10-Q 1 jaco10qdec03.txt JACO ELECTRONICS, INC. 10-Q DECEMBER 31, 2003 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)