| JACO ELECTRONICS INC 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 as provided in 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 |
| 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 |
| 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, "e we "e , "e us "e , "e our "e , the "e Company "e , "e Jaco "e and similar terms refer to Jaco Electronics, Inc |
| and our consolidated subsidiaries |
| Our Company We are a leading 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 ( "e OEMs "e ) |
| 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 manufacture and assembly of a diverse and growing range of electronic products, including: o telecommunications equipment o computers and office equipment o medical devices and instrumentation o industrial equipment and controls o military/aerospace systems o automotive electronics o Voting and gaming machines o home entertainment and other consumer electronics We have two distribution centers and 16 strategically located sales offices throughout the United States and one sales office in Bejing, China opened in August 2004 |
| We distribute more than 45cmam000 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 |
| and Cosel USA, Inc, to a base of over 5cmam500 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 1 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 |
| Our Industry 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 &apos 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 &apos 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 &apos 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 their marketing efforts |
| 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: 2006 2005 2004 ------------ --------- --------- -------- Semi 50prca 58prca 53prca FPDs 27prca 17prca 21prca Passive 15prca 17prca 19prca EMCH 8prca 8prca 7prca ------------ --------- --------- -------- 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, 2 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 |
| Value-Added Services We also provide a number of value-added services which are intended to attract new customers, to maintain and increase sales to existing customers and, in the case of FPD integration, to generate revenues from new customers |
| Value-added services include: o Automated Inventory Management Services |
| We offer comprehensive, state-of-the-art solutions that effectively manage our customers &apos inventory reordering, stocking and administration functions |
| These services reduce paperwork, inventory, cycle time and the overall cost of doing business for our customers |
| Kitting consists of assembling to a customerapstas specifications two or more of our 45cmam000 stock items into pre-packaged kits ready for use in the customerapstas assembly line |
| Kitting services allow us to provide a partial or complete fill of a customerapstas order and enable the customer to more efficiently manage its inventory |
| We offer both field programming instruments, as well as volume production capabilities performed in-house |
| All standard surface mount and dip packages are available |
| We provide custom oscillators at a user-specified frequency |
| In addition, we offer configurable modular power supplies featuring the flexibility of 10 wide-range outputs, with the best technical specifications in its class |
| This configurable power supply series offers quick turnaround and fully-tested units in medical, test and measurement, industrial and datacom applications |
| o FPD Integration |
| Our FPD sales specialists and technical engineers work directly with our customers to design, develop, configure, test and deliver highly customized solutions to meet specific FPD requirements for both business and consumer applications |
| We are able to internalize key elements of the FPD integration process that were previously sub-contracted to outside vendors and offer customers a one-stop source for their FPD and integration needs through our state-of-the-art FPD integration facility |
| Sales and Marketing We believe we have developed valuable long-term customer relationships and an understanding of our customers &apos requirements |
| Our sales personnel are trained to identify our customers &apos 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 13prca and 11prca, 21prca and 13prca, and 14prca and 11prca of our total net sales for the fiscal years ended June 30, 2006, 2005 and 2004, respectively |
| None of our other customers individually represented more than 7prca, 4prca or 9prca of our total net sales for fiscal years 2006, 2005 or 2004, respectively |
| 3 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 todayapstas 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 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 16 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 |
| In August 2004, we opened a sales office in Beijing, China to support our business in the Far East |
| We also utilize a third party warehouse to support key customers in the Far East |
| 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 |
| 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 "e box-build "e 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 |
| Suppliers 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 manufacturerapstas 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 &apos products |
| Currently, we have non-exclusive distribution agreements with many manufacturers, including Dallas Semiconductor Corporation, Sharp Electronics Corp, NEC, Kemet Electronics Corporation, Samsung Semiconductor, Inc, 3 M Touch Systems, Inc, Vishay Intertechnology, Inc, Vitesse Semiconductor Corporation, Lambda, Cosel and Epson Electronics America, Inc |
| We continuously seek to identify potential new suppliers such as NEC During the fiscal year ended June 30, 2006, products purchased from our two largest suppliers accounted for 27prca and 7prca, 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 |
| 4 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 |
| Many of our current agreements have continued 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 5prca of a prior periodapstas purchases or some of our vendors allow us to scrap 3prca 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 |
| Inventory management is critical to a distributorapstas business |
| We constantly focus on a high number of resales or "e turns "e 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 six times for the fiscal year ended June 30, 2006 |
| Manufacturing |
| Our 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 &apos 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 5 facility in Hauppauge, New York to meet the needs of our expanding FPD customer base |
| The 20cmam000 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 50cmam000 units |
| Discontinued Operations On September 20, 2004, we completed the sale of substantially all of the assets of our non-core contract manufacturing subsidiary, Nexus Custom Electronics Inc |
| for total consideration of up to dlra13cmam000cmam000 and the assumption of certain liabilities |
| Under the terms of the purchase agreement relating to this transaction, we received dlra9dtta25 million of the purchase consideration in cash at closing |
| The balance of the fixed portion of the purchase consideration was satisfied through the delivery of a dlra2dtta75 million subordinated note issued by the purchaser |
| This note has a maturity date of September 1, 2009 and bears interest at the lower of the prime rate or 7prca |
| The note is payable by the purchaser in quarterly cash installments ranging from dlra156cmam250 to dlra500cmam000 each, commencing in September 2006 (which initial payment was not made) and continuing for each quarter thereafter until maturity |
| Prepayment of the principal of and accrued interest on the note is permitted |
| Additionally, we are entitled to receive additional consideration in the form of a six-year earn-out based on 5prca of the annual net sales in excess of dlra20 million of Nexus after the closing date, up to dlra1cmam000cmam000 in the aggregate |
| Pursuant to the purchase agreement, Sagamore Holdings has also entered into a contract that designates us as a key supplier of electronic components to Nexus for a period of five years |
| As a result of the sale, we have classified the operations of Nexus as "e discontinued "e for all periods presented herein |
| On September 19, 2006, Nexus Nano Electronics, Inc |
| ( "e NNE "e ), as successor to Sagamore, and its subsidiary filed suit against Jaco in the US 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 believes that the plaintiffs &apos claims are without merit and intends to contest them vigorously as well as assert counterclaims for amounts owed to it in connection with such sale, if this matter is not settled |
| Subsequent to the filing of this suit, the parties entered into settlement discussions and have reached an agreement in principle to settle this matter for, among other things, a mutual release of all disputed claims relating to this transaction and the cancellation of the purchaserapstas dlra2dtta75 million subordinated note held by the Company in consideration for NNEapstas issuance to the Company of shares of its preferred stock |
| The documentation relating to this proposed settlement has not yet been finalized or approved by the parties &apos respective boards of directors and, therefore, the Company cannot assure you that this settlement will be completed upon the terms described above or at all |
| "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal Year Ended June 30, 2005 with Fiscal Year Ended June 30, 2004 - Discontinued Operations, "e and Note B - - "e Discontinued Operations "e to our Consolidated Financial Statements included under Item 15 of this report for additional information regarding this transaction |
| Competition The electronic components distribution industry is highly competitive, primarily with respect to price, product availability, knowledge of product and quality of service |
| We believe that the breadth of 6 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 All American Semiconductor, Inc |
| and 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 |
| Our ability to purchase competitively priced electronic components from our suppliers, who have foreign parents, could be adversely affected by increases in tariffs, duties, changes in the US 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 US 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 |
| Backlog As is typical of electronic components distributors, we have a backlog of customer orders |
| At June 30, 2006, we had a backlog of approximately dlra53dtta8 million as compared to a backlog of approximately dlra43dtta5 million at June 30, 2005 |
| 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 |
| 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 |
| Employees At June 30, 2006, we had a total of 205 employees, of which five were engaged in administration, 16 were managerial and supervisory employees, 117 were in sales and 67 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 7 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, 2006, 2005 and 2004, sales of semiconductors represented 50prca, 58prca and 53prca of our net sales, respectively, and our revenues tend to closely follow the strength or weakness of the semiconductor market |
| While the semiconductor industry has strengthened in recent years, it is uncertain whether this improvement will continue, and 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 |
| 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 in the past by the downturn in the technology industry and the general economy |
| From a high of approximately dlra321 million in sales in fiscal 2001, our sales stabilized between dlra200 million and dlra250 million in fiscal 2003 through 2005 |
| In the fiscal year ended June 30, 2006, our revenues showed continued signs of stability with quarterly sequential revenues of dlra52dtta5, dlra48dtta1, dlra60dtta9 and dlra67dtta0 million |
| Nevertheless, 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 modified our business plan to focus on those core areas where we believe we can most effectively compete in the current business environment |
| Specifically, we are aggressively pursuing sales of flat panel displays and concentrating 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 |
| 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, 2006, products purchased from our two largest suppliers accounted for 27prca and 7 %, 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 industryapstas 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 8 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 generally affecting each customerapstas 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 competed 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 9 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 managementapstas 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 |
| 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, 2006, we had cash, and cash equivalents, of approximately dlra29cmam000 (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 providing for a dlra40 million secured revolving line of credit, of which dlra35dtta1 million was being borrowed as of June 30, 2006, with an additional dlra1dtta3 million available |
| 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 |
| Based on preliminary discussions with our lenders, we believe we will be able to renew our credit facility on terms similar to those currently in effect prior to its scheduled maturity on December 31, 2006, although we cannot assure that this renewal will occur |
| 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 specified levels of cash flow, net worth and 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 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: - increasing our vulnerability to general adverse economic and industry conditions; 10 - increasing our exposure to increasing interest rates; - restricting our credit with our suppliers, which would limit our ability to purchase inventory; - limiting our ability to obtain additional financing on acceptable terms or at all; - requiring the dedication of a portion of any cash flow from operations to service our indebtedness (currently, our credit facility requires the deposit of customer receipts to be directed to a blocked account and applied directly to the repayment of outstanding indebtedness), thereby reducing the amount of any cash flow available for other purposes, including capital expenditures; - limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and - placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources |
| 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 Interest rates have risen over the last year and may continue to rise |
| Continuing increases in interest rates could materially adversely affect our results of operations |
| Our business in non-US 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: - import and export regulations that could erode profit margins or restrict exports; - the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations; - potential restrictions on transfers of funds; - foreign currency fluctuations; - import and export duties and value added taxes; - transportation delays and interruptions; - uncertainties arising from local business practices and cultural considerations; and - potential military conflicts and political risks |
| 11 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: - increases in tariffs or duties; - changes in trade treaties; - strikes or delays in air or sea transportation; - future US legislation with respect to pricing and/or import quotas on products imported from foreign countries; and - turbulence in offshore economies or financial markets |
| 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 have 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 |
| 12 Our operations would be materially adversely affected if third party carriers were unable to transport our products on a timely basis |
| 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 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 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 13 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 |