------- Jeffrey D. Gash, Vice President Finance Principal Financial and Accounting Officer) Date: September 28, 1998 Stephen A. Cohen --------------------- Stephen A. Cohen, Director Date: September 28, 1998 Edward M. Frankel --------------------- Edward M. Frankel, Director Date: September 28, 1998 Charles B. Girsky --------------------- Charles B. Girsky, Executive Vice President and Director Date: September 28, 1998 Joseph F. Hickey, Jr. ------------------------------- Joseph F. Hickey, Jr., Director EX-21.1 2 SUBSIDIARIES OF THE COMPANY The following subsidiaries, all of which were 100% directly owned, were included in the Registrant's consolidated financial statements. Name of Subsidiary State or Jurisdiction of Incorporation Distel, Inc. California RC Components, Inc. Massachusetts Micatron Inc. New York Quality Components, Inc. Texas Jaco Overseas, Inc. Virgin Islands Nexus Custom Electronics, Inc. New Jersey Jaco Electronics Canada, Inc. Canada Corona Electronics, Inc. California EX-23.1 3 CONSENT OF GRANT THORNTON LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated August 21, 1998 accompanying the consolidated financial statements and schedule of Jaco Electronics, Inc. as of June 30, 1997 and 1998 and for each of the three years in the period ended June 30, 1998 contained in this annual report of Jaco Electronics, Inc. on Form 10-K for the year ended June 30, 1998. We hereby consent to the incorporation by reference of the aforementioned reports in the Registration Statement of Jaco Electronics, Inc. on Form S-8/S-3 (File No. 33-89994, effective March 3, 1995), as amended by the Post-Effective Amendment No. 1 to the Registration Statement of Jaco Electronics, Inc. or Form S-8/S-3 (File No. 333-49873, effective April 10, 1998); and the Registration Statement of Jaco Electronics, Inc. on Form S-8/S-3 (File No. 333-49877, effective April 10, 1998). GRANT THORNTON LLP Melville, New York September 28, 1998 EX-99.8.2 4 JACO AMMENDMENT August 1, 1997 JACO ELECTRONICS, INC. 145 Oser Avenue Hauppauge, NY 11778 NEXUS CUSTOM ELECTRONICS, INC. Prospect Street Brandon, VT 05733 Gentlemen: Reference is made to the Second Restated and Amended Loan and Security Agreement between Jaco Electronics, Inc. and Nexus Custom Electronics, Inc., as Debtor, and our predecessor-in-interest, The Bank of New York Commercial Corporation, as Lender, and each other Lender a party thereto, dated September 13, 1995, as amended and supplemented (the "Loan Agreement"). Initially capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. It is hereby agreed that effective as of August 1, 1997, the Loan Agreement shall be amended as follows: 1. The definition of "Agent ABR Loan" set forth in Paragraph 1 is deleted in its entirety and replaced by the following definition of "Agent LIBO Rate Loan": " "Agent LIBO Rate Loan" shall have the meaning set forth in Paragraph 4( c ) of this Agreement." 2. The definition of "Contract Rate" set forth in Paragraph 1 is amended to read in its entirety as follows: " "Contract Rate" means an interest rate per annum equal to (i) the applicable LIBO Rate plus one percent (1%) in the case of LIBO Rate Loans first arising, or first continued or converted thereto prior to January 1, 1998, and (ii) in the case of LIBO Rate Loans first arising, or first continued or converted thereto on or after January 1, 1998, the applicable LIBO Rate plus ( a ) one and one-quarter percent (1 1/4%) if the ratio of total Loans to net earnings before interest, taxes, depreciation, amortization, extraordinary gains and losses, and all other non-cash charges on a consolidated basis ("EBITDA") during the immediately preceding four (4) fiscal quarters is greater than 2 to 1, ( b ) one percent (1%) if the ratio of total Loans to EBITDA during the immediately preceding four (4) fiscal quarters is 1.5-2 to 1, or ( c ) three-quarters of one percent (3/4%) if the ratio of total Loans to EBITDA during the immediately preceding four (4) fiscal quarters is less than 1.5 to 1. The Contract Rate applicable to LIBO Rate Loans under clause (ii) hereof shall be adjusted quarterly." 3. The definitions of "Interest Period", "LIBO Rate (Reserve Adjusted)", "LIBOR Office" and "LIBOR Reserve Percentage" set forth in Paragraph 1 are deleted in their entirety. 4. The definition of "LIBO Rate" set forth in Paragraph 1 is amended to read in its entirety as follows: " "LIBO Rate" means the rate per annum for the one month LIBOR as published in The Wall Street Journal, averaged monthly on a calendar month basis." 5. The definition of "LIBO Rate Loan" set forth in Paragraph 1 is amended to read in its entirety as follows: " "LIBO Rate Loan" means a Loan or any portion thereof that bears interest based on the LIBO Rate." 6. The fourth through the seventh lines of the definition of "Term Loan Notes" set forth in Paragraph 1 are deleted in their entirety and replaced by the following: "restate in their entirety, upon terms and conditions therein more fully described, that certain promissory note initially issued by Debtor to the order of BNYCC dated as of March 11, 1994 in the original principal amount of $1,500,000." 7. The second full paragraph of Paragraph 2 is amended by deleting the following language: "provided that any application of the proceeds of Accounts which (i) is made prior to the occurrence of an Event of Default and (ii) is not made at the direction of Borrower, and which application results in the payment of a LIBO Rate Loan prior to the last day of an Interest Period with respect thereto shall not result in the required payment by Debtor to Lender of any penalty or premium or loss or expense pursuant to Paragraph 5(g) hereof," 8. Paragraph 4( c )( i ) is deleted in its entirety and replaced by the following: "[INTENTIONALLY OMITTED]". 9. Paragraph 4( c )( ii ) is amended to read in its entirety as follows: "( ii ) The Debtor may by telephonic notice received by an officer of the Agent, request a borrowing prior to 1:00 P.M. New York time in the form of a LIBO Rate Loan on the date on which it requests to incur such a Loan, such request to specify the amount of the Loan requested. In any such instance, the Agent may: (a) notify each of the Lenders, not later than 2:00 P.M. New York time, of the LIBO Rate Loan to be funded on such date, as well as the amount of such Lender's Pro Rata Share of the requested LIBO Rate Loan, and each such Lender shall make such amount available to the Agent on such date in same day funds, to such account of the Agent as the Agent may designate, by not later than 5:00 P.M. New York time; or (b) if the Agent shall elect to do so in its sole and absolute discretion, subject to the terms and conditions hereof and in its capacity as a Lender, make such LIBO Rate Loan available to the Debtor (each an "Agent LIBO Rate Loan") on the date so requested, by transferring same day funds to the operating account(s) of the Debtor maintained with the Agent. Each such Agent LIBO Rate Loan shall constitute a Loan hereunder and shall be subject to all of the terms and conditions applicable to other Loans, except that all payments thereon shall be payable to the Agent in its capacity as Lender, solely for its own account, until such time as each of the Lenders shall Settle with the Agent as to such Agent LIBO Rate Loan on the Settlement Date next occurring. Until such Settlement shall occur, the Agent shall correspondingly increase its Pro Rata Share of the Aggregate Maximum Loan Amount and the Pro Rata Share of each such other Lender shall be correspondingly decreased and upon such Settlement occurring, appropriate adjustments shall be made to such Pro Rata Shares in order to restore such Pro Rata Shares to their respective levels prior to the relevant Agent LIBO Rate Loan." 10. Paragraph 4( c )( v ) is deleted in its entirety and replaced by the following: "[INTENTIONALLY OMITTED]". 11. Paragraph 5(a)(i) is amended by deleting the words "except that interest with respect to LIBO Rate Loans shall be payable on the last day of the Interest Period with respect thereto" and inserting at the end of said paragraph the following sentence: "Whenever the LIBO Rate is increased or decreased, the applicable Contract Rate shall be similarly changed without notice or demand by an amount equal to the amount of such change in the LIBO Rate." 12. Paragraph 4(e)is amended by deleting the following language: "(except as set forth in subsection (b) of the definition of "Interest Period" appearing herein)". 13. Paragraph 5(a) is amended by deleting the following language: "except that interest with respect to LIBO Rate Loans shall be payable on the last day of the Interest Period with respect thereto". 14. Paragraph 5(e) is amended by deleting the following language: "at the end of the then current Interest Periods with respect thereto or sooner". 15. Paragraph 5(g) is deleted in its entirety and replaced by the following: "[INTENTIONALLY OMITTED]". 16. The first sentence of Paragraph 17(d) is amended to read in its entirety as follows: "Maintain at all times a ratio of consolidated current assets of Debtor and its Subsidiaries to consolidated current liabilities of Debtor and its Subsidiaries of not less than 1.6 to 1.0." 17. Paragraphs 17(e), (f) and (g) are amended to read in their entirety as follows: "(e) Maintain at all times consolidated net worth (all amounts which would be included under shareholders' equity on a consolidated balance sheet of the Debtor determined in accordance with generally accepted accounting principles) in an amount not less than $34,000,000, which amount shall be increased at the end of each quarter on a cumulative basis by an amount equal to fifty percent (50%) of the consolidated net profit after taxes, if any, for such quarter." "(f) Maintain at all times a ratio of the sum of (1) cash and cash equivalents plus (2) accounts receivable to current liabilities (as defined in Paragraph 17(d)) of not less than 0.65 to 1.0 on a consolidated basis." "(g) Maintain at all times an excess of current assets over current liabilities (both as defined in Paragraph 17(d) and each on a consolidated basis) of not less than $23,000,000." 18. The first sentence of Paragraph 18(e) is amended to read in its entirety as follows: "Permit at any time the ratio of Indebtedness to Tangible Net Worth to be greater than 1.30 to 1.0; "Indebtedness" shall mean consolidated total liabilities of Debtor and its Subsidiaries determined in accordance with generally accepted accounting principles consistently applied." 19. The first sentence of Paragraph 21 is amended to read in its entirety as follows: "This (Second Restated and Amended Loan and Security) Agreement shall (subject to compliance with the Conditions Precedent) become effective on the Closing Date hereof, without any interruption or break in continuity (as more fully described in the second paragraph hereof) and shall continue until the fifth anniversary of the Closing Date." 20. The fifth sentence of Paragraph 21 is amended by deleting the following language: "provided that any such payment which results in a payment of a LIBO Rate Loan before the last date of the Interest Period with respect thereto shall be subject to the provisions of Paragraph 5(g) hereof". Except as hereinabove specifically set forth, the Loan Agreement shall remain unmodified and in full force and effect in accordance with its terms. If you are in agreement with the foregoing, please so indicate by signing and returning to us the enclosed copy of this letter. Very truly yours, BNY FINANCIAL CORPORATION f/k/a THE BANK OF NEW YORK COMMERCIAL CORPORATION, as Agent and Lender By:Frank Imperato Title: Vice President FLEET BANK, N.A. f/k/a/ NATWEST BANK N.A., as Lender By:Alice Adelberg Title:Vice President AGREED: JACO ELECTRONICS, INC. By:Jeffrey D. Gash Title:Vice President NEXUS CUSTOM ELECTRONICS, INC. By:Jeffrey D. Gash Title:Vice President EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the audited consolidated balance sheet as of June 30, 1998 and the audited consolidated statement of earnings for the year ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 562,556 764,810 23,155,618 1,268,000 35,737,288 61,538,102 9,253,181 3,150,736 73,419,289 19,057,449 17,736,593 0 0 406,572 36,218,675 73,419,289 153,674,226 153,674,226 121,796,083 121,796,083 28,706,520 0 1,140,362 2,031,261 847,000 1,184,261 0 0 0 1,184,261 0.31 0.30
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