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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.
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- 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
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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.
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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.
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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
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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.
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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.
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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
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(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