-----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, I5wLLFsfSCnc6Xw6473tqESfrSx/Qub42IasjSc82p5qR96KJ4IOuS7XIezmBGYc B90R0PNjngPEtizF1/FyAQ== 0000950123-04-011474.txt : 20040928 0000950123-04-011474.hdr.sgml : 20040928 20040928151329 ACCESSION NUMBER: 0000950123-04-011474 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040928 DATE AS OF CHANGE: 20040928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACO ELECTRONICS INC CENTRAL INDEX KEY: 0000052971 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 111978958 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-34664 FILM NUMBER: 041049707 BUSINESS ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 6312735500 MAIL ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 y02559e10vk.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-5896 JACO ELECTRONICS, INC. ---------------------- (Exact name of registrant as specified in its charter) New York 11-1978958 --------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) No.) 145 Oser Avenue, Hauppauge, New York 11788 ------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 273-5500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 per share ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: [X] No: [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes:[ ] No: [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of December 31, 2003 was $ 31,586,178 (based on the last reported sale price on the Nasdaq National Market on that date). The number of shares of the registrant's common stock outstanding as of September 20, 2004 was 6,262,832 shares (excluding 659,900 treasury shares). DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's definitive proxy statement to be filed on or before October 28, 2004 under Regulation 14A in connection with the registrant's 2004 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. FORWARD-LOOKING STATEMENTS This Form 10-K contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Act of 1934, as amended, or the Exchange Act, which represent our management's beliefs and assumptions concerning future events. When used in this report and in documents incorporated herein by reference, forward-looking statements include, without limitation, statements regarding our financial forecasts or projections, our expectations, beliefs, intentions or future strategies that are signified by the words "expects", "anticipates", "estimates", "intends" or similar language. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that could cause our actual results and the timing of certain events to differ materially from those expressed in the forward-looking statements. Potential factors that could cause our actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following: - We are dependent on a limited number of suppliers for our products, which generate a significant portion of our sales. As a result, to the extent that these suppliers are not willing to do business with us in the future on terms acceptable to us, the loss of these suppliers could materially adversely affect our business, results of operations and financial condition. - Most of our distributorship agreements are cancelable upon short notice. While these agreements typically provide for certain protections in the event of termination to reduce our exposure to losses from unsold inventory (such as price protection and rights of return), we cannot assure you that we will not experience significant losses from unsold inventory in the future. - The market for our products and services is very competitive and subject to rapid technological advances. We compete with many other distributors of electronic components, many of which are larger and have significantly greater name recognition and greater financial and other resources than we have. Failure to maintain and enhance our competitive position could adversely affect our business. - Some of our customer base is transferring to the Far East in order to reduce production costs. If we are unsuccessful in expanding our Far East operations in response to this trend, our sales could be negatively impacted. - Downturns in the electronic components industry and in the general economy have in the past, and could in the future, adversely affect our business, results of operations and financial condition. - Strikes or other delays or disruptions in air or sea transportation and possible future legislative or regulatory changes with respect to pricing and/or import quotas on products we import from foreign countries could adversely affect our business. - Terrorist attacks may create instability and uncertainty in the electronic components industry. - Volatile pricing of electronic components may reduce our profit margins. - Costs or difficulties related to the integration of the operations and personnel of businesses we acquire may be greater than expected. - Limited allocation of products by our suppliers may reduce the availability of certain products we offer. - 2 - - Adverse changes may occur in the securities markets. In light of these and other risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to update publicly or revise any forward-looking statements to reflect new information or events or circumstances occurring after the date of this report. - 3 - PART I ITEM 1. BUSINESS. Jaco Electronics, Inc. was organized in the State of New York in 1961. Our principal executive offices are located at 145 Oser Avenue, Hauppauge, New York 11788, and our telephone number is (631) 273-5500. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, if any, filed or furnished with the Securities and Exchange Commission, or SEC, under the Exchange Act are available free of charge on our website at www.jacoelectronics.com/investor-fin-news.asp as soon as reasonably practicable after we file or furnish them with the SEC. Information contained on our website is not incorporated by reference in this report. As used in this report, the terms, "we", "us", "our", the "Company" and similar terms refer to Jaco Electronics, Inc. and our consolidated subsidiaries. OUR COMPANY We are a leading distributor of electronic components to industrial OEMs (Original Equipment Manufacturers) and contract manufacturers (see "Discontinued Operations", Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal Year Ended June 30, 2004 with Fiscal Year Ended June 30, 2003 - Discontinued Operations," and Note B - - "Discontinued Operations" to our Consolidated Financial Statements included elsewhere in this report for a description of our recent sale of our contract manufacturing subsidiary, Nexus Custom Electronics, Inc.). We also provided contract manufacturing services to our industrial OEM customers. We distribute products such as semiconductors, capacitors, resistors, electromechanical devices, flat panel displays and power supplies, which are used in the manufacture and assembly of electronic products, including: - - telecommunications equipment - - medical devices and instrumentation - - military/aerospace systems - - computers and office equipment - - industrial equipment and controls - - automotive and consumer electronics We have two distribution centers and 16 strategically located sales offices throughout the United States and one sales office recently opened in Bejing, China. We distribute more than 45,000 products from over 100 vendors, including such market leaders as Kemet Electronics Corporation, Samsung Semiconductor, Inc., Vishay Intertechnology, Inc. and Sharp Electronics Corp, to a base of over 7,500 customers through a direct sales force. To enhance our ability to distribute electronic components, we provide a variety of value-added services, including automated inventory management services, integrating and assembling various custom components with flat panel displays to customer specifications, assembling stock items for our customers into pre-packaged kits, providing contract manufacturing services and programming and testing of power supplies and crystal oscillators. Our core customer base consists primarily of small and medium-sized manufacturers that produce electronic equipment used in a wide variety of industries. OUR INDUSTRY The electronic components distribution industry has become an increasingly important sales channel for component manufacturers. Electronic components distributors relieve component - 4 - manufacturers of a portion of the costs and personnel needed to warehouse and sell their products. Distributors market manufacturers' products to a broader range of OEMs than such manufacturers could economically serve with their direct sales forces. Today, distributors have become an integral part of their customers' purchasing and inventory process. Distributors offer their customers the ability to outsource their purchasing and warehousing responsibilities. Electronic Data Interchange (EDI) permits distributors to receive timely scheduling of component requirements from customers enabling them to better provide these value-added services. Distributors also provide Field Application Engineers (FAEs). FAEs provide technical support to our customers engineering staff while serving as primary technical point of contact for our sales force. Our FAE team is trained by our key suppliers on their specific product and serve as an extension of their marketing efforts. The FAE also is responsible for our technical training designed at increasing the technical competence of our sales force. These functions are intended to increase the contribution of our sales and marketing effort as a value added service to our customers. PRODUCTS We currently distribute over 45,000 stock items. Our management believes that it is necessary for us to carry a wide variety of items in order to fully service our customers' requirements. Our products fall into four broad categories: Semiconductors (Semi), Flat Panel Displays (FPDs), Passive Components (capacitors and resistors) and Electromechanical Devices (EMCH). Our net distribution sales in each of these four product categories as a percentage of our total net distribution sales appears below:
2004 2003 ---- ---- Semi 53% 58% FPDs 21% 10% Passive 19% 26% EMCH 7% 6%
Semiconductors consist of such items as integrated circuits, microprocessors, transistors, diodes, dynamic random access memory (RAM), static RAMs, video RAMs and metal oxide field effect transistors. FPDs incorporate such items as flat panels and flat panel monitors, touch screens and controllers. Passive components consist primarily of capacitors and resistors. EMCH consists of such products as power supplies, relays and printerheads. VALUE-ADDED SERVICES We also provide a number of value-added services which are intended to attract new customers, to maintain and increase sales to existing customers and, in the case of flat panel system integration and contract manufacturing, to generate revenues from new customers. Value-added services include: - Automated Inventory Management Services. We offer comprehensive, state-of-the-art solutions that effectively manage our customers' inventory reordering, stocking and administration functions. These services reduce paperwork, inventory, cycle time and the overall cost of doing business for our customers. - 5 - - Flat Panel Systems Integration. Our display sales specialists and corporate product engineers configure highly customized solutions to meet specific flat panel display requirements. We provide technical services and integrate, test and deliver complete flat panel display products for both business and consumer applications. - Kitting. Kitting consists of assembling to a customer's specifications two or more of our 45,000 stock items into pre-packaged kits ready for use in the customer's assembly line. Kitting services allow us to provide a partial or complete fill of a customer's order and enable the customer to more efficiently manage its inventory. - Programming. We offer both Field Programming Instruments, as well as volume production capabilities performed in-house. All standard surface mount and dip packages are available. We provide custom oscillators at a user-specified frequency. In addition, we offer configurable modular power supplies featuring the flexibility of 10 wide-range outputs, with the best technical specifications in its class. This configurable power supply series offers quick turnaround and fully-tested units in Medical, Test and Measurement, Industrial and Datacom applications. SALES AND MARKETING We believe we have developed valuable long-term customer relationships and an in-depth understanding of our customers' needs and purchasing patterns. Our sales personnel are trained to identify our customers' requirements and to actively market our entire product line to satisfy those needs. We serve a broad range of customers in the computer, computer-related, telecommunications, data transmission, defense, aerospace, medical equipment and other industries. We have established specific sales and marketing programs to address the unique needs of the contract manufacturing sector. None of our customers individually represented more than 17% of our total net sales in any of the fiscal years ended June 30, 2004, 2003 and 2002. As an authorized distributor for key manufacturers, we are able to offer our customers engineering support as well as a variety of supply chain management programs. Engineering, support and supply chain management services enhance our ability to attract new customer contracts. Many of today's services revolve around the use of software automation and computer-to-computer transactions through EDI and internet-based solutions, and through technically competent product managers and a team of display sales specialists and field application engineers. We provide design support and technical assistance to our customers with detailed data solutions employing the latest technologies. Sales are made throughout North America from the sales departments maintained at our two distribution facilities located on the East and West Coasts of the United States in New York and California and from 17 strategically located sales offices. Sales are made primarily through personal visits by our employees and by a staff of trained telephone sales personnel who answer inquiries and receive and process orders from customers. In addition, we utilize the services of independent sales representatives whose territories include parts of North America and several foreign countries. We recently opened a sales office in Bejing, China to support our anticipated sales growth in the Far East. We also utilize a third party warehouse to support key customers in the Far East. These independent sales representatives operate under agreements which are terminable by either party upon 30 days notice and prohibit them from representing competing product lines. Independent sales representatives are authorized to solicit sales of all of our product lines. - 6 - SUPPLIERS Manufacturers of electronic components are increasingly relying on the marketing, customer service and other resources of distributors who market their product lines to customers not normally served by the manufacturer, and to supplement the manufacturer's direct sales efforts in other accounts often by providing value-added services not offered by the manufacturer. Manufacturers seek distributors who have strong relationships with desirable customers, are financially strong, have the infrastructure to handle large volumes of products and can assist customers in the design and use of the manufacturers' products. Currently, we have non-exclusive distribution or master inventory agreements with many manufacturers, including Dallas Semiconductor Corporation, Sharp Electronics Corp, Kemet Electronics Corporation, Samsung Semiconductor, Inc., 3 M Touch Systems, Inc., Vishay Intertechnology, Inc., Vitesse Semiconductor Corporation, Seiko Instruments USA, Inc., Oki Semiconductor Company and Epson Electronics America, Inc. We continuously seek to identify potential new suppliers and obtain additional distributorships for new lines of products. We believe that such expansion and diversification will increase our sales and market share. During the year ended June 30, 2004, products purchased from our two largest suppliers accounted for 26% and 12%, respectively, of our total net sales. As is common in the electronics distribution industry, from time to time we have experienced terminations of relationships with suppliers. We cannot assure you that, in the event a supplier cancelled its distributor agreement with us, we would be able to replace the sales associated with such supplier with sales of other products. We generally purchase products from manufacturers pursuant to non-exclusive distributor agreements. As an authorized distributor, we are able to offer our suppliers marketing support and technical assistance regarding product knowledge through our FAE program. This program is a technical resource that allows us the opportunity to work with our customers' engineers to design our more advanced products. These products typically have higher average selling prices and higher gross profit margins than commodity components and there is limited competition for the sale of these products. Most of our distributor agreements are cancelable by either party, typically upon 30 to 90 days notice, although these agreements are usually entered into with the intention of a long-term relationship. We have many active agreements with durations of in excess of fifteen years. These agreements typically provide for price protection, stock rotation privileges and the right to return inventory. Price protection is typically in the form of a credit to us for any inventory in our possession for which the manufacturer reduces its prices. Stock rotation privileges typically allow us to exchange inventory in an amount up to five percent of a prior period's purchases. Upon termination of a distributor agreement, the right of return typically requires the manufacturer to repurchase our inventory at our adjusted purchase price. We believe that these types of protective provisions contained in our distributorship agreements generally have served to reduce our exposure to loss from unsold inventory. Because price protection, stock rotation privileges and the right to return inventory are limited in scope, however, we cannot assure you that we will not experience significant losses from unsold inventory in the future. ACQUISITIONS In June 2003, we acquired certain assets of the electronics distribution business of Reptron Electronics, Inc. ("Reptron"), located in Florida. This acquisition has expanded our customer and supplier base. In addition, we recognized certain benefits relating to expected synergies in operations and the improved quality of the management team. The total purchase price, including transaction costs, was approximately $9,353,000, of which approximately $5,394,000 was paid in cash and the remaining portion resulted in our assumption of certain liabilities of Reptron. - 7 - OPERATIONS Component Distribution. Inventory management is critical to a distributor's business. We constantly focus on a high number of resales or "turns" of existing inventory to reduce exposure to product obsolescence and changing customer demand. Our central computer system facilitates the control of purchasing and inventory, accounts payable, shipping and receiving, and invoicing and collection information of our distribution business. Our distribution software system includes financial systems, EDI, customer order entry, purchase order entry to manufacturers, warehousing and inventory control. Each of our sales departments and offices is electronically linked to our central computer systems, which provide fully integrated on-line real-time data with respect to our inventory levels. Our inventory management system was developed internally and is considered proprietary. We track inventory turns by vendor and by product, and our inventory management system provides immediate information to assist in making purchasing decisions and decisions as to which inventory to exchange with suppliers under stock rotation programs. Our inventory management system also uses bar-code technology. In some cases, customers use computers that interface directly with our computers to identify available inventory and rapidly process orders. Our computer system also tracks inventory turns by customer. We also monitor supplier stock rotation programs, inventory price protection, rejected material and other factors related to inventory quality and quantity. This system enables us to more effectively manage our inventory and to respond quickly to customer requirements for timely and reliable delivery of components. Our inventory turnover was approximately five times for the fiscal year ended June 30, 2004. Contract Manufacturing. During the fiscal year ended June 30, 2004, we conducted our contract manufacturing operations through our wholly owned subsidiary, Nexus Custom Electronics, Inc. ("Nexus"). As described below under "Discontinued Operations," on September 20, 2004, we completed the sale of substantially all of the assets of this subsidiary and, as a result, are no longer engaged in contract manufacturing as of the date of this report. During the fiscal year ended June 30, 2004, we operated at two locations through our former Nexus subsidiary. The first location was an approximately 32,000 square foot facility located in Brandon, Vermont. The second location was an approximately 30,000 square foot facility located in Woburn, Massachusetts. During the fiscal year ended June 30, 2004, Nexus provided contract manufacturing services to OEM customers, which included procurement of customer specified components and raw materials from our network of suppliers and other suppliers, assembly of components on printed circuit boards (PCBs) and post-assembly testing. OEMs then incorporated the PCBs into finished products. In assembling PCBs, Nexus was capable of employing both PTH and SMT. PTH is a method of assembling PCBs in which component leads are inserted and soldered into plated holes in the board. SMT is a method of assembling PCBs in which components are fixed directly to the surface of the board, rather than being inserted into holes. DISCONTINUED OPERATIONS On September 20, 2004, we completed the sale of substantially all of the assets of our non-core contract manufacturing subsidiary, Nexus, to Sagamore Holdings, Inc. for total consideration of up to $13,000,000 and the assumption of certain liabilities. Under the terms of the purchase agreement relating to this transaction, we received $9.25 million of the purchase consideration in cash at closing. The balance of the fixed portion of the purchase consideration was satisfied through the delivery of a $2.75 million subordinated note issued by the purchaser. This note has a maturity date of September 1, 2009 and bears interest at the lower of the prime rate or 7%. The note is payable by the purchaser in quarterly cash installments ranging from $156,250 to $500,000 each, commencing in September 2006 and continuing for each quarter thereafter until maturity. Prepayment of the principal of and accrued interest on the note is permitted. - 8 - Additionally, we are entitled to receive additional consideration in the form of a six-year earn-out based on 5% of the annual net sales in excess of $20 million of Nexus after the closing date, up to $1,000,000 in the aggregate. Pursuant to the purchase agreement, Sagamore Holdings has also entered into a contract that designates us as a key supplier of electronic components to Nexus for a period of five years As a result of the sale, we have classified the operations of Nexus Custom Electronics as "discontinued" for all periods presented herein. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal Year Ended June 30, 2004 with Fiscal Year Ended June 30, 2003 - Discontinued Operations," and Note B - "Discontinued Operations" to our Consolidated Financial Statements included under Item 15 of this report for additional information regarding this transaction. COMPETITION The electronic components distribution industry is highly competitive, primarily with respect to price and product availability. We believe that the breadth of our customer base, services and product lines, our level of technical expertise and the quality of our services generally are also particularly important. We compete with large national distributors such as Arrow Electronics, Inc. and Avnet, Inc., as well as regional and specialty distributors, such as All American Semiconductor, Inc., many of whom distribute the same or competitive products. Many of our competitors have significantly greater name recognition and greater financial and other resources than we do. The electronics contract manufacturing industry is highly fragmented and is characterized by relatively high levels of volatility, competition and pricing and margin pressure. Many large contract manufacturers operate high-volume facilities and primarily focus on high-volume product runs. In contrast, certain contract manufacturers, such as Nexus, focused on low-to-medium volume and service-intensive products. BACKLOG The trend over the last couple of years has been toward outsourcing, and more customers have entered into just-in-time contracts with distributors, instead of placing orders with long lead times. Our backlog is subject to delivery rescheduling and cancellations by the customer, sometimes without penalty or notice. Therefore, our backlog is not necessarily indicative of our future sales for any particular period. EMPLOYEES At June 30, 2004, we had a total of 412 employees, of which 154 were employed by our former Nexus subsidiary and are no longer employed by us following the disposition of Nexus. Of our total employees, 10 were engaged in administration, 62 were managerial and supervisory employees, 159 were in sales and 181 performed warehouse, manufacturing and clerical functions. Of these employees, a total of 4 were employed by Nexus in administration, 12 in management and supervisory positions, 4 in sales and 134 in warehouse, manufacturing and clerical functions. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory. ITEM 2. PROPERTIES. All of our facilities are leased except for the Brandon, Vermont property, which was owned by Nexus. We currently lease 20 facilities strategically located throughout the United States, two of which - 9 - are multipurpose facilities used principally as administrative, sales and purchasing offices, as well as warehouses, one of which is used for contract manufacturing and the remainder of which are used principally by us as sales offices. Our satellite sales offices range in size from approximately 900 square feet to approximately 10,000 square feet. Base rents for such properties range from approximately $900 per month to approximately $7,500 per month. Depending on the terms of each particular lease, in addition to base rent, we may also be responsible for portions of real estate taxes, utilities and operating costs, or increases in such costs over certain base levels. The lease terms range from month to month to as long as ten years. All facilities are linked by computer terminals to our Hauppauge, New York headquarters. The following table sets forth certain information as of September 20, 2004 regarding our four principal leased facilities:
LEASE BASE RENT EXPIRATION LOCATION PER MONTH SQUARE FEET USE DATE ------------ --------- ----------- --------------- ---------- Hauppauge, NY (1) $50,000 72,000 Administrative, 12/31/13 Sales and Warehouse Franklin, MA $19,500 11,700 Sales 3/31/05 Woburn, MA (2) $14,300 30,000 Manufacturing 7/31/05 Westlake Village, CA $10,600 11,000 Administrative, 4/30/06 Sales and Warehouse
(1) Leased from a partnership owned by Joel H. Girsky, Chairman and President of the Company, and Charles B. Girsky, his brother, at a current monthly rent, which the Company believes represents the fair market value for such space. (2) This facility relates to our discontinued operation, and as of September 20, 2004, is no longer an obligation of the Company. Prior to our sale of Nexus on September 20, 2004, we owned and occupied, through Nexus, an approximately 32,000 square foot facility located in Brandon, Vermont that was used for manufacturing, storage and office space. We believe that our present facilities will be adequate to meet our needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS. We are a party to legal matters arising in the general conduct of business. The ultimate outcome of such matters is not expected to have a material adverse effect on our business, results of operations or financial condition. - 10 - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to our security holders during the fourth quarter of fiscal 2004. - 11 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. (a) Our common stock is traded on the Nasdaq National Market under the symbol "JACO". The stock prices listed below represent the high and low sale prices of our common stock, as reported by the Nasdaq National Market, for each fiscal quarter beginning with the first fiscal quarter of the fiscal year ended June 30, 2003.
HIGH LOW ---- --- FISCAL YEAR 2003: First quarter ended September 30, 2002............ $5.39 $2.11 Second quarter ended December 31, 2002............ 3.87 2.01 Third quarter ended March 31, 2003................ 3.15 2.05 Fourth quarter ended June 30, 2003................ 5.15 2.65 FISCAL YEAR 2004: First quarter ended September 30, 2003............ $6.50 $4.50 Second quarter ended December 31, 2003............ 7.50 5.61 Third quarter ended March 31, 2004................ 9.41 6.12 Fourth quarter ended June 30, 2004................ 8.44 4.40
(b) As of September 20, 2004, there were approximately 152 holders of record of our common stock. We believe our stock is held by more than 2,600 beneficial owners. (c) We have never declared or paid any cash dividends on our common stock. We intend for the foreseeable future to retain future earnings for use in our business. The amount of dividends we pay in the future, if any, will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results and other factors as the Board of Directors, in its discretion, deems relevant. In addition, our credit facility prohibits us from paying cash dividends on our common stock. - 12 - ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data set forth below contains only a portion of our financial statements and should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The historical results are not necessarily indicative of results to be expected for any future period. The share and per share data have been adjusted to give effect to a 3-for-2 stock split which was effective on July 24, 2000. Significant events effecting the comparability of this schedule include the acquisitions of Reptron and Interface in June, 2003 and June, 2000 respectively. The historical results for 2000 to 2003 have been adjusted to reclassify the results of operations of Nexus as discontinued.
YEAR ENDED JUNE 30, ------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales $ 249,100 $ 202,656 $ 175,948 $ 321,124 $ 193,111 Cost of goods sold 214,389 176,918 148,693 257,181 147,782 ---------- ---------- ---------- ---------- ---------- Gross profit 34,711 25,738 27,255 63,943 45,329 Selling, general and administrative expenses 35,016 28,184 32,635 44,776 33,317 ---------- ---------- ---------- ---------- ---------- Operating (loss) profit (305) (2,446) (5,380) 19,167 12,012 Interest expense 1,539 1,025 1,683 3,457 1,053 ---------- ---------- ---------- ---------- ---------- (Loss) earnings from continuing operations before income taxes (1,844) (3,471) (7,063) 15,710 10,959 Income tax (benefit) provision (553) (1,180) (2,500) 6,408 4,467 ---------- ---------- ---------- ---------- ---------- (Loss) earnings from continuing operations $ (1,291) $ (2,291) $ (4,563) $ 9,302 $ 6,492 Earnings (loss) from discontinued operations, net of taxes 736 (693) (481) 548 (116) ---------- ---------- ---------- ---------- ---------- NET (LOSS) EARNINGS $ (555) $ (2,984) $ (5,044) $ 9,850 $ 6,376 ========== ========== ========== ========== ========== PER SHARE INFORMATION Basic (loss) earnings per common share: (Loss) earnings from continuing operations $ (0.22) $ (0.40) $ (0.80) $ 1.64 $ 1.18 Earnings (loss) from discontinued operations $ 0.13 $ (0.12) $ (0.08) $ 0.10 $ (0.02) ---------- ---------- ---------- ---------- ---------- Net (loss) earnings $ (0.09) $ (0.52) $ (0.88) $ 1.74 $ 1.16 ========== ========== ========== ========== ========== Diluted (loss) earnings per common share:
- 13 -
YEAR ENDED JUNE 30, ------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (Loss) earnings from continuing operations $ (0.22) $ (0.40) $ (0.80) $ 1.50 $ 1.13 Earnings (loss) from discontinued operations $ 0.13 $ (0.12) $ (0.08) $ 0.09 $ (0.02) ---------- ---------- ---------- ---------- ---------- Net (loss) earnings $ (0.09) $ (0.52) $ (0.88) $ 1.59 $ 1.11 ========== ========== ========== ========== ========== Weighted-average common shares and common equivalent shares outstanding: Basic 5,974 5,783 5,713 5,670 5,498 ========== ========== ========== ========== ========== Diluted 5,974 5,783 5,713 6,179 5,766 ========== ========== ========== ========== ==========
AT JUNE 30, ------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET: Working capital ............................. $ 17,459 $ 11,437 $ 18,327 $ 23,752 $ 18,649 Total assets ................................ 121,782 114,212 110,635 136,315 126,329 Short-term debt ............................. 37,089 35,736 34,705 55,639 40,543 Long-term debt .............................. 119 63 1,072 1,572 1,206 Shareholders' equity ........................ 46,706 45,568 48,668 53,251 42,790
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60 recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of the Company's financial condition and results of operations and those that require significant judgments and estimates. The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates on historical experience, actuarial valuations and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the - 14 - carrying value of assets and liabilities that are not readily apparent from other sources. Some of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements. The accounting principles we utilized in preparing our consolidated financial statements conform in all material respects to generally accepted accounting principles in the United States of America. THE ACCOUNTING POLICIES IDENTIFIED AS CRITICAL ARE AS FOLLOWS: VALUATION OF RECEIVABLES - The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness. The Company continuously monitors payments from customers and a provision for estimated uncollectible amounts is maintained based upon historical experience and any specific customer collection issues, which have been identified. While such uncollectible amounts have historically been within the Company's expectations and provisions established, if a customer's financial condition were to deteriorate, additional reserves may be required. Concentration of credit risk with respect to accounts receivable is generally mitigated due to the large number of entities comprising the Company's customer base, their dispersion across geographic areas and industries, along with the Company's policy of maintaining credit insurance. VALUATION OF INVENTORIES - Inventories are valued at the lower of cost or market. Cost is determined by using the first-in, first-out and average cost methods. The Company's inventories are comprised of high technology components sold to rapidly changing and competitive markets whereby such inventories may be subject to early technological obsolescence. The Company evaluates inventories for excess, obsolescence or other factors rendering inventories as unsellable at normal gross profit margins. Write-downs are recorded so that inventories reflect the approximate market value and take into account the Company's contractual provisions with its suppliers governing price protections and stock rotations. Due to the large number of transactions and complexity of managing the process around price protections and stock rotations, estimates are made regarding the valuation of inventory at market value. In addition, assumptions about future demand, market conditions and decisions to discontinue certain product lines can impact the decision to write-down inventories. If assumptions about future demand change and/or actual market conditions are different than those projected by management, additional write-downs of inventories may be required. In any case, actual results may be different than those estimated. GOODWILL AND OTHER INTANGIBLE ASSETS - The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the excess of the purchase price over the fair value of identifiable net assets of acquired companies allocated to goodwill. Other intangible assets primarily represent franchise agreements and non-compete covenants. We evaluate long-lived assets used in operations, including goodwill and purchased intangible assets. The allocation of the acquisition cost to intangible assets and goodwill has a significant impact on our future operating results as the allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may - 15 - not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, and significant industry or economic trends. When impairment indicators are identified with respect to previously recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques. Significant management judgment is required in the forecasting of future operating results which are used in the preparation of the projected discounted cash flows and should different conditions prevail, material write downs of net intangible assets and goodwill could occur. NEW ACCOUNTING STANDARDS In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 has not had a material impact on the Company's consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a material impact on the Company's consolidated financial position, results of operations or cash flows. In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition" ("SAB No. 104"), which codifies, revises and rescinds certain sections of SAB No. 101, "Revenue Recognition", in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Company's financial position, results of operations or cash flows. RESULTS OF OPERATIONS THE FOLLOWING TABLE SETS FORTH CERTAIN ITEMS IN OUR STATEMENT OF OPERATIONS AS A PERCENTAGE OF NET SALES FOR THE PERIODS SHOWN: - 16 -
2004 2003 2002 ---- ---- ---- Net sales ............................................. 100.0% 100.0% 100.0% Cost of goods sold .................................... 86.1 87.3 84.5 ---- ---- ---- Gross profit .......................................... 13.9 12.7 15.5 Selling, general and administrative expenses .......... 14.0 13.9 18.5 ---- ---- ---- Operating loss ........................................ (0.1) (1.2) (3.0) Interest expense ...................................... 0.6 0.5 1.0 ---- ---- ---- Loss from continuing operations before income taxes ... (0.7) (1.7) (4.0) Income tax benefit .................................... (0.2) (0.6) (1.4) ---- ---- ---- Loss from continuing operations ....................... (0.5) (1.1) (2.6) Earnings (loss) from discontinued operations, net of taxes .......................................... 0.3 (0.4) (0.3) ---- ---- ---- Net loss .............................................. (0.2)% (1.5)% (2.9)% ==== ==== ====
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2004 ("FISCAL 2004") WITH FISCAL YEAR ENDED JUNE 30, 2003 ("FISCAL 2003") RESULTS FROM CONTINUING OPERATIONS: Net sales for Fiscal 2004 were $249.1 million, an increase of 22.9% from $202.7 million for Fiscal 2003. Approximately $41.0 million of the increase in net sales is attributable to new supplier relationships associated with the acquisition of certain assets of the electronics distribution business of Reptron Electronics, Inc. ("Reptron") in June 2003 and the balance is attributed to internal growth. We have seen an improvement in the demand for components throughout the electronics industry. Flat panel displays continues to represent our fastest growing product group. Flat panel sales increased from 10% of our total net sales during Fiscal 2003 to 21% for Fiscal 2004. Our ability to sustain our sales growth will be partially determined by our ability to continue to market successfully our flat panel displays. Semiconductors continue to represent our largest product group in terms of net sales. During Fiscal 2004, semiconductors accounted for 53% of our total net sales. Our semiconductor sales grew during the fiscal year as a result of increased marketing efforts, improving market conditions, and the addition of certain strategic franchises that we added through our acquisition of Reptron. Passive components have become very competitive in pricing. With manufacturing being done almost entirely off shore, it has become difficult to pursue new opportunities. Although we continue to still have a strong presence in selling passive components, our passive component sales decreased to 19% of net sales during Fiscal 2004 compared to 26% during Fiscal 2003. We have also increased our marketing of power supplies and printerheads. These products have a higher selling price per component, usually require some design work to be performed and as a result often generate higher gross profit margins. Our sales to the Far East represented approximately 20% of our total net sales in Fiscal 2004. These sales were primarily derived from business that we were already doing domestically that we were able to transition to the Far East. It is important to our ability to increase sales that we are able to expand our presence in the Far East, which represents the fastest growth area globally in our industry due to its currently low cost structure. Gross profit was $34.7 million, or 13.9% of net sales for Fiscal 2004, as compared to $25.7 million, or 12.7% of net sales for Fiscal 2003, an increase of 34.9%. Management considers gross profit - 17 - to be a key performance indicator in managing our business. Gross profit margins are usually a factor of product mix and demand for product. As discussed above, our passive component sales are decreasing. Historically, we have realized higher gross profit margins on passive components than semiconductors. As a result, unless demand for passive components increase, we do not anticipate any material increase in our overall margins, and we do not anticipate any significant change in demand for the foreseeable future. In addition, demand for our products may be adversely affected by events beyond our control. Selling, general and administrative expenses ("SG&A") were $35.0 million, or 14.1% of net sales, for Fiscal 2004, as compared to $28.2 million, or 13.9% of net sales for Fiscal 2003. The acquisition of Reptron increased our SG&A by $7.0 million. We continue to monitor all discretionary spending, without reducing personnel to the point that we cannot support sales growth. Our variable costs are primarily those costs associated with increases in gross profit dollars, such as sales commissions and bonuses. Management considers SG&A as a percentage of net sales to be a key performance indicator in managing our business. We believe that we already have in place the infrastructure to sustain our sales growth for the foreseeable future. Therefore, an increase in our net sales should result in a decrease in SG&A as a percentage of net sales. Interest expense increased to $1.5 million for Fiscal 2004 compared to $1.0 million for Fiscal 2003. The increase is attributable to higher borrowing as a result of cash expended due to the acquisition of Reptron and cash required due to the higher accounts receivable and inventory as a result of the growth in sales. Slightly higher interest rates also contributed to the increase. Any significant increase in our borrowing rates could significantly increase our interest expense, which would have a negative impact on our results of operations. Net loss from continuing operations for Fiscal 2004 was $1.3 million, or $0.22 per diluted share, as compared to $2.3 million, or $0.40 per diluted share, for Fiscal 2003. The improved performance is attributable to the increase in our net sales and resulting increase in gross profit dollars, partially offset by the increase in SG&A and interest expense. We believe we have benefited during Fiscal 2004 from the improved demand in the electronics industry and the integration of the Reptron distribution business. DISCONTINUED OPERATIONS: As described in Item 1. "Business- Discontinued Operations," on September 20, 2004, we completed the sale of substantially all of the assets of our contract manufacturing subsidiary, Nexus, for total consideration of up to $13.0 million, consisting primarily of $9.25 million paid in cash at closing and a $2.75 million subordinated note from the purchaser payable in quarterly installments over the next five years. Net income from these discontinued operations was $0.7 million, or $0.13 per diluted share, for Fiscal 2004. For Fiscal 2003, there was a net loss from these discontinued operations of $0.7 million, or $0.12 per diluted share. Increase in sales resulted in improved utilization of our fixed costs, resulting in increased gross profit. COMBINED NET LOSS: The net loss from both continuing and discontinued operations for Fiscal 2004 was $0.6 million, or $0.09 per diluted share, compared to $3.0 million, or $0.52 per diluted share, for Fiscal 2003. The - 18 - improved performance was attributable to the increase in gross profit dollars in excess of the increased SG&A during Fiscal 2004 as compared to Fiscal 2003. COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2003 ("FISCAL 2003") WITH FISCAL YEAR ENDED JUNE 30, 2002 ("FISCAL 2002") CONTINUING OPERATIONS: Net sales for Fiscal 2003 were $202.7 million, an increase of 15.2%, as compared to $176.0 million for Fiscal 2002. We have seen an increase in net sales to certain customers where inventory management programs have been implemented. It has been our focus to offer value-added services to enhance value. Although there are indications of improvement, including certain customers in different industry segments who have seen their business improve, it is too early to be certain when this will lead to a general recovery in our industry. On June 13, 2003, the Company acquired certain assets of the electronics distribution operations of Reptron. Sales included in Fiscal 2003 associated with the Reptron acquisition were approximately $3.4 million. For Fiscal 2003 flat panel display ("FPD") sales represented approximately 10% of our total distribution sales. Passive components represented approximately 32% of our distribution sales and active components, including FPD's, represented approximately 68% of our distribution sales during Fiscal 2003. Gross profit was $25.7 million, or 12.7% for Fiscal 2003, as compared to $27.3 million, or 15.5% for Fiscal 2002. The Fiscal 2003 gross profit includes inventory write-downs of approximately $2.8 million, of which approximately $1.9 million was provided for in the fourth quarter of Fiscal 2003. Pricing of components continues to be highly competitive due to the availability of product. Our sales growth has been through the automated inventory programs, which have a high concentration of semiconductors that sell at lower margins. We do anticipate our margins to improve slightly due to sales associated with the Reptron acquisition, which historically have been at higher margins than ours. SG&A expenses were $28.2 million in Fiscal 2003, a decrease of $4.4 million, or 13.5% compared to $32.6 million in Fiscal 2002. We continue to strive to operate more efficiently. We continue to eliminate discretionary spending, while being careful not to impact our ability to service customers. We do anticipate our SG&A expenses to increase due to the Reptron acquisition. Interest expense decreased to $1.0 million in Fiscal 2003, as compared to $1.7 million in Fiscal 2002, representing a decrease of $0.7 million, or 41.2%. The decrease is attributable to a reduction of the average long-term debt balance for Fiscal 2003 as compared to Fiscal 2002. We do expect an increase in interest expense as a result of additional borrowings due to the Reptron acquisition. Net loss from continuing operations for Fiscal 2003 was $2.3 million, or $0.40 per diluted share, compared to a net loss during Fiscal 2002 of $4.6 million, or $0.80 per diluted share. As a result of our decrease in SG&A expenses and interest expense, we were able to reduce our net loss from continuing operations 49.8% for Fiscal 2003, as compared to Fiscal 2002. DISCONTINUED OPERATIONS: Net loss from these discontinued operations was $0.6 million, or $0.12 per diluted share, for Fiscal 2003, as compared to $0.5 million, or $0.08 per diluted share in Fiscal 2002. The increase in our net loss from these discontinued operations was primarily due to a decrease in sales from our discontinued unit in Fiscal 2003 as compared to Fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES To provide additional liquidity and flexibility in funding its operations, the Company borrows amounts under credit facilities and other external sources of financing. On December 22, 2003, we entered into a Third Restated and Amended Loan and Security Agreement with GMAC Commercial Finance LLC and PNC Bank, National Association providing for a $50,000,000 revolving secured line of credit. This credit facility has a maturity date of December 31, 2006 and amended an existing $45,000,000 - 19 - secured line of credit. Borrowings under the new credit facility are based principally on eligible accounts receivable and inventories of the Company, as defined in the credit agreement, and are collateralized by substantially all of the assets of the Company. At June 30, 2004, the outstanding balance on this new revolving line of credit facility was $37.0 million, with an additional $8.1 million available. The credit agreement contains provisions for maintenance of certain financial covenants, including, among others EBITDA and Minimum Net Worth, as defined. The interest rate on the outstanding borrowings at June 30, 2004 was approximately 4.5%. At June 30, 2004, we were in compliance with all such covenants. Failure to remain in compliance with these covenants could trigger an acceleration of our obligation to repay all outstanding borrowings under our credit facility, limit our ability to borrow additional amounts under the line of credit and put a requirement that we maintain an aggregate undrawn availability of $1.5 million until certain financial requirements are achieved, which would reduce the undrawn availability to $500,000. The credit agreement includes both a subjective acceleration clause and requires the deposit of customer receipts to be directed to a blocked account and applied directly to the revolving credit facility. Accordingly, the debt is classified as a current liability. The Company's prior credit agreement was amended on September 19, 2003 to extend the maturity date to October 1, 2004, and was subsequently amended on November 7, 2003 to provide a waiver for noncompliance with our EBITDA covenant for the quarter ended September 30, 2003. The prior agreement required us to maintain an $800,000 compensating balance arrangement with our banks in an interest bearing account, which was funded during the quarter ended December 31, 2002. The new credit agreement allows for the release of this $800,000 compensating balance arrangement and initially included an additional available amount under the line of credit of up to $750,000. The additional available amount at the time of closing was $732,000, declining by $31,000 monthly thereafter. The interest rate under the prior agreement was based on the average 30-day LIBOR plus 2.25% to 2.75%, depending on our performance for the immediately preceding four fiscal quarters measured by a specified financial ratio. The interest rate on the outstanding borrowings at June 30, 2003 was 3.9%. The outstanding balance on the prior revolving line of credit was $35.5 million at June 30, 2003. Effective September 19, 2003, the rate converted to the higher of the prime rate plus 0.75% or the federal funds rate plus 1.25%. Effective November 7, 2003, the rate converted to the higher of the prime rate plus 1% or the federal funds rate plus 1.50%. Effective December 22, 2003, the rate under the new credit agreement converted to the higher of the prime rate plus 0.75% or the federal funds rate plus 1.25%, or at our option, the average 30-day LIBOR plus 3.25%. On September 20, 2004, our credit facility was amended to provide the lenders' consent to our sale of our contract manufacturing subsidiary, Nexus, and to (1) change our (a) EBITDA (b) Fixed Charge Ratio and (c) Minimum Net Worth covenants, as defined (2) eliminates the remaining portion of the additional $732,000 of the additional available amount under the facility to zero, and (3) require the cash proceeds from the sale of Nexus to be used to repay indebtedness outstanding under the facility, (4) and put a requirement that we maintain an aggregate undrawn availability of $1.5 million until certain financial requirements are achieved which would reduce the undrawn availability requirement to $500,000. For Fiscal 2004, our net cash used in operating activities was approximately $1.7 million, as compared to net cash provided by operating activities of $7.9 million for Fiscal 2003. The increase in net cash used is primarily attributable to an increase in our accounts receivable and inventory, which was partially offset by an increase in our accounts payable. The increase in our accounts receivable resulted from the increase in our net sales for Fiscal 2004. The inventory increase was primarily due to supporting specific managed customer inventory programs. Net cash used in investing activities was approximately $0.6 million for Fiscal 2004 as compared to $7.9 million for Fiscal 2003. The decrease is primarily attributable to $5.6 million related to the acquisition of Reptron in Fiscal 2003 and to deferred payments - 20 - of $2.1 million for Fiscal 2003 related to our acquisition in June 2000 of Interface Electronics Corp. Net cash provided by financing activities was approximately $2.7 million for Fiscal 2004 as compared to net cash used in financing activities of $.1 million for Fiscal 2003. The increase in net cash provided is primarily attributable to the release of an $800,000 compensating balance requirement under our credit facility and proceeds from the exercise of stock options. For Fiscal 2004 and Fiscal 2003, our inventory turnover was 5.8 times and 5.2 times, respectively. The average days outstanding of our accounts receivable at June 30, 2004 was 52 days, as compared to 47 days at June 30, 2003. Inventory turnover and average days outstanding are key ratios that management relies on to monitor our business. In fiscal 2005, we plan to make certain leasehold improvements to construct a 20,000 square foot FPD facility that will allow us to vertically integrate our entire FPD operation. When the facility is completed, we will offer customers a one-stop source for their FPD supply and integration needs. The cost of this project is not expected to be material and will be funded with cash from current operations. Based upon our present plans, including no anticipated material capital expenditures, we believe that cash flow from operations and funds available under our credit facility will be sufficient to fund our capital needs for the next twelve months and for the foreseeable future. However, our ability to maintain sufficient liquidity depends partially on our ability in achieving anticipated revenue and managing costs as well. Our planned expansion to the Far East and construction of an integration center for our FPD sales will require capital expenditures that have been planned for by the sale of our contract manufacturing subsidiary Nexus Custom Electronics, Inc. However, our cash expenditures may vary significantly from current levels based on a number of factors, including, but not limited to, future acquisitions and capital expenditures, if any. Historically, we have, when necessary, been able to obtain amendments to our credit facilities to satisfy instances of non-compliance with financial covenants. While we cannot assure you that any such future amendments, if needed, will be available, management believes we will be able to continue to obtain financing on acceptable terms under our existing credit facility or through other external sources. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition. Based on the sale of Nexus, on September 20, 2004, the Company received $9.25 million cash at closing plus a subordinated note for $2.75 million. The cash at closing will be applied against the Company's outstanding line of credit. This will increase availability, except for certain restrictions (outlined previously in this section) that were established in the bank amendment approving the sale. These proceeds will be available to fund the anticipated expansion into the Far East and construction of an integration center to support the anticipated growth of the FPD product. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet debt, nor do we have any transactions, arrangements or relationships with any special purpose entities. CONTRACTUAL OBLIGATIONS This table summarizes our known contractual obligations and commercial commitments at June 30, 2004
TOTAL < 1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS > 5 YEARS -------------- -------------- -------------- -------------- -------------- Long Term Debt 37,035,245 37,035,245 Capital Lease 530,979 396,745(A) 134,234 Operating Lease 9,651,170 1,943,158(B) 2,207,072(C) 1,652,467 3,848,473 -------------- -------------- -------------- -------------- -------------- Total 47,217,394 39,375,148 2,341,306 1,652,467 3,848,473 ============== ============== ============== ============== ==============
- 21 - (A) Includes $323,527 from discontinued operations (B) Includes $198,806 from discontinued operations (C) Includes $14,331 from discontinued operations INFLATION Inflation has not had a significant impact on our operations during the last three fiscal years. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to interest rate changes with respect to borrowings under our credit facility, which bears interest at the higher of the prime rate plus 0.75% or the federal funds rate plus 1.25%. At August 31, 2004, $34.0 million was outstanding under the credit facility. Changes in the prime interest rate or the federal funds rate during the current fiscal year will have a positive or negative effect on our interest expense. Each 1.0% fluctuation in the prime interest rate or the federal funds rate will increase or decrease interest expense for us by approximately $0.3 million based on outstanding borrowings at August 31, 2004. The impact of interest rate fluctuations on other floating rate debt is not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. For an index to the financial statements and supplementary data, see Item 15 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response to this item is required. ITEM 9A. CONTROLS AND PROCEDURES. An evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2004. Based upon that evaluation, the Company's management, including its Principal Executive Officer and Principal Financial Officer, has concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. There have been no changes in the Company's internal control over financial reporting or in other factors identified in connection with this evaluation that occurred during the fiscal year ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION No response to this item is required. - 22 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. CODE OF ETHICS We have adopted a code of ethics within the meaning of Item 406(b) of SEC Regulation S-K, called the "Jaco Electronics, Inc. Code of Business Conduct," which applies to our chief executive officer, chief financial officer, controller and all our other officers, directors and employees. This document is available free of charge on our website at www.jacoelectronics.com. The other information required by this item is incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Shareholders to be held on December 16, 2004, which will be filed with the SEC not later than October 28, 2004 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference from the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS. EQUITY COMPENSATION PLAN DISCLOSURE The following table summarizes equity compensation plans approved by security holders and equity compensation plans that were not approved by security holders as of June 30, 2004:
(c) (a) NUMBER OF SECURITIES NUMBER OF SECURITIES (b) REMAINING AVAILABLE FOR TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY EXERCISE OF OUTSTANDING EXERCISE PRICE OF COMPENSATION PLANS (EXCLUDING OPTIONS, WARRANTS AND OUTSTANDING OPTIONS, SECURITIES PLAN CATEGORY RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) - ----------------------------------- ------------------------- ------------------------ ---------------------------------- Equity compensation plans (stock options) approved by stockholders 744,750 $5.17 10,750 ------- ----- ------ Total 744,750 $5.17 10.750
The other information required by this item is incorporated herein by reference from the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by reference from the Proxy Statement. - 23 - ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this item is incorporated herein by reference from the Proxy Statement. - 24 - PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Page ------- (a) (1) Financial Statements included in Part II, Item 8, of this Report: Index to Consolidated Financial Statements and Schedule F-1 Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Operations F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-35 (2) Financial Statement Schedule included in Part IV of this Report: Report of Independent Registered Public Accounting Firm on Schedule F-36 Schedule II - Valuation and Qualifying Accounts F-37 (3) See Exhibit Index on pages 26 through 30 of this report for a list of the exhibits filed, furnished or incorporated by reference as part of of this report.
(b) Reports on Form 8-K (1) On April 28, 2004, a Current Report on Form 8-K was filed under Item 12. "Results of Operations and Financial Condition" to report the Company's results for its third quarter of the fiscal year ending June 30, 2004. (2) On September 23, 2004, a Current Report on Form 8-K was filed under Item 2.01. "Completion of Acquisition or Disposition of Assets" to report the Company's completion of the sale of its contract manufacturing subsidiary, Nexus Custom Electronics, Inc. (3) On September 27, 2004, a Current Report on Form 8-K was filed under Item 2.02. "Results of Operations and Financial Condition" to report the Company's results for its fourth quarter and fiscal year ending June 30, 2004. - 25 - EXHIBIT NO. EXHIBIT - ----------- ------- 3.1 Restated Certificate of Incorporation adopted November, 1987, incorporated by reference to the Company's definitive proxy statement distributed in connection with the Company's annual meeting of shareholders held in November, 1987, filed with the SEC on November 3, 1986, as set forth in Appendix A to the aforesaid proxy statement. 3.1.1 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. 10.1 Sale and leaseback with Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1983, Exhibit 10(1), pages 48-312. 10.2 Amendment No. 1 to Lease between the Company and Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.2. 10.2.2 Lease between the Company and Bemar Realty Company, dated January 1, 1996, incorporated by reference to the Company's 1996 10-K, Exhibit 10.2.2. 10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference to the Company's 1993 10-K, Exhibit 10.6. 10.6.1 1993 Non-Qualified Stock Option Plan, as amended (filed as Exhibit A to the Company's Definitive Proxy Statement, dated November 3, 1997 for the Annual Meeting of Shareholders held on December 9, 1997. 10.6.2 1993 Non-Qualified Stock Option Plan, as amended (filed as Exhibit A to the Company's Definitive Proxy Statement, dated November 2, 1998 for the Annual Meeting of Shareholders held on December 7, 1998. 10.7 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. - 26- 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. 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 No. 333 -49877, filed April 10, 1998 Exhibit 4.4. 10.12.4 Restricted Stock Plan (filed as Exhibit B to the Company's Definitive Proxy Statement, dated November 2, 1998 for the Annual Meeting of Shareholders held on December 7, 1998). 10.13 Employment agreement between Joel Girsky and the Company, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.13. 10.13.1 Amendment No. 1 to Employment Agreement between Joel Girsky and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.13.1. 10.14 Employment agreement between Charles Girsky and the Company, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.14. 10.15 Employment agreement between Jeffrey D. Gash and the Company, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.15. 10.15.1 Amendment No. 1 to the Employment Agreement between Jeffrey D. Gash and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.15.1. 10.16 Employment Agreement, dated June 6, 2000, between the Company and Joseph Oliveri, incorporated by reference to the Company's Current Report on Form 8-K, filed June 12, 2000, Exhibit 10.16. - 27 - 10.16.1 Amendment No. 1 to the Employment Agreement between Joseph Oliveri and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.16.1. 10.17 Stock Purchase Agreement by and among Jaco Electronics, Inc. and all of the Stockholders of Interface Electronics Corporation as of May 4, 2000, incorporated by reference to the Company's Current Report on Form 8-K, filed May 15, 2000, Exhibit 2.1. 10.17.1 Amendment No. 1 to the Stock Purchase Agreement by and among Jaco Electronics, Inc. and all of the Stockholders of Interface Electronics Corp. as of May 4, 2000, dated June 6, 2000, incorporated by reference to the Company's Current Report on Form 8-K, filed June 12, 2000, Exhibit 2.2. 10.18 Agreement between the Company and Gary Giordano, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.18. 10.19 Employment Agreement between Joel H. Girsky and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.19. 10.20 Employment Agreement between Charles Girsky and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 10.20. 10.21 Asset Purchase Agreement dated as of May 19, 2003 by and between the Company and Reptron Electronics, Inc., incorporated by reference to the Company's Current Report on Form 8-K, filed June 26, 2003, Exhibit 2.1. 10.21.1 First Amendment to the Asset Purchase Agreement dated as of June 2, 2003 by and between the Company and Reptron Electronics, Inc., incorporated by reference to the Company's Current Report on Form 8-K, filed June 26, 2003, Exhibit 2.2. 10.22 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. 10.22.1 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. 10.22.2 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of August 1, 1997, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1998, Exhibit 99.8.2. 10.22.3 Amendment to Second Restated and Amended Loan and Security Agreement dated July 1, 1998, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 99.8.3. - 28 - 10.22.4 Amendment to Second Restated and Amended Loan and Security Agreement dated September 21, 1998 incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Exhibit 99.8.4. 10.22.5 Amendment to Second Restated and Amended Loan and Security Agreement dated October 26, 1999, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, Exhibit 99.8.5. 10.22.6 Amendment to Second Restated and Amended Loan and Security Agreement dated December 31, 1999, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, Exhibit 99.8.6. 10.22.7 Amendment to Second Restated and Amended Loan and Security Agreement dated June 6, 2000, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Exhibit 99.8.7. 10.22.8 Amendment to Second Restated and Amended Loan and Security Agreement dated September 28, 2000, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Exhibit 99.8.8. 10.22.9 Amendment to Second Restated and Amended Loan and Security Agreement dated January 29, 2001, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2000, Exhibit 99.8.9. 10.22.10 Amendment to Second Restated and Amended Loan and Security Agreement dated June 12, 2001, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 99.8.10. 10.22.11 Amendment to Second Restated and Amended Loan and Security Agreement dated July 1, 2001, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2001, Exhibit 99.8.11. 10.22.12 Amendment to Second Restated and Amended Loan and Security Agreement dated November 14, 2001, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 99.8.12. 10.22.13 Amendment to Second Restated and Amended Loan and Security Agreement dated February 6, 2002, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, Exhibit 99.8.13. 10.22.14 Amendment to Second Restated and Amended Loan and Security Agreement dated September 23, 2002, incorporated by reference to the Company's Annual Report on Form 10K for the year ended June 30, 2002, Exhibit 99.8.14. 10.22.15 Amendment to Second Restated and Amended Loan and Security Agreement dated May 12, 2003, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, Exhibit 99.8.15. 10.22.16 Amendment to Second Restated and Amended Loan and Security Agreement dated June 5, 2003, incorporated by reference to the Company's Current Report on Form 8-K, filed June 26, 2003, Exhibit 99.8.16. - 29 - 10.22.17 Amendment to Second Restated and Amended Loan and Security Agreement dated September 19, 2003, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2003, Exhibit 99.8.17. 10.22.18 Amendment to Second Restated and Amended Loan and Security Agreement dated November 7, 2003, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 99.8.18. 10.23 Third Restated and Amended Loan and Security Agreement dated as of December 22, 2003, by and among GMAC Commercial Finance LLC as Lender and as Agent, PNC Bank, National Association, as Lender and Co-Agent, Jaco Electronics, Inc., Nexus Custom Electronics, Inc., Interface Electronics Corp. and Jaco de Mexico, Inc. ("Third Restated and Amended Loan and Security Agreement"), incorporated by reference to the Company's Current Report on Form 8-K, filed January 8, 2004, Exhibit 10.23. 10.23.1 Amendment to Third Restated and Amended Loan and Security Agreement dated September 20, 2004. 10.24 Asset Purchase Agreement made and entered into as of September 20, 2004 among Sagamore Holdings, Inc., NECI Acquisition, Inc., Nexus Custom Electronics, Inc. and Jaco Electronics, Inc., incorporated by reference to the Company's Current Report on Form 8-K, filed September 23, 2004, Exhibit 10.24. 21.1 Subsidiaries of the Company. 23 Consent of Grant Thornton LLP. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. 32.1 Section 1350 Certification of Principal Executive Officer. 32.2 Section 1350 Certification of Principal Financial Officer. - 30 - INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page ---- Report of Independent Registered Public Accounting Firm F-2 Financial Statements Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Operations F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-35 Report of Independent Registered Public Accounting Firm on Schedule F-36 Schedule II - Valuation and Qualifying Accounts F-37
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders JACO ELECTRONICS, INC. We have audited the accompanying consolidated balance sheets of Jaco Electronics, Inc. (a New York Corporation) and subsidiaries (the "Company") as of June 30, 2004 and 2003, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP - ---------------------- GRANT THORNTON LLP Melville, New York August 27, 2004 (except for Notes B and F(a), as to which the date is September 20, 2004) F-2 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30,
ASSETS 2004 2003 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 552,655 $ 157,467 Restricted cash 800,000 Marketable securities 770,283 652,608 Accounts receivable, less allowance for doubtful accounts of $695,000 in 2004 and $1,288,000 in 2003 35,926,553 30,121,965 Inventories 37,017,390 34,558,854 Prepaid expenses and other 1,513,657 927,432 Prepaid and refundable income taxes 1,059,897 Deferred income taxes 2,725,000 2,555,000 Current assets of discontinued operations 12,910,801 7,920,097 ------------ ------------ Total current assets 91,416,339 78,753,320 PROPERTY, PLANT AND EQUIPMENT - NET 2,003,137 2,526,724 DEFERRED INCOME TAXES 416,000 431,000 GOODWILL 25,416,087 25,599,082 OTHER ASSETS 2,530,269 3,845,701 NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS 3,055,951 ------------ ------------ $121,781,832 $114,211,778 ============ ============
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 2004 2003 ------------- ------------- CURRENT LIABILITIES Accounts payable $ 31,533,041 $ 26,625,744 Current maturities of long-term debt and capitalized lease obligations 37,088,743 35,735,797 Accrued compensation 1,581,922 1,211,386 Accrued expenses 953,169 1,536,919 Current liabilities of discontinued operations 2,800,664 2,206,871 ------------- ------------- Total current liabilities 73,957,539 67,316,717 LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS 118,525 63,205 NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS 314,199 DEFERRED COMPENSATION 1,000,000 950,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued Common stock - authorized, 20,000,000 shares, $.10 par value; 6,855,232 and 6,425,732 shares issued, respectively, and 6,195,332 and 5,765,832 shares outstanding, respectively 685,523 642,573 Additional paid-in capital 26,735,295 25,152,010 Retained earnings 21,562,396 22,117,967 Accumulated other comprehensive income (loss) 37,120 (30,327) Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566) ------------- ------------- 46,705,768 45,567,657 ------------- ------------- $ 121,781,832 $ 114,211,778 ============= =============
The accompanying notes are an integral part of these statements. F-4 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended June 30,
2004 2003 2002 ------------- ------------- ------------- Net sales $ 249,100,345 $ 202,656,281 $ 175,948,640 Cost of goods sold 214,389,155 176,918,022 148,693,460 ------------- ------------- ------------- Gross profit 34,711,190 25,738,259 27,255,180 Selling, general and administrative expenses 35,016,383 28,184,534 32,635,242 ------------- ------------- ------------- Operating loss (305,193) (2,446,275) (5,380,062) Interest expense 1,539,007 1,025,067 1,683,203 ------------- ------------- ------------- Loss from continuing operations before income taxes (1,844,200) (3,471,342) (7,063,265) Income tax benefit (553,131) (1,180,105) (2,499,892) ------------- ------------- ------------- Loss from continuing operations $ (1,291,069) $ (2,291,237) $ (4,563,373) Earnings (loss) from discontinued operations, net of income tax provision (benefit) of $400,359, $(329,895) and $(268,108) in 2004, 2003 and 2002, respectively 735,498 (693,424) (480,598) ------------- ------------- ------------- NET LOSS $ (555,571) $ (2,984,661) $ (5,043,971) ============= ============= ============= PER SHARE INFORMATION Basic (loss) earnings per common share: Loss from continuing operations $ (0.22) $ (0.40) $ (0.80) Earnings (loss) from discontinued operations $ 0.13 $ (0.12) $ (0.08) ------------- ------------- ------------- Net loss $ (0.09) $ (0.52) $ (0.88) ============= ============= ============= Diluted (loss) earnings per common share: Loss from continuing operations $ (0.22) $ (0.40) $ (0.80) Earnings (loss) from discontinued operations $ 0.13 $ (0.12) $ (0.08) ------------- ------------- ------------- Net loss $ (0.09) $ (0.52) $ (0.88) ============= ============= ============= Weighted-average common shares and common equivalent shares outstanding: Basic 5,974,844 5,783,275 5,713,365 ============= ============= ============= Diluted 5,974,844 5,783,275 5,713,365 ============= ============= =============
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, 2004, 2003 and 2002
Common stock Additional -------------------- paid-in Retained Shares Amount capital Earnings ------ ------ ------- -------- Balance at July 1, 2001 6,315,759 $631,576 $24,615,866 $30,146,599 Net loss (5,043,971) Unrealized loss on marketable securities - net of deferred taxes of $50,402 Exercise of stock options 109,973 10,997 480,564 Stock options income tax benefits 55,580 ---------- -------- ----------- ----------- Comprehensive loss Balance at June 30, 2002 6,425,732 642,573 25,152,010 25,102,628 Net loss (2,984,661) Unrealized loss on marketable securities - net of deferred taxes of $2,218 Purchase of treasury stock ---------- -------- ----------- ----------- Comprehensive loss Balance at June 30, 2003 6,425,732 642,573 25,152,010 22,117,967 Net loss (555,571) Unrealized gain on marketable securities - net of deferred taxes of $41,339 Exercise of stock options 429,500 42,950 932,258 Stock options income tax benefits 651,027 ---------- -------- ----------- ----------- Comprehensive loss Balance at June 30, 2004 6,855,232 $685,523 $26,735,295 $21,562,396 ========== ======== =========== ===========
Accumulated other Total comprehensive Treasury shareholders' Comprehensive income (loss) stock equity loss ------------- ----- ------ ---- Balance at July 1, 2001 $ 61,107 $(2,204,515) $53,250,633 Net loss (5,043,971) $(5,043,971) Unrealized loss on marketable securities - net of deferred taxes (85,661) (85,661) $ (85,661) of $50,402 Exercise of stock options 491,561 Stock options income tax benefits 55,580 -------- ----------- ----------- ----------- Comprehensive loss $(5,129,632) =========== Balance at June 30, 2002 (24,554) (2,204,515) 48,668,142 Net loss (2,984,661) $(2,984,661) Unrealized loss on marketable securities - net of deferred taxes (5,773) (5,773) $ (5,773) of $2,218 Purchase of treasury stock (110,051) (110,051) -------- ----------- ----------- ----------- Comprehensive loss $(2,990,434) =========== Balance at June 30, 2003 (30,327) (2,314,566) 45,567,657 Net loss (555,571) $ (555,571) Unrealized gain on marketable securities - net of deferred taxes 67,447 67,447 $ 67,447 of $41,339 Exercise of stock options 975,208 Stock options income tax benefits 651,027 -------- ----------- ----------- ----------- Comprehensive loss $ (488,104) =========== Balance at June 30, 2004 $ 37,120 $(2,314,566) $46,705,768 ======== =========== ===========
The accompanying notes are an integral part of these statements. F-6 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30,
2004 2003 2002 ---- ---- ---- Cash flows from operating activities Net loss $ (555,571) $ (2,984,661) $ (5,043,971) (Earnings) loss from discontinued operations (735,498) 693,424 480,598 ------------- --------------- --------------- Loss from continuing operations (1,291,069) (2,291,237) (4,563,373) Adjustments to reconcile loss to net cash provided by (used in) operating activities Depreciation and amortization 1,275,745 1,292,565 1,438,882 Deferred compensation 50,000 50,000 50,000 Deferred income tax (benefit) expense (196,339) (532,783) 225,402 Stock options income tax benefits 651,027 55,580 Gain on disposal/sale of equipment (49,159) (5,000) (4,648) Provision for doubtful accounts 623,850 822,500 486,300 Changes in operating assets and liabilities, net of effects of acquisitions (Increase) decrease in accounts receivable (6,428,438) (4,583,646) 6,528,806 (Increase) decrease in inventories (2,458,536) 6,072,329 16,056,416 (Increase) decrease in prepaid expenses and other (403,230) 127,503 (291,366) Decrease (increase) in prepaid and refundable income taxes 1,059,897 1,380,158 (1,953,730) Decrease (increase) in other assets 1,007,404 (60,820) (8,827) Increase in accounts payable 4,907,297 4,280,375 2,905,519 Increase (decrease) in accrued compensation 370,536 310,769 (1,214,512) (Decrease) increase in accrued expenses (583,750) (906,874) 26,471 ------------- --------------- --------------- Net cash (used in) provided by continuing operations (1,464,765) 5,955,839 19,736,920 Net cash (used in) provided by discontinued operations (192,076) 1,955,191 2,238,095 ------------- --------------- --------------- Net cash (used in) provided by operating activities (1,656,841) 7,911,030 21,975,015 ------------- --------------- --------------- Cash flows from investing activities Purchase of marketable securities (8,889) (10,331) (14,924) Capital expenditures (313,461) (135,562) (174,229) Proceeds from the sale of equipment 2,100 5,000 34,673 Business acquisition (5,577,002) Deferred payments on business acquisitions (2,099,563) (243,297) ------------- --------------- --------------- Net cash used in continuing operations (320,250) (7,817,458) (397,777) Net cash used in discontinued operations (300,909) (113,193) (4,227) ------------- --------------- --------------- Net cash used in investing activities (621,159) (7,930,651) (402,004) ------------- --------------- --------------- Cash flows from financing activities Borrowings from line of credit 266,318,190 207,569,803 161,505,349 Repayments of line of credit (264,801,418) (205,894,585) (182,254,268) Release of compensating balance 800,000 Funding of compensating balance (800,000) Principal payments under equipment financing (159,094) (203,691) (215,689) Payments under term loan (33,022) (116,628) (139,487) Purchase of treasury stock (110,051) Proceeds from exercise of stock options 975,208 491,561 ------------- --------------- --------------- Net cash provided by (used in) continuing operations 3,099,864 444,848 (20,612,534) Net cash used in discontinued operations (426,676) (592,207) (725,553) ------------- --------------- --------------- Net cash provided by (used in) financing activities 2,673,188 (147,359) (21,338,087) ------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH 395,188 (166,980) 234,924 Cash and cash equivalents at beginning of year 157,467 324,447 89,523 ------------- --------------- --------------- Cash and cash equivalents at end of year $ 552,655 $ 157,467 $ 324,447 ============= =============== =============== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,841,000 $ 1,341,000 $ 2,223,000 Income taxes 117,000 35,000 275,000 Supplemental schedule of non-cash financing and investing activities: Liabilities assumed in connection with a business $ 3,608,784 acquisition Deferred acquisition costs $ 2,099,563 Equipment acquired under capital leases $ 130,669 396,685
The accompanying notes are an integral part of these statements. F-7 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily engaged, principally in the United States, in the distribution of electronic components, including semiconductors, capacitors, resistors, electromechanical devices, flat panel displays and monitors, and power supplies, which are used in the manufacture and assembly of electronic products. In addition, the Company provides contract manufacturing services. During the first quarter of fiscal 2005, the Company sold its contract manufacturing subsidiary. The results of operations for the contract manufacturing subsidiary have been reclassified to discontinued for all periods presented herein. (See Note B). Electronic components distribution sales include exports made principally to customers located in Western Europe, Canada, Mexico, and the Far East. For the years ended June 30, 2004, 2003 and 2002, export sales amounted to approximately $58,028,000, $57,787,000 and $32,211,000, 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 derives revenue from the shipment of finished products to its customers. In general, revenue is recognized when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been shipped to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured. The Company reduces revenue for rebates and estimated customer returns and other allowances. The Company offers rebates to certain customers based on the volume of products purchased. The Company's products are sold on a stand alone basis and are not part of sales arrangements with multiple deliverables. Revenue from product sales is recognized generally when the product is shipped as the Company does not have any obligations beyond shipment to its customers. A portion of the Company's business involves shipments directly from its suppliers to its customers. In these transactions, the Company is responsible for negotiating price both with the supplier and customer, payment to the supplier, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment. As the principal with the customer, the Company recognizes revenue when the Company is notified by the supplier that the product has been shipped. The Company also maintains a consignment inventory program which provides for certain components to be shipped on-site to a consignee so that such components are available for the F-8 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) consignee's use when they are required. The consignee maintains a right of return related to unused parts that are shipped under the consignment inventory program. Revenue is not recognized from products shipped on consignment until notification is received from the Company's customer that they have accepted title of the inventory that was shipped initially on consignment. The items shipped on consignment in which title has not been accepted are included in the Company's inventories. 3. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers cash instruments with original maturities of less than three months to be cash equivalents. 4. Investments in Marketable Securities Investments in marketable securities consist of investments in mutual funds. Such investments have been classified as "available-for-sale securities" and are reported at fair market value, which is inclusive of a gross unrealized gain of $59,871 for the year ended June 30, 2004, and a gross unrealized loss of $48,915 for the year ended June 30, 2003. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. Changes in the fair value of available-for-sale securities are included in accumulated other comprehensive loss, net of the related deferred tax effects. The Company has not had any sales of available-for-sale securities and no realized gains or losses thereon during years ended, June 30, 2004, 2003 or 2002. 5. Accounts Receivable The Company's accounts receivable are due from a broad range of customers in the computer, computer-related, telecommunications, data transmission, defense, aerospace, medical equipment and other industries. The Company extends credit based upon ongoing evaluations of a customer's financial condition and payment history and generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. While such uncollectible amounts have historically been within the Company's expectations and provisions established, if a customer's financial condition were to deteriorate, additional reserves may be required. F-9 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 6. Inventories Inventories, which consist of goods held for resale, are stated at the lower of cost or estimated market value. Cost is determined using the first-in, first-out and average cost methods. A provision of $4,732,000 and $ 4,632,000 to reduce inventories to their estimated market value as of June 30, 2004 and 2003 has been provided for. The Company, on occasion, receives price protection from certain vendors. The Company accounts for price protection received from its vendors in accordance with the provisions of EITF 02-16 "Accounting for Consideration Given By a Vendor to a Customer." The Company records cash consideration or credits received from a vendor for inventory price protection as a result of the vendor lowering its prices as a reduction of product cost, which is therefore reported as a reduction of cost of goods sold in the statement of operations. 7. Properties, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful life of the assets. The Company capitalizes costs incurred for internally developed software where economic and technological feasibility has been established. These capitalized software costs are being amortized on a straight-line basis over the estimated useful life of seven years. Significant improvements are capitalized if they extend the useful life of the asset. Routine repairs and maintenance are expensed when incurred. 8. Goodwill And Other Intangible Assets Goodwill represents the excess of the aggregate price paid by the Company over the fair market value of the tangible assets acquired in business acquisitions accounted for as a purchase. During the year ended June 30, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The new standards require that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value-based test. The Company performed its annual impairment test as of June 30, 2004 and reviewed seven reporting units. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Those intangible assets are reviewed for impairment under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." F-10 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Included in other assets on the accompanying balance sheets are the costs of identifiable intangible assets, net of accumulated amortization of $770,000 and $462,000, aggregating $1,665,000 and $1,973,000 at June 30, 2004 and 2003, respectively. Such assets consist of franchise agreements and a non-compete agreement and are being amortized on a straight-line basis over ten and five years, respectively. Amortization expense on intangible assets aggregated approximately $308,000, $137,000 and $137,000 for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. Expected amortization expense related to intangible assets for the next five years is as follows:
Year ending June 30, 2005 $ 297,000 2006 171,000 2007 171,000 2008 171,000 2009 171,000
F-11 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 9. Impairment of Long-Lived Assets The Company evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Fair value is determined generally based on discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 10. 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 carry forwards for which income tax expenses or benefits are expected to be realized in future years. A valuation allowance is established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. 11. Earnings (Loss) Per Common Share Basic earnings per share are determined by dividing the Company's net earnings by the weighted average shares outstanding. Diluted earnings per share include any dilutive effects of outstanding stock options. Excluded from the calculation of earnings (loss) per share are stock options to purchase 744,750, 1,117,250 and 844,548 common shares in fiscal 2004, 2003 and 2002, respectively, as their inclusion would have been antidilutive. 12. Financial Instruments and Business Concentrations Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of accounts receivable. Concentration of credit risk with respect to accounts receivable is generally mitigated due to the large number of entities comprising the Company's customer base, their dispersion across geographic areas and industries, along with the Company's policy of maintaining credit insurance. The Company routinely addresses the financial strength of its customers and, historically, its accounts receivable credit risk exposure is limited. Two customers within the electronics components distribution segment of the Company accounted for approximately 14% and 11% of net sales for the fiscal year ended June 30, 2004, as compared to 17% and 11% for the fiscal year ended June 30, 2003. Statement of Financial Accounting Standards No. 107 "Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of the estimated fair value of an entity's financial instrument F-12 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) assets and liabilities. The Company's principal financial instrument consists of a revolving credit facility, expiring on December 31, 2006, 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, 2004, products purchased from two suppliers accounted for 26% and 12%, respectively, of net sales, as compared to 25% and 16% for the fiscal year ended June 30, 2003. 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 would be able to replace the sales associated with such supplier with sales of other products. 13. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management in preparing the consolidated financial statements include the allowance for doubtful accounts, the reserve for obsolete or slow moving inventories and the valuation of goodwill and other intangible assets. 14. Comprehensive Income (Loss) Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), establishes rules for reporting and display of comprehensive income (loss) and its components in financial statements. Comprehensive income (loss) consists of net earnings (loss) and unrealized gains and losses on available-for-sale securities and is presented in the consolidated statement of changes in shareholders' equity, net of applicable taxes. F-13 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 15. Segment Reporting Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information," requires that the Company disclose certain information about its operating segments defined as "components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance." Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company has two reportable segments, consisting of electronics components distribution and contract manufacturing, as defined by the provisions of SFAS No. 131 (See Note B). 16. Shipping and Handling Fees Shipping and handling fees charged to customers are included in net sales. Shipping and handling expenses paid are included as a component of cost of good sold. 17. Advertising Advertising costs, which are incurred primarily for print advertising in trade and leisure publications, are expensed as incurred and totaled $43,519, $97,288 and $158,791 for the years ended June 30, 2004, 2003 and 2002, respectively. F-14 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 18. Stock Compensation As described more fully in Note I, the Company maintains two stock option plans. The Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25") and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123" ("SFAS No. 148"). Under APB No. 25, compensation expense is only recognized when the market value of the underlying stock at the date of grant exceeds the amount an employee must pay to acquire the stock. As the market price of the stock has equaled or exceeded the exercise price of the stock options on the date of grant for all option grants, no compensation expense has been recognized in the company's consolidated financial statements in connection with any employee stock option grants. During the year ended June 30, 2004, 85,000 stock options were granted to certain employees or directors of the Company. These stock options had exercise prices ranging from $6.70 to $8.31 and are due to expire ten years from the date of grant. The weighted-average fair value of these options of $4.83, which was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumption: expected volatility of 80%; risk-free interest rate of 3.27%; expected term of 5 years and expected dividend yield of 0%. During the year ended June 30, 2003, 290,000 stock options were granted to certain employees or directors of the Company. These stock options had an exercise price of $2.35 and are due to expire ten years from the date of grant. The weighted-average fair value of these options of $1.55, which was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumption: expected volatility of 81%; risk-free interest rate of 2.85%; expected term of 5 years and expected dividend yield of 0%. There were no stock options granted during the fiscal year ended June 30, 2002. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that 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-15 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table illustrates the effect on net income and earnings per share for the years ended June 30, 2004, 2003 and 2002 had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" to stock-based employee compensation.
2004 2003 2002 ---------- ------------- ------------ Net loss, as reported $ (555,571) $ (2,984,661) $ (5,043,971) Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (263,201) (206,957) (524,962) ---------- ------------ ------------ Pro forma net loss $ (818,772) $ (3,191,618) $ (5,568,933) ========== ============ ============ Net loss per common share: Basic - as reported $ (0.09) $ (0.52) $ (0.88) ========== ============ ============ Basic - pro forma $ (0.14) $ (0.55) $ (0.97) ========== ============ ============ Diluted - as reported $ (0.09) $ (0.52) $ (0.88) ========== ============ ============ Diluted - pro forma $ (0.14) $ (0.55) $ (0.97) ========== ============ ============
19. Reclassifications Certain prior year balances have been reclassified to conform with the current year's presentation. F-16 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 20. Impact of Recently Issued Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 has not had a material impact on the Company's consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a material impact on the Company's consolidated financial position, results of operations or cash flows. In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition" ("SAB No. 104"), which codifies, revises and rescinds certain sections of SAB No. 101, "Revenue Recognition", in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Company's financial position, results of operations or cash flows. F-17 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE B - DISCONTINUED OPERATIONS Subsequent to the Company's fiscal year-end, on September 20, 2004, the Company completed the sale of substantially all of the assets of its contract manufacturing subsidiary, Nexus Custom Electronics, Inc. ("Nexus"), to Sagamore Holdings, Inc. for total consideration of up to $13,000,000 and the assumption of certain liabilities. The divestiture of Nexus allows the Company to focus its resources on its core electronics distribution business. Under the terms of the purchase agreement relating to this transaction, the Company received $9,250,000 of the purchase consideration in cash on the closing date. Such cash consideration will be used to repay a portion of the outstanding borrowings under the Company's line of credit (See Note F). The balance of the fixed portion of the purchase consideration was satisfied through the delivery of a $2,750,000 subordinated note issued by the purchaser. This note has a maturity date of September 1, 2009 and bears interest at the lower of the prime rate or 7%. The note is payable by the purchaser in quarterly cash installments ranging from $156,250 to $500,000 commencing September 2006 and continuing for each quarter thereafter until maturity. Prepayment of the principal of and accrued interest on the note is permitted. Additionally, the Company is entitled to receive additional consideration in the form of a six-year earn-out based on 5% of the annual net sales of Nexus after the closing date, up to $1,000,000 in the aggregate. Pursuant to the purchase agreement, the purchaser has also entered into a contract that designates the Company as a key supplier of electronic components to Nexus for a period of five years following the closing date. As a result of the sale of Nexus, the Company will no longer engage in contract manufacturing, and will have no continuing involvement or cash flows from Nexus. In accordance with the provisions of SFAS No, 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), the Company has accounted for the results of operations of Nexus as discontinued in the accompanying consolidated statements of operations, as the Company's plan of divestiture was initiated in the fourth quarter. The Company has also classified the assets sold and liabilities assumed of Nexus(the disposal group) as part of assets and liabilities of discontinued operations in the accompanying consolidated balance sheets. F-18 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE B - DISCONTINUED OPERATIONS (CONTINUED) A summary of the assets and liabilities included in the disposal group is as follows:
2004 2003 ----------- ----------- Accounts receivable, net $ 2,407,527 $ 1,876,019 Inventories 7,923,578 5,934,654 Prepaid expenses and other 75,429 109,424 Property, plant and equipment, net 2,504,267 3,032,398 Other assets 23,553 ----------- ----------- Total assets 12,910,801 10,976,048 ----------- ----------- Accounts payable 2,240,314 1,656,833 Accrued compensation 218,209 98,482 Accrued expenses 27,942 24,880 Long-term debt and capitalized lease obligations 314,199 740,875 ----------- ----------- Total liabilities 2,800,664 2,521,070 ----------- ----------- Net assets sold $10,110,137 $ 8,454,978 =========== ===========
A summary of operating results of Nexus were as follows:
2004 2003 2002 ----------- ------------ ------------- Net sales $ 22,427,191 $ 15,328,634 $ 18,157,568 Income (loss) before income taxes $ 1,135,857 $ (1,023,319) $ (748,706)
F-19 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE C - MARKETABLE SECURITIES The cost, gross unrealized gains and losses and aggregate fair value of available-for-sale securities is as follows:
June 30, ------------------------------------------------------------------------------------------------------------- 2004 2003 ---------------------------------------------------- ------------------------------------------------------ Gross Gross Gross Gross Unrealized Unrealized Unrealized Unrealized Cost Gains Losses Fair Value Cost Gains Losses Fair Value -------- ---------- ---------- ---------- -------- ---------- ---------- ---------- Mutual Funds $710,412 $ 90,395 $ (30,524) $ 770,283 $701,523 $ 20,460 $ (69,375) $ 652,608 ======== ========== ========== ========== ======== ========== ========== ==========
NOTE D - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
Useful June 30, Life ------------------------------- in years 2004 2003 -------- ------------ ------------ Machinery and equipment 3 to 7 $ 7,210,070 $ 6,929,468 Internally developed software costs 7 2,172,378 2,008,850 Transportation equipment 3 to 5 76,942 76,942 Leasehold improvements 5 to 10 601,218 601,218 ------------ ------------ 10,060,608 9,616,478 Less accumulated depreciation and amortization (including $21,778 in 2004 and $644,456 in 2003 of capitalized lease amortization) 8,057,471 7,089,754 ------------ ------------ $ 2,003,137 $ 2,526,724 ============ ============
Included in machinery and equipment are assets recorded under capitalized leases at June 30, 2004 and 2003 for $130,669 and $709,832, respectively. Accumulated amortization of internally developed software costs at June 30, 2004 and 2003 aggregated $1,518,815 and $1,220,048, respectively. F-20 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE E - INCOME TAXES The components of the Company's benefit for income taxes are as follows:
Year Ended June 30, ----------------------------------------------- 2004 2003 2002 ---------- ----------- ----------- Federal Current $ (394,000) $ (680,000) $(2,487,000) Deferred (196,000) (533,000) 225,000 ---------- ----------- ----------- (590,000) (1,213,000) (2,262,000) State 37,000 33,000 (238,000) ---------- ----------- ----------- $ (553,000) $(1,180,000) $(2,500,000) ========== =========== ===========
The Company's effective income tax rate differs from the statutory U.S. Federal income tax rate as a result of the following:
Year Ended June 30, --------------------------------- 2004 2003 2002 ------- ------- ------- Statutory U.S. Federal tax rate (34.0)% (34.0)% (34.0)% State income taxes, net of Federal tax benefit 1.4 (0.7) (3.5) Sales expense for which no tax benefit arises 3.6 0.9 0.8 Other (1.0) (0.2) 1.3 ----- ----- ----- Effective tax rate (30.0)% (34.0)% (35.4)% ===== ===== =====
F-21 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE E - INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities resulting from differences between accounting for financial statement purposes and tax purposes are summarized as follows:
2004 2003 ---------- ----------- Deferred tax assets Net operating loss and other carryforwards $ 511,000 $ 530,000 Allowance for bad debts 304,000 517,000 Inventory valuation 2,215,000 2,092,000 Deferred compensation 572,000 412,000 Unrealized loss on marketable securities available for sale 18,000 Other deferred tax assets 182,000 107,000 ---------- ----------- Total deferred tax assets 3,784,000 3,676,000 Deferred tax liabilities Depreciation (620,000) (690,000) Unrealized gain on marketable securities available for sale (23,000) ---------- ----------- Total deferred tax liabilities (643,000) (690,000) ---------- ----------- Net deferred tax assets $3,141,000 $ 2,986,000 ========== ===========
At June 30, 2004, the Company, through an acquisition, has available a Federal net operating loss carryforward of approximately $113,000. Such net operating loss is subject to certain limitations and expires in varying amounts during the fiscal years 2007 through 2010. In addition, the Company has various state net operating loss carry forwards that expire in varying amounts during the fiscal years 2007 through 2024. F-22 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS Debt and capitalized lease obligations are as follows:
June 30, ------------------------------- 2004 2003 ----------- ----------- Term loan and revolving line of credit (a) $36,999,693 $35,482,921 Other term loan (b) 35,552 68,574 Capitalized lease obligations (c) 530,979 1,048,099 ----------- ----------- 37,566,224 36,599,594 Less amounts representing interest on capitalized lease obligations 44,757 59,717 ----------- ----------- 37,521,467 36,539,877 Less current maturities 37,088,743 35,735,797 ----------- ----------- 432,724 804,080 Less amounts reclassified to liabilities of discontinued operations 314,199 740,875 ----------- ----------- $ 118,525 $ 63,205 =========== ===========
(a) Term Loan and Revolving Line of Credit Facility To provide additional liquidity and flexibility in funding its operations, the Company borrows amounts under credit facilities and other external sources of financing. On December 22, 2003, the Company entered into a Third Restated and Amended Loan and Security Agreement with GMAC Commercial Finance LLC and PNC Bank, National Association providing for a $50,000,000 revolving secured line of credit. This credit facility has a maturity date of December 31, 2006 and amended an existing $45,000,000 secured line of credit. Borrowings under the new credit facility are based principally on eligible accounts receivable and inventories of the Company, as defined in the credit agreement, and are collateralized by substantially all of the assets of the Company. At June 30, 2004, the outstanding balance on this new revolving line of credit facility was $37.0 million, with an additional $8.1 million available. The credit agreement contains provisions for maintenance of certain financial covenants, including, among others EBITDA and Minimum Net Worth, as defined. The interest rate on the outstanding borrowings at June 30, 2004 was approximately 4.5%. F-23 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED) At June 30, 2004, we were in compliance with all such covenants. Failure to remain in compliance with these covenants could trigger an acceleration of our obligation to repay all outstanding borrowings under our credit facility, limit our ability to borrow additional amounts under the line of credit and put a requirement that we maintain an aggregate undrawn availability of $1.5 million until certain financial requirements are achieved, which would reduce the undrawn availability to $500,000. The credit agreement includes both a subjective acceleration clause and requires the deposit of customer receipts to be directed to a blocked account and applied directly to the revolving credit facility. Accordingly, the debt is classified as a current liability. The Company's prior credit agreement was amended on September 19, 2003 to extend the maturity date to October 1, 2004, and was subsequently amended on November 7, 2003 to provide a waiver for noncompliance with our EBITDA covenant for the quarter ended September 30, 2003. The prior agreement required us to maintain an $800,000 compensating balance arrangement with our banks in an interest bearing account, which was funded during the quarter ended December 31, 2002. The new credit agreement allows for the release of this $800,000 compensating balance arrangement and initially included an additional available amount under the line of credit of up to $750,000. The additional available amount at the time of closing was $732,000, declining by $31,000 monthly thereafter. The interest rate under the prior agreement was based on the average 30-day LIBOR plus 2.25% to 2.75%, depending on our performance for the immediately preceding four fiscal quarters measured by a specified financial ratio. The interest rate on the outstanding borrowings at June 30, 2003 was 3.9%. The outstanding balance on the prior revolving line of credit was $35.5 million at June 30, 2003. Effective September 19, 2003, the rate converted to the higher of the prime rate plus 0.75% or the federal funds rate plus 1.25%. Effective November 7, 2003, the rate converted to the higher of the prime rate plus 1% or the federal funds rate plus 1.50%. Effective December 22, 2003, the rate under the new credit agreement converted to the higher of the prime rate plus 0.75% or the federal funds rate plus 1.25%, or at our option, the average 30-day LIBOR plus 3.25%. On September 20, 2004, our credit facility was amended to provide the lenders' consent to our sale of our contract manufacturing subsidiary, Nexus, and to (1) change our (a) EBITDA (b) Fixed Charge Ratio and (c) Minimum Net Worth covenants, as defined (2) eliminates the remaining portion of the additional $732,000 of the additional available amount under the facility to zero, and (3) require the cash proceeds from the sale of Nexus to be used to repay indebtedness outstanding under the facility, (4) and put a requirement that we maintain an aggregate undrawn availability of $1.5 million until certain financial requirements are achieved which would reduce the undrawn availability requirement to $500,000. F-24 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED) (b) Other Term Loan The Company has a term loan which initially required monthly payments of $9,829 through January 31, 2004. During fiscal 2004, this loan was amended to extend the maturity date through August 31, 2006. As a result of the disposition of Nexus in September 2004, the Company will repay this balance in its entirety. As such, this balance has been classified as current at June 30, 2004. The loan, which bears interest at 1% per annum, is collateralized by the related equipment acquired, having a carrying value of approximately $112,000 at June 30, 2004 and $186,000 at June 30, 2003. The agreement contains, among other things, restrictive covenants on one of the Company's subsidiaries, which place limitations on significant changes in its business and incurrence of additional indebtedness. (c) Capitalized Lease Obligations The Company leases certain equipment under agreements accounted for as capital leases. The aggregate obligations for the equipment require the Company to make monthly payments through April 1, 2007, with implicit interest rates from 7.07% to 13.3%. As a result of the disposition of Nexus in September 2004, the obligations under one capital lease were assumed by the purchaser. Such obligation amounted to $314,199 at June 30, 2004 and is classified as a component of liabilities of discontinued operations in the accompanying consolidated balance sheet. The following is a summary of the aggregate annual maturities of debt and capitalized lease obligations as of June 30, 2004:
Capitalized Debt Leases ----------- ----------- Year ending June 30, 2005 37,035,245 396,745 2006 73,218 2007 61,016 ----------- ----------- $37,035,245 $ 530,979 =========== ===========
F-25 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 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, 2005 $1,787,876 2006 1,232,946 2007 829,085 2008 795,040 2009 804,551 Thereafter 3,848,473 ---------- $9,297,971 ==========
Included in the minimum annual lease payments above are $171,972 and $14,331 for the years ended June 30, 2005 and 2006, respectively, that pertain to Nexus (See Note B). Included in the above are office and warehouse facilities leased from a partnership owned by two officers and directors of the Company. The lease expires in December 2013 and requires minimum lease payments of $615,000 during the fiscal year ended June 30, 2005. The Company's rent expense was approximately $678,000, $602,000 and $602,000 for the years ended June 30, 2004, 2003 and 2002, respectively, in connection with this lease. Rent expense on all office and warehouse facilities leases for the years ended June 30, 2004, 2003 and 2002 was approximately $2,068,000, $2,041,000 and $2,049,000, respectively. F-26 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED) 2. Other Leases The Company also leases various office equipment and automobiles under noncancellable operating leases expiring through June 2009. The minimum rental commitments required under these leases at June 30, 2004 are as follows: Year ending June 30, 2005 $155,282 2006 90,396 2007 54,650 2008 38,824 2009 14,052 -------- $353,204 ========
3. Employment Agreements The Company has entered into employment agreements with three executive officers, which provide for annual base salaries aggregating $785,000 through June 30, 2007 and contain provisions for severance payments in the event of change of control as defined in the agreements. The Company's agreements with its Chairman and Executive Vice President provide for cash bonuses equal to 4% and 2%, respectively, of the Company's earnings before income taxes for each fiscal year in which such earnings are in excess of $1,000,000, or 6% and 3%, respectively, of the Company's earnings before income taxes if such earnings are in excess of $2,500,000 up to a maximum annual cash bonus of $720,000 and $360,000, respectively. In addition, the Company's agreement with its Chairman provides for deferred compensation which accrues at a rate of $50,000 per year and becomes payable in its entirety no later than January 15 of the year next following his cessation of employment for any reason. The Company is obligated to provide health insurance to its Chairman and Executive Vice President, and their respective spouses, commencing upon their termination of employment with Jaco and ending on the later to occur of (i) their death or (ii) the death of their respective spouses. The Company has adopted Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pension," which requires the Company to recognize the cost of providing postretirement benefits over the employees' service periods. The recorded liabilities for these postretirement benefits, none of which has been funded, amounted to $146,700 at June 30, 2004. The weighted-average discount rate used in determining the liability was 5.5%, and the annual percentage increase in health costs was 7%. F-27 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 business, results of operations or financial condition. 5. Guarantees The Company has not entered into any third-party guarantees subsequent to December 31, 2002, nor has the Company modified any existing third-party guarantees subsequent to that date. 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, 2004, 2003 and 2002, the Company contributed to this plan approximately $139,000, $78,000 and $144,000, respectively. NOTE I - SHAREHOLDERS' EQUITY 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 Compensation Committee is responsible for the granting and pricing of options under the 1993 Plan. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. The options expire five years from the date of grant and are exercisable over the period stated in each option. In December 1997, the shareholders of the Company approved an increase in the amount of shares reserved for the 1993 plan to 900,000 from 440,000, of which 165,000 are outstanding at June 30, 2004. In October 2000, the Board of Directors approved the adoption of the "2000 Stock Option Plan," hereinafter referred to as the "2000 Plan." The 2000 Plan provides for the grant of incentive stock options ("ISOs") and nonqualified stock options ("NQSOs") to employees, officers, directors, consultants and advisers of the Company. The Board of Directors or Compensation Committee is responsible for the granting and pricing of these options. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. In the case of ISOs granted to shareholders owning more than 10% of the Company's voting securities, the exercise price shall be no less than 110% of the fair market value of the Company's common stock on the date of grant. F-28 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE I - SHAREHOLDERS' EQUITY (CONTINUED) All options shall expire ten years from the date of grant of such option (five years in the case of an ISO granted to a 10% shareholder) or on such earlier date as may be prescribed by the Committee and set forth in the option agreement, and are exercisable over the period stated in each option. Under the 2000 Plan, 600,000 shares of the Company's common stock are reserved, of which 579,750 are outstanding at June 30, 2004. Outstanding options granted to employees, directors and officers for the last three fiscal years are summarized as follows:
Nonqualified Weighted- stock options average ----------------------------------- exercise Price range Shares price -------------- --------- --------- Outstanding at July 1, 2001 $1.79 - $13.71 965,170 $4.56 Exercised $2.50 - $ 4.67 (109,973) 4.47 Expired $8.00 - $13.71 (10,649) 9.05 --------- Outstanding at June 30, 2002 $1.79 - $13.71 844,548 4.52 Granted $2.35 290,000 2.35 Expired $4.17 - $ 8.00 (17,298) 5.65 --------- Outstanding at June 30, 2003 $1.79 - $13.71 1,117,250 3.94 Granted $6.70 - $ 8.31 85,000 6.98 Expired $2.75 - $13.71 (28,000) 6.05 Exercised $1.79 - $ 3.25 (429,500) 2.27 --------- OUTSTANDING AT JUNE 30, 2004 $2.35 - $13.71 744,750 $5.17 ========= OPTIONS EXERCISABLE AT JUNE 30, 2004 659,750 $4.93 ========= OPTIONS EXERCISABLE AT JUNE 30, 2003 827,250 $4.49 ========= OPTIONS EXERCISABLE AT JUNE 30, 2002 844,548 $4.52 =========
F-29 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE I - SHAREHOLDERS' EQUITY (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable nonqualified stock options:
Options outstanding Options exercisable ------------------------------------------ ----------------------------------------- Weighted- Weighted- Average Weighted- average Weighted- Remaining average remaining average Number contractual exercise Number contractual exercise Range of exercise prices outstanding life (months) price exercisable life (months) Price - ------------------------ ----------- ------------- ---------- ----------- ------------- --------- $2.35 - $3.25 405,000 70 $ 2.51 405,000 70 $ 2.51 $6.01 - $8.31 302,250 88 $ 7.67 217,250 77 $ 7.94 $13.71 37,500 11 $13.71 37,500 11 $13.71
The Board of Directors of the Company had authorized the purchase of up to 375,000 shares of its common stock under a stock repurchase program. In fiscal 1998, the Board of Directors authorized the repurchase of up to an additional 600,000 shares of the Company's common stock. The purchases were made by the Company from time to time on the open market at the Company's discretion and were dependent on market conditions. The Company had made purchases of 618,300 shares of its common stock from July 31, 1996 through September 13, 2000 for aggregate consideration of $2,204,515. On September 14, 2000, the Board of Directors passed a resolution to terminate the stock repurchase program. On September 18, 2001, the Company announced that its Board of Directors authorized the repurchase of up to 250,000 shares of its outstanding common stock. Purchases may be made from time to time in market or private transactions at prevailing market prices. The Company made purchases of 41,600 shares of its common stock for aggregate consideration of $110,051 during fiscal 2003. F-30 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE J - RELATED PARTY TRANSACTIONS During the fiscal years ended June 30, 2004, 2003 and 2002, the Company recorded sales of $5,515,450, $1,910,201 and $2,703,107, respectively, from a customer, Frequency Electronics, Inc. ("Frequency"). The Company's Chairman of the Board of Directors and President also serves on the Board of Directors of Frequency. Amounts included in accounts receivable from Frequency at June 30, 2004 and 2003 aggregate $188,720 and $168,549, respectively. The Company leases office and warehouse facilities lease from a partnership owned by two officers and directors of the Company (See Note G). NOTE K - ACQUISITION On June 13, 2003, the Company acquired certain assets of the electronics distribution business of Reptron Electronics, Inc. ("Reptron"), located in Florida. The Company believes that this acquisition will expand the Company's core customer and supplier base. In addition, the Company expects to recognize certain benefits relating to expected synergies in operations and the improved quality of the management team. The total purchase price, including transaction costs, was approximately $9,536,000, of which approximately $5,577,000 was paid in cash and the remaining portion resulted in the Company's assumption of certain liabilities of Reptron. A portion of the purchase price was held in escrow pending the satisfaction of certain conditions, which occurred during fiscal 2004. The acquisition has been accounted for as a purchase and the operations of Reptron have been included in the Company's Statement of Operations since the date of acquisition. Included in other assets are the costs of the identifiable intangible assets acquired, principally franchise agreements which are being amortized on a straight-line basis over ten years. The excess of the purchase price and related expenses over the net tangible and identifiable intangible assets acquired initially amounted to approximately $3,236,000, all of which is expected to be tax deductible. During fiscal 2004, a purchase price adjustment to decrease goodwill by $183,000 was recorded. The purchase price of $9,353,000 and the allocation thereof is now final. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. F-31 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE K - ACQUISITION (CONTINUED) Current assets $ 4,500,000 Property, plant and equipment 600,000 Intangible assets 1,200,000 Goodwill 3,053,000 ----------- Total assets acquired 9,353,000 ----------- Liabilities assumed (3,609,000) Transaction costs (350,000) ----------- (3,959,000) ----------- Net assets acquired $ 5,394,000 ===========
Summarized below are the unaudited pro forma results of operations of the Company as if Reptron had been acquired at the beginning of the fiscal period presented:
June 30, 2003 ---- (in thousands, except per share amounts) Net sales $ 302,763 Net loss (34,918) Net loss per share: Basic (6.04) Diluted (6.04)
The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the periods presented or of future operating results of the combined companies. F-32 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE L - BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION The Company has two reportable segments: electronics components distribution and contract manufacturing. On September 20, 2004, the assets and certain liabilities of the contract manufacturing segment were sold (See Note B). The Company's primary business activity is conducted with small and medium size manufacturers, located in North America, that produce electronic equipment used in a variety of industries. Information pertaining to the Company's operations in different geographic areas for fiscal years 2004, 2003 and 2002 is not considered material to the financial statements. The Company's chief operating decision maker utilizes net sales and operating (loss) profit information in assessing performance and making overall operating decisions and resource allocations. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company accounts for intersegment sales as if the sales were to third parties, that is, at current market prices. Information about the Company's segments is as follows:
Year ended June 30, 2004 2003 2002 --------- --------- --------- (in thousands) Net sales to external customers Electronic components distribution: Semiconductors $ 132,259 $ 116,616 $ 80,590 Flat Panel Displays 51,533 20,334 23,886 Passive components 47,395 53,069 63,110 Electromechanical devices 17,913 12,637 8,363 --------- --------- --------- Total 249,100 202,656 175,949 Contract manufacturing 22,427 15,329 18,157 Less: amount reclassified to discontinued operations (22,427) (15,329) (18,157) --------- --------- --------- $ 249,100 $ 202,656 $ 175,949 ========= ========= ========= Intersegment net sales Electronics components distribution $ 1,381 $ 615 $ 268 Contract manufacturing 3 26 10 Less: amount reclassified to discontinued operations (3) (26) (10) --------- --------- --------- $ 1,381 $ 615 $ 268 ========= ========= =========
F-33 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE L - BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED) Operating (loss) profit Electronics components distribution $ (305) $ (2,446) $ (5,380) Contract manufacturing 1,548 606 209 Less: amount reclassified to discontinued operations (1,548) (606) (209) --------- --------- --------- $ (305) $ (2,446) $ (5,380) ========= ========= ========= Interest expense Electronics components distribution $ 1,539 $ 1,025 $ 1,683 Contract manufacturing 412 417 540 Less: amount reclassified to discontinued operations (412) (417) (540) --------- --------- --------- $ 1,539 $ 1,025 $ 1,683 ========= ========= ========= Income tax (benefit) provision Electronics components distribution $ (553) $ (1,180) $ (2,500) Contract manufacturing 400 (330) (268) Less: amount reclassified to discontinued operations (400) 330 268 --------- --------- --------- $ (553) $ (1,180) $ (2,500) ========= ========= ========= Identifiable assets Electronics components distribution $ 108,755 $ 103,228 $ 97,412 Contract manufacturing 13,027 10,984 13,223 --------- --------- --------- $ 121,782 $ 114,212 $ 110,635 ========= ========= ========= Capital expenditures Electronics components distribution $ 313 $ 136 $ 174 Contract manufacturing 300 113 31 Less: amount reclassified to discontinued operations (300) (113) (31) --------- --------- --------- $ 313 $ 136 $ 174 ========= ========= ========= Depreciation and amortization Electronics components distribution $ 1,276 $ 1,293 $ 1,439 Contract manufacturing 829 843 893 Less: amount reclassified to discontinued operations (829) (843) (893) --------- --------- --------- $ 1,276 $ 1,293 $ 1,439 ========= ========= =========
F-34 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE M - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) On September 20, 2004, the assets and certain liabilities of the contract manufacturing segment were sold (See Note B). Accordingly, the quarterly information provided below has been restated to reflect the results of the discontinued operations for all periods indicated.
Quarter ended ---------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, March 31, 2004 2004 2003 2003 2003 2003 ----------- ----------- ------------ ------------- ----------- ------------ Net sales $57,063,560 $63,119,859 $61,488,811 $67,425,307 $51,373,301 $55,422,287 Gross profit $ 8,933,213 $ 8,805,490 $ 8,294,491 $ 8,677,996 $ 5,643,967 $ 7,024,922 Loss from continuing operations $ (145,573) $ (28,682) $ (592,213) $ (524,600) $(1,027,704) $ (86,251) Earnings (loss) from discontinued operations $ 322,089 $ 157,403 $ 154,976 $ 101,029 $ (169,064) $ (173,413) Net earnings (loss) $ 176,516 $ 128,721 $ (437,237) $ (423,571) $(1,196,768) $ (259,664) Loss from continuing operations Basic $ (0.02) $ (0.01) $ (0.10) $ (0.09) $ (0.18) $ (0.02) Diluted $ (0.02) $ (0.01) $ (0.10) $ (0.09) $ (0.18) $ (0.02) Earnings (loss) from discontinued operations Basic $ 0.05 $ 0.03 $ 0.03 $ 0.02 $ (0.03) $ (0.03) Diluted $ 0.05 $ 0.03 $ 0.03 $ 0.02 $ (0.03) $ (0.03) Earnings (loss) Per Share Basic $ 0.03 $ 0.02 $ (0.07) $ (0.07) $ (0.21) $ (0.05) Diluted $ 0.03 $ 0.02 $ (0.07) $ (0.07) $ (0.21) $ (0.05) Basic 6,185,008 5,997,409 5,928,169 5,792,123 5,765,832 5,767,588 Diluted 6,185,008 5,997,409 5,928,169 5,792,123 5,765,832 5,767,588 Quarter ended --------------------------- December 31, September 30, 2002 2002 ------------ ------------- Net sales $49,748,250 $46,086,265 Gross profit $ 6,671,160 $ 6,398,210 Loss from continuing operations $ (469,347) $ (707,936) Earnings (loss) from discontinued operations $ (71,672) $ (279,274) Net earnings (loss) $ (541,019) $ (987,210) Loss from continuing operations Basic $ (0.08) $ (0.12) Diluted $ (0.08) $ (0.12) Earnings (loss) from discontinued operations Basic $ (0.01) $ (0.05) Diluted $ (0.01) $ (0.05) Earnings (loss) Per Share Basic $ (0.09) $ (0.17) Diluted $ (0.09) $ (0.17) Basic 5,791,717 5,807,432 Diluted 5,791,717 5,807,432
F-35 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE Board of Directors and Shareholders JACO ELECTRONICS, INC. In connection with our audits of the consolidated financial statements of Jaco Electronics, Inc. and subsidiaries referred to in our report dated August 27, 2004 (except for Notes B and F(a), as to which the date is September 20, 2004) 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, 2004. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thornton LLP - ---------------------- GRANT THORNTON LLP Melville, New York August 27, 2004 F-36 Jaco Electronics, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 2004, 2003 and 2002
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, 2004 $1,288,000 $ 624,000 $ 10,000 (a) $ 1,227,000 (b) $ 695,000 ========== ========== ======== =========== =========== Year ended June 30, 2003 $1,536,000 $ 822,000 $444,000 (a) $ 1,514,000 (b) $ 1,288,000 ========== ========== ======== =========== =========== Year ended June 30, 2002 $1,507,000 $ 486,000 $ 79,000 (a) $ 536,000 (b) $ 1,536,000 ========== ========== ======== =========== =========== Reserve for slow-moving and obsolete inventory YEAR ENDED JUNE 30, 2004 $4,632,000 $1,532,000 $ 1,432,000 (c) $ 4,732,000 ========== ========== =========== =========== Year ended June 30, 2003 $2,762,000 $2,849,000 $ 979,000 (c) $ 4,632,000 ========== ========== =========== =========== Year ended June 30, 2002 $1,962,000 $2,098,000 $ 1,298,000 (c) $ 2,762,000 ========== ========== =========== ===========
(a) Recoveries of accounts. (b) Represents write-offs of uncollectible accounts. (c) Disposal and sale of slow-moving and obsolete inventory. F-37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JACO ELECTRONICS, INC. By: /s/ Joel H. Girsky ------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer Dated: September 28, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ Joel H. Girsky Chairman of the Board, September 28, 2004 - ------------------------------------- President and Treasurer Joel H. Girsky (Principal Executive Officer) /s/ Jeffrey D. Gash Executive Vice President- September 28, 2004 - ------------------------------------- Finance and Secretary Jeffrey D. Gash (Principal Financial and Accounting Officer) /s/ Joseph F. Oliveri Vice Chairman of the Board September 28, 2004 - ------------------------------------- and Executive Vice President Joseph F. Oliveri /s/ Charles B. Girsky Executive Vice President and September 28, 2004 - ------------------------------------- Director Charles B. Girsky /s/ Stephen A. Cohen September 28, 2004 - ------------------------------------- Stephen A. Cohen Director /s/ Edward M. Frankel Director September 28, 2004 - ------------------------------------- Edward M. Frankel /s/ Joseph F. Hickey, Jr. Director September 28, 2004 - ------------------------------------- Joseph F. Hickey, Jr. /s/ Neil Rappaport Director September 28, 2004 - ------------------------------------- Neil Rappaport /s/ Robert J. Waldman Director September 28, 2004 - ------------------------------------- Robert J. Waldman
EX-10.23.1 2 y02559exv10w23w1.txt AMENDMENT TO THIRD RESTATED AND AMENDED LOAN AND SECURITY AGREEMENT EXHIBIT 10.23.1 AMENDMENT #1 TO THE THIRD RESTATED AND AMENDED LOAN AND SECURITY AGREEMENT September 20, 2004 JACO ELECTRONICS, INC. ("Jaco") 145 Oser Avenue Hauppauge, NY 11778 NEXUS CUSTOM ELECTRONICS, INC. ("Nexus") Prospect Street Brandon, VT 05733 INTERFACE ELECTRONICS, INC. ("Interface") 124 Grove Street Franklin, MA 02028 Gentlemen: Reference is made to the Third Restated and Amended Loan and Security Agreement in effect between GMAC Commercial Finance LLC, as successor by merger to GMAC Commercial Credit LLC, which was the successor in interest to BNY Financial Corporation ("GMAC"), as Agent and Lender, and PNC Bank National Association ("PNC") as Lender and Co-Agent, and Jaco, Nexus and Interface, dated December 22, 2003, as supplemented and amended from time to time, (the "Agreement"). Both GMAC and PNC may hereinafter be referred to jointly as the "Lenders", and individually, as a "Lender" and GMAC may also be herein referred to as "Agent" when acting in such capacity, as the case may be and PNC may also herein be referred as "Co-Agent", as the case may be. Initially capitalized terms not defined herein shall have the meanings ascribed to such terms in the Agreement. Jaco, Nexus and Interface may hereinafter and in the Agreement, be referred to jointly and severally as "Debtors", and each individually as a "Debtor". WHEREAS you have informed us that you intend to sell substantially all of the assets of Nexus to Sagamore Advisors LLC (the "Buyer") for a purchase price in the amount of $9,250,000 in cash (the "Cash Portion of the Purchase Price"), a subordinated promissory note in the amount of $2,750,000 (the "Note") and an additional $1,000,000 in cash based on performance of the purchaser after the completion of the sale (the "Cash Performance Amount"); and WHEREAS you have requested the Agent and the Lenders consent to the proposed sale (as required by the terms of the Agreement), subject to the terms and conditions, outlined in a certain letter of intent (the "Letter of Intent"), between Jaco and the Buyer, dated July 6, 2004 (the "Sale"); and WHEREAS the Agent and the Lenders are willing to give the requested consent subject to the terms and conditions stated herein below; NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS: Effective as of the closing date of the Sale, the Agreement is hereby amended as follows: 1. The definition of "Contract Rate" as stated in Sub-Section 1.2 of the Agreement is hereby deleted in its entirety and replaced by the following definition: " "Contract Rate" shall mean, as applicable, with respect to Revolving Advances, an interest rate per annum equal to (i) the Base Rate plus three-quarters of one (.75%) percent or (ii) the Eurodollar Rate plus three (3%) percent, as applicable (provided however, that it shall mean the Eurodollar Rate plus three and one-quarter (3.25%) percent, until September 30, 2005. However, the Contract Rate, for Eurodollar Rate Loans, shall continue to mean the Eurodollar Rate plus three and one-quarter (3.25%) percent, after September 30, 2005, if the Fixed Charge Coverage Ratio on September 30, 2005, calculated on a four (4) quarter rolling basis, for the previous four (4) quarters, shall be less than 1.1 to 1.0, until such time as the Fixed Charge Coverage Ratio shall be equal to or greater than 1.1 to 1.0 at the end of any fiscal quarter ending after September 30, 2005, calculated on a four (4) quarter rolling basis, for the previous four (4) quarters.)" 2. Section 6.9(a), of the Agreement, is hereby deleted in its entirety and replaced by the following: 2 "6.9. Financial Covenants. (a) EBITDA. Maintain EBITDA for the Loan Parties on a Consolidated Basis as of the end of each fiscal quarter set forth below for the respective fiscal periods set forth below ending on the last day of such fiscal quarter in an amount not less than the amount set forth below:
Fiscal Period Minimum EBITDA - ------------- -------------- Fiscal Quarter Ending 12/31/03 $ 400,000 Fiscal Quarter Ending 3/31/04 $ 1,000,000 Fiscal Quarter Ending 6/30/04 $ 1,300,000 Fiscal Quarter Ending 9/30/04 $ 235,000 Fiscal Quarter Ending 12/31/04 $ 400,000
(b) Fixed Charge Coverage Ratio. Maintain as of the end of each quarter, on a four quarter rolling basis for the previous four quarters, a Fixed Charge Coverage Ratio for the Loan Parties on a Consolidated Basis as of the end of each fiscal quarter set forth below for the respective periods set forth below of not less than the ratios set forth below:
Fiscal Period Ending Fixed Charge Coverage Ratio - -------------------- --------------------------- 3/31/05 1.0 to 1.0 6/30/05 1.0 to 1.0 9/30/05 and any fiscal period thereafter 1.1 to 1.0"
3. Sub-Section 6.10, of the Agreement, shall be deleted in its entirety and replaced by the following: "6.10. Minimum Net Worth. Maintain at all times a minimum Net Worth of at least $44,500,000 to be increased for each fiscal year by sixty-five (65%) percent of fiscal year end net income (excluding net income from the Sale of Nexus) and increased by eighty (80%) percent of the profit from the sale of the assets of Nexus (during the fiscal year of such sale) and reduced by eighty (80%) percent of the amount of any write-off amount (if any) of the note executed by the buyer of such assets for the benefit of Jaco (during the fiscal year of any such write-off)." 3 4. The following Sub-Section 6.12 shall be added to Section VI of the Agreement. "6.12. Permanent Undrawn Availability . Maintain at all times (for all Loan Parties) an aggregate Undrawn Availability of $1, 500,000, provided however, that such Undrawn Availability may be reduced to $500, 000 at all times on the later to occur of (i) 3-31-05 or (ii) the last day of the second consecutive fiscal quarter during which the Fixed Charge Coverage Ratio equals 1.1 to 1.0, calculated on a rolling four quarter basis, excluding any profits derived from the Sale." 5. Sub-Section 7.6, of the Agreement, is hereby deleted in its entirety and replaced by the following: "7.6. Capital Expenditures. Contract for, purchase or make any net Capital Expenditures, as of each fiscal year, in an amount not exceeding the amount stated opposite such fiscal year in the table below.
Fiscal Year Ending Amount - ------------------ ------ 6/30/04 $750,000 6/30/05 and each fiscal year thereafter $500,000"
6. Notwithstanding anything contrary in the Agreement, as of the closing date of the Sale, the Effective Additional Availability Amount shall be reduced to zero (0). 7. The Agent and the Lenders hereby consent to the Sale of all of the assets of Nexus, subject to the terms and conditions of the Letter of Intent, and the sales agreement executed pursuant thereto dated September __, 2004, provided Lender receives the Cash Portion of the Purchase Price. The Agent, on behalf of the Lenders, shall release, as of the date of the closing of the Sale, upon receipt of the Cash Portion of the Purchase Price at the account specified below, any and all liens it may have on the assets of Nexus in which the Agent and/or the Lenders presently have a lien on or a security interest in and agree, at Borrowers' expense, to execute all necessary releases and financing statements, as may reasonably be requested by Borrowers. Borrowers hereby agree to also arrange to have the proceeds of the Note and the Cash Performance Amount to be wired transferred to the account specified below. The Cash Portion of the Purchase Price, the proceeds of the Note and the Cash Performance 4 Amount (if any) shall be applied, by the Agent, to reduce the amount of the Obligations in accordance, with the terms of the Agreement. The Cash Portion of the Purchase Price, the proceeds of the Note and the Cash Performance Amount (if any) shall be wire transferred to the Agent's account as follows: "BANK ONE NA ABA # 072000326 Account # 361324984 Attention Operations Department For the account of GMAC Commercial Finance LLC Reference Jaco Electronics, Inc." 8. As additional Collateral and inconsideration of the Sale, Jaco shall pledge and assign, to the Agent, for the pro rata benefit of the Lenders, the Note. 9. In consideration of the foregoing consent, Loan Parties hereby agree to pay, the Agent, a fee of $25,000 for the pro rata benefit of the Lenders on September 20, 2004. The Loan Parties hereby authorize the Lender to automatically charge to Borrowers' account with the amount of such fee, as of such date. 10. By their signatures below, Jaco, Nexus and Interface hereby ratify the Agreement (as hereby amended) and agree to be jointly and severally liable for all Obligations under the Agreement and agree that all of the outstanding amounts of the Loans under the Agreement, as of the date hereof, shall be valid and binding Obligations of each of them, and shall be deemed Obligations outstanding under the Agreement, and hereby agree and promise to repay to the Agent, for the benefit of the Lenders, such Obligations (including but not limited to all applicable interest) in accordance with the terms of the Agreement, but in no event, later than the Termination Date. 11. By their signatures below, Jaco, Nexus and Interface hereby ratify and affirm to the Agent that as of the date hereof, they are in full compliance with all covenants under the Agreement (except as waived above) and certify that all representations and warranties of the Agreement are true and accurate as of the date hereof, with the same effect as if they had been made as of the date hereof. Except as herein specifically amended, the Agreement shall remain in full force and effect in accordance with its original terms, except as previously amended. If the foregoing accurately reflects our understanding, kindly sign the enclosed 5 copy of this letter and return it to our office as soon as practicable. Very truly yours, GMAC COMMERCIAL FINANCE LLC (as Agent and Lender) By: /s/ Daniel Murray --------------------------- Title: 1st. Vice President AGREED AND ACCEPTED: JACO ELECTRONICS, INC. PNC BANK NATIONAL ASSOCIATION (as Lender) By: /s/ Jeffrey D. Gash By: /s/ Wing Louie --------------------------------- --------------------------- Title: Vice President - Secretary Title: Vice President NEXUS CUSTOM ELECTRONICS, INC. INTERFACE ELECTRONICS CORP. By: /s/ Jeffrey D. Gash By: /s/ Jeffrey D. Gash --------------------------------- --------------------------- Title: Vice President Title: Vice President 6 EX-21.1 3 y02559exv21w1.txt SUBSIDIARIES OF THE COMPANY Exhibit 21.1 State or Jurisdiction Name of Subsidiary of Incorporation ------------------------------- ------------------------------- Nexus Custom Electronics, Inc. Delaware Interface Electronics Corp. Massachusetts EX-23 4 y02559exv23.txt CONSENT OF GRANT THORNTON LLP Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated August 27, 2004 (except for Notes B and F(a), as to which the date is September 20, 2004), accompanying the consolidated financial statements and schedule included in the Annual Report of Jaco Electronics, Inc. and Subsidiaries on Form 10-K for the fiscal year ended June 30, 2004. We hereby consent to the incorporation by reference of said report in the Registration Statements of Jaco Electronics, Inc. and Subsidiaries on Form S-8/S-3 (File No. 33-89994, effective March 3, 1995), as amended by Post-Effective Amendment No. 1 to the Registration Statement of Jaco Electronics on Form S-8/S-3 (File No. 333-49873, effective April 10, 1998), the Registration Statement of Jaco Electronics, Inc. and Subsidiaries on Form S-8/S-3 (File No. 333-49877, effective April 10, 1998) and the Registration Statement of Jaco Electronics, Inc. and Subsidiaries on Form S-8/S-3 (File No. 333-111065, effective December 10, 2003). /s/ Grant Thornton LLP - ------------------------------ GRANT THORNTON LLP Melville, New York September 28, 2004 EX-31.1 5 y02559exv31w1.txt CERTIFICATION EXHIBIT 31.1 RULE 13a-14(a)/15d-14(a) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Joel H. Girsky, certify that: 1. I have reviewed the annual report on Form 10-K for the year ended June 30, 2004 of Jaco Electronics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 28, 2004 /s/ Joel H. Girsky ----------------------------------- Joel H. Girsky Chairman, President and Treasurer (Principal Executive Officer) EX-31.2 6 y02559exv31w2.txt CERTIFICATION EXHIBIT 31.2 RULE 13a-14(a)/15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Jeffrey D. Gash, certify that: 1. I have reviewed the annual report on Form 10-K for the year ended June 30, 2004 of Jaco Electronics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 28, 2004 /s/ Jeffrey D. Gash --------------------------------- Jeffrey D. Gash Executive Vice President, Finance and Secretary (Principal Financial Officer) EX-32.1 7 y02559exv32w1.txt CERTIFICATION EXHIBIT 32.1 SECTION 1350 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER The undersigned, Chairman, President and Treasurer, of Jaco Electronics, Inc. (the "Company"), hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) the Annual Report on Form 10-K of the Company for the year ended June 30, 2004 (the "Annual Report") accompanying this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented as required by such report. The foregoing certification is based upon, among other things, my responsibilities as principal executive officer of the Company, my own due diligence and representations made by certain other members of the Company's senior management. Date: September 28, 2004 /s/ Joel H. Girsky ---------------------------------- Joel H. Girsky Chairman, President and Treasurer (Principal Executive Officer) EX-32.2 8 y02559exv32w2.txt CERTIFICATION EXHIBIT 32.2 SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER The undersigned, Executive Vice President, Finance and Secretary, of Jaco Electronics, Inc. (the "Company"), hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) the Annual Report on Form 10-K of the Company for the year ended June 30, 2004 (the "Annual Report") accompanying this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented as required by such report. The foregoing certification is based upon, among other things, my responsibilities as principal financial officer of the Company, my own due diligence and representations made by certain other members of the Company's senior management. Date: September 28, 2004 /s/ Jeffrey D. Gash ----------------------------------------------- Jeffrey D. Gash Executive Vice President, Finance and Secretary (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----