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Jaco Electronics 10-K 2008 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For the
fiscal year ended June 30, 2008
For the
transition period from __________ to __________
Commission
File Number 0-5896
JACO ELECTRONICS,
INC.
(Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code: (631) 273-5500
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 per
share
(Title
of Class)
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes
__ No X
Indicate by check mark whether the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes
__ No X
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 a large accelerated filer, an
accelerated filer,a non-accelerated filer or a small reporting
company. See definition of “accelerated filer”, “large accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer o Smaller
reporting company ý
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes: No:
X
The
aggregate market value of voting stock held by non-affiliates of the registrant
as of December 31, 2007 was $ 5,664,964
(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
19, 2008 was 6,294,332
shares (excluding 659,900 treasury shares).
DOCUMENTS
INCORPORATED BY REFERENCE.
Portions
of the registrant’s definitive proxy statement to be filed on or
before under Regulation 14A in connection with the registrant’s 2008
Annual Meeting of Shareholders are incorporated by reference in Part III of this
Form 10-K.
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 Exchange Act of 1934, as amended, or the
Exchange Act, which represent our management’s beliefs and assumptions
concerning future events. When used in this report and in other
documents we file or furnish under the Exchange Act, 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” “believes”,
“intends”, “plans” 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.
You
should understand that many important factors, in addition to those discussed or
incorporated by reference in this report, could cause our results to differ
materially from those expressed in the forward-looking statements. Potential
factors that could affect our results include, in addition to others not
described in this report, those described in Item 1A. Risk Factors of this
report.
In
light of these risks and uncertainties, the forward-looking events discussed in
this report might not occur and, therefore, you are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. Except in connection with changes to risk factors
provided in response to Part II Item 1A of Form 10-Q under the Exchange Act, 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.
i PART
I
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 the 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”, “Jaco” and similar terms refer to Jaco Electronics,
Inc. and our consolidated subsidiaries.
We are a
distributor of active and passive electronic components used in the manufacture
and assembly of electronic products to a wide variety of industrial Original
Equipment Manufacturers (“OEMs”). We also sell products to contract electronics
manufacturers, particularly in the Far East, who manufacture products for
companies in select segments of the electronics industry.
We also
are a provider of flat panel display and supporting technology products and
services. We distribute a range of semiconductors (active components), including
transistors, diodes, memory devices, microprocessors, micro controllers, other
integrated circuits, active matrix displays and various board-level products, as
well as passive products, consisting primarily of capacitors, resistors and
electromechanical devices including power supplies, relays, switches, connectors
and printer heads. These products are used in the assembly of a
diverse and growing range of electronic products, including:
We have
two distribution centers, a warehouse in Singapore and 15 strategically located
sales offices throughout the United States. We distribute more than 45,000
products from over 100 vendors, including such market leaders as Kemet
Electronics Corporation, NEC, Samsung Semiconductor, Inc., Vishay Americas,
Inc., Sharp Electronics Corp, Vitesse Semiconductor Corporation, Epson
Electronics America, Inc., Lambda Americas Inc. Cosel USA, Inc. and AU
Optronics, to a base of over 5,500 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; integration, turnkey design and development, project
management, and extended and post-sale support services for various custom
components with flat panel displays; assembly of stock items for customers into
pre-packaged kits; 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.
1
The
electronic components distribution industry represents an important sales
channel for component manufacturers. Electronic components
distributors relieve component manufacturers of a portion of the costs and
personnel needed to warehouse, sell and deliver their
products. Distributors market manufacturers’ products to a broader
range of customers than such manufacturers could economically serve with their
direct sales forces. Today, distributors have become an integral part
of their customers’ purchasing and inventory processes. Distributors
offer their customers the ability to outsource their purchasing and warehousing
responsibilities so that they may concentrate their resources on their core
competencies, namely research, product development, sales and
marketing. Electronic data interchange (EDI) permits distributors to
receive timely scheduling of component requirements from customers enabling them
to better provide these value-added services. Generally, companies engaged in
the distribution of electronic components, including Jaco, are required to
maintain a relatively significant investment in inventories and accounts
receivable to be responsive to the needs of customers. To meet these
requirements, we, as well as other companies in our industry, typically depend
on internally generated funds as well as external sources of
financing.
Distributors
also provide technical engineers to work directly with their
customers. Our engineers provide technical support to our customers’
for our flat panel display products, micro controllers and power supplies. Our
technical engineers are trained by our key suppliers on their specific product
offerings and serve as an extension of our suppliers marketing
efforts.
We
currently distribute over 45,000 stock items. Our products fall into
four broad categories: semiconductors (Semi), flat panel displays
(FPD), passive components (Passive) 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:
Semiconductors
are active products consisting of such items as integrated circuits,
microprocessors, transistors, diodes, dynamic random access memory (RAM), static
RAMs, and video RAMs which respond to or activate upon receipt of electronic
current. FPDs incorporate such items as flat panels, touch screens
and controllers, which are commonly used in personal computers, televisions,
automated teller machines, voting and gaming machines, and video monitors, and
are rapidly replacing standard cathode ray tubes in a variety of applications,
including medical, industrial and commercial equipment, as well as in the
specific types of products listed above. Passive components consist primarily of
capacitors and resistors. EMCH consists of such products as power
supplies, relays and printerheads. Both passive and EMCH products are
designed to facilitate completion of electric functions.
2
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 FPD integration, to generate revenues from new
customers. Value-added services include:
Sales
and Marketing
We
believe we have developed valuable long-term customer relationships and an
understanding of our customers’ current and future requirements. 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 inventory management programs
to address the specific distribution requirements of the global contract
manufacturing sector. Two of our customers represented 7% and 7%, 14%
and 10%, and 13% and 11% of our total net sales for the fiscal years ended June
30, 2008, 2007 and 2006, respectively. None of our other customers
individually represented more than 5%, 6% or 7% of our total net sales for
fiscal years ended June 2008, 2007 or 2006, respectively.
As an
authorized distributor for many component manufacturers, we are able to offer
technical support as well as a variety of supply chain management
programs. Technical engineering, support and supply chain management
services enhance our ability to attract new customers. Many of today’s services
revolve around the use of software automation, computer-to-computer transactions
through EDI, Internet-based solutions, technically competent product managers,
business development managers (BDM) and
3
technical
engineers for our FPD product offering. 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 15 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. Sales are
also made through general advertising, referrals and marketing support from
component manufacturers. In addition, we utilize the services of independent
sales representatives whose territories include parts of North America and
several foreign countries. Independent sales representatives generally operate
under agreements, which are terminable by either party upon 30 days notice and
prohibit them from representing competing product lines. In most cases,
independent sales representatives are authorized to solicit sales of all of our
product lines. We utilize a third party warehouse in the Far East and
in March 2007 we opened a warehouse in Singapore to continue to support key
customers in the Far East.
For our
FPD product, we provide high quality component and value-added display
solutions. As panel technology is added to a rapidly expanding list
of electronic products and devices, it has become necessary to support the
growing number of specific applications with a customized
solution. We provide in-house design, sub-assembly, and complete
“box-build” capability, high level integration, project management, and testing
and after-market capabilities to provide the varying levels of support required
by our customer base. We define our addressable market as qualified
OEMs and systems integrators with critical time-to-market and product
optimization needs that may also have specialized design and engineering service
requirements followed by a scalable FPD program.
Manufacturers
of electronic components are increasingly relying on the marketing, customer
service, technical support and other resources of distributors who market and
sell their product lines to customers not normally served by the manufacturer
and to supplement the manufacturer’s direct sales efforts for other accounts
often by providing value-added services not offered by the
manufacturer. Manufacturers seek distributors who have strong
relationships with desirable customers, 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 agreements with many manufacturers, including AU Optronics, Sharp
Electronics Corp, NEC, Kemet Electronics Corporation, Samsung Semiconductor,
Inc., 3M Touch Systems, Inc., Vishay Intertechnology, Inc., Vitesse
Semiconductor Corporation, Lambda, Cosel and Epson Electronics America,
Inc. We continuously seek to identify potential new suppliers. In
August 2007 we signed a distribution agreement with Dawar Technologies, a
leading manufacturer of man-machine interface products. During the fiscal year
ended June 30, 2008, products purchased from our two largest suppliers accounted
for 13% and 5%, 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. Products requiring specialized technical assistance typically have
higher average selling prices and higher gross profit margins than commodity
components and there is more 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.
4
Many of
our current agreements are with suppliers with which we have had relationships
for more than fifteen years. Most of 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 5% of a prior period’s purchases and some of our
vendors allow us to scrap 3% of traditionally non-returnable inventory. 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, and often subject to our compliance with certain customary conditions,
we cannot assure you that we will not experience significant losses from unsold
inventory in the future.
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 our 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 for 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. Most of 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 to 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, 2008.
LCD
Manufacturing. Our LCD manufacturing capabilities support
customization requirements for almost any commercial or industrial application,
including prototype, sub-assembly, full system assembly, LCD optical
enhancement, touch-screen integration and system integration. The
Company has sold ‘ruggedized’ applications that address military, aerospace and
special industrial requirements (including hazardous
environments). We maintain world-class quality standards and are ISO
9001 certified for company functions. In February 2005, we completed
the construction of a state-of-the-art integration facility in Hauppauge, New
York to meet the needs of our expanding FPD customer base. The 20,000
square foot plant houses design and engineering, manufacturing, integration,
after-market support and operations. The integration center is
equipped with a large, modern batch assembly area as well as work cells designed
for continuous quality manufacturing. Products with clean room
requirements are assembled on premises. The facility is configured to
accommodate customized projects that range from low-volume design and prototype
to higher volume assembly as large as 50,000 units.
5
Discontinued
Operations
On September 20, 2004, the Company
completed the sale of substantially all of the assets of its contract
manufacturing subsidiary, Nexus Custom Electronics, Inc. ("Nexus"), to Sagamore
Holdings, Inc. (“Sagamore”) for consideration of up to $13,000,000, subject to
closing adjustments, and the assumption of certain liabilities. The divestiture
of Nexus has allowed the Company to focus its resources on its core electronics
distribution business. As a result of the sale of Nexus, the Company no longer
engages in contract manufacturing, which is the placement of components on
computer boards to customers specifications.
Under the terms of the purchase
agreement relating to this transaction, the Company received $9,250,000 of the
purchase consideration in cash on the closing date. Such cash consideration was
used to repay a portion of the outstanding borrowings under the Company's
then-existing line of credit. The balance of the purchase consideration was
satisfied through the delivery of a $2,750,000 subordinated note issued by the
purchaser. The purchase agreement also provided for a working capital adjustment
of up to $500,000. Additionally, the Company was 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 $20,000,000 of Nexus after the closing date, up to $1,000,000
in the aggregate.
On September 1, 2006 Nexus Nano
Electronics, Inc. (“NNE”), as successor to Sagamore, and its subsidiary filed
suit against the Company in the U.S. District Court for the Southern District of
New York alleging fraud and misrepresentations by the Company in connection with
the sale of Nexus and seeking an unspecified amount of damages. The
Company answered the complaint and asserted counterclaims for amounts owed to it
under the purchase agreement. On July 8, 2008, the case was dismissed
by order of the Court pursuant to the parties’ settlement, which provided for
the exchange of releases without payment to any party and a Supply Agreement for
the possible sale by the Company of electronic components to Titan Nexus and
related parties. The Company has no basis of determining how much
product will be sold under the Supply Agreement.
Prior to the settlement, the Company’s
management determined that the note receivable had been impaired and recorded a
full write-off of the note receivable and all other amounts arising from the
sale of Nexus as of June 30, 2007, which amounted to $3,183,401. Such write-off
had been reflected as a loss on sale of subsidiary in the Company’s consolidated
statement of operations for the year ended June 30, 2007. In
addition, the Company was uncertain of its ability to collect accounts
receivable due to it from NNE and as of September 30, 2007 had set up a reserve
against the entire amount of this receivable, which amounted to
$713,000.
Competition
The
electronic components distribution industry is highly competitive, primarily
with respect to price, product availability, knowledge of product and quality of
service. We believe that the breadth of our customer base, services
and product lines, our level of technical expertise and the overall quality of
our services are particularly important to our competitive
position. We compete with large national distributors such as Arrow
Electronics, Inc. and Avnet, Inc., as well as mid-size distributors, such as Nu
Horizons Electronic Corporation, many of whom distribute the same or competitive
products as we do. We also compete for customers with some of our own
suppliers and additional competition has emerged from third-party logistics
providers, fulfillment companies, catalogue distributors and e-commerce
companies, including on-line distributors and brokers, which have grown with the
expanded use of the Internet. Many of our competitors have
significantly greater assets, name recognition and financial, personnel and
other resources than we do.
6
Our
ability to purchase competitively priced electronic components from our
suppliers that have foreign parents could be adversely affected by increases in
tariffs, duties, changes in the U.S. trade agreements with Japan, Taiwan or
other foreign countries, transportation strikes or the adoption of federal laws
imposing import restrictions. In addition, the cost of our imported
components could be subject to governmental controls and international currency
fluctuations. The decline in the value of the U.S. dollar relative to the
currencies of Japan and other countries would cause increases in the dollar
prices we pay for these components. Although we have not experienced any
material adverse effect to date on our ability to compete or otherwise as a
result of any of the foregoing factors, we cannot assure you that such factors
will not have a material adverse effect on us in the future.
As is
typical of electronic components distributors, we have a backlog of customer
orders. At June 30, 2008, we had a backlog of approximately $45.8
million as compared to a backlog of approximately $43.3 million at June 30,
2007. We believe that a substantial portion of our backlog represents
orders due to be filled within the next 90 days. In recent years, the trend in
our industry has been toward outsourcing, with more customers entering into
just-in-time contracts with distributors, instead of placing orders with long
lead times. As a result, the correlation between backlog and future
sales is changing and backlog is not as useful in predicting long-term
sales. In addition, we have increased our use of EDI transactions,
where we purchase inventory based on electronically transmitted forecasts from
our customers that may not become an order until the date of shipment and,
therefore, may not be reflected in our backlog. Our backlog is subject to
delivery rescheduling and cancellations by the customer, sometimes without
penalty or notice. For the foregoing reasons our backlog is not
necessarily indicative of our future sales for any particular
period.
At June
30, 2008, we had a total of 194 employees, of which five were engaged in
administration, 16 were managerial and supervisory employees, 118 were in sales
and 55 performed 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
1A. Risk Factors
Our
industry is highly cyclical, and an industry downturn could have a material
adverse effect on our business.
The
electronic components distribution industry and, in particular, the
semiconductor industry from which a large portion of our revenues come, has
historically been affected by general economic downturns and fluctuations in
product supply and demand, often associated with changes in technology and
manufacturing capacity. These industry cycles and economic downturns
have often had an adverse economic effect upon manufacturers, end-users of
electronic components and electronic components distributors, including Jaco. We
cannot predict the timing or the severity of the cycles within our industry, or
how long and to what levels any industry downturn and/or general economic
weakness will last or be exacerbated by terrorism or war or other factors on our
industry. During each of the fiscal years ended June 30, 2008, 2007 and
2006, sales of semiconductors represented 37%, 54% and 50% of our net sales,
respectively, and our revenues tend to closely follow the strength or weakness
of the semiconductor market. Future downturns in the technology
industry, particularly in the semiconductor sector, could have a material
adverse effect on our business, results of operations and financial
condition.
7
Our
revenues and profitability previously declined significantly from historical
highs and, although revenues have shown growth recently, we may be unable to
achieve profitability at levels experienced in the past.
Our
operations have been significantly and negatively affected by the downturn in
the technology industry and the general economy. From a high of
approximately $321 million in sales in fiscal 2001, our sales have continued to
decline from $250 million to $190 million in fiscal 2003 through 2008.We have
not yet been able to achieve consistent profitability, much less at a level
deemed acceptable to management. During the past fiscal year, we
continued to focus on those core areas where we believe we can most effectively
compete in the current business environment. Specifically, we
continue to aggressively pursue sales of flat panel displays and to concentrate
our marketing efforts on those core vendors whose products we believe still have
a viable market in North America. In the event this strategy is
unsuccessful, we may need to adopt further cost-cutting measures, which could
include restructuring and other charges.
We
are dependent on a limited number of suppliers. Loss of one or more
of our key suppliers could have a material adverse effect on our
business.
We rely
on a limited number of suppliers for products which generate a significant
portion of our sales. During the fiscal year ended June 30, 2008,
products purchased from our two largest suppliers accounted for 13% and 5%,
respectively, of our total net sales. Substantially all of our
inventory has been and will be purchased from suppliers with which we have
entered into non-exclusive distribution agreements. Moreover, most of
our distribution agreements are cancelable upon short notice. As a
result, in the event that one or more of those suppliers experience financial
difficulties or are not willing to do business with us in the future on terms
acceptable to management, there could be a material adverse effect on our
business, results of operations or financial condition. Additionally,
our relationships with our customers could be materially adversely affected
because our customers depend on our distribution of electronic components and
computer products from the industry’s leading suppliers.
Declines
in the value of our inventory could materially adversely affect our
business.
The
electronic components and computer products industry is subject to rapid
technological change, new and enhanced products and evolving industry standards,
which can contribute to a decline in value or obsolescence of
inventory. During an industry and/or economic downturn, it is
possible that prices will decline due to an oversupply of product and,
therefore, there may be greater risk of declines in inventory
value. Although it is the policy of many of our suppliers to offer
distributors like us certain protections from the loss in value of inventory
(such as price protection, stock rotation privileges and limited rights of
return and rebates), we cannot assure you that such protections will fully
compensate us for the loss in value, or that the suppliers will choose to, or be
able to, honor such agreements, some of which are not documented and therefore
subject to the discretion of the supplier. We cannot assure you that
unforeseen new product developments or declines in the value of our inventory
will not materially adversely affect our business, results of operations or
financial condition, or that we will successfully manage our existing and future
inventories.
Significant
order cancellations, reductions or delays by our customers could materially
adversely affect our business.
Our sales
are typically made pursuant to individual purchase orders, and we generally do
not have long-term supply arrangements with our customers, but instead work with
our customers to develop nonbinding forecasts of future
requirements. Based on these forecasts, we make commitments regarding
the level of business that we will seek and accept, the timing of production
schedules and the levels and utilization of personnel and other
resources. A variety of conditions, both specific to each customer
and
8
generally
affecting each customer’s industry, may cause customers to cancel, reduce or
delay orders that were either previously made or
anticipated. Generally, customers may cancel, reduce or delay
purchase orders and commitments without penalty, except for payment for services
rendered or products completed and, in certain circumstances, payment for
materials purchased and charges associated with such cancellation, reduction or
delay. Significant or numerous order cancellations, reductions or
delays by our customers could have a material adverse effect on our business,
financial condition or results of operations.
The
market for our products and services is very competitive and, if we cannot
effectively compete, our business will be harmed.
The
market for our products and services is very competitive and subject to rapid
technological change. We compete with many other distributors of
electronic components, many of which are larger and have significantly greater
assets, name recognition and financial, personnel and other resources than we
have. As a result, our competitors may be in a stronger position to
respond quickly to potential acquisitions and other market opportunities, new or
emerging technologies and changes in customer
requirements. Occasionally, we compete for customers with many of our
own suppliers and additional competition has emerged from third-party logistics
providers, fulfillment companies, catalogue distributors and e-commerce
companies, including on-line distributors and brokers, which have grown with the
expanded use of the Internet. Furthermore, as more and more
electronic components manufacturing moves outside North America, we believe that
the total available distribution market share in North America is being reduced
as procurement channels increase in Asia and Europe. While we have implemented
new strategies, including our website and multiple portals, in response to
certain of these new sources of competition and trends, we cannot assure you
that we will be able to maintain our market share against the emergence of these
or other sources of competition. Failure to maintain and enhance our
competitive position could materially adversely affect our business and
prospects.
Additionally,
prices for our products tend to decrease over their life cycle. This
reduces resale per component sold. There is also continuing pressure
from customers to reduce their total cost for products. Our suppliers
may also seek to reduce our margins on the sale of their products in order to
increase their own profitability or to be competitive with other suppliers of
comparable product. We incur substantial costs on our value-added
services required to remain competitive, retain existing business and gain new
customers, and we must evaluate the expense of those efforts against the impact
of price and margin reductions.
Substantial
defaults by our customers on accounts receivable or the loss of significant
customers could have a material adverse effect on our business.
A
substantial portion of our working capital consists of accounts receivable from
customers. If customers responsible for a significant amount of
accounts receivable were to become insolvent or otherwise unable to pay for
products and services, or to make payments in a timely manner, our business,
results of operations or financial condition could be materially adversely
affected. An economic or industry downturn could materially adversely
affect the servicing of these accounts receivable, which could result in longer
payment cycles, increased collection costs and defaults in excess of
management’s expectations. A significant deterioration in our ability
to collect on accounts receivable could also trigger an event of default under
our credit facility or otherwise impact the cost or availability of financing
available to us.
9
We
may not have adequate liquidity or access to capital resources, and our
substantial leverage and debt service obligations could materially adversely
affect our ability to meet our cash needs.
We need
cash to service our indebtedness and for general corporate purposes, such as
funding our ongoing working capital and capital expenditure needs. At
June 30, 2008, we had cash, and cash equivalents, of approximately $14,000
(our credit facility, referred to below, currently requires cash from customer
receipts to be applied directly to the repayment of outstanding
indebtedness). In addition, we currently have access to a credit
facility, which was entered into on December 22, 2006, providing for a $55
million secured revolving line of credit, of which $31.4 million was being
borrowed as of June 30, 2008, with an additional $7.7 million available. On
March 23, 2007, the credit facility was amended to provide the Company with a
supplemental loan (“Supplemental Loan”) of $3,000,000, which originally was
payable on May 17, 2007. On May 18, 2007, the Supplemental Loan was amended to
provide for periodic payments to be made through July 15, 2007, at which time
the Supplemental Loan was to be paid in full. On July 24, 2007 the Supplemental
Loan was amended again to provide a $3,000,000 loan at an interest rate equal to
the LIBOR rate plus 5%. The Supplemental Loan is now payable in seven quarterly
installments commencing October 1, 2007. The Company has currently made all the
required installment payments for this Supplemental Loan. In addition, mandatory
prepayments are to be made based (i) on an amount equal to fifty percent of
Excess Cash Flow, as defined in the agreement and (ii) on the net proceeds of
Designated Inventory, as defined in the agreement, when and if such amounts
exist. 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. Our ability to satisfy our cash needs depends on our ability to
generate cash from operations and to continue to access capital from external
sources of financing, both of which are subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Management believes we will be able to continue
to obtain financing on acceptable terms under our existing credit facility or
through other external sources.
Our
credit facility imposes debt service obligations and exposes us to certain risks
associated with being a substantially leveraged company. For example,
our credit facility contains several restrictive financial covenants, including,
among others, provisions for maintenance of a fixed charge coverage ratio, and
limitations on capital expenditures, dividends and other restricted
payments. Failure to remain in compliance with these and other
covenants could result in an event of default triggering an acceleration of our
obligation to repay all outstanding indebtedness under our credit facility or
limit our ability to borrow additional amounts
thereunder. Historically, we have, when necessary, been able to
obtain waivers or amendments to our prior credit facility to satisfy instances
of non-compliance with our financial covenants. However, we cannot
assure you that any such future waivers or amendments, if needed, will be
available and, if they are not, any future non-compliance with our bank
covenants could have a material adverse effect on our business, financial
condition or results of operations.
Our
substantial leverage could also have other significant negative consequences on
our business, including:
10
Interest rate changes may adversely
affect our operating results>.
We are
affected by interest rate changes with respect to our credit facility, which
currently is based upon, at our option, the prime rate, federal funds rate or
LIBOR. While interest rates have remained relatively constant over the last
year, any increases in interest rates could materially adversely affect our
results of operations.
Our
business in non-U.S. locations, particularly Asia, represent a significant and
growing portion of our sales, and our failure to expand in Asia may negatively
impact our sales.
The
manufacturing of electronic components and computer products is increasingly
shifting to lower-cost production facilities in Asia, most notably China.
Suppliers in Asia have traditionally had lower gross profit margins than those
in the United States and Europe, and typically charge lower prices in the Asian
markets for their products, which places pressure on us to lower our prices to
meet competition. Additionally, some of our customer base is
transferring to the Far East in order to reduce production costs. In
response to this trend, we continue to seek to expand our presence in Asia,
primarily through marketing our value-added services to support global contract
manufacturers. In addition, as part of our long-term growth plans, we
continue to search for a potential strategic alliance or partner in the Far
East. If we are unsuccessful in expanding our Far East operations,
our sales could be negatively impacted.
Expanding
internationally may subject our operations to a variety of risks that are
specific to international operations, including the following:
While we
have and will continue to adopt measures to reduce the potential impact of
losses resulting from the shift of business abroad and the risks of doing
business internationally, we cannot assure you that such measures will be
adequate.
We
are dependent on foreign manufacturers and subject to trade regulations which
expose us to political and economic risk.
A
significant number of components sold by us are manufactured by foreign
companies. As a result, our ability to sell certain products at competitive
prices could be adversely affected by any of the following:
11
Our
ability to be competitive with respect to sales of imported components could
also be affected by other governmental actions and policy changes, including
anti-dumping and other international antitrust legislation.
Our
industry is subject to supply shortages. Any delay or inability to obtain
components may have a material adverse effect on our business.
During
prior periods, there have been shortages of components in the electronics
industry and the availability of certain components has been limited by some of
our suppliers. Although such shortages and allocations have not had a material
adverse effect on our business, we cannot assure you that any future shortages
or allocations would not have such an effect on us.
The
prices of our components are subject to volatility.
A
significant portion of the memory products we sell have historically experienced
volatile pricing. If market pricing for these products decreases significantly,
we may experience periods when our investment in inventory exceeds the market
price of such products. In addition, at times there are price increases from our
suppliers that we are unable to pass on to our customers. These market
conditions could have a negative impact on our sales and gross profit margins
unless and until our suppliers reduce the cost of these products to us.
Furthermore, in the future, the need for aggressive pricing programs in response
to market conditions, an increased number of low-margin, large volume
transactions and/or increased availability of the supply of certain products,
could further impact our gross profit margins.
A
reversal of the trend for distribution to play an increasing role in the
electronic components industry could materially adversely affect our
business.
In recent
years, there has been a growing trend for original equipment manufacturers and
contract electronics manufacturers to outsource their procurement, inventory and
materials management processes to third parties, particularly electronic
component distributors, including Jaco. Although we do not currently foresee
this trend reversing, if it did, our business would be materially adversely
affected.
Our
operations would be materially adversely affected if third party carriers were
unable to transport our products on a timely basis.
All of
our products are shipped through third party carriers. If a strike or other
event prevented or disrupted these carriers from transporting our products,
other carriers may be unavailable or may not have the capacity to deliver our
products to our customers. If adequate third party sources to ship our products
were unavailable at any time, our business would be materially adversely
affected.
Our
products may be found to be defective and, as a result, warranty and/or product
liability claims may be asserted against us which could have a material adverse
effect on our business.
Our
products are sold at prices that are significantly lower than the cost of the
equipment or other goods in which they are incorporated. Since a
defect or failure in a product could give rise to failures in
12
the end
products that incorporate them (and claims for consequential damages against us
from our customers), we may face claims for damages that are disproportionate to
the sales and profits we receive from our products involved. While we
and our suppliers specifically exclude consequential damages in our standard
terms and conditions, our ability to avoid such liabilities may be limited by
the laws of some of the countries where we do business. Our business
could be materially adversely affected as a result of a significant quality or
performance issue in the products sold by us depending on the extent to which we
are required to pay for the damages that result, although historically such
amounts have not been material. Although we currently have product
liability insurance, such insurance is limited in coverage and
amount.
If
we are unable to recruit and retain key personnel necessary to operate our
business, our ability to compete successfully will be adversely
affected.
We are
heavily dependent on our current executive officers, management and technical
personnel. The loss of any key employee or the inability to attract
and retain qualified personnel could materially adversely affect our ability to
execute our business plans. Competition for qualified personnel is
intense, and we might not be able to retain our existing key employees or
attract and retain any additional personnel.
We
rely heavily on our internal information systems which, if not properly
functioning, could materially adversely affect our business.
Our
current global operations reside on our technology platforms. Any of
these systems are subject to electrical or telecommunications outages, computer
hacking or other general system failure. Failure of our internal
information systems or material difficulties in upgrading our global financial
system financial system could have material adverse effects on our
business.
If
we fail to maintain an effective system of internal controls or discover
material weaknesses in our internal controls over financial reporting, we may
not be able to report our financial results accurately or timely, which could
have a material adverse effect on our business.
An
effective internal control environment is necessary for us to provide reasonable
assurance with respect to our financial reports and to effectively prevent
financial fraud. We are required to periodically evaluate the
effectiveness of the design and operation of our internal control over financial
reporting. These evaluations may result in the conclusion that
enhancements, modifications or changes to internal controls are necessary or
desirable. While management evaluates the effectiveness of our internal controls
on a regular basis, these controls may not always be effective. There
are inherent limitations on the effectiveness of internal controls, including
collusion, the circumvention or override of controls, and human error and
failure of judgment. Therefore, even effective internal controls
cannot provide absolute assurance with respect to the preparation and fair
presentation of financial statements. If we fail to maintain an
effective system of internal controls, including any failure to implement
required new or improved controls, or if management or our independent
registered public accounting firm was to discover material weaknesses in our
internal controls, we may be unable to produce reliable financial reports or
timely meet our reporting obligations, which could have a material adverse
effect on our business, financial condition or results of
operations. In addition, such failure could subject us to
investigation or sanctions by regulatory or self-regulatory authorities, such as
the SEC or the Nasdaq National Market. Any such actions could also
result in an adverse reaction in the financial markets due to a loss of
confidence in the reliability of our financial statements, which could cause the
market price of our common stock to decline or limit our access to external
sources of capital.
13
Item
1B. Unresolved Staff Comments.
None
All of
our facilities are leased. We currently lease 17 facilities
strategically located throughout the United States, two of which are
multipurpose facilities used principally as administrative, sales and purchasing
offices, as well as warehouses. Our satellite sales
offices range in size from approximately 200 square feet to approximately 6,000
square feet. Base rents for such properties range from approximately
$850 per month to approximately $6,500 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, 2008 regarding our two principal leased facilities:
We
believe that our present facilities will be adequate to meet our needs for the
foreseeable future.
We are a
party to legal matters arising in the general conduct of
business. The ultimate outcome of any such pending matters is not
expected to have a material adverse effect on our business, results of
operations or financial condition.
As
previously disclosed and as described in this report under "Discontinued
Operations," on September 1, 2006 Nexus Nano Electronics, Inc. (“NNE”), as
successor to Sagamore, and its subsidiary filed suit against the Company in the
U.S. District Court for the Southern District of New York alleging fraud and
misrepresentations by the Company in connection with the Company's sale of
Nexus and seeking an unspecified amount of damages. The Company
answered the complaint and asserted counterclaims for amounts owed to it under
the purchase agreement. On July 8, 2008, the case was dismissed by
order of the Court pursuant to the parties’ settlement, which provided for the
exchange of
14
releases
without payment to any party and a Supply Agreement for the possible sale by the
Company of electronic components to Titan Nexus and related
parties. The Company has no basis of determining how much product
will be sold under the Supply Agreement.
No
matters were submitted to our security holders during the fourth quarter of
fiscal 2008.
15
PART
II
16
The chart
below reflects the Company’s total return performance. The information set forth
in the performance graph is not deemed to be filed nor should it be incorporated
by reference into any other Company filing under the Securities Act of 1933, as
amended, or the Exchange Act except to the extent the Company specifically
incorporates such report by reference therein.
 17
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.
18
For an
understanding of the significant factors that influenced the Company’s
performance during the past three fiscal years, the following discussion should
be read in conjunction with the consolidated financial statements and other
information appearing elsewhere in this report.
Overview
Jaco is a
distributor of active and passive electronic components to industrial OEMs that
are used in the manufacture and assembly of electronic products in such
industries as telecommunications, medical devices, computers and office
equipment, military/aerospace and automotive and consumer
electronics. Products distributed by the Company include
semiconductors, flat panel displays, capacitors, resistors, electromechanical
devices and power supplies.
Demand
for our products has remained relatively stable in recent periods, the average
selling prices of many of the components we distribute, particularly
semiconductor and passive components, have decreased due to global competitive
pressures, which has adversely affected our operating profits. In
response, the Company has implemented cost reduction initiatives to reduce
expenses to levels required to support current sales and profit
levels. Due to the ongoing shift of manufacturing to the Far East,
the Company has modified its business model to pursue the business available in
the United States, increase its support of global contract manufacturers that
require its value-added services and logistics programs, and aggressively
promote its flat panel display (“FPD”) product offerings line, which experienced
significant growth in fiscal 2006, 2007 and 2008 and which the Company believes
has potential for growth in the future.
The
Company incurred net losses of approximately $9,136,000 and $3,121,000 during
the years ended June 30, 2008 and 2007, respectively. Included in the net loss
for the year ended June 30, 2008, was a non-cash goodwill impairment charge of
$8,500,000. Excluding such goodwill impairment charge,
19
the
Company incurred a loss from continuing operations of approximately $636,000.
Included in net loss for the year ended June 30, 2007, was approximately
$3,183,000 related to the write-off of an uncollectible note receivable and
other receivables, which had arisen from the sale of the contract manufacturing
subsidiary. Excluding such write-off, the Company reported income from
continuing operations of approximately $62,000.
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 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:
The
Company evaluates inventories for excess, obsolescence or other factors
rendering inventories as unsaleable 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.
20
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.
We evaluate
long-lived assets used in operations, including goodwill and purchased
intangible assets. The allocation of the acquisition cost to intangible assets
and goodwill has a significant impact on our future operating results as the
allocation process requires the extensive use of estimates and assumptions,
including estimates of future cash flows expected to be generated by the
acquired assets. An impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an
impairment review include, but are not limited to, significant under-performance
relative to historical or projected future operating results, significant
changes in the manner of use of the acquired assets or the strategy for our
overall business, and significant industry or economic trends. When
impairment indicators are identified with respect to previously recorded
intangible assets, the values of the assets are determined using discounted
future cash flow techniques. Significant management judgment is required in the
forecasting of future operating results which are used in the preparation of the
projected discounted cash flows and should different conditions prevail,
material write downs of net intangible assets and goodwill could occur. The
Company performed its annual impairment test as of June 30, 2008 and reviewed
its seven reporting units by comparing the fair value of the reporting unit to
its carrying amount, including goodwill. As a result of this impairment test it
was determined that no impairment exists with respect to the recorded amount of
goodwill for six of the reporting units. The impairment test for the seventh
reporting unit Interface Electronics Corp. (“IEC”) indicated that the fair value
of IEC was less than its carrying value and as a result the Company recorded an
impairment charge of approximately $8,500,000 as a non-cash charge to operating
expenses.
Valuation
of Deferred Income Taxes
We
account for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, “Accounting for Income Taxes”. We would record a
valuation allowance when, based on the weight of available evidence, it is more
likely than not that the amount of future tax benefit would not be
realized. While the Company still believes that it is positioned for
long-term growth, the volatility in our industry and markets has made it
increasingly difficult to predict sales and operating results on a short-term
basis, and when coupled with the cumulative losses reported over the last
several fiscal years, the Company concluded that a full valuation allowance
against the entire benefit was needed due to the uncertainty regarding the
Company’s ability to utilize the benefit. The valuation allowance increased by
approximately $46,000 and $1,526,000 in Fiscal 2008 and 2007,
respectively.
Revenue
Recognition
We derive
revenue from the shipment of finished products to our customers when title is
transferred. Revenue is recognized when it is realized or realizable and earned.
Management 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
21
assured.
We reduce revenue for rebates and estimated customer returns and other
allowances. We offer rebates to certain customers based on the volume of
products purchased.
Our
products are sold on a stand alone basis and are not part of sales arrangements
with multiple deliverables. Revenue from product sales is recognized when the
product is shipped as we do not have any obligations beyond shipment to our
customers. When the shipping terms are FOB shipping point, revenue is recorded
as the goods leave our facility. In certain instances and to certain customers,
goods are shipped with shipping terms of FOB destination point. In these
instances we determine when the goods are delivered to our customer’s facility
and calculate whether an adjustment to defer revenue recognition is required. If
such adjustment is material, an adjustment is recorded in the financial
statements. In fiscal 2008 such adjustments were not material.
A portion
of our business involves shipments directly from our suppliers to its customers.
In these transactions, we are responsible for negotiating price both with the
supplier and customer, payment to the supplier, establishing payment terms with
the customer, product returns, and have risk of loss if the customer does not
make payment. As the principal with the customer, we recognize revenue when we
are notified by the supplier that the product has been shipped. We also maintain
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
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 our 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 our
inventories.
Stock
Based Compensation
With the
adoption of SFAS No. 123(R) on July 1, 2005, we are required to record the fair
value of stock-based compensation awards as an expense. In order to determine
the fair value of stock options on the date of grant, we apply the Black-Scholes
option-pricing model and an estimate of forfeitures. Inherent in this
model are assumptions related to expected stock-price volatility, option term,
risk-free interest rate and dividend yield. While the risk-free interest rate
and dividend yield are less subjective assumptions that are based on factual
data derived from public sources, the expected stock-price volatility and option
term assumptions require a greater level of judgment which makes them critical
accounting estimates. The adoption of SFAS No. 123(R) has not had a
material impact on our financial position, results of operations or cash
flows.
Effective
July 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes-An Interpretation of FASB 109” (“FIN
48). FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to
be recognized, a tax position must be more likely than not to be sustained upon
examination by taxing authorities. The adoption of the provisions of FIN 48 did
not have an impact on the Company’s consolidated financial position and did not
result in unrecognized tax benefits being recorded. FIN 48 also provides
guidance on the accounting for potential interest and penalties. The Company’s
historical accounting policy with respect to interest and penalties related to
tax uncertainties has been to classify these amounts as income taxes, and the
Company has continued this classification upon the adoption of FIN 48. Since no
unrecognized tax benefits are being recorded, no corresponding interest and
penalties have been accrued.
22
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. There are currently no examinations underway. The Company is no longer
subject to U.S. federal income tax examinations by the Internal Revenue Service
and most state and local authorities for fiscal tax years ending prior to June
30, 2004. (Certain state authorities may subject the Company to examination up
to the period ending June 30, 2003.)
In,
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” to
eliminate the diversity in practice that exists due to the different definitions
of fair value. SFAS No. 157 retains the exchange price notion in earlier
definitions of fair value, but clarifies that the exchange price is the price in
an orderly transaction between market participants to sell an asset or liability
in the principal or most advantageous market for the asset or liability. SFAS
No. 157 states that the transaction is hypothetical at the measurement date,
considered from the perspective of the market participant who holds the asset or
liability. As such, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price), as opposed to the
price that would be paid to acquire the asset or received to assume the
liability at the measurement date (an entry price). SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued FASB Staff Position (“FSP”) FAS 157-2,“Effective Date of FASB
Statement No. 157” which delays the effective date of SFAS No. 157 for
all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We are evaluating the impact the adoption
of SFAS No. 157 will have on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement
No. 115”, (“SFAS No. 159,”). This standard amends SFAS No. 115,
“Accounting for Certain Investment in Debt and Equity Securities”, with respect
to accounting for a transfer to the trading category for all entities with
available-for-sale and trading securities electing the fair value option. This
standard allows companies to elect fair value accounting for many financial
instruments and other items that currently are not required to be accounted as
such, allows different applications for electing the option for a single item or
groups of items, and requires disclosures to facilitate comparisons of similar
assets and liabilities that are accounted for differently in relation to the
fair value option. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are evaluating the impact the adoption of
SFAS No.159 will have on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and No.
160, “Noncontrolling Interests in Consolidated Financial Statements.” Effective
for fiscal years beginning after December 15, 2008, these statements revise and
converge internationally the accounting for business combinations and the
reporting of noncontrolling interests in consolidated financial statements. The
adoption of these statements will change the Company’s accounting treatment for
business combinations on a prospective basis.
On
December 21, 2007, the Securities and Exchange Commission issued "SAB
No. 110" to permit entities, under certain circumstances to continue to use the
"simplified" method, in developing estimates of expected term of "plain-vanilla"
share options in accordance with SFAS No. 123R . SAB No. 110 amended SAB No.107
to permit the use of the "simplified" method beyond December 31, 2007. The
Company believes that the adoption of SAB No. 110 will not have a
material impact on its consolidated financial
statements.
In March
2008, the FASB issued SFAS No.161, Disclosures about Derivative Instruments and
Hedging Activities - An Amendment of FASB Statement No. 133 . SFAS No. 161
requires enhanced qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-
23
related
contingent features in derivative agreements. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company is currently evaluating the impact of SFAS No.
161 on its consolidated financial statements although it does not anticipate
that the statement will have a material impact since the Company has not
historically engaged in hedging activities or acquired derivative
instruments.
In
May 2008, the FASB issued SFAS No. 162 , “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with U.S. GAAP. SFAS No. 162 will become effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles.” This statement is not expected
to change the Company’s current accounting practice.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” . FSP FAS 142-3 amends the factors that should be considered
in developing a renewal or extension assumptions used for purposes of
determining the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets . FSP FAS 142-3 is intended to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS No. 141 (R) and other
U.S. generally accepted accounting principles. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. Earlier
application is not permitted. The Company will be assessing the potential effect
of FSP FAS 142-3 if applicable, if it enters into a business
combination
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:
Comparison
of Fiscal Year Ended June 30, 2008 (“Fiscal 2008”) with Fiscal Year Ended June
30, 2007 (“Fiscal 2007”)
Net Sales
for Fiscal 2008 were $193.7 million compared to $240.2 million for Fiscal 2007,
a $46.5 million, or 19.3% decrease. The decrease in net sales is
attributable to a $56.6 million decrease in our logistic business supporting
global contract manufacturers. We support these customers with inventory
24
management
services and warehousing capabilities. Sales to these global contract
manufacturers are subject to our ability to provide the products that are
required at competitive prices. We have continued to see weak demand from these
customers. Also, without direct operations in the Far East, where
these customers are located, we have been unable to expand our customer base to
offset the decrease in net sales to our existing customers. The resulting
decline in its sales to these global contract manufacturers was a direct result
in the Company recording an impairment charge of approximately $8,500,000 as a
non-cash charge to operating expenses.
Our
primary area of focus has been on our Flat Panel Display (“FPD”) products both
as components through our standard distribution channel and as a value-added
product offering through our in-house integration center. We provide design
capabilities and a “full solution” capability enabling us to offer our customers
an expanded range of services to integrate FPD product into our customer’s
specific applications. We market our FPD capabilities to a broad range of
industries, such as electronic kiosk, the fast food industry, signage, the
gaming industry, financial institutions, medical applications, military and
electronic voting machines. We previously announced that we were
awarded a sizable contract to build optical scan voting
machines. During the fourth quarter we began shipping this
product. Our Fiscal 2008 net sales were $72.6 million compared to
$59.4 million last fiscal year. This represents approximately a 22% increase
compared to Fiscal 2007. For Fiscal 2008 our FPD sales represented
approximately 37.4% of our total net sales. This is the first time that FPD
product has represented the largest percentage of our net sales on an annual
basis. We continue to aggressively market our FPD product offering. We believe
we can continue to be competitive with this product and that it has the
potential for continued growth.
Semiconductors
represented approximately 36.7% of net sales for Fiscal 2008 compared to
approximately 54.1% for Fiscal 2007. Net sales were $71.7 million for Fiscal
2008 compared to $129.9 million for Fiscal 2007, a decrease of approximately
45.2%. The majority of this decrease is a result of the decrease in sales
through our logistic programs. Our sales domestically also decreased in Fiscal
2008 compared to Fiscal 2007. Pricing has continued to decrease reducing our
sales. Due to the historically highly cyclical nature of the
semiconductor industry, we have been subject to fluctuations in this portion of
our business.
Passive
components which are primarily a commodity product such as capacitor and
resistors accounted for $35.3 million, or approximately 18.2% of net sales for
Fiscal 2008 compared to $37.0 million, or approximately 15.4% of net sales for
Fiscal 2007. We primarily market passive components domestically. Due to
manufacturing continuing to shift to the Far East, we do not believe we will
materially increase our net sales of passive components for the foreseeable
future.
Electromechanical
products such as power supplies, relays and printer heads accounted for $14.6
million, or approximately 7.5%, of net sales for Fiscal 2008 compared to $13.9
million, or 5.8%, of net sales for Fiscal 2007. This represents an increase of
approximately 4.0%. We believe we can compete domestically with
this product and continue to market accordingly.
Gross
profit for Fiscal 2008 was $31.4 million, or 16.2% of net sales, compared to
$33.7 million, or 14.0% of net sales for Fiscal 2007. The decrease in gross
profit is attributable to the decrease in net sales and corresponding gross
profit of our logistics business. Our core business has historically operated at
higher gross profit margins compared to our logistics business. This accounted
for the increase in our gross profit margin as a percentage of net sales.
Management does not anticipate any material variances in our gross profit margin
based on our current mix of sales. Management considers gross
profit to be a key performance indicator in managing our business. Any future
changes in demand for product through our logistic programs could affect our
gross profit margin. In addition, demand and pricing for our products have been,
and in the future may continue to be, affected by industry-wide trends and
events beyond our control.
25
Selling,
general and administrative (“SG&A”) expenses for Fiscal 2008 were $29.9
million, or 15.4% of net sales, compared to $30.9 million, or 12.8% of net sales
for Fiscal 2007. Actual SG&A decreased approximately $0.9 million. This
represents a 3.0% decrease when comparing Fiscal 2008 to Fiscal 2007. Management
considers SG&A as a percentage of net sales, to be a key performance
indicator in managing our business. The increase in percentage of SG&A to
net sales this fiscal year compared to Fiscal 2007 is attributable to the
decrease in net sales. We continue to review all expenses and eliminate any
expenses that will not result in a decrease in net sales. We continue to be
committed to growing sales of our FPD product. As a result, we continue to
increase our spending in this area. We believe these investments have
contributed to our increase in FPD sales.
Operating
loss for Fiscal 2008 was $7.0 million compared to an operating profit of $2.9
million for Fiscal 2007. As a result of its annual impairment test the Company
determined that an impairment existed with respect to the recorded amount of
goodwill for one of its reporting units (“IEC”) and as a result the Company
recorded an impairment charge of approximately $8,500,000 as a non-cash charge
to operating expenses. This impairment charge
and the decrease in net sales and corresponding reduction in gross profit was
responsible for the decrease in operating income.
Interest
expense was $2.1 million for Fiscal 2008 compared to $2.8 million for Fiscal
2007. The decrease is primarily attributable to the reduction in borrowing
rates. Recent reductions in federal lending rates will favorably impact interest
expense for the foreseeable future. Fluctuations in our borrowings
under our credit facility would impact interest expense for future
periods.
Comparison
of Fiscal Year Ended June 30, 2007 (“Fiscal 2007”) with Fiscal Year Ended June
30, 2006 (“Fiscal 2006”)
Results
from Continuing Operations:
Net sales
for Fiscal 2007 were $240.2 million compared to $228.5 million for Fiscal 2006,
an $11.7 million, or 5.1% increase.
We
support global contract manufacturers primarily in the Far East with logistic
programs. These programs consist of inventory management services and
warehousing capabilities. Sales to these customers consist almost entirely of
semiconductors. During the earlier quarters of Fiscal 2007 demand was very
strong for this product. During the last two quarters we saw a weakening in
demand. Net sales to these contract manufacturers were $94.3 million during
Fiscal 2007 compared to $74.5 million during Fiscal 2006. This represents an
increase of $19.8 million, or 26.5%. Our global customers support the
requirements of major equipment manufactures. As a result, our logistics
programs are partially dependent on the ability of these manufacturers to
forecast future requirements.
The
increase in sales through our logistics programs resulted in an increase in our
sales of semiconductors. Semiconductor sales increased to $129.9 million for
Fiscal 2007 compared to $114.6 million for Fiscal 2006. This represented an
increase of $15.3 million, or 13.4%. The increase in semiconductor sales was due
to the strong demand for product through our logistic programs during the first
two quarters of Fiscal 2007.
Passive
components, which are primarily commodity products such as capacitors, resistors
and electromechanical components, which consist primarily of relays, printer
heads, and power supplies, accounted for approximately $37.0 million of sales in
Fiscal 2007 compared to approximately $35.8 million of sales in Fiscal 2006.
This represents an increase of $1.2 million or approximately 3.4%. We primarily
sell passive components in the United States.
26
We sell
Flat Panel Display (“FPD”) products as component sales through our standard
distribution channel and also as a value-added offering through our in-house
integration center. We provide design capabilities and a “full solution”
capability enabling us to offer our customers an expanded range of services. We
market our FPD capabilities to a broad range of business segments, such as
electronic kiosk, the fast food industry, signage, financial institutions,
electronic voting equipment, medical, and military applications. Fiscal 2007
sales for FPD product was $59.4 million compared to $60.6 million for Fiscal
2006. The virtually flat sales when comparing this fiscal year to last fiscal
year is the result of a significant customer in the electronic voting industry
not placing any orders during the last six months of this fiscal year. FPD sales
to all other customers increased 18.4% this fiscal year compared to last fiscal
year.
We
continue to aggressively market our FPD product, while looking to focus on our
other products that we believe to be competitive in the United States. We intend
to continue to market our logistics programs to global manufacturers. In
addition, we continue to seek to identify potential strategic alliances to
expand our presence in the Far East in response to the significant growth in
manufacturing in the region. Recently, we have opened a warehouse in Singapore
to better service our customers in the region.
Gross
profit for Fiscal 2007 was $33.7 million, or 14.0% of net sales, compared to
$30.2 million, or 13.2% of net sales for Fiscal 2006.This represents a $3.5
million increase in gross profit, or 11.7%. Management considers
gross profit to be a key performance indicator in managing our business. Gross
profit margins are usually a factor of product mix and demand. We have been able
to increase our gross profit margins by optimizing our procurement for the
logistics programs and as a result slightly increasing the gross profit margins.
We have also been able to increase our FPD gross margin by approximately 1%
comparing Fiscal 2007 to Fiscal 2006. These two areas resulted in the overall
increase in gross profit margin this fiscal year compared to last fiscal year.
Any changes in demand for product could have a significant effect on our gross
profit margin in the future. In addition, demand and pricing for our products
have been, and in the future may continue to be, adversely affected by
industry-wide trends and events beyond our control.
Selling,
general and administrative (“SG&A”) expenses were $30.9 million, or 12.8% of
net sales for Fiscal 2007 compared to $28.1 million, or 12.3% of net sales for
Fiscal 2006. Management considers SG&A as a percentage of net sales to be a
key performance indicator in managing our business. The increase in SG&A
when comparing fiscal 2007 to fiscal 2006 was primarily the result of variable
costs, such as commissions, that are associated with the increase in gross
profit dollars and additional costs that reflects our commitment to our FPD
product.
Operating
income for Fiscal 2007 was $2.9 million compared to $2.1 million for Fiscal
2006. This represents a $0.8 million, or 35.4% increase. The increase
in net sales and gross profit dollars generated the growth in operating
profit.
Interest
expense increased $0.2 million, or 7% in Fiscal 2007 to $2.8 million from $2.6
million in Fiscal 2006. Lower interest rates as a result of our new credit
facility effective December 22, 2006 partially offset higher borrowing amounts
that were required to support the increase in sales.
Earnings
before taxes and discontinued operations were $85,000 for Fiscal 2007 compared
to a loss of $495,000 for Fiscal 2006. This was primarily the result of
increased sales and corresponding gross profit dollars.
During
the fourth quarter of Fiscal 2007 it was determined that the Note Receivable
recorded from the sale of Nexus Custom Electronics, Inc. during September 2004
has become uncollectible. Therefore,
27
we deemed
it appropriate to write-off approximately $3.2 million as discontinued
operations. As a result, the net loss for Fiscal 2007 is $3.1 million compared
to a net loss of $6.9 million for Fiscal 2006.
Liquidity
and Capital Resources
To
provide liquidity in funding its operations, the Company borrows amounts under
credit facilities and other external sources of financing. On
December 22, 2006, the Company entered into a new three-year credit agreement
with CIT Group/Business Credit, Inc., which provides for a $55,000,000 revolving
secured line of credit. This credit facility has a maturity date of December 22,
2009. On January 23, 2007, the CIT Group/Business, Inc. assigned $25,000,000 of
its interest in the credit facility to Bank of America, N.A. On March
23, 2007, the credit facility was amended to provide the Company with a
supplemental loan of $3,000,000, which was payable on May 17, 2007 (the
“Supplemental Loan”). On May 18, 2007 the Supplemental Loan was amended. The
amendment provided for periodic payments to be made through July 15, 2007, at
which time the Supplemental Loan was paid in full. On July 24, 2007 the
Supplemental Loan was amended again. The amendment provides a $3,000,000 loan at
an interest rate equal to the LIBOR rate plus 5%. The loan is payable in seven
quarterly installments commencing October 1, 2007. The Company has currently
made all the required installment payments for this Supplemental Loan. In addition, mandatory
prepayments are to be made based (i) on an amount equal to fifty percent of
Excess Cash Flow (if any), as defined in the agreement and (ii) on the net
proceeds of Designated Inventory, as defined in the agreement. Borrowings under
the credit facility are based principally on eligible accounts receivable and
inventories of the Company, as defined in the credit agreement, and are
collateralized by substantially all of the assets of the Company. At
June 30, 2008, the outstanding balance on this revolving line of credit
facility was $31,374,987 ($27,000,000 of which is borrowed under a 30-day
LIBOR-based revolver and $2,000,000 under the Supplemental Loan) with an
additional 7,739,765 available. At June 30, 2008, the Company had outstanding
$2,900,000 of stand-by letters of credit on behalf of certain
vendors. The interest rate on the outstanding borrowings under the
credit facility at June 30, 2008 was 4.88% on the borrowings under the 30-day
LIBOR-based revolver, 7.46% on the supplemental loan and 6% (prime plus 1.00%)
on the balance of the borrowings.
Under the
credit agreement, the Company is required to comply with one financial covenant
which stipulates that in the event the Company’s additional borrowing
availability under the revolving line of credit facility for any five
consecutive days is less than $5,000,000, the Company is required to
retroactively maintain a Fixed Charge Coverage Ratio (as defined therein) of 1.1
to 1.0 as of the end of the immediately preceding fiscal quarter for the most
recently ended four fiscal quarters. The credit agreement also provides for a
limitation on capital expenditures of $700,000 for the Company’s 2008 fiscal
year and $500,000 for remaining fiscal years in which the credit agreement is in
effect. The credit agreement also contains other covenants and restrictions,
including limitations on: the Company’s incurrence of additional indebtedness
unrelated to the credit facility; its incurrence of liens; mergers,
consolidations and sales of assets by the Company; investments, loans and
acquisitions by the Company; and the Company’s ability to pay cash dividends. In
addition, the credit agreement includes a subjective acceleration clause and
requires the deposit of customer receipts to be directed to a blocked account
and applied directly to the repayment of indebtedness outstanding under the
credit facility. Accordingly, outstanding borrowings under the credit
agreement are classified as a current liability.
As of June
30, 2008, the Company was in compliance with all of its covenants contained in
the credit agreement.
At
June 30, 2008, the Company had cash of approximately $14,000 and working capital
of approximately $4,112,000, as compared to cash of approximately $16,000 and
working capital of approximately $3,897,000 at June 30, 2007. As
described above, our credit agreement requires our cash
28
generated
from operations to be applied directly to the prepayment of indebtedness under
our credit facility.
For
Fiscal 2008 our net cash provided from operating activities was approximately
$6,493,000 as compared to net cash used in operating activities of
$2,370,000 million for Fiscal 2007. The increase in net cash provided from
operating activities is primarily attributable to a decrease in our accounts
receivable and an increase in accounts payable, partially offset by an increase
in inventory and prepaid expenses relating to inventory. Net cash used in
investing activities was approximately $97,000 for Fiscal 2008 as compared to
net cash used in investing activities of $221,000 for Fiscal 2007. Net cash used
in financing activities was approximately $6,397,000 for Fiscal 2008 as compared
to net cash provided by financing activities of $2,577,000 for Fiscal 2007. The
decrease in net cash provided is attributable to an increase in repayments made
under our credit facility.
For
Fiscal 2008 and 2007, our inventory turnover was 5.15 times and 6.57 times,
respectively. The average days outstanding of our accounts receivable at June
30, 2008 were 64 days, as compared to 55 days at
June 30, 2007. Inventory turnover and average days outstanding are key ratios
that management relies on to monitor our business.
Based
upon our present plans, including no anticipated material capital expenditures,
we believe that cash flow that we expect to generate from operations and funds
available under our credit facility will be sufficient to fund our capital needs
for the next twelve months. However, our ability to maintain
sufficient liquidity depends partially on our ability to achieve anticipated
levels of revenue, while continuing to control costs, and remaining in
compliance with our bank covenants. Historically, we have, when necessary, been
able to obtain amendments to our credit facilities or waivers from our lenders
to satisfy instances of our non-compliance with financial covenants. While we
cannot assure that any such future amendments or waivers, if needed, will be
available, management believes we will be able to continue to obtain financing
on acceptable terms under our existing credit facility or through other external
sources. In the event that in the future we are unable to obtain such
an amendment or waiver of our non-compliance with our financial covenants, the
lenders under our credit facility could declare us to be in default under the
facility, requiring all amounts outstanding under the facility to be immediately
due and payable and/or limit the Company’s ability to borrow additional amounts
under the facility. If we did not have sufficient available cash to pay all such
amounts that become due and payable, we would have to seek additional debt or
equity financing through other external sources, which may not be available on
acceptable terms, or at all. Failure to maintain financing arrangements on
acceptable terms would have a material adverse effect on our business, results
of operations and financial condition.
We do not
have any off-balance sheet debt, nor do we have any transactions, arrangements
or relationships with any special purpose entities.
This
table summarizes our known contractual obligations and commercial commitments at
June 30, 2008.
29
Inflation
and seasonality have not had a significant impact on our operations during the
last two fiscal years.
We are
exposed to interest rate changes with respect to borrowings under our credit
facility, which bears interest at a variable rate dependent upon either the
prime rate, federal funds rate or the LIBOR rate (“rates”). At August
31, 2008, $33.9 million was outstanding under the credit
facility. Changes in any of the rates during the current fiscal year
will have a positive or negative effect on our interest expense. Each
1.0% fluctuation in the rate will increase or decrease our interest expense
under the credit facility by approximately $0.34 million based on outstanding
borrowings at August 31, 2008.
The
impact of interest rate fluctuations on our other floating rate debt is not
material.
The
financial statements and supplementary data are provided under Item 15 of this
report.
None
We
maintain “disclosure controls and
procedures,” as such term is defined under Securities Exchange Act Rule
13a-15(e), that are designed to ensure that information required to be disclosed
in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and in reaching a reasonable level of assurance our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We have carried
out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2008. Based upon their evaluation and subject to
the foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of June 30, 2008 our disclosure controls and procedures were effective
at the reasonable assurance level in ensuring that information we
are required to disclose in reports that are filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time period specified in SEC rules and forms.
Management’s
Annual Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
30
preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. All internal control systems, no matter how well
designed, have inherent limitations.
We
conducted an assessment of the effectiveness of our system of internal control
over financial reporting as of June 30, 2008. This assessment was based on
criteria established in the framework Internal Control—Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation of internal control over financial reporting, our management
concluded that our internal control over financial reporting was effective as of
June 30, 2008.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
Changes
in Internal Control over Financial Reporting.
During
the fourth quarter of the fiscal year ended June 30, 2008, there have been no
changes in the our internal control over financial reporting that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected.
None
PART
III
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.
Any amendments adopted to, or waivers granted from the code of ethics will be
posted on our website within four business days.
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 10, 2007, which will be filed with the SEC not later than
October 28, 2007 (the “Proxy Statement”).
31
The
information required by this item is incorporated herein by reference from the
Proxy Statement.
The
information required by this item is incorporated herein by reference from the
Proxy Statement.
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, 2008:
The other
information required by this item is incorporated herein by reference from the
Proxy Statement.
The
information required by this item is incorporated herein by reference from the
Proxy Statement.
The
information required by this item is incorporated herein by reference from the
Proxy Statement.
32
PART
IV
33
34
35
36
37
38
39
40
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 29,
2008
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.
- -
41
INDEX
TO CONSOLIDATED
FINANCIAL
STATEMENTS AND SCHEDULE
Page
Reports
of Independent Registered Public Accounting
Firms F-2 –
F-3
Financial
Statements
Consolidated Balance
Sheets F-4 –
F-5
Consolidated Statements of
Operations F-6
Consolidated Statement of Changes in
Shareholders’
Equity F-7
Consolidated Statements of Cash
Flows F-8
Notes to Consolidated Financial
Statements
F-9 – F-31
Report of Independent Registered
Public Accounting Firm on Supplemental
Schedule F-32 –
F-33
Schedule II - Valuation and
Qualifying
Accounts F-34
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
Jaco Electronics, Inc.
We have
audited the accompanying consolidated balance sheet of Jaco Electronics, Inc. (a
New York Corporation) and subsidiaries (the “Company”) as of June 30, 2008, and
the related consolidated statements of operations, changes in shareholders’
equity and cash flows for the year then ended. 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 audit.
We
conducted our audit 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. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
of designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. 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 audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Jaco Electronics, Inc. and
subsidiaries as of June 30, 2008, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
EISNER
LLP
New York,
New York
September
29, 2008
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
Jaco Electronics, Inc.
We have
audited the accompanying consolidated balance sheet of Jaco Electronics, Inc. (a
New York Corporation) and subsidiaries (the “Company”) as of June 30, 2007, and
the related consolidated statements of operations, changes in shareholders’
equity and cash flows for the year then ended. 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 audit.
We
conducted our audit 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. The Company was not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis of designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Jaco Electronics, Inc. and
subsidiaries as of June 30, 2007, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Melville,
New York
September
24, 2007 F-3
Jaco
Electronics, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
June
30,
The accompanying notes are an
integral part of these statements
F-4
.
Jaco
Electronics, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS (continued)
June
30,
The
accompanying notes are an integral part of these statements. F-5
Jaco
Electronics, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
Year
ended June 30,
The
accompanying notes are an integral part of these statements. F-6
Jaco
Electronics, Inc. and Subsidiaries
CONSOLIDATED
STATEMENT OF CHANGES
IN
SHAREHOLDERS’ EQUITY
Years
ended June 30, 2008, 2007 and 2006
The
accompanying notes are an integral part of this statement. F-7
Jaco
Electronics, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
ended June 30,
The
accompanying notes are an integral part of these statements.
F-8
Jaco
Electronics, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2008 and 2007
NOTE
A – DESCRIPTION OF BUSINESS AND LIQUIDITY MATTERS
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 power supplies, which are used in the manufacture and
assembly of electronic products. In addition, the Company previously
provided 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 classified as
discontinued operations for all periods presented herein (See Note
C).
The
Company incurred net losses of approximately $9,136,000 and $3,121,000 during
the years ended June 30, 2008 and 2007, respectively. Included in the net loss
for the year ended June 30, 2008, was a non-cash goodwill impairment charge of
$8,500,000. Included in net loss for the year ended June 30, 2007, was
approximately $3,183,000 related to the write-off of an uncollectible note
receivable and other receivables which had arisen from the sale of the contract
manufacturing subsidiary (see Note C). Excluding such write-off, the Company
reported income from continuing operations of approximately $62,000. The Company
generated approximately $6,493,000 of cash from operations during the year ended
June 30, 2008. At June 30, 2008, the Company had cash of
approximately $14,000 and working capital of approximately $4,112,000.
As
discussed further in Note F, the Company maintains a secured revolving line of
credit, which provides the Company with bank financing based upon eligible
accounts receivable and inventory, as defined. On December 22, 2006, the Company
entered into a new three-year credit agreement with CIT Group/Business Credit,
Inc., which provided for a $55,000,000 revolving secured line of
credit. Under the credit agreement, the Company is required to comply
with one financial covenant which stipulates that in the event the Company’s
additional borrowing availability under the revolving line of credit facility
for any five consecutive days is less than $5,000,000, the Company is required
to retroactively maintain a Fixed Charge Coverage Ratio (as defined therein) of
1.1 to 1.0 as of the end of the immediately preceding fiscal quarter for the
most recently ended four fiscal quarters. In the quarter ended September 30,
2007, the Company was in violation of this covenant and was required to get an
amendment to the credit agreement. As of June 30, 2008 the Company was in
compliance with all of its financial covenants contained in its credit
agreement.
Management
believes that the Company should be able to generate sufficient revenues,
improve operating costs and vendor support consistent with its plan, and to
remain in compliance with its bank covenants. Such operating performance will be
subject to financial, economic and other factors beyond the Company's control,
and there can be no assurance that the Company will be able to achieve these
goals. If these goals are not achieved or if the Company is unable to remain in
compliance with its bank covenants it would have a material adverse effect upon
the Company.
F-9
Jaco
Electronics, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2008
and 2007
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 sale of finished goods to its
customers. 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, title to the product has
transferred to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured. The Company’s products are sold on a stand
alone basis and are not part of sales arrangements with multiple deliverables.
The Company reduces revenue for rebates and estimated customer returns and other
allowances.
The
majority of our sales are shipped FOB shipping point. We recognize
revenue as product is shipped based on FOB shipping point terms and
when title passes to customers. However, there are instances with
certain customers where product is shipped with FOB destination point
terms. For the sales that are shipped FOB destination point, we do
not recognize the revenue until the product is received by the
customer.
A portion
of the Company’s business involves shipments directly from its suppliers to its
customers with FOB shipping point terms. 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 consignee’s use when they are required. The consignee
maintains a right of return related to unused standard 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 it has accepted title to the inventory that was shipped initially
on consignment. The items shipped on consignment as to which the customer has
not yet accepted title are included in the Company’s inventories on the
accompanying balance sheets. Consignment inventory at customer’s locations
amounted to approximately $1,231,000 and $1,046,000, respectively, at June 30,
2008 and June 30, 2007.
F-10
Jaco
Electronics, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2008 and 2007 NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Cash
and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers cash instruments
with maturities of less than three months when purchased to be cash
equivalents.
4. 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 to 60 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 records an
allowance when an accounts receivable becomes 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.
The
following is a summary of changes in the allowance for doubtful
accounts:
F-11
Jaco
Electronics, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2008 and
2007
NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Inventories
Inventories,
which consist of finished goods held for resale, are stated at the lower of cost
or estimated market value. Cost is determined using the first-in,
first-out. A provision of $5,665,000 and $6,162,000 to reduce
inventories to their estimated market value as of June 30, 2008 and 2007,
respectively, has been provided for. The Company, with most
vendor agreements, receives price protection on certain product. The
Company accounts for price protection received from its vendors in accordance
with the provisions of Emerging Issues Task Force No. 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 when the product is sold.
6. Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Depreciation is provided for
using the straight-line method over the estimated useful life of the
assets.
The
Company capitalizes costs incurred for internally developed software where
economic and technological feasibility has been established. These
capitalized software costs are being amortized on a straight-line basis over the
estimated useful life of seven years.
Significant
improvements are capitalized if they extend the useful life of the asset.
Routine repairs and maintenance are expensed when incurred.
7. Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the aggregate price paid by the Company over the fair
market value of the tangible assets acquired in business
acquisitions.
Goodwill
and intangibles with indefinite lives are not subject to amortization, but are
subject to at least an annual assessment for impairment by applying a fair
value-based test (discounted cash flow). The Company performed its
annual impairment test as of June 30, 2008 and reviewed its seven reporting
units by comparing the fair value of the reporting unit to its carrying amount,
including goodwill. As a result of this impairment test it was determined that
no impairment exists with respect to the recorded amount of goodwill for six of
the reporting units. The impairment test for the seventh reporting unit,
Interface Electronics Corp., (“IEC”) indicated that the fair value of IEC was
less than its carrying value and as a result the Company recorded an impairment
charge of $8,500,000 as a non-cash charge to operating expenses.
This impairment charge was the result of a significant sales decrease in IEC due
to decreased demand of certain vendor products.
F-12
Jaco
Electronics, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30,
2008 and 2007
NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible
assets with finite lives are amortized over their estimated useful
lives. Those intangible assets are reviewed for impairment under
Statement of Financial Standards (“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” Included in other assets on the
accompanying balance sheets are the costs of identifiable intangible assets, net
of accumulated amortization of $855,000 and $684,000, aggregating $855,000 and
$1,026,000 at June 30, 2008 and 2007, respectively. Such assets
consist of franchise agreements that are being amortized on a straight-line
basis over ten years. Amortization expense on intangible assets
aggregated approximately $171,000 and $171,000 for the fiscal years ended June
30, 2008 and 2007, respectively.
Expected
amortization expense related to intangible assets for the next five years is as
follows:
8. 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.
9. 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. The Company concluded that a full valuation allowance against the
entire benefit was needed due to the uncertainty
F-13
Jaco
Electronics, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30,
2008 and 2007
NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
regarding
the Company’s ability to utilize the benefit. The valuation allowance increased
by approximately $46,000 and $1,526,000 in Fiscal 2008 and 2007,
respectively. (See Note E)
10. Loss
Per Common Share
Basic
income (loss) per common share is based upon the weighted average number of
common shares outstanding during the period. Diluted income (loss) per common
share reflects the potential dilution that would occur if stock options were
exercised.
A
reconciliation between the denominators of the basic and diluted income (loss)
per common share is s follows:
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