FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended March 31, 1998 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 office) (Zip Code) Registrant's telephone number, including area code: (516) 273-5500 Indicated 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 report), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ Number of Shares of Registrant's Common Stock Outstanding as of May 12, 1998 - 3,975,721 (Excluding 199,500 Shares of Treasury Stock and 90,000 Shares of Restricted Stock). FORM 10-Q March 31, 1998 Page 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, June 30, 1998 1997 -------------- ------------- ASSETS Current Assets Cash $ 285,741 $ 463,352 Marketable securities 764,359 627,179 Accounts receivable - net 22,728,887 22,008,210 Inventories 36,195,836 33,311,201 Prepaid expenses and other 1,449,354 1,359,617 Prepaid income taxes 299,937 528,243 Deferred income taxes 897,000 750,000 ----------- ----------- Total current assets 62,621,114 59,047,802 Property, plant and equipment - net 5,663,763 5,009,045 Deferred income taxes 282,000 244,000 Excess of cost over net assets acquired 4,001,615 4,151,574 Other assets 1,614,331 1,543,257 ----------- ----------- $74,182,823 $69,995,678 =========== =========== See accompanying notes to condensed consolidated financial statements. FORM 10-Q March 31, 1998 Page 3 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, June 30, 1998 1997 ------------ ------------ LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses $ 19,703,465 $ 17,302,127 Current maturities of long term debt and capitalized lease obligations 681,930 599,239 ------------- ------------ Total current liabilities 20,385,395 17,901,366 Long term debt and capitalized lease obligations 16,606,446 15,552,549 Deferred compensation 687,500 650,000 SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued Common stock - authorized 10,000,000 shares, $.10 par value; issued 4,065,721 and 3,975,721 shares respectively, and 3,866,221 and 3,888,221 shares outstanding, respectively 406,572 397,572 Additional paid-in capital 22,334,420 22,180,295 Unrealized gain on marketable securities 164,684 120,200 Retained earnings 15,017,768 13,893,696 Treasury stock (1,419,962) (700,000) ------------ ------------ Total shareholders' equity 36,503,482 35,891,763 ---------- ---------- $74,182,823 $69,995,678 =========== =========== See accompanying notes to condensed consolidated financial statements. FORM 10-Q March 31, 1998 Page 4 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) 1998 1997 ----------- ---------- NET SALES $38,334,936 $38,661,610 ----------- ----------- COST AND EXPENSES Cost of goods sold 30,421,293 30,798,265 ---------- ---------- Gross profit 7,913,643 7,863,345 Selling, general and administrative expenses 7,190,963 7,012,577 ------------ ------------ Operating profit 722,680 850,768 Interest expense 280,821 266,430 ------------ ------------ Earnings before income taxes 441,859 584,338 Income tax provision 179,000 237,000 ------------ ------------ NET EARNINGS $ 262,859 $ 347,338 ============ ============ Net earnings per common share Basic and diluted $ 0.07 $ 0.09 ============ ============ Weighted average common shares outstanding Basic 3,798,010 3,888,221 Diluted 3,920,838 3,937,253 ============ ============ See accompanying notes to condensed consolidated financial statements. FORM 10-Q March 31, 1998 Page 5 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE NINE MONTHS ENDED MARCH 31, (UNAUDITED) 1998 1997 -------------- ------------ NET SALES $115,001,364 $115,178,339 COST AND EXPENSES Cost of goods sold 91,071,936 91,187,699 ---------- ---------- Gross profit 23,929,428 23,990,640 Selling, general and administrative expenses 21,217,183 20,366,027 ---------- ---------- Operating profit 2,712,245 3,624,613 Interest expense 823,173 672,353 ----------- ------------ Earnings before income taxes 1,889,072 2,952,260 Income tax provision 765,000 1,196,000 ------------ ------------ NET EARNINGS $1,124,072 $1,756,260 ========== ========== Net earnings per common share Basic $ 0.29 $ 0.45 Diluted $ 0.29 $ 0.44 ============== ============== Weighted average common shares outstanding Basic 3,856,787 3,902,783 Diluted 3,932,061 3,953,384 ========= ========= See accompanying notes to condensed consolidated financial statements. FORM 10-Q March 31, 1998 Page 6 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) Unrealized Additional Gain on Common Stock Paid-In Marketable Retained Treasury Shares Amount Capital Securities Earnings Stock --------------- ------------- ----------------- --------------- ----------------- --------------- Balance at July 1, 1997 3,975,721 $ 397,572 $ 22,180,295 $ 120,200 $ 13,893,696 $ (700,000) Issuance of restricted stock 90,000 9,000 621,000 Deferred compensation expense Purchase of treasury stock (719,962) Unrealized gain on marketable securities - net 44,484 Net earnings 1,124,072 --------------- ------------- ----------------- --------------- ----------------- -------------- Balance at March 31, 1998 4,065,721 $ 406,572 $ 22,801,295 $ 164,684 $ 15,017,768 $ (1,419,962) =============== ============= ================= =============== ================= =============== Total Deferred Shareholders' Compensation Equity --------------- ------------- Balance at July 1, 1997 $ 35,891,763 Issuance of restricted stock $ (540,000) 90,000 Deferred compensation expense 73,125 73,125 Purchase of treasury stock (719,962) Unrealized gain on marketable securities - net 44,484 Net earnings 1,124,072 --------------- ------------- Balance at March 31, 1998 $ (466,875) $ 36,503,482 =============== ============= See accompanying notes to condensed consolidated financial statements. FORM 10-Q March 31, 1998 Page 7 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, (UNAUDITED) 1998 1997 ----------------- ----------------- Cash flows from operating activities Net earnings $ 1,124,072 $ 1,756,260 Adjustments to reconcile net earnings to net cash provided by (used in)operating activities Depreciation and amortization 993,183 737,898 Deferred compensation 110,625 37,500 Deferred income tax benefit (215,000) (141,000) Gain on sale of equipment (10,094) Provision for doubtful accounts 364,965 220,206 Changes in operating assets and liabilities, net of effect of acquisitions Increase in operating assets - net (3,741,708) (1,847,191) Increase (decrease) in operating liabilities - net 2,401,338 (574,142) ----------------- ----------------- Net cash provided by operating activities 1,037,475 179,437 ----------------- ----------------- Cash flows from investing activities Capital expenditures (783,323) (682,586) Proceeds from sale of equipment 36,683 Business acquisitions - net (4,694,519) Increase in marketable securities - net (62,696) Increase in other assets (171,073) (218,449) ----------------- ----------------- Net cash used in investing activities (1,017,092) (5,558,871) ----------------- ----------------- Cash flows from financing activities Borrowings under line of credit 112,863,510 118,419,608 Payments under line of credit (111,670,859) (111,773,984) Principal payments under equipment financing and term loans (670,683) (375,054) Purchase of treasury stock (719,962) (700,000) ----------------- ----------------- Net cash (used in) provided by financing activities (197,994) 5,570,570 ----------------- ----------------- NET (DECREASE) INCREASE IN CASH (177,611) 191,136 ----------------- ----------------- Cash at beginning of period 463,352 164,161 ----------------- ----------------- Cash at end of period $ 285,741 $ 355,297 ================= ================= Supplemental schedule of non-cash financing and investing activities Equipment under capital leases $ 614,620 $ 355,824 See accompanying notes to condensed consolidated financial statements. FORM 10-Q March 31, 1998 Page 8 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - 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 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 year ended June 30, 1997 and the notes thereto included in the Company's annual report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. 2) The Company has a $30,000,000 term loan and revolving line of credit facility with its banks, which are based principally on eligible accounts receivables and inventories as defined in the agreement. The agreement was amended to (i) extend the maturity date to September 13, 2000, (ii) change the interest rate to a rate based on the average 30 day LIBOR rate plus 3/4% to 1 1/4% depending on the Company's performance measured by a financial ratio effective January 1, 1998 and (iii) changed the requirements of certain financial covenants. The applicable interest rate may be adjusted quarterly and borrowings under this facility are collateralized by substantially all of the assets of the Company. 3) The Board of Directors of the Company has authorized the purchase of up to 250,000 shares of its outstanding common stock under a stock repurchase program. The purchases may be made by the Company from time to time on the open market. The Company has made purchases of 199,500 shares of its common stock as of May 12, 1998 for aggregate consideration of $1,419,962. 4) For interim financial reporting purposes, the Company uses the gross profit method for computing inventories, which consists of goods held for resale. 5) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The Company has adopted this standard and has restated its earnings per share for prior periods presented. FORM 10-Q March 31, 1998 Page 9 The number of shares used in the Company's basic and diluted earnings per share computations are as follows Three Months Ended Nine Months Ended March 31, March 31, ------------------------- ------------------------ 1998 1997 1998 1997 ----------- ----------- ----------- ------------ Weighted average common shares outstanding net of treasury shares, for basic earnings per share 3,798,010 3,888,221 3,856,787 3,902,783 Common stock equivalents for stock options and restricted stock 122,828 49,032 75,274 50,601 ----------- ----------- ----------- ----------- Weighted average common shares outstanding for diluted earnings per share 3,920,838 3,937,253 3,932,061 3,953,384 ========= ========= ========= ========= 6) During August 1996, and January 1997, the Company purchased QPS Electronics, Inc. and Corona Electronics, Inc., respectively, both of which are electronic component distributors. Aggregate consideration paid for the acquisitions approximated $4,700,000 of which $157,500 was paid through the issuance of 20,000 shares of the Company's common stock. These acquisitions have been accounted for by the purchase method and, as such, the fair value of the assets and liabilities acquired have been recorded on the date of the respective acquisitions. The respective results of their operations are included with those of the Company from the date of acquisition. The excess of the purchase price, over the fair value of the assets acquired, approximately $3,053,000, is being amortized using the straight-line method over a period of twenty years. Pro forma historical results of operations are not presented, as such results would not be materially different from the historical results of the Company. 7) In December 1997, the shareholders' of the Company approved an amendment to the Company's 1993 Non-Qualified Stock Option Plan, (the "Plan") to increase the aggregate number of shares of common stock which may be issued upon exercise of all options granted under the Plan from 293,000 shares to 600,000 shares. Additionally, the shareholders' approved the adoption of the Jaco Electronics, Inc. Restricted Stock Plan (the "Restricted Stock Plan"). The Restricted Stock Plan, enables the Board of Directors or Plan Committee to have sole discretion and authority to determine who may purchase restricted stock, the number of shares, the price to be paid and the restrictions placed upon the stock. Pursuant to the Restricted Stock Plan, the Board of Directors has authorized the purchase of 90,000 shares of the Company's common stock by certain employees at a purchase price of $1.00 per share. Shares purchased are subject to a four-year vesting period. FORM 10-Q March 31, 1998 Page 10 JACO ELECTRONICS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this filing, and elsewhere, which look forward in time involve risks and uncertainties which may effect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: dependence on a limited number of suppliers for products which generate a significant portion of the Company's sales, the effect upon the Company of increases in tariffs or duties, changes in trade treaties, strikes or delays in air or sea transportation and possible future United States legislation with respect to pricing and/or import quotas on products imported from foreign countries, and general economic effect upon manufacturers, end users of electronic components and electronic component distributors. GENERAL Jaco is a distributor of electronic components and provider of contract manufacturing and value-added services. Products distributed by Jaco include semiconductors, capacitors, resistors, electromechanical devices, flat panel displays (FPD's) and power supplies used in the assembly and manufacturing of electronic equipment. The Company's customers are primarily small and medium sized manufacturers. The trend for these customers has been to shift certain manufacturing functions to third parties (outsourcing). The Company intends 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 Jaco consist of configuring complete computer systems to customer specifications both in tower and desktop configurations, kitting (e.g. supplying sets of specified quantities of products to a customer that are prepackaged for ease of feeding the customer's production lines), automated inventory management services and contract manufacturing services through the Company's wholly-owned subsidiary, Nexus Custom Electronics, Inc. FORM 10-Q March 31, 1998 Page 11 Results of Operations The following table sets forth certain items in the Company's statement of earnings as a percentage of net sales for the periods shown; Three Months Ended Nine Months Ended March 31, March 31, -------------------------------- ---------------------------------- 1998 1997 1998 1997 ------------- -------------- --------------- --------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 79.4 79.7 79.2 79.2 ------------- -------------- --------------- --------------- Gross profit 20.6 20.3 20.8 20.8 Selling, general and administrative expenses 18.7 18.1 18.4 17.7 ------------- -------------- --------------- --------------- Operating profit 1.9 2.2 2.4 3.1 Interest expense 0.7 0.7 0.7 0.6 ------------- -------------- --------------- --------------- Earnings before income taxes 1.2 1.5 1.7 2.5 Income tax provisions 0.5 0.6 0.7 1.0 ------------- -------------- --------------- --------------- NET EARNINGS 0.7% 0.9% 1.0% 1.5% ============= ============== =============== =============== COMPARISON OF THE THREE AND NINE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997 - -------------------------------------------------------------------------------- Net sales for the third quarter and nine months ended March 31, 1998 were $38.3 million and $115.0 million as compared to $38.7 million and $115.2 million for the three and nine months ended March 31, 1997. This represented a .8% and .2% decrease in net sales, respectively. The decrease in net sales was primarily the result of an industry wide reduction in component pricing. FORM 10-Q March 31, 1998 Page 12 While the Company continues to sell more components than in previous quarters and has added new franchises that has begun to result in additional sales, this was offset by the component price decreases. The Company believes that the recent addition of new suppliers, the expansion of it's flat panel display product lines, the addition of several field application engineers and the continued expansion and enhancement of it's semiconductor group will result in an increase in sales as market conditions improve. Gross profit margins for the three and nine months ended March 31, 1998 were 20.6% and 20.8% as compared to 20.3% and 20.8% for the comparable periods of the prior fiscal year. The Company experienced a slight increase in gross margin for the three months while remaining constant for the nine months. The Company has been able to maintain these margins even though there has been a significant decrease in component pricing by carefully reviewing the purchasing of these components and the profitability of sales opportunities that arise. The Company cannot give any assurances that this trend will continue in future periods. Selling, general and administrative (SG&A) expenses were $7.2 million and $21.2 million for the three and nine months ended March 31, 1998, compared to $7.0 million and $20.4 million last year. The additional costs incurred were due to the acquisition of Corona Electronics, Inc. ("Corona") during January 1997, the addition of field application engineers, and the expansion of the flat panel marketing and semiconductor groups. These increases were partially offset during the quarter and nine months by management's efforts to reduce costs in non-core personnel and administrative expenditures. Interest expense increased slightly to $281,000 this quarter compared to $266,000 last year. The minimal increase was attributable to the cash outlay, due to the acquisition of Corona that was completed during the third quarter last year. Net earnings for the three months ended March 31, 1998 was $263,000, or $.07 per share diluted, as compared to $347,000, or $.09 per share diluted for the three months ended March 31, 1997. Net earnings for the nine months ended March 31, 1998 was $1,124,000, or $.29 per share diluted, as compared to $1,756,000, or $.44 per share diluted for the comparable period last year. The decrease in net earnings was attributable to flat sales and an increase in SG&A expenses incurred in expanding the semiconductor and flat-panel display groups, the field application engineer program and the acquisition of Corona. LIQUIDITY AND CAPITAL RESOURCES The Company has a $30,000,000 term loan and revolving line of credit facility with its banks, which are based principally on eligible accounts receivables and inventories as defined in the agreement. The agreement was amended to (i) extend the maturity date to September 13, 2000, (ii) change the interest rate to a rate based on the average 30 day LIBOR rate plus 3/4 % to 1 1/4% depending on the Company's performance measured by a financial ratio effective January 1, 1998 and (iii) changed the requirements of certain financial covenants. The applicable interest rate may be adjusted quarterly and borrowings under this facility are collateralized by substantially all of the assets of the Company. FORM 10-Q March 31, 1998 Page 13 The outstanding balance on the revolving line of credit facility was $15,176,169 at March 31, 1998. The term loan, with a remaining balance of $642,857 at March 31, 1998 requires monthly principal payments of $17,857, together with interest through September 13, 2000, with a final payment of $107,147 on September 13, 2000. The agreement contains provisions for maintenance of certain financial ratios, all of which the Company believes it is in compliance with at March 31, 1998, and prohibits the payment of cash dividends. For the nine months ended March 31, 1998 the Company's net cash provided by operating activities was $1,037,000 as compared to net cash provided by operating activities of $179,000 for the nine months ended March 31, 1997. Net cash used in investing activities decreased to $1,017,000 for the first nine months of fiscal 1998, as compared to $5,559,000 for the first nine months of fiscal 1997. The acquisition of QPS Electronics, Inc. and Corona during fiscal 1997 required approximately $4,700,000, which was financed substantially through additional borrowings from the Company's revolving line of credit. The Company's cash expenditures may vary significantly from current levels, based on a number of factors, including, but not limited to, future acquisitions, if any. On April 15, 1996, the Company's Board of Directors authorized the purchase of up to 250,000 shares of its common stock under a stock repurchase program. During fiscal 1998, the Company repurchased 112,000 shares at an average market price of $6.43 per share. As of May 12, 1998, in the aggregate, the Company has repurchased 199,500 shares at an average market price of $7.12 per share. The year 2000 data management issue, which has received wide spread publicity, is not expected to have a material impact on the Company. For the first nine months of fiscal 1998 and fiscal 1997 inventory turnover was 3.5x and 3.9x, respectively. The average days outstanding of the Company's accounts receivable at March 31, 1998 was 53 days, as compared to 55 days at March 31, 1997. The Company has not experienced any significant trade collection difficulties during fiscal 1998. The Company believes that cash flow from operations and funds available under its credit facility will be sufficient to fund the Company's capital needs for at least the next twelve months. INFLATION Inflation has not had a significant impact on the Company's operations during the last three fiscal years. FORM 10-Q March 31, 1998 Page 14 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 Nothing to Report Item 5. Other Information Nothing to Report Item 6. Exhibits and Reports on Form 8-K a) Exhibits 27. Financial Data Schedule b) Reports on Form 8-K None 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. JACO ELECTRONICS, INC. (Registrant) BY: /s/ Jeffrey D. Gash Jeffrey D. Gash, Vice President/Finance (Principal Financial Officer) DATED: May 15, 1998