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 September 30, 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 November 11,
1998 - 3,653,521 (Excluding 412,200 Shares of Treasury Stock).
FORM 10-Q September 30, 1998
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
1998 1998
----------- -----------
ASSETS
Current Assets
Cash $ 1,519,542 $ 562,556
Marketable securities 687,060 764,810
Accounts receivable - net 21,331,931 21,887,618
Inventories 35,756,451 35,737,288
Prepaid expenses and other 1,074,337 1,203,198
Prepaid income taxes 762,613 610,132
Deferred income taxes 824,000 772,500
----------- -----------
Total current assets 61,955,934 61,538,102
Property, plant and equipment - net 7,102,677 6,102,445
Deferred income taxes 342,000 333,000
Excess of cost over net assets acquired - net 3,729,796 3,776,912
Other assets 1,589,426 1,668,830
----------- -----------
$74,719,833 $73,419,289
=========== ===========
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 1998
Page 3
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
1998 1998
------------ -----------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 18,012,534 $ 18,394,251
Current maturities of long term debt and
capitalized lease obligations 733,613 663,198
------------- ------------
Total current liabilities 18,746,147 19,057,449
Long term debt and capitalized lease obligations 19,661,795 17,036,593
Deferred compensation 712,500 700,000
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 shares
and 3,657,321 and 3,866,221
shares outstanding, respectively 406,572 406,572
Additional paid-in capital - net 22,430,045 22,396,295
Accumulated other comprehensive income 118,135 164,385
Retained earnings 14,835,851 15,077,957
Treasury stock (2,191,212) (1,419,962)
------------ ------------
Total shareholders' equity 35,599,391 36,625,247
---------- ----------
$74,719,833 $73,419,289
=========== =============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 1998
Page 4
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1998 1997
-------------- -------------
NET SALES $33,256,456 $36,878,534
COST AND EXPENSES
Cost of goods sold 26,554,068 29,061,380
---------- ----------
Gross profit 6,702,388 7,817,154
Selling, general and administrative expenses 6,795,052 6,877,115
------------ ------------
Operating (loss) profit (92,664) 940,039
Interest expense 313,442 272,009
------------ ------------
(Loss) earnings before income taxes (406,106) 668,030
Income tax benefit (provision) 164,000 (270,000)
------------ ------------
NET (LOSS) EARNINGS $ (242,106) $ 398,030
============ ============
Net (loss) earnings per common share
Basic and diluted $ (0.06) $ 0.10
============ ============
Weighted average common shares outstanding
Basic 3,830,397 3,888,221
Diluted 3,830,397 3,943,192
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 1998
Page 5
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Accumulated
Additional Other
Common Stock Paid-In Comprehensive Retained Treasury
Shares Amount Capital Income Earnings Stock
--------------- -------------- ---------------- -------------- ----------------- ---------------
Balance at July 1, 1998 4,065,721 $406,572 $ 22,801,295 $ 164,385 $15,077,957 $ (1,419,962)
Deferred compensation expense
Purchase of treasury stock (771,250)
Unrealized loss on marketable
securities - net (46,250)
Net loss $ (242,106)
--------------- -------------- ---------------- -------------- ----------------- ---------------
Balance at September 30, 1998 4,065,721 $406,572 $ 22,801,295 $ 118,135 $14,835,851 $ (2,191,212)
=============== ============== ================ ============== ================= ===============
Total
Deferred Shareholders'
Compensation Equity
--------------- --------------
Balance at July 1, 1998 $ (405,000) $36,625,247
Deferred compensation expense 33,750 33,750
Purchase of treasury stock (771,250)
Unrealized loss on marketable
securities - net (46,250)
Net loss (242,106)
--------------- --------------
Balance at September 30, 1998 $ (371,250) $35,599,391
=============== ==============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 1998
Page 6
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1998 1997
----------------- -----------------
Cash flows from operating activities
Net (loss) earnings $ (242,106) $ 398,030
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation and amortization 375,299 330,083
Deferred compensation 46,250 12,500
Deferred income tax benefit (29,000) (55,000)
Provision for doubtful accounts 120,814 89,375
Changes in operating assets and liabilities,
Decrease (increase) in operating assets - net 392,090 (702,433)
(Decrease) increase in operating liabilities - net (381,717) 318,005
----------------- -----------------
Net cash provided by operating activities 281,630 390,560
----------------- -----------------
Cash flows from investing activities
Capital expenditures (742,538) (260,536)
Decrease (increase) in other assets 46,071 (6,130)
----------------- -----------------
Net cash used in investing activities (696,467) (266,666)
----------------- -----------------
Cash flows from financing activities
Borrowings under line of credit 15,987,250 35,455,080
Payments under line of credit (13,656,102) (35,489,278)
Principal payments under equipment financing
and term loans (188,075) (151,352)
Purchase of treasury stock (771,250)
----------------- -----------------
Net cash provided by (used in) financing activities 1,371,823 (185,550)
----------------- -----------------
NET INCREASE (DECREASE) IN CASH 956,986 (61,656)
----------------- -----------------
Cash at beginning of period 562,556 463,352
----------------- -----------------
Cash at end of period $ 1,519,542 $ 401,696
================= =================
Supplemental schedule of non-cash financing and
investing activities
Equipment under capital leases $ 552,544
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 1998
Page 7
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, 1998 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 for the immediately preceding four fiscal quarters
measured by a certain financial ratio, 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
650,000 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 412,200 shares of its common stock as of
November 12, 1998 for aggregate consideration of $2,204,514.
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 fiscal 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No.
128 replaces the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and, where appropriate, restated to
conform to the SFAS No. 128 computation.
FORM 10-Q September 30, 1998
Page 8
The number of shares used in the Company's basic and diluted earnings
per share computations are as follows:
Three Months Ended
September 30,
--------------------------------------------
1998 1997
----------------- ------------------
Weighted average common shares
outstanding net of treasury shares,
for basic earnings per share 3,830,397 3,888,221
Common stock equivalents for
stock options 54,971
----------------- ------------------
Weighted average common shares
outstanding for diluted earnings per share 3,830,397 3,943,192
================= ==================
6) The company has adopted SFAS No. 130 "Reporting Comprehensive Income" which
establishes guidance for the reporting and display of comprehensive income and
its components. The purpose of reporting comprehensive income is to report a
measure of all changes in equity that resulted from recognized transactions and
other economic events of the period other than transactions with stockholders.
Adoption of SFAS No. 130 had no economic impact on the Company's consolidated
financial position, net earnings, stockholders' equity or cash flows, although
the presentation of certain items has changed.
Comprehensive income and its components, net of tax, are as follows:
Three Months Ended
September 30,
--------------------------------------------
1998 1997
----------------- ------------------
(in thousands)
Net (loss) earnings $(242) $398
Other comprehensive income:
Net unrealized investments (losses) gains (46) 30
----------------- ------------------
Comprehensive (loss) income $(288) $428
================= ==================
The components of accumulated other comprehensive income included in
the accompanying condensed consolidated balance sheets and consolidated
statement of changes in shareholders' equity consists of net unrealized
investment gains as of the end of the period.
FORM 10-Q September 30, 1998
Page 9
7) The Financial Accounting Standard Board issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ( "SFAS 131"). SFAS 131 established standards to report
information about operating segments and related discussions about products and
services, geographic areas and major customers. SFAS 131 is effective for fiscal
years beginning after December 15, 1997. This statement permits early
application and requires restatement for all prior period. SFAS 131 is not
required to be applied to interim financial statements in the initial year of
adoption. Management believes that the adoption of this statement will not have
any material impact on previously reported information.
8) The Company has entered into three employment agreements during the current
fiscal year with its Chairman and two other key executives. The agreements are
for four years and are renewable for one year periods thereafter, they provide
for base salary along with cash bonuses which are dependent upon the Company's
performance. In addition, among other items, the agreements have made provisions
in the event of a change in control of the Company.
JACO ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
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
downturns in the electronics distribution industry which may have an adverse
economic effect upon manufacturers, end-users of electronic components and
electronic component distributors.
GENERAL
Jaco is a distributor of electronic components, provider of contract
manufacturing and value-added services. Products distributed by Jaco include
semiconductors, capacitors, resistors, electromechanical devices, flat panel
displays and monitors, 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), and contract manufacturing
through the Company's wholly owned subsidiary Nexus Custom Electronics, Inc.
FORM 10-Q September 30, 1998
Page 10
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
September 30,
--------------------------------------------
1998 1997
------------ ------------
Net sales 100.0% 100.0%
Cost of goods sold 79.8 78.8
------------ ------------
Gross profit 20.2 21.2
Selling, general and
administrative expenses 20.4 18.6
------------ ------------
Operating (loss) profit (.2) 2.6
Interest expense 1.0 0.8
------------ ------------
(Loss) earnings before income taxes (1.2) 1.8
Income tax (benefit) expense (0.5) 0.7
------------ ------------
NET (LOSS) EARNINGS (0.7%) 1.1%
============ ===========
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Net sales for the first quarter of fiscal 1999 decreased 10% to $33.3
million as compared to $36.9 million for the first quarter of fiscal 1998. The
Company's first quarter results were impacted by the continued industry wide
pressures on pricing; compounded by the softening demand for electronic
components which has affected the electronics industry for over two years. The
Company derived approximately $3.2 million in sales from contract manufacturing.
The Company believes that with the expansion of the semiconductor management
group, flat panel display division and field application engineer program it is
positioned for future growth and will benefit from these strategic investments.
Gross profit margin as a percentage of net sales was 20.2% for the
three months ended September 30, 1998 compared to 21.2% for the comparable
period last fiscal year. The Company's product mix has remained relatively
constant. The decrease in margin is attributable to the pressure on pricing that
has existed due to the excess availability of components.
Selling, general and administrative expenses decreased to $6.8 million
for the first quarter of fiscal 1999 compared to $6.9 million and $7.5 million
for the first and fourth quarters of fiscal 1998 respectively. The Company
implemented cost saving initiatives of overhead items that the Company believes
to be non-essential to future growth.
FORM 10-Q September 30, 1998
Page 11
Interest expense increased to $313,000 for the three months ended
September 30, 1998 compared to $272,000 for the comparable period last fiscal
year. The increase was primarily attributable to the increased borrowings
resulting from the Company's purchasing of approximately 209,000 shares of its
common stock for an aggregate consideration of $771,000 through its stock
repurchase program and maintaining higher levels of inventory during this fiscal
quarter compared to the same quarter last fiscal year.
Net loss for the three months ended September 30, 1998 was $242,000 or
approximately $.06 per share diluted, compared to net earnings of $398,000 or
$.10 per share diluted for the three months ended September 30, 1997. The
decrease in sales during this fiscal quarter and decrease in gross profit
dollars resulted in the reported loss during the quarter ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's agreement with its banks, as amended, provides the
Company with a $30,000,000 term loan and revolving line of credit facility based
principally on eligible accounts receivable and inventories of the Company as
defined in the agreements expiring September 13, 2000. The interest rate of the
credit facility is based on the average 30 day LIBOR rate plus 3/4% to 1-1/4%
depending on the Company's performance for the immediately preceding four fiscal
quarters measured by a certain financial ratio, and may be adjusted quarterly.
The outstanding balance on the revolving line of credit facility was $17,643,943
at September 30, 1998. The term loan, with a remaining balance of $535,714 at
September 30, 1998, requires monthly principal payments of $17,857, together
with interest through September 13, 2000, with a final payment of $107,146 due
on September 13, 2000. Borrowings under this facility are collateralized by
substantially all of the assets of the Company. The agreement contains
provisions for maintenance of certain financial ratios, all of which the Company
is in compliance with at September 30, 1998, and prohibits the payment of cash
dividends.
For the three months ended September 30, 1998, the Company's net cash
provided by operating activities was approximately $.3 million as compared to
net cash provided by operating activities of $.4 million for the three months
ended September 30, 1997. Net cash used in investing activities increased to $.7
million for the three months ended September 30, 1998, as compared to $.3
million for the three months ended September 30, 1997. The increase is primarily
attributable to the increase in capital expenditures during the quarter of $.7
million which almost entirely represented equipment required by the contract
manufacturing operation. Net borrowings under the Company's line of credit
increased during the quarter by approximately $2.3 million due primarily to the
purchase of $.8 million of treasury stock by the Company and an increase in the
days outstanding of the Company's accounts receivable, resulting in reduced
collections. 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.
For the first three months of fiscal 1999 and fiscal 1998 inventory
turnover was 3.0x and 3.4x, respectively. The average days outstanding of the
Company's accounts receivable at September 30, 1998 was 59 days, as compared to
55 days at September 30, 1997.
The Board of Directors of the Company had authorized the purchase of up to
250,000 shares of its common stock under a stock repurchase program. During the
quarter, the Board of Directors authorized the repurchase of up to an additional
400,000 shares of the Company's common stock. The purchases may be made by the
Company from time to time on the open market at the Company's discretion and
will be dependent on market conditions. Through November 12, 1998, the Company
has purchased 412,200 shares of its common stock for aggregate consideration of
$2,204,515 under this program.
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.
Year 2000 Compliance
The year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond
FORM 10-Q September 30, 1998
Page 12
the year 1999, which could cause a system failure or other computer errors,
leading to disruptions in operations. In April 1996, the Company developed a
three-phase program for Y2K information systems compliance. Phase I was to
identify those systems with which the Company has exposure to Y2K issues. Phase
II was the development and implementation of action plans to be Y2K compliant in
all areas by late 1998. Phase III, to be fully completed by mid 1999, is the
final major area of exposure to ensure compliance. The Company has identified
three major areas determined to be critical for successful Y2K compliance: (1)
financial and informational system applications, (2) manufacturing applications
and (3) third party relationships.
As of September 1, 1998, Jaco has completed the redesign and
development of an entirely new distribution software system. All of the dates in
this new database are 8 characters, including the century. The system has been
tested and has been in production as of September 1, 1998. The systems include
customer order entry, purchase order entry to the Company's manufacturers,
warehousing and inventory control.
The financial systems, Accounts Payable and General Ledger have been
Y2K compliant since April 1997. The Accounts Receivable system is Y2K compliant
as of September 1, 1998.
Jaco's distribution facilities: warehouse, shipping and other physical
handling have been tested and are Y2K compliant.
The Company, as it relates to the contract manufacturing operations in
accordance with Phase I of the program, is in the process of conducting an
internal review of all systems and contacting all software suppliers to
determine major areas of exposure to Y2K issues. In the financial and
information systems area a number of applications have been identified as Y2K
compliant due to their recent implementation. The contract manufacturing core
financial and reporting systems are not Y2K compliant but are scheduled to be
complete and fully tested by mid 1999. In the third party area, the Company has
contacted most of its major third parties.
These parties state that they intend to be Y2K compliant by the year 2000.
The Company believes it will cost approximately $1.5 million to replace
the core financial, reporting and distribution software systems. The Company
utilized outside consultants to undertake a portion of the work. The Company
does not expect the cost that will be incurred to be material in connection with
the contract manufacturing area and the third party area.
INFLATION
Inflation has not had a significant impact on the Company's operations
during the last three fiscal years.
FORM 10-Q September 30, 1998
Page 13
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
10.13 Employment agreement between
Joel Girsky and the Company
10.14 Employment agreement between
Charles Girsky and the Company
10.15 Employment agreement between
Jeffrey D. Gash and the Company
27.1 Financial Data Schedule
99.8.3 Amendment to Second Restated
and Amended Loan and Security Agreement
dated July 1, 1998
99.8.4 Amendment to Second Restated
and Amended Loan and Security Agreement
dated September 21, 1998
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: Jeffrey D. Gash
Jeffrey D. Gash, Vice President/Finance
(Principal Financial Officer)
DATED: November 16, 1998