10-Q 1 jaco10qdec2001.txt JACO ELECTRONICS, INC 10Q DEC 31 2001 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 December 31, 2001 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: (631) 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 February 8, 2002 - 5,707,459 (Excluding 618,300 Shares of Treasury Stock). FORM 10-Q December 31, 2001 Page 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, June 30, 2001 2001 --------------- ----------- ASSETS Current Assets Cash $ 97,126 $ 89,523 Marketable securities 723,461 771,406 Accounts receivable - net 26,805,550 37,820,946 Inventories 49,856,900 62,212,121 Prepaid expenses and other 983,244 824,121 Prepaid and refundable income taxes 1,606,115 486,325 Deferred income taxes 2,187,000 2,190,000 --------- --------- Total current assets 82,259,396 104,394,442 Property, plant and equipment - net 7,763,747 8,389,651 Deferred income taxes 475,000 436,000 Excess of cost over net assets acquired - net 20,213,733 20,095,844 Other assets 3,259,254 2,998,902 ----------- ----------- $113,971,130 $136,314,839 ============ ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2001 Page 3 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, June 30, 2001 2001 ------------ ----------- LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses $ 18,188,049 $ 25,004,058 Current maturities of long term debt and capitalized lease obligations 985,875 1,081,905 ------------- ------------ Total current liabilities 19,173,924 26,085,963 Long term debt and capitalized lease obligations 43,508,101 56,128,243 Deferred compensation 875,000 850,000 SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued Common stock - authorized, 20,000,000, $.10 par value; issued 6,325,759 and 6,315,759 shares, respectively, and 5,707,459 and 5,697,459 shares outstanding, respectively 632,576 631,576 Additional paid-in capital 24,639,866 24,615,866 Retained earnings 27,323,056 30,146,599 Accumulated other comprehensive income 23,122 61,107 Treasury stock (2,204,515) (2,204,515) ---------- ----------- Total shareholders' equity 50,414,105 53,250,633 ---------- ---------- $113,971,130 $136,314,839 ============ ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2001 Page 4 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, (UNAUDITED) 2001 2000 -------------- ------------- NET SALES $42,405,312 $100,235,652 COST AND EXPENSES Cost of goods sold 35,803,750 80,158,461 ---------- ---------- Gross profit 6,601,562 20,077,191 Selling, general and administrative expenses 8,193,330 12,052,203 ------------ ------------ Operating (loss) profit (1,591,768) 8,024,988 Interest expense 539,227 1,169,326 ------------ ------------ (Loss) earnings before income taxes (2,130,995) 6,855,662 Income tax (benefit) provision (810,000) 2,811,000 ------------ ------------ NET (LOSS) EARNINGS $(1,320,995) $ 4,044,662 ============ ============ Net (loss) earnings per common share: Basic $ (0.23) $ 0.72 ============ ============ Diluted $ (0.23) $ 0.65 ============ ============ Weighted average common shares outstanding: Basic 5,707,459 5,655,089 ============ ============ Diluted 5,707,459 6,230,451 ============ ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2001 Page 5 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, (UNAUDITED) 2001 2000 -------------- ------------- NET SALES $91,835,835 $194,394,480 COST AND EXPENSES Cost of goods sold 77,218,772 153,699,631 ---------- ----------- Gross profit 14,617,063 40,694,849 Selling, general and administrative expenses 17,585,675 23,886,259 ------------ ------------ Operating (loss) profit (2,968,612) 16,808,590 Interest expense 1,308,931 2,058,061 ------------ ------------ (Loss) earnings before income taxes (4,277,543) 14,750,529 Income tax (benefit) provision (1,454,000) 6,048,000 ------------ ------------ NET (LOSS) EARNINGS $(2,823,543) $ 8,702,529 ============ ============ Net (loss) earnings per common share: Basic $ (0.49) $ 1.54 ============ ============ Diluted $ (0.49) $ 1.40 ============ ============ Weighted average common shares outstanding: Basic 5,704,198 5,644,524 ============ ============ Diluted 5,704,198 6,232,609 ============ ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2001 Page 6 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 (UNAUDITED) Accumulated Additional other paid-in Retained comprehensive Shares Amount capital earnings income --------------- -------------- ---------------- ------------------- ---------------- Balance at July 1, 2001 6,315,759 $ 631,576 $ 24,615,866 $ 30,146,599 $ 61,107 Net loss (2,823,543) Unrealized loss on marketable securities, net of deferred taxes (37,985) Exercise of stock options 10,000 1,000 24,000 --------------- -------------- ---------------- ------------------- ---------------- --- Balance at December 31, 2001 6,325,759 $ 632,576 $ 24,639,866 $ 27,323,056 $ 23,122 =============== ============== ================ =================== ================ === Total Treasury shareholders' stock equity ------------ ----------------- Balance at July 1, 2001 $ (2,204,515) $ 53,250,633 Net loss (2,823,543) Unrealized loss on marketable securities, net of deferred taxes (37,985) Exercise of stock options 25,000 ----------- ------------ Balance at December 31, 2001 $ (2,204,515) $ 50,414,105 =========== ============ See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2001 Page 7 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, (UNAUDITED) 2001 2000 ------------------ ----------------- Cash flows from operating activities Net (loss) earnings $ (2,823,543) $ 8,702,529 Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities Depreciation and amortization 1,189,926 1,486,162 Deferred compensation 25,000 92,500 Deferred income tax benefit (14,968) (363,000) Gain on sale of equipment (7,048) Provision for doubtful accounts 181,300 746,201 Changes in operating assets and liabilities, Decrease (increase) in operating assets - net 21,790,519 (36,820,975) (Decrease) increase in operating liabilities - net (6,591,009) 8,532,402 ------------------ ----------------- Net cash provided by (used in) operating activities 13,750,177 (17,624,181) ------------------ ----------------- Cash flows from investing activities Capital expenditures (159,169) (1,415,902) Proceeds from sale of equipment 37,673 Increase in marketable securities (11,072) (52,573) Business acquisitions - deferred payments (193,297) Increase in other assets (328,852) (223,466) ------------------ ----------------- Net cash used in investing activities (654,717) (1,691,941) ------------------ ----------------- Cash flows from financing activities Borrowings under line of credit 76,592,648 176,491,113 Payments under line of credit (89,150,168) (157,413,488) Principal payments under equipment financing and term loans (555,337) (425,382) Payment of fractional shares (559) Proceeds from exercise of stock options 25,000 306,000 ------------------ ----------------- Net cash (used in) provided by financing activities (13,087,857) 18,957,684 ------------------ ----------------- NET INCREASE (DECREASE) IN CASH 7,603 (358,438) ------------------ ----------------- Cash at beginning of period 89,523 617,603 ------------------ ----------------- Cash at end of period $ 97,126 $ 259,165 ================== ================= Supplemental schedule of non-cash financing and investing activities: Equipment acquired under capital lease obligations $ 396,685 Accrued acquisition costs $ 3,960,000 See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2001 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, 2001 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 $70,000,000 revolving line of credit facility with its banks, which is based principally on eligible accounts receivables and inventories as defined in the loan agreement. The agreement was amended to (i) extend the maturity date to September 14, 2003, and (ii) change the requirements of certain financial covenants. The interest rate is based on the average 30-day LIBOR plus 1% to 2-1/4% depending on the Company's performance for the immediately preceding four fiscal quarters measured by a certain financial ratio. 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) For interim financial reporting purposes, the Company uses the gross profit method for computing inventories, which consists of goods held for resale. 4) 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. 5) On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations," and Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. However, certain provisions of this statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS No. 142. The new standards require that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value-based test. The Company has adopted, as of July 1, 2001, the provisions of SFAS Nos. 141 and 142. Accordingly, the results for the three and six months ended December 31, 2001 excludes approximately $287,000 and $565,000, respectively, of such amortization, as compared to approximately $222,000 and $444,000, which were included in the comparable periods last year. The Company has performed a transitional fair value based impairment test and has determined that no impairment of goodwill or intangibles exist as of December 31, 2001. FORM 10-Q December 31, 2001 Page 9 The following table presents a reconciliation of net (loss) earnings and net (loss) earnings per common share amounts, as reported in the Company's statement of operations, to those amounts adjusted for goodwill and intangible asset amortization determined in accordance with the provisions of SFAS No. 142. Three Months Ended Six Months Ended December 31, December 31, 2001 2000 2001 2000 ---- ---- ---- ---- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Dollars in thousands except Dollars in thousands except per share data per share data -------------- -------------- Reported net (loss) earnings $ (1,321) $ 4,045 $ (2,824) $ 8,703 Add back: goodwill amortization 213 426 Add back: franchise agreement amortization 9 18 ---------------- ------------ -------------- --------------- Adjusted net (loss) earnings $ (1,321) $ 4,267 $ (2,824) $ 9,147 ================ ============ ============== =============== BASIC (LOSS) EARNINGS PER SHARE: Reported net (loss) earnings $ (0.23) $ 0.72 $ (0.49) $ 1.54 Goodwill amortization 0.03 0.08 Franchise agreement amortization 0.00 0.00 ---------------- ------------ -------------- --------------- Adjusted net (loss) earnings $ (0.23) $ 0.75 $ (0.49) $ 1.62 ================ ============ ============== =============== DILUTED (LOSS) EARNINGS PER SHARE: Reported net (loss) earnings $ (0.23) $ 0.65 $ (0.49) $ 1.40 Goodwill amortization 0.03 0.07 Franchise agreement amortization 0.00 0.00 ---------------- ------------ -------------- --------------- Adjusted net (loss) earnings $ (0.23) $ 0.68 $ (0.49) $ 1.47 ================ ============ ============== ===============
6) In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement is effective for fiscal years beginning after December 15, 2001. This supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining many of the requirements of such statement. The adoption of SFAS 144 is not expected to have a material impact or effect on the Companys financial position or it s results of operations. 7) On June 6, 2000, the Company acquired all of the issued and outstanding shares of common stock, no par value, of Interface Electronics Corp. ("Interface"), a distributor of electronic parts, components and equipment, located in Massachusetts. The purchase price was $15,400,000 payable in cash at the closing, plus a deferred payment of $3,953,297. On the second anniversary of the closing date a deferred payment of up to $2,640,000 shall be paid if certain conditions, as defined in the purchase agreement, are met. When the remaining contingency is resolved, the Company shall record the current fair value of the consideration paid as additional goodwill. FORM 10-Q December 31, 2001 Page 10 The acquisition has been accounted for as a purchase and the operations of Interface have been included in the Company's Statement of Operations since the date of acquisition, June 6, 2000. Included in other assets are the costs of the identifiable intangible assets acquired, principally an employment agreement which is being amortized on a straight-line basis over five years, and a franchise agreement which was being amortized on a straight-line basis over fifteen years until the Company's adoption of SFAS No. 142. The excess of the purchase price and related expenses over the net tangible and identifiable intangible assets acquired amounted to approximately $17,604,000 and was being amortized on a straight-line basis over twenty years until the Company's adoption of SFAS No. 142. 8) On February 25, 2000, the Company purchased the operating assets of PGI, Industries, Inc., ("PGI") an exporter of electronic components, located in Ronkonkoma, New York. The purchase price was $1,200,000 paid in cash, plus a deferred payment of $100,000 payable over the next two years based on certain conditions, as defined in the purchase agreement. As of December 31, 2001, $50,000 of the deferred payment has been paid. When the remaining contingency is resolved, the Company shall record the current fair value of the consideration issued as additional costs of the acquired enterprise. The acquisition has been accounted for as a purchase and the operations of PGI have been included in the Company's Statement of Operations since the date of acquisition, February 25, 2000. The excess of the purchase price over the fair value of the assets acquired, approximately $260,000, was being amortized on a straight-line basis over twenty years until the Company's adoption of SFAS No. 142. 9) Total comprehensive income and its components for the three and six months ended December 31, 2001 and 2000 are as follows: Three Months Ended Six Months Ended December 31, December 31, -------------------------------- -------------------------------- 2001 2000 2001 2000 -------------- -------------- ------------- ------------- Net (loss) income $(1,320,995) $4,044,662 $(2,823,543) $8,702,529 Unrealized gain (loss) on marketable securities 50,016 (108,938) (59,017) (112,835) Deferred tax (expense) benefit (18,000) 39,600 21,032 41,000 -------------- -------------- ------------- ------------- Comprehensive (loss) income $(1,288,979) $3,975,324 $(2,861,528) $8,630,694 ============== ============== ============= ============= Accumulated other comprehensive income is comprised of unrealized gains and losses on marketable securities, net of the related tax effect.
FORM 10-Q December 31, 2001 Page 11 10) The number of shares used in the Company's basic and diluted earnings per share computations are as follows: Three Months Ended Six Months Ended December 31, December 31, --------------------------------- -------------------------------- 2001 2000 2001 2000 -------------- -------------- ------------- ------------- Weighted average common shares outstanding net of treasury shares, for basic earnings per share 5,707,459 5,655,089 5,704,198 5,644,524 Common stock equivalents for stock options 575,362 588,085 -------------- -------------- ------------- ------------- Weighted average common shares outstanding for diluted earnings per share 5,707,459 6,230,451 5,704,198 6,232,609 ============== ============== ============= =============
The diluted loss per common share for the three and six months ended December 31, 2001 is based only on the weighted average number of common shares outstanding during the period, as the inclusion of 259,683 and 285,718 common share equivalents, respectively, would have been antidilutive. 11) 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, 2001 and 2000 is not considered material to the financial statements. The Company's chief operating decision maker 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. Information about the Company's segments is as follows: FORM 10-Q December 31, 2001 Page 12 Three Months Ended Six Months Ended December 31, December 31, ------------ ------------ 2001 2000 2001 2000 --------- --------- --------- ------- (in thousands) (in thousands) Net sales from external customers Electronics components distribution $38,163 $93,656 $80,601 $181,423 Contract manufacturing 4,242 6,580 11,235 12,971 ------- ------- -------- -------- $42,405 $100,236 $91,836 $194,394 ====== ======= ====== ======= Intersegment net sales Electronics components distribution $ 54 $ 254 $ 169 $ 382 Contract manufacturing _____ _____ _____ _____ $ 54 $ 254 $ 169 $ 382 ======== ========= ======= ======= Operating (loss) profit Electronics components distribution $ (1,451) $ 7,712 $ (3,025) $ 15,971 Contract manufacturing (141) 313 56 838 --------- ------- ------ ------- $ (1,592) $ 8,025 $ (2,969) $ 16,809 ======= ===== ======== ======= Interest expense Electronics components distribution $ 403 $ 1,015 $ 1,007 $ 1,767 Contract manufacturing 136 154 302 291 -------- -------- ------- ------- $ 539 $ 1,169 $ 1,309 $ 2,058 ====== ======== ========= ========= Income tax (benefit) provision Electronics components distribution $ (716) $ 2,746 $ (1,370) $ 5,824 Contract manufacturing (94) 65 (84) 224 ---------- -------- ---------- --------- $ (810) $ 2,811 $ (1,454) $ 6,048 ========= ========= =========== ========= Identifiable assets Electronics components distribution $99,884 $150,593 $99,884 $150,593 Contract manufacturing 14,087 15,890 14,087 15,890 -------- -------- -------- -------- $113,971 $166,483 $113,971 $166,483 ======= ======= ======= ======= Capital expenditures Electronics components distribution $ 58 $ 196 $ 128 $ 529 Contract manufacturing 31 86 31 887 ------- ------- ------- -------- $ 89 $ 282 $ 159 $ 1,416 ====== ======= ======= ========= Depreciation and amortization Electronics components distribution $ 373 $ 540 $ 742 $ 1,076 Contract manufacturing 225 211 448 410 -------- -------- ------- ------- $ 598 $ 751 $ 1,190 $ 1,486 ======= ======= ========= =========
FORM 10-Q December 31, 2001 Page 13 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: Except for the historical information, this filing includes forward-looking statements that involve risks and uncertainties, including, but not limited to, general industry and economic conditions, the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results, delays in development of highly-complex products, the ability of the Company to continue to expand its operations, the level of costs incurred in connection with the Company's expansion efforts and the financial strength of the Company's customers and suppliers and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. The forward-looking statements in this filing involve risks and uncertainties which could cause actual results, performance or trends, including margins, SG&A expenses as a percentage of revenues and earnings per diluted share, to differ materially from those expressed in the forward-looking statements. The Company believes that all forward-looking statements made by it have a reasonable basis, but there can be no assurance that management's expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. Actual results may differ materially from such information set forth herein. 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 automated inventory management services, 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 Nexus Custom Electronics, Inc., a wholly owned subsidiary of the Company. The Company is 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, 2001 Page 14 Results of Operations The following table sets forth certain items in the Company's statements of operations as a percentage of net sales for the periods shown: Three Months Ended Six Months Ended December 31, December 31, ------------------------------ --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 84.4 80.0 84.1 79.1 ---------- ---------- ---------- ---------- Gross Profit 15.6 20.0 15.9 20.9 Selling, general and administrative expenses 19.3 12.0 19.1 12.3 ---------- ---------- ---------- ---------- Operating (loss) profit (3.7) 8.0 (3.2) 8.6 Interest expense 1.3 1.2 1.5 1.0 ---------- ---------- ---------- ---------- (Loss) earnings before income taxes (5.0) 6.8 (4.7) 7.6 Income tax (benefit) provision (1.9) 2.8 (1.6) 3.1 ---------- ---------- ---------- ---------- NET (LOSS) EARNINGS (3.1)% 4.0% (3.1)% 4.5% ========== ========== ========== ==========
COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 ------------------------------------------------------------------------------- Net sales for the three and six months ended December 31, 2001 were $42.4 million and $91.8 million, respectively, compared to $100.2 million and $194.4 million for the three and six months ended December 31, 2000, respectively, representing decreases of 57.7% and 52.8%. The decreases are the result of continuing weak demand for components throughout the electronics industry and a general slowdown in the global economy. Additionally, as a result of the reduced demand, many of our customers have a surplus of inventory. At such time that this surplus diminishes the Company believes that sales will increase. Weak demand negatively impacted sales in all product groups except flat panels. As applications for flat panel usage increases, the Company has dedicated additional resources to this market and has realized sequential growth compared to the first quarter of this fiscal year. Also, the focus on the sale of integrated flat panel product has resulted in new flat panel business. FORM 10-Q December 31, 2001 Page 15 Gross profit was $6.6 million, or 15.6% and $14.6 million, or 15.9% for the three and six months ended December 31, 2001, respectively, compared to $20.1 million, or 20.0% and $40.7 million, or 20.9% for the three and six months ended December 31, 2000, representing decreases of 67.1% and 64.1%. Demand for components continues to be weak. We do not foresee any material increase in gross margin until such time that demand for our product improves. Selling, general and administrative ("SG&A") expenses were $8.2 million and $17.6 million for the three and six months ended December 31, 2001, respectively, compared to $12.1 million and $23.9 million for the three and six months ended December 31, 2000, respectively. This represents a decrease of $3.9 million, or 32.0% and $6.3 million, or 26.4% for the three and six months ended December 31, 2001, respectively, compared to the same periods for Fiscal 2001. As a result of weak demand, it has been necessary to significantly reduce staffing levels in all departments. The Company has reduced costs that are deemed discretionary and has seen a decrease in variable costs, such as commissions paid to sales personnel, as a result of the decrease in sales. Though management is continuing to review all SG&A expenses, we believe that we have not hindered our ability to grow as customers demand increases. Interest expense decreased to $0.5 million and $1.3 million for the three and six months ended December 31, 2001, respectively, compared to $1.2 million and $2.1 million for the three and six months ended December 31, 2000, respectively, representing decreases of 53.9% and 36.4%. The reduction of interest expense is attributable to the Company's ability to reduce inventory levels as demand has weakened, a decrease in Accounts Receivable as a function of sales, and a reduction in borrowing rates. Net loss for the three and six months ended December 31, 2001 was $1.3 million, or $0.23 per share diluted, and $2.8 million, or $0.49 per share diluted, respectively, compared to net earnings of $4.0 million, or $0.65 per share diluted and $8.7 million, or $1.40 per share diluted for the three and six months ended December 31, 2000, respectively. The Company was unable to reduce costs during this time period to the same extent as sales decreased. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Our agreement with our banks, as amended, expires on September 14, 2003. The agreement provides us with a $70 million revolving line of credit facility based principally on eligible accounts receivable and inventories as defined in the agreement. The interest rate of the credit facility is based on the average 30-day LIBOR rate plus 1.0%-2.25% depending on our 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 $42.0 million at December 31, 2001. Borrowings under this facility are collateralized by substantially all of our assets. The agreement, as amended on February 6, 2002, contains provisions for maintenance of certain financial ratios, all of which we were in compliance with as of December 31, 2001, and prohibits the payment of cash dividends. For the six months ended December 31, 2001, our cash provided by operating activities was approximately $13.8 million, as compared to net cash used in operating activities of $17.6 million for the same period last fiscal year. The increase in net cash provided is primarily attributable to a decrease in accounts receivable and inventory. This was partially offset by a decrease in accounts payable and accrued expenses for the six months ended December 31, 2001. The decrease in accounts receivable and inventory was the result of the decrease in net sales for the six months ended December 31, 2001, as compared to the same period last year. Net cash used in investing activities decreased to $0.7 million for the six months ended December 31, 2001, as compared to $1.7 million for the six months ended December 31, 2000. The decrease is primarily attributable to a reduction in capital expenditures. Net cash used in financing activities was $13.1 million for the six months ended December 31, 2001 as compared to net cash provided by financing activities of $19.0 million for the comparable period last fiscal year. The increase in net cash used is primarily attributable to the decrease in the outstanding balance on the revolving line of credit facility from $54.6 million as of June 30, 2001 to $42.0 million as of December 31, 2001, which was a result of the decreases in accounts receivable and inventory. FORM 10-Q December 31, 2001 Page 16 For the six months ended December 31, 2001 and December 31, 2000, our inventory turnover was 2.8x and 4.9x, respectively. The average days outstanding of our accounts receivable at December 31, 2001 were 63 days, as compared to 48 days at December 31, 2000. We believe that cash flow from operations and funds available under our credit facility will be sufficient to fund our capital needs for the forseeable future. However, our cash expenditures may vary significantly from current levels, based on a number of factors, including, but not limited to future acquisitions, if any. While there can be no assurances that such financing will be available, the Company believes it will be able to continue to obtain financing on acceptable terms. Inflation Inflation has not had a significant impact on the Company's operations during the last three fiscal years. Quantitative and Qualitative Disclosure about Market Risk. ---------------------------------------------------------- We are exposed to interest rate changes with respect to our credit facility which bears interest at the higher of the prime rate or the federal funds rate plus 0.5%, or at our option, at a rate equal to the average 30-day LIBOR rate plus 1.0% to 2.25% depending on our performance for the immediately preceding four fiscal quarters measured by a certain financial ratio, and may be adjusted quarterly. At January 31, 2002, $43.3 million was outstanding under the credit facility. Changes in the LIBOR interest rate during the fiscal year will have a positive or negative effect on our interest expense. Each 1.0% fluctuation in the LIBOR interest rate will increase or decrease interest expense for us by approximately $0.4 million based on outstanding borrowings at January 31, 2002. The impact of interest rate fluctuations on other floating rate debt is not material. FORM 10-Q December 31, 2001 Page 17 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 12, 2001. The Shareholders approved the following: The election of each of the nominees to the Board of Directors: Stephen A. Cohen For: 5,412,704 Withheld: 79,695 Edward M. Frankel For: 5,418,204 Withheld: 74,195 Charles B. Girsky For: 5,232,404 Withheld: 259,995 Joel H. Girsky For: 5,232,404 Withheld: 259,995 Joseph F. Hickey, Jr. For: 5,418,204 Withheld: 74,195 Joseph F. Oliveri For: 5,232,404 Withheld: 259,995 Item 5. Other Information Nothing to Report Item 6. Exhibits and Reports on Form 8-K a) Exhibits 99.8.13 Amendment to Second Restated and Amended Loan and Security Agreement dated February 6, 2002 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, Chief Financial Officer (Principal Financial Officer) DATED: February 14, 2002