UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number 0-5896
JACO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1978958
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
145 OSER AVENUE, HAUPPAUGE, NEW YORK 11788
------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 273-5500
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at February 6, 2004
----- --------------------------------------
Common Stock, $0.10 Par Value 5,932,082 (excluding 659,900 shares
held as treasury stock)
FORM 10-Q December 31, 2003
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
2003 2003
--------------- -----------
ASSETS
Current Assets
Cash $ 487,255 $ 157,467
Restricted cash 800,000
Marketable securities 747,636 652,608
Accounts receivable - net 35,998,760 31,997,984
Inventories 45,704,149 40,493,508
Prepaid expenses and other 1,035,361 1,036,856
Prepaid and refundable income taxes 1,324,338 1,059,897
Deferred income taxes 2,739,000 2,555,000
--------- ---------
Total current assets 88,036,499 78,753,320
Property, plant and equipment - net 4,931,864 5,559,122
Deferred income taxes 404,000 431,000
Excess of cost over net assets acquired - net 25,599,082 25,599,082
Other assets 3,032,473 3,869,254
----------- -----------
Total assets $122,003,918 $114,211,778
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2003
Page 3
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
2003 2003
----------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 38,733,798 $ 31,154,244
Current maturities of long-term debt and
capitalized lease obligations 553,942 679,552
------------- ------------
Total current liabilities 39,287,740 31,833,796
Long-term debt and capitalized lease obligations 36,523,258 35,860,325
Deferred compensation 975,000 950,000
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 100,000 shares,
$10 par value; none issued
Common stock - authorized, 20,000,000,
$0.10 par value; issued 6,591,982 and
6,425,732 shares, respectively,
and 5,932,082 and 5,765,832 shares
outstanding, respectively 659,198 642,573
Additional paid-in capital 25,590,573 25,152,010
Retained earnings 21,257,159 22,117,967
Accumulated other comprehensive gain (loss) 25,556 (30,327)
Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566)
---------- -----------
Total shareholders' equity 45,217,920 45,567,657
---------- ----------
Total liabilities and shareholders' equity $122,003,918 $114,211,778
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2003
Page 4
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
2003 2002
-------------- -------------
NET SALES $66,819,181 $54,180,114
COST AND EXPENSES
Cost of goods sold 57,882,435 47,265,256
---------- ----------
Gross profit 8,936,746 6,914,858
Selling, general and administrative expenses 8,992,015 7,348,081
------------ ------------
Operating loss (55,269) (433,223)
Interest expense 616,968 398,796
------------ ------------
Loss before income taxes (672,237) (832,019)
Income tax benefit (235,000) (291,000)
------------ ------------
NET LOSS $ (437,237) $ (541,019)
============ ============
Net loss per common share:
Basic and Diluted $ (0.07) $ (0.09)
============ ============
Weighted average common shares outstanding:
Basic and Diluted 5,928,169 5,791,717
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2003
Page 5
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31,
(UNAUDITED)
2003 2002
-------------- -------------
NET SALES $139,087,725 $103,223,769
COST AND EXPENSES
Cost of goods sold 120,947,294 89,961,447
----------- ----------
Gross profit 18,140,431 13,262,322
Selling, general and administrative expenses 18,403,477 14,813,444
------------ ------------
Operating loss (263,046) (1,551,122)
Interest expense 1,060,762 800,107
------------ ------------
Loss before income taxes (1,323,808) (2,351,229)
Income tax benefit (463,000) (823,000)
------------ ------------
NET LOSS $ (860,808) $(1,528,229)
============ ============
Net loss per common share:
Basic and Diluted $ (0.15) $ (0.26)
============ ============
Weighted average common shares outstanding:
Basic and Diluted 5,860,146 5,799,574
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2003
Page 6
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Additional
paid-in Retained
Shares Amount capital earnings
--------------- -------------- ---------------- -------------------
Balance at July 1, 2003 6,425,732 $ 642,573 $ 25,152,010 $ 22,117,967
Net loss (860,808)
Unrealized gain on marketable
securities, net of deferred taxes
Exercise of stock options 166,250 16,625 438,563
--------------- -------------- ---------------- -------------------
Balance at December 31, 2003 6,591,982 $ 659,198 $ 25,590,573 $ 21,257,159
=============== ============== ================ ===================
Accumulated
other Total
comprehensive Treasury shareholders'
(loss) gain stock equity
-------------- ---------------- -----------------
Balance at July 1, 2003 $ (30,327) $ (2,314,566) $ 45,567,657
Net loss (860,808)
Unrealized gain on marketable
securities, net of deferred taxes 55,883 55,883
Exercise of stock options 455,188
-------------- ---------------- -----------------
Balance at December 31, 2003 $ 25,556 $ (2,314,566) $ 45,217,920
============== ================ =================
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2003
Page 7
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31,
(UNAUDITED)
2003 2002
------------------ -----------------
Cash flows from operating activities
Net loss $ (860,808) $ (1,528,229)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 1,058,493 1,122,473
Deferred compensation 25,000 25,000
Deferred income tax (benefit) expense (191,000) 23,000
Gain on sale of equipment (2,100)
Provision for doubtful accounts 435,250 389,200
Changes in operating assets and liabilities
(Increase) decrease in operating assets - net (9,909,613) 6,437,068
Increase (decrease) in operating liabilities - net 7,579,554 (199,417)
------------------ -----------------
Net cash (used in) provided by operating activities (1,865,224) 6,269,095
------------------ -----------------
Cash flows from investing activities
Capital expenditures (277,221) (50,655)
Proceeds from sale of equipment 2,100
Purchase of marketable securities (5,145) (6,391)
Business acquisitions - deferred payments (2,099,563)
Decrease in other assets 682,767 39,971
------------------ -----------------
Net cash provided by (used in) investing activities 402,501 (2,116,638)
------------------ -----------------
Cash flows from financing activities
Borrowings under line of credit 135,158,492 92,969,790
Payments under line of credit (134,252,155) (95,723,054)
Release of compensating balance 800,000
Funding of compensating balance (800,000)
Principal payments under equipment financing
and term loans (369,014) (473,468)
Purchase of treasury stock (98,604)
Proceeds from exercise of stock options 455,188
------------------ -----------------
Net cash provided by (used in) financing activities 1,792,511 (4,125,336)
------------------ -----------------
NET INCREASE IN CASH 329,788 27,121
------------------ -----------------
Cash at beginning of period 157,467 324,447
------------------ -----------------
Cash at end of period $ 487,255 $ 351,568
================== =================
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2003
Page 8
JACO ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
1) The accompanying condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring accrual adjustments, which are,
in the opinion of management, necessary for a fair presentation of the
consolidated financial position and the results of operations of Jaco
Electronics, Inc. and its subsidiaries (the "Company") at and for the periods
presented. Such financial statements do not include all the information or
footnotes necessary for a complete presentation. Therefore, they should be read
in conjunction with the Company's audited consolidated statements for the fiscal
year ended June 30, 2003 and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2003. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire year.
2) On December 22, 2003, the Company obtained a $50,000,000 revolving secured
line of credit from GMAC Commercial Finance LLC and PNC Bank, National
Association with a maturity date of December 31, 2006. This facility amended an
existing $45,000,000 secured line of credit. The amended credit facility is
based principally on eligible accounts receivable and inventories of the Company
as defined in the agreement. The prior agreement was amended on September 19,
2003 to extend the maturity date to October 1, 2004, and was subsequently
amended on November 7, 2003 to provide a waiver for noncompliance of a certain
financial covenant for the quarter ended September 30, 2003. The prior agreement
required the Company to maintain an $800,000 compensating balance arrangement
with its banks in an interest bearing account, which was funded during the
quarter ended December 31, 2002. The new agreement allows for the release of the
$800,000 compensating balance arrangement, and includes an additional available
amount under the line of credit of up to $750,000. The additional available
amount at the time of closing was $732,000, and declines by $31,000 monthly. The
interest rate under the prior agreement was based on the average 30-day LIBOR
plus 2.25% to 2.75% depending on the Company's performance for the immediately
preceding four fiscal quarters measured by a specified financial ratio.
Effective September 19, 2003, the rate converted to the higher of the prime rate
plus 0.75% or the federal funds rate plus 1.25%. Effective November 7, 2003, the
rate converted to the higher of the prime rate plus 1% or the federal funds rate
plus 1.50%. Effective December 22, 2003, the rate converted to the higher of the
prime rate plus 0.75% or the federal funds rate plus 1.25%, or at the Company's
option, the average 30-day LIBOR plus 3.25%. The outstanding balance on the
amended revolving line of credit facility was $36.4 million with an additional
$6.8 million available at December 31, 2003. Borrowings under this facility are
collateralized by substantially all of the assets of the Company. The agreement
contains provisions for maintenance of certain financial covenants, all of which
we were in compliance with at December 31, 2003, and prohibits the payment of
cash dividends. Failure to remain in compliance with these covenants could
trigger an acceleration of our obligation to repay all outstanding borrowings
under our credit facility.
3) On September 18, 2001, the Company announced that its Board of Directors
authorized the repurchase of up to 250,000 shares of its outstanding common
stock. Purchases may be made from time to time in market or private transactions
at prevailing market prices. The Company made purchases of 41,600 shares of its
common stock from November 5, 2002 through December 31, 2003 for aggregate
consideration of $110,051.
FORM 10-Q December 31, 2003
Page 9
4) Total comprehensive loss and its components for the three and six months ended December 31, 2003 and 2002 are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- ---------------
Net loss $(437,237) $(541,019) $(860,808) $(1,528,229)
Unrealized gain (loss)
on marketable securities 73,111 31,302 89,883 (66,676)
Deferred tax (expense) benefit (28,000) (12,000) (34,000) 25,000
-------------- -------------- ------------- ---------------
Comprehensive loss $(392,126) $(521,717) $(804,925) $(1,569,905)
============== ============== ============= ===============
Accumulated other comprehensive income (loss) is comprised of
unrealized gains and losses on marketable securities, net of the related tax
effect.
5) The Company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations ("APB
No. 25") and has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an Amendment of FASB Statement No. 123" ("SFAS No.
148"). Under APB No. 25, compensation expense is only recognized when the market
value of the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock. Accordingly, no compensation expense has
been recognized in the Company's condensed consolidated financial statements in
connection with employee stock option grants.
The following table illustrates the effect on net income and earnings
per share for the three and six months ended December 31, 2003 and 2002 had the
Company applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" to
stock-based employee compensation.
FORM 10-Q December 31, 2003
Page 10
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
Net loss, as reported $(437,237) $(541,019) $(860,808) $(1,528,229)
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (17,490) (60,870) (90,534) (60,870)
-------------- -------------- -------------- -------------
Pro forma net loss $(454,727) $(601,889) $(951,342) $(1,589,099)
============== ============== ============== ==============
Net loss per common share:
Basic - as reported $(0.07) $(0.09) $(0.15) $(0.26)
============== ============== ============== =============
Basic - pro forma $(0.08) $(0.10) $(0.16) $(0.27)
============== ============== ============== =============
Diluted - as reported $(0.07) $(0.09) $(0.15) $(0.26)
============== ============== ============== =============
Diluted - pro forma $(0.08) $(0.10) $(0.16) $(0.27)
============== ============== ============== =============
6) The weighted average common shares outstanding, net of treasury shares, used
in the Company's basic and diluted earnings per share computations on its
condensed consolidated statements of operations were 5,928,169 and 5,860,146 for
the three and six months ended December 31, 2003, respectively, compared to
5,791,717 and 5,799,574 for the three and six months ended December 31, 2002,
respectively. Excluded from the calculation of earnings per share are options to
purchase 993,000 and 1,125,750 shares of the Company's common stock for the
three and six months ended December 31, 2003 and 2002, respectively, as their
inclusion would have been antidilutive. Common stock equivalents for stock
options are calculated using the treasury stock method.
7) In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Management does not expect the adoption of SFAS
No. 149 to have a material impact on its consolidated financial position,
results of operations or cash flows.
8) In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
The new Statement requires that those instruments be classified as liabilities
in statements of financial position. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Management does not expect the adoption of SFAS No. 150 to have a material
impact on its consolidated financial position, results of operations or cash
flows.
FORM 10-Q December 31, 2003
Page 11
9) In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Prior to the adoption of FIN
No. 46, a company generally included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN No. 46 changes that treatment by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The Company does not have any
variable interest entities which would require consolidation under FIN No. 46.
Accordingly, the adoption of FIN No. 46 has had no effect on the Company's
consolidated financial position, results of operations or cash flows.
10) The Company is a party to legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on the Company's business, results of operations or
financial position.
11) The Company leases certain office and warehouse facilities under
noncancellable operating leases. On December 22, 2003, the Company amended and
extended the lease for their primary place of business. The new lease requires
minimum lease payments as follows:
Year ending June 30,
- ----------------------------------------------------------- - ------------------
2004 $ 300,000
- ----------------------------------------------------------- - -----------------
2005 615,000
- ----------------------------------------------------------- - -----------------
2006 645,750
- ----------------------------------------------------------- - -----------------
2007 678,038
- ----------------------------------------------------------- - -----------------
2008 711,939
- ----------------------------------------------------------- - -----------------
2009 364,652
- ----------------------------------------------------------- - -----------------
This is leased from a partnership owned by two officers and directors of the
Company.
12) The Company has two reportable segments: electronics parts distribution and
contract manufacturing. The Company's primary business activity is conducted
with small and medium size manufacturers, located in North America, that produce
electronic equipment used in a variety of industries. Information pertaining to
the Company's operations in different geographic areas for the three and six
months ended December 31, 2003 and 2002 is not considered material to the
Company's financial statements.
The Company's management utilizes net sales and net earnings
information in assessing performance and making overall operating decisions and
resource allocations. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies
included in the Company's annual report to shareholders for the fiscal year
ended June 30, 2003. Information about the Company's segments is as follows:
FORM 10-Q December 31, 2003
Page 12
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2003 2002 2003 2002
--------- --------- --------- -------
(in thousands) (in thousands)
Net sales from external customers
Electronics components distribution $61,489 $49,748 $128,917 $95,835
Contract manufacturing 5,330 4,432 10,171 7,389
------- ------- -------- -------
$66,819 $54,180 $139,088 $103,224
====== ====== ======= =======
Intersegment net sales
Electronics components distribution $ 196 $ 74 $ 955 $ 114
Contract manufacturing _____ _____ 3 _____
-----
$ 196 $ 74 $ 958 $ 114
======== ======== ==== =======
Operating (loss) profit
Electronics components distribution $ (402) $ (439) $ (859) $ (1,258)
Contract manufacturing 347 6 596 (293)
------- ----- -------- ---------
$ ( 55) $ (433) $ (263) $ (1,551)
===== ===== ====== ========
Interest expense
Electronics components distribution $ 509 $ 287 $ 861 $ 575
Contract manufacturing 108 112 200 225
-------- -------- ------- -------
$ 617 $ 399 $ 1,061 $ 800
====== ====== ====== =======
Loss before income taxes
Electronics components distribution $ (911) $ (726) $ (1,719) $ (1,833)
Contract manufacturing 239 (106) 395 (518)
--------- ----------- --------- -----------
$ (672) $ (832) $ (1,324) $ (2,351)
========= ========= =========== ===========
Identifiable assets
Electronics components distribution $110,584 $91,642 $110,584 $91,642
Contract manufacturing 11,420 11,824 11,420 11,824
-------- -------- -------- --------
$122,004 $103,466 $122,004 $103,466
======= ======= ======= =======
Capital expenditures
Electronics components distribution $ 26 $ 24 $ 218 $ 51
Contract manufacturing 42 _____ 59 _____
------ ------
$ 68 $ 24 $ 277 $ 51
==== ======== ==== ========
Depreciation and amortization
Electronics components distribution $ 330 $ 354 $ 658 $ 707
Contract manufacturing 202 209 400 415
-------- -------- ------- -------
$ 532 $ 563 $ 1,058 $ 1,122
======= ======= ====== =========
FORM 10-Q December 31, 2003
Page 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement under the Private Securities Litigation Reform Act of 1995:
Certain statements contained in this report or in other written or oral
statements made from time to time by the Company may contain forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
Such statements may use words such as "anticipate," "estimate," "expect,"
"believe," "may," "intend" and similar words or terms. Although we believe that
the expectations in such forward-looking statements are reasonable, we cannot
assure you that such expectations will prove to have been correct. The
forward-looking statements are based upon a number of assumptions and estimates
that, while presented with specificity and considered reasonable by us, are
inherently subject to significant business, economic and competitive risks,
uncertainties and contingencies which are beyond our control, and upon
assumptions with respect to future business decisions which are subject to
change. Accordingly, the forward-looking statements are only an estimate and
actual results will vary from the forward-looking statements, and these
variations may be material. We are not obligated to update any forward-looking
statement, but investors are urged to consult any further disclosures we make in
our subsequent filings with the Securities and Exchange Commission.
Consequently, the inclusion of the forward-looking statements should not be
regarded as a representation by us of results or performance that actually will
be achieved. Forward-looking statements are necessarily speculative in nature,
and it is usually the case that one or more of the assumptions in the
forward-looking statements do not materialize. Investors are cautioned not to
place undue reliance on the forward-looking statements. We caution investors
that the factors set forth below, which are described in further detail in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2003, and in our
other filings with the Securities and Exchange Commission could cause our
results to differ materially from those stated in the forward-looking
statements. These factors include, among others, the impact of competitive
products, demand for our products and related market acceptance risks,
fluctuations in our operating results, delays in development of highly complex
electronic products, our ability to continue to expand our operations, the level
of costs incurred in connection with our expansion efforts, the financial
strength of our customers and suppliers, and risks associated with general
industry and economic conditions.
GENERAL
Jaco is a distributor of electronic components, and provider of
contract manufacturing and value-added services. Products distributed by us
include semiconductors, capacitors, resistors, electromechanical devices, flat
panel displays and monitors, and power supplies used in the assembly and
manufacturing of electronic equipment.
Our customers are primarily small and medium sized manufacturers. The
trend for these customers has been to shift certain manufacturing functions to
third parties (i.e., outsourcing). We intend to seek to capitalize on this trend
toward outsourcing by increasing sales of products enhanced by value-added
services. Value-added services currently provided by us consist of automated
inventory management services, kitting (e.g., supplying sets of specified
quantities of products to a customer that are prepackaged in kits for ease of
feeding the customer's production lines), and contract manufacturing through
Nexus Custom Electronics, Inc., a wholly owned subsidiary. We are also expanding
in the flat panel display value-added market, which includes full system
integration, kitting and the implementation of touch technologies.
FORM 10-Q December 31, 2003
Page 14
Results of Operations
The following table sets forth certain items in our statements of operations as
a percentage of net sales for the periods shown:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 86.6 87.2 87.0 87.2
---------- ---------- ---------- ----------
Gross Profit 13.4 12.8 13.0 12.8
Selling, general and
administrative expenses 13.5 13.6 13.2 14.3
---------- ---------- ---------- ----------
Operating loss (0.1) (0.8) (0.2) (1.5)
Interest expense 0.9 0.7 0.8 0.8
---------- ---------- ---------- ----------
Loss before income taxes (1.0) (1.5) (1.0) (2.3)
Income tax benefit (0.3) (0.5) (0.4) (0.8)
---------- ---------- ---------- ----------
NET LOSS (0.7)% (1.0)% (0.6)% (1.5)%
============ ============ ============ ============
COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND DECEMBER 31,
2002
Net sales for the three and six months ended December 31, 2003 were
$66.8 million and $139.1 million, respectively, compared to $54.2 million and
$103.2 million for the three and six months ended December 31, 2002,
representing increases of 23.3% and 34.7%, respectively. The increase in net
sales for the three and six months of this fiscal year from the comparable
periods of last fiscal year of $12.6 million and $35.9 million, respectively, is
attributable to both additional sales from the purchase of certain assets of the
electronics distribution business of Reptron Electronics, Inc. ("Reptron"), in
June 2003 and internal growth. We continue to see increased demand from existing
customers as well as new customers. Specifically, demand for certain
semiconductors and flat panel displays ("FPD") continues to be strong. Our FPD
net sales were approximately $11.5 million and $26.6 million for the three and
six months ended December 31, 2003, respectively. This represents 18.7% and
20.5% of our distribution net sales, respectively. Our active components net
sales, including FPDs, represented 74.7% and 75% for the three and six months
ended December 31, 2003, respectively, compared to 67.1% and 66.5% for the same
periods last fiscal year. Passive components such as capacitors and resistors
accounted for the balance of our distribution net sales. Nexus Custom
Electronics, Inc. ("Nexus"), a wholly-owned subsidiary of the Company, performs
contract manufacturing services. Nexus is also benefiting from an increase in
demand. Net sales for the three and six months ended December 31, 2003 were $5.3
million and $10.2 million, respectively, representing increases of 20.3% and
37.7%, respectively.
Gross profit was $8.9 million, or 13.4%, and $18.1 million, or 13.0%,
respectively, for the three and six months ended December 31, 2003, compared to
$6.9 million, or 12.8%, and $13.3 million, or 12.8%, for the three and six
months ended December 31, 2002. The increase in gross profit is primarily a
result of the increase in net sales. The gross profit margin increase is a
result of the overall improvement in demand for components. Our product mix in
the distribution business continues to be
FORM 10-Q December 31, 2003
Page 15
heavily weighted to active components. Historically, active components sell at
lower margins than passive components.
Selling, general and administrative ("SG&A") expenses were $9.0 million and
$18.4 million for the three and six months ended December 31, 2003,
respectively, compared to $7.3 million and $14.8 million for the three and six
months ended December 31, 2002, respectively. The increase in SG&A is
principally attributable to the purchase of the portion of Reptron's
distribution operation. There was a reduction of approximately $0.4 million in
SG&A compared sequentially to the quarter ended September 30, 2003. This
reduction is attributable to the integration of Reptron and elimination of
almost all the related transition costs.
Interest expense increased to $0.6 million and $1.1 million for the
three and six months ended December 31, 2003, respectively, compared to $0.4
million and $0.8 million for the three and six months ended December 31, 2002,
respectively, representing increases of 54.7% and 32.6%. The increase in
interest expense is primarily attributable to the increase in borrowings
incurred to finance the purchase of Reptron and higher accounts receivable as a
result of the increase in net sales and higher borrowing costs.
Net loss for the three and six months ended December 31, 2003 was $0.4
million, or $0.07 per share diluted, and $0.9 million, or $0.15 per share
diluted, respectively, compared to a net loss of $0.5 million, or $0.09 per
share diluted, and $1.5 million, or $0.26 per share diluted, for the three and
six months ended December 31, 2002, respectively. Our decrease in net loss for
the quarter was primarily the result of the increase in net sales, resulting in
an increase in gross profit partially offset by the increase in interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
On December 22, 2003, the Company obtained a $50,000,000 revolving
secured line of credit from GMAC Commercial Finance LLC and PNC Bank, National
Association with a maturity date of December 31, 2006. This facility amended an
existing $45,000,000 secured line of credit. The amended credit facility is
based principally on eligible accounts receivable and inventories of the Company
as defined in the agreement. The prior agreement was amended on September 19,
2003 to extend the maturity date to October 1, 2004, and was subsequently
amended on November 7, 2003 to provide a waiver for noncompliance of a certain
financial covenant for the quarter ended September 30, 2003. The prior agreement
required the Company to maintain an $800,000 compensating balance arrangement
with its banks in an interest bearing account, which was funded during the
quarter ended December 31, 2002. The new agreement allows for the release of the
$800,000 compensating balance arrangement, and includes an additional available
amount under the line of credit of up to $750,000. The additional available
amount at the time of closing was $732,000, and declines by $31,000 monthly. The
interest rate under the prior agreement was based on the average 30-day LIBOR
plus 2.25% to 2.75% depending on the Company's performance for the immediately
preceding four fiscal quarters measured by a specified financial ratio.
Effective September 19, 2003, the rate converted to the higher of the prime rate
plus 0.75% or the federal funds rate plus 1.25%. Effective November 7, 2003, the
rate converted to the higher of the prime rate plus 1% or the federal funds rate
plus 1.50%. Effective December 22, 2003, the rate converted to the higher of the
prime rate plus 0.75% or the federal funds rate plus 1.25%, or at the Company's
option, the average 30-day LIBOR plus 3.25%. The outstanding balance on the
amended revolving line of credit facility was $36.4 million with an additional
$6.8 million available at December 31, 2003. Borrowings under this facility are
collateralized by substantially all of the assets of the Company. The agreement
contains provisions for maintenance of certain financial covenants, all of which
we were in compliance with at December 31, 2003, and prohibits the payment of
cash dividends. Failure to remain in compliance with these covenants could
trigger an acceleration of our obligation to repay all outstanding borrowings
under our credit facility.
For the six months ended December 31, 2003, our net cash used in
operating activities was approximately $1.9 million, as compared to net cash
provided by operating activities of $6.3 million for the same period in our last
fiscal year. The increase in net cash used is primarily attributable to an
increase in our accounts receivable and inventory. This was partially offset by
an increase in our accounts payable and accrued expenses. The increase in our
accounts receivable was the result of the increase in our net sales for the six
months ended December 31, 2003. Net cash provided by investing activities was
approximately $0.4 million for the six months ended December 31, 2003, as
compared to net cash used in investing activities of $2.1 million for the six
months ended December 31, 2003. The decrease is primarily attributable to
deferred payments of $2.1 million for the six months ended December 31, 2002
related to
FORM 10-Q December 31, 2003
Page 16
our acquisition in June 2000 of Interface Electronics Corp. Net cash provided by
financing activities was $1.8 million for the six months ended December 31, 2003
as compared to net cash used in financing activities of $4.1 million for the
same period in our last fiscal year. The increase in net cash provided is
primarily attributable to the increase in net borrowings under our credit
facility of approximately $3.7 million.
For the six months ended December 31, 2003 and 2002, our inventory
turnover was 5.7x and 4.4x, respectively. The average days outstanding of our
accounts receivable at December 31, 2003 was 49 days, as compared to 48 days at
December 31, 2002. Based upon our present plans, we believe that cash flow from
operations and funds available under our credit facility will be sufficient to
fund our capital needs for the next twelve months and for the foreseeable
future. However, our cash expenditures may vary significantly from current
levels based on a number of factors, including, but not limited to, future
acquisitions and capital expenditures, if any. Historically, we have been able
to obtain amendments to our existing credit facility to satisfy financial
covenants, when necessary. While we cannot assure you that any such future
amendment, 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.
Inflation
Inflation has not had a significant impact on our operations during the
last three fiscal years.
Critical Accounting Policies and Estimates
We have disclosed in Note A to our consolidated financial statements
and in Management's Discussion and Analysis of Financial Condition and Results
of Operations included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2003 those accounting policies that we consider to be significant
in determining our results of operations and financial position. There have been
no material changes to the critical accounting policies previously identified
and described in our Form 10-K. 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 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 our 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.
New Accounting Standards
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Management does not expect the adoption of SFAS
No. 149 to have a material impact on its consolidated financial position,
results of operations or cash flows. In May 2003, the FASB issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 improves the accounting
for certain financial instruments that, under previous guidance, issuers could
account for as
FORM 10-Q December 31, 2003
Page 17
equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Management does not expect the adoption of SFAS No. 150 to
have a material impact on its consolidated financial position, results of
operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN No. 46"). In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Prior to the adoption of FIN No. 46, a company generally included another entity
in its consolidated financial statements only if it controlled the entity
through voting interests. FIN No. 46 changes that treatment by requiring a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The Company does not have any variable interest entities which would
require consolidation under FIN No. 46. Accordingly, the adoption of FIN No. 46
has had no effect on the Company's consolidated financial position, results of
operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes with respect to borrowings
under our credit facility, which bears interest at the higher of the prime rate
plus 0.75% or the federal funds rate plus 1.25%, or at the Company's option, the
average 30-day LIBOR plus 3.25%. At January 31, 2004, $35.7 million was
outstanding under the credit facility. Changes in the prime interest rate,
federal funds rate, or the average 30-day LIBOR during the fiscal year will have
a positive or negative effect on our interest expense. Each 1.0% fluctuation in
the prime interest rate, federal funds rate, or average 30-day LIBOR will
increase or decrease our interest expense under the credit facility by
approximately $0.4 million based on the amount of outstanding borrowings at
January 31, 2004.
The impact of interest rate fluctuations on our other floating rate
debt is not material.
Item 4. Controls and Procedures
An evaluation was performed, under the supervision and with the
participation of the Company's management, including the Company's Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of December 31, 2003. Based upon that evaluation, the Company's
management, including its Principal Executive Officer and Principal Financial
Officer, have concluded that the Company's disclosure controls and procedures
are effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
changes in the Company's internal control over financial reporting or in other
factors identified in connection with this evaluation that occurred during the
three months ended December 31, 2003 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
FORM 10-Q December 31, 2003
Page 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Nothing to Report
Item 2. Changes in Securities and Use of Proceeds
Nothing to Report
Item 3. Defaults Upon Senior Securities
Nothing to Report
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on December 16,
2003. The Shareholders approved the following:
The election of each of the nominees to the Board of
Directors:
Stephen A. Cohen For: 5,536,050 Withheld: 27,313
Edward M. Frankel For: 5,542,171 Withheld: 21,192
Charles B. Girsky For: 5,525,773 Withheld: 37,590
Joel H. Girsky For: 5,541,373 Withheld: 21,990
Joseph F. Hickey, Jr. For: 5,542,171 Withheld: 21,192
Joseph F. Oliveri For: 5,541,373 Withheld: 21,990
Item 5. Other Information
On February 2, 2004, Neil Rappaport and Robert Waldman were elected to
the Company's Board of Directors and were both determined to be
independent as defined in the applicable rules of the Nasdaq Stock
Market. Effective February 2, 2004, Robert Waldman was appointed to the
Company's Audit Committee and elected Chairman. Joseph F. Hickey, Jr.
remains on the Audit Committee as a general member.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification of
Principal Executive Officer.
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification of
Principal Financial Officer.
Exhibit 32.1 - Section 1350 Certification of Principal
Executive Officer.
Exhibit 32.2 - Section 1350 Certification of Principal
Financial Officer.
FORM 10-Q December 31, 2003
Page 19
b) Reports on Form 8-K
(1) On November 13, 2003, a Current Report on Form 8-K was
filed under "Results of Operations and Financial Condition"
to announce the Company's results for its first quarter of
the fiscal year ending June 30, 2004.
S I G N A T U R E
Pursuant to the requirements 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.
February 17, 2004
JACO ELECTRONICS, INC.
(Registrant)
BY: /s/ Jeffrey D. Gash
---------------------------------------
Jeffrey D. Gash, Executive Vice President,
Finance and Secretary
(Principal Financial Officer)