-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B85Eq2mSqwKENpQWs6AIL05y/v2zEKr5safBSIOri4kyzFhoxiCoghQZKhQjmjso w14AuHvr/bE1CdxK/8jp8A== 0000950123-97-008127.txt : 19970929 0000950123-97-008127.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950123-97-008127 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACO ELECTRONICS INC CENTRAL INDEX KEY: 0000052971 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 111978958 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-05896 FILM NUMBER: 97686376 BUSINESS ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162735500 MAIL ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K405 1 FORM 10-K JACO ELECTRONICS, INC. 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended .........................................June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (I.R.S. Employer Identification No.) of incorporation or organization) 145 Oser Avenue, Hauppauge, New York 11788 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (516) 273-5500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.10 per share (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates of the Company, computed by reference to the closing price on September 22, 1997 was $25,140,827. Number of shares outstanding of each class of Common Stock, as of September 22, 1997: 3,888,221 shares (excluding 87,500 shares of treasury stock). DOCUMENTS INCORPORATED BY REFERENCE: Part III: Definitive Proxy Statement to be filed on or before October 28, 1997, under Regulation 14A, in connection with the Company's 1997 Annual Meeting of Shareholders. 2 PART I ITEM 1. BUSINESS Jaco Electronics, Inc., a New York corporation organized in 1961 (collectively with all of its subsidiaries, unless otherwise noted, "Jaco" or the "Company"). GENERAL Jaco markets and distributes passive and active electronic components to original equipment manufacturers ("OEMs") throughout the United States and Canada from two distribution centers located on the East and West coasts and 14 sales offices located throughout the United States. The Company distributes products such as semiconductors, capacitors, resistors, electro-mechanical devices, flat panels, computers and computer subsystems, which are used in the manufacture and assembly of electronic products. The Company also provides a variety of value-added services including configuring complete computer systems to customers' specifications, kitting the component requirements of certain customers and furnishing contract manufacturing services. Value-added services are intended to attract new customers, maintain and increase sales to existing customers and, where feasible, generate additional revenues and improve margins from sales of components. In addition, these services are designed to respond to an industry trend of outsourcing, in which purchasing and warehousing functions are allocated by customers to the most efficient provider. The Company entered the contract manufacturing business in March 1994, when it acquired all of the outstanding capital stock of Nexus Custom Electronics, Inc. ("Nexus"), a Vermont-based contract manufacturer of printed circuit boards. Management believes the acquisition of Nexus has enabled, and will continue to enable, the Company to expand and broaden its range of value-added service capabilities. The Company's core customer base consists primarily of small and medium-sized OEMs that produce electronic equipment used in a wide variety of industries, including manufacturers of 2 3 telecommunications, computer, computer-related, medical and aerospace equipment and several Fortune 500 manufacturers. In the fiscal year ended June 30, 1997, the Company distributed electronic components to thousands of customers, none of which individually represented more than 3% of net sales. Jaco is a service-oriented company, built on strong customer and supplier relationships. The Company's inventory management and information systems assist its customers in controlling materials costs, in reducing cycle times and in keeping pace with rapidly occurring technological developments. The Company utilizes a computerized inventory control system to assist in the marketing of its products and coordinate purchases from suppliers with sales to customers. The Company's computer system provides detailed on-line information regarding the availability of the Company's entire stock of inventory located at its stocking facilities as well as on-line access to the inventories of some of the Company's major suppliers. Through the Company's integrated real-time information system, customers' orders can readily be tracked through the entire process of entering the order, reserving products to fill the order, ordering components from suppliers, if necessary, and shipping products to customers on scheduled dates. The Company is thus able to provide the type of distributor service required by its OEM customers that have adopted the "just-in-time" method of inventory procurement. The "just-in-time" method is utilized in an effort to operate more efficiently and profitably by relying on scheduled deliveries of such components at the time they are needed in the production process and thereby reducing inventories of components. The Company provides additional customer support through technically competent product managers, field engineers, value-added services and communication with customers from computer to computer or through electronic data interchange ("EDI"). INDUSTRY OVERVIEW The electronics distribution industry has become an increasingly important sales channel for the electronics industry because distributors can market component manufacturers' products to a 3 4 broader range of OEMs than such manufacturers could economically serve with their direct sales forces. Historically, manufacturers of electronic components have sold directly to large OEMs and relied upon distributors to serve small customers. Today, distributors have become more of an extension of component manufacturers' product delivery channels by providing value-added services and technical support to customers, by stocking sufficient inventory to ensure timely delivery of components and by managing customer credit. Distributors also work with OEMs to ensure that manufacturers' components are integrated into the design of new products. According to the National Electronics Distributors Association, an industry trade association, in 1996 the electronics distribution industry recorded approximately $24.5 billion in sales. Of these sales, approximately $7.0 billion of industry sales consisted of sales of interconnect (connectors, sockets), electromechanical (relays, switches) and passive (resistors, capacitors) components, which products accounted for approximately $73.9 million of the Company's net distribution sales in the year ended June 30, 1997. Approximately $16.6 billion of industry sales consisted of sales of semiconductors and computer products, which accounted for approximately $71.2 million of the Company's net distribution sales for the year ended June 30, 1997. PRODUCTS The Company currently distributes over 60,000 stock items. Management believes that it is necessary for the Company to carry a wide variety of items in order to fully service its customers requirements and, in addition, many suppliers require the Company to carry their full product line. The components distributed by the Company are used in the assembly and manufacture of electronic equipment such as computers, data transmission and telecommunications equipment and transportation equipment, including electronic signals and aircraft, and a broad variety of other electronic products. The Company's products fall into two broad categories: "passive" components and "active" components. 4 5 Passive components consist primarily of capacitors, electromechanical devices, and resistors. Passive products accounted for approximately 52%, 48%, and 51% of the Company's net distributor sales in the fiscal years ended June 30, 1995, June 30, 1996 and June 30, 1997, respectively. Active components include semiconductors and computer subsystems. Semiconductors consist of such items as integrated circuits and discrete components, transistors, diodes, dynamic RAMs, static RAMs, video RAMs and MOSFETs. Computer subsystems are an integral part of personal computers and computer workstations and incorporate such items as disk drives, tape drives, flat panels and flat panel monitors, floppy disks and controllers. These products represented approximately 48%, 52% and 49% of the Company's net distributor sales in the fiscal years ended June 30, 1995, June 30, 1996 and June 30, 1997, respectively. VALUE-ADDED SERVICES The Company provides a number of value-added services which are intended to attract new customers, to maintain and increase sales to existing customers and, where feasible, to generate additional revenues and improve margins from sales of components. Value-added services include: - CONFIGURING COMPUTER SYSTEMS. Subsystem integration is a service offered by the Company where it offers turnkey solutions to customers' computer requirements by integrating such components as disks, tapes and floppy disk drives with other components, including power suppliers, enclosures, interface electronics cables and converters and active components to configure complete computer systems to customer specifications, both in tower and desktop configurations. - KITTING. Kitting of customer component product requirements is provided to fill a segment or a complete order of products to a select customer base. Kitting consists of assembling to a customer's specifications two or more of the Company's 60,000 stock items into pre-packaged kits ready for use in the customer's assembly line. 5 6 - CONTRACT MANUFACTURING. The Company also furnishes turnkey contract manufacturing printed circuit boards ("PCBs") for OEMs using both conventional pin-through-hole and, on an increasing basis, more advanced surface mount technologies. Contract manufacturing operations involve assembling PCBs to customer specifications utilizing components from suppliers with whom the Company has distribution agreements and other suppliers. As a turnkey contract manufacturer of PCBs, the Company procures the required raw materials and components, manages the assembly and test operations, and supplies the PCBs in accordance with the customer's delivery schedule and quality requirements for the finished product. SALES AND MARKETING Management believes the Company has developed valuable long-term customer relationships and an in-depth understanding of its customers' needs and purchasing patterns. Jaco serves a broad range of customers in the computer, computer-related, telecommunications, data transmission, defense, aerospace, medical equipment and other industries. None of the Company's customers individually represented more than 3%, 2% and 3%, respectively, of net sales in the fiscal years ended June 30, 1995, June 30, 1996 and June 30, 1997. The Company's sales personnel are trained to identify their customers' requirements and to actively market the Company's entire product line to satisfy those needs. For example, the Company's sales staff and field engineers regularly meet with customers' engineers and designers to discuss prospective needs and potential design or procurement problems and enable the sales personnel to understand which products will meet the customers' performance criteria, are cost-effective and target specifically identified problems. 6 7 Sales are made throughout the United States and Canada from the sales departments maintained at the Company's two distribution facilities located on the East and West Coasts of the United States in California and New York and from 14 additional sales offices located in California, Florida, Maryland, Massachusetts, Minnesota, North Carolina, Oregon, Texas, Washington, Colorado, Arizona and Illinois. Sales are made primarily through personal visits by the Company's employees and by a staff of trained telephone sales personnel who answer inquiries and receive and process orders from customers. In addition, the Company utilizes the services of independent sales representatives whose territories include parts of the United States, Canada, and several foreign countries. These sales representatives operate under agreements which are terminable by either party upon 30 days' notice. Independent sales representatives are authorized to solicit sales of all of the Company's product lines and are prohibited from representing competing product lines. In the fiscal year ended June 30, 1997, 94% of the Company's sales were produced by Company sales personnel and 6% by independent sales representatives. No one sales representative produced more than 2% of the Company's sales. The Company believes that the termination of any independent sales representative would not have a material adverse effect upon its business. BACKLOG As the trend toward outsourcing increases, customers have been entering into just-in-time contracts with distributors, instead of placing orders. As a result, the Company's backlog has been reduced. The Company's backlog was $40.6 million at June 30, 1996, compared to $27.1 million at June 30, 1997. Backlog consists of purchase orders received from customers for products scheduled for delivery within the next twelve months. Orders constituting the Company's backlog are subject to delivery rescheduling, price negotiations and cancellations by the customer, sometimes without penalty or notice. Backlog is not necessarily indicative of future sales for any particular period and, therefore, the Company expects that in the normal course of business, less than all backlogged orders will be filled. 7 8 OPERATIONS Component Distribution. Inventory management is critical to a distributor's business. The Company constantly focuses on a high number of resales or "turns" of existing inventory to reduce exposure to product obsolescence and changing customer demand. The Company's central computer system facilitates the control of purchasing and inventory, accounts payable, shipping and receiving, and invoicing and collection information of Jaco's distribution business. Each of the Company's sales departments and offices is electronically linked to the Company's central computer systems which provides fully integrated on-line real-time data with respect to the Company's inventory levels. The Company's inventory management system was developed internally by Jaco and is considered proprietary. Inventory turns are tracked by vendor, and the Company's inventory management system provides immediate information to assist in making purchasing decisions and decisions as to which inventory to exchange with suppliers under stock rotation programs. The Company's inventory management system also uses bar-code technology along with scanning devices, which are supplied by Jaco to certain customers, and is networked to the facilities of select customers. In some cases, customers use computers that interface directly with the Company's computers to identify available inventory and rapidly process orders. This system enables the Company to more effectively manage its inventory and to respond more quickly to customer requirements for timely and reliable delivery of components. The Company's inventory turnover was approximately 3.9 for the year ended June 30, 1997. Approximately 80% of the Company's component distribution inventory is maintained at its East Coast distribution center in Hauppauge, New York. Most of the remaining inventory is maintained at the Company's West Coast facility in Westlake Village, California. The Company also monitors supplier stock rotation programs, inventory price protection, rejected material and other factors related to inventory quality and quantity. 8 9 Contract Manufacturing. The Company conducts its contract manufacturing operations through Nexus at an approximately 32,600 square foot facility located in Brandon, Vermont. Nexus provides turnkey and consigned contract manufacturing of PCBs for OEMs. "Turnkey" is an industry term that describes a contract manufacturer that buys customer-specified components from suppliers, assembles the components onto finished PCBs and performs post-assembly testing, while "consigned" refers to a contract manufacturer that provides the assembly and testing elements only. OEMs then incorporate the PCBs into finished products. In assembling PCBs, Nexus is capable of employing both pin-through-hole ("PTH") and surface mount technologies ("SMT"). PTH is a method of assembling PCBs in which component leads are inserted and soldered into plated holes in the board. SMT is a method of assembling PCBs in which components are fixed directly to the surface of the board, rather than being inserted into holes. The SMT process allows for more miniaturization, cost savings and shorter lead paths between components (which results in greater signal speed). In the fiscal year ended June 30, 1997, the Company invested approximately $665,000 primarily in SMT machinery and equipment, as part of the Company's ongoing program to expand Nexus' operations. Nexus maintains strict quality control procedures for its products, including use of total quality management ("TQM") systems. Incoming raw material and components are checked by the Nexus quality control personnel. During the production stage, quality control personnel check all work in process at several points in the production process. Finally, after the assembly stage, Nexus conducts random testing of finished products. Nexus' manufacturing facility has earned ISO 9002 certification by the Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. Nexus' receipt of ISO 9002 certification demonstrates that Nexus' manufacturing operations meet established world standards. Management believes sophisticated customers increasingly are requiring their manufacturers to be ISO 9002-certified for purposes of quality assurance. 9 10 Acquisition of Q.P.S. Electronics, Inc. On August 2, 1996, the Company acquired the operating assets of Q.P.S. Electronics, Inc. ("QPS"), a distributor of quality active and passive electronic components based in Schaumburg, Illinois. Management expects that the acquisition of QPS will continue to contribute to the expansion of the Company's national, dedicated distribution network by firmly establishing the Company's presence in the Midwest marketplace. Acquisition of Corona Electronics, Inc. On January 21, 1997, the Company acquired all of the outstanding shares of capital stock of Corona Electronics, Inc. ("Corona"), an electronics component distributor located in Orange County, California. Management expects that the acquisition of Corona will strengthen the Company's presence in the Southern California marketplace. SUPPLIERS Manufacturers of passive and active electronic components are increasingly relying on the marketing, customer service and other resources of distributors who market their product lines to customers not normally served by the manufacturer, and to supplement the manufacturer's direct sales efforts in other accounts often by providing value-added services not offered by the manufacturer. Manufacturers seek distributors who have strong relationships with desirable customers, are financially strong, have the infrastructure to handle large volumes of products and can assist customers in the design and use of the manufacturers' products. Currently, the Company has non-exclusive distribution agreements with many manufacturers, including Deutsch, Inc., International Resistive Company, Inc., Johanson Dielectric Inc., Kemet Electronics Corporation, Mitel Inc., Rohm Company, Limited, Samsung Semiconductor, Inc., TDK Corporation of America, Vishay Intertechnology, Inc., and Zetex, Inc. Management continuously seeks to identify potential new suppliers and obtain additional distributorships for new lines of products. Management believes that such expansion and diversification will increase the Company's sales and market share. 10 11 In the fiscal year ended June 30, 1997, of the Company's top ten suppliers, only Kemet accounted for more than 10% of net sales and the remaining nine each accounted for between 9.5% and 2.0% of net sales. No other supplier accounted for more than 1% of net sales. As is common in the electronics distribution industry, from time to time the Company has experienced terminations of relationships with suppliers which may affect its results of operations in post-termination fiscal periods. The Company generally purchases products from manufacturers pursuant to non-exclusive distributor agreements. Selection as an authorized distributor is a valuable marketing tool for the Company because customers receive warranty protection and support from manufacturers when they purchase products from the Company. As an authorized distributor, the Company is able to offer customers marketing and engineering support from the product manufacturers, which enhances the Company's ability to attract new customers and close sales. Most of the Company's distributor agreements are cancelable by either party, typically upon 30 to 90 days' notice. These agreements typically provide for price protection, stock rotation privileges and the right to return inventory. Price protection is typically in the form of a credit to the distributor for any inventory in the distributor's possession for which the manufacturer reduces its prices. Stock rotation privileges typically allow the Company to exchange inventory in an amount up to 5% of a prior period's purchases. Upon termination of a distributor agreement, the right of return typically requires the manufacturer to repurchase the Company's inventory at the Company's adjusted purchase price. The Company believes that the above-described provisions of its distributorship agreements generally have served to reduce the Company's exposure to loss from unsold inventory. As such price protection and stock rotation privileges are limited in scope, there can be no assurance that the Company will not experience significant losses from unsold inventory in the future. 11 12 COMPETITION The electronics distribution industry is highly competitive, primarily with respect to price and product availability. The Company believes that the breadth of customer base, services and product lines, its level of technical expertise and the quality of its services generally are also particularly important. The Company competes with large national distributors such as Arrow Electronics, Inc. and Avnet, Inc., as well as regional and specialty distributors, many of whom distribute the same or competitive products. Many of the Company's competitors have significantly greater name recognition and greater financial and other resources than those of the Company. The PCB contract manufacturing industry is highly fragmented and is characterized by relatively high levels of volatility, competition and pricing and margin pressure. Many large contract manufacturers operate high-volume facilities and primarily focus on high-volume product runs. In contrast, certain contract manufacturers, such as Nexus, focus on low-to-medium volume and service-intensive products, where the finished product often requires a greater amount of overall labor. The Company believes that contract manufacturers which are affiliated or integrated with electronics distributors have competitive advantages over comparably-sized, stand-alone contract manufacturers. Distributors can reduce the risk of inventory obsolescence through stock rotation privileges and inventory price protection and can also take advantage of material acquisition skills, just-in-time delivery expertise and broad supplier relationships. EMPLOYEES At August 29, 1997, the Company had a total of 406 employees, of which 110 were employed by Nexus. Of total employees, 11 were engaged in administration, 57 were managerial and supervisory employees, 151 were in sales and 187 performed warehouse, manufacturing and clerical functions. Of these employees, Nexus employed one in administration, nine in management 12 13 and supervisory positions, four in sales and 96 in warehouse, manufacturing and clerical functions. There are no collective bargaining contracts covering any of the Company's employees. The Company believes its relationship with its employees is satisfactory. ITEM 2. PROPERTIES All of the Company's facilities are leased except for the Brandon, VT property which is owned by Nexus. Jaco currently leases 16 facilities located in the States of Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Minnesota, New York, North Carolina, Oregon, Texas and Washington, three of which are multipurpose facilities used principally as administrative, sales, and purchasing offices, as well as warehouses, and the remainder of which are used exclusively by Jaco as sales offices. Jaco's satellite sales offices range in size from approximately 1,000 square feet to approximately 7,200 square feet. Base rents for such properties range from approximately $1,000 per month to approximately $5,700 per month. Depending on the terms of each particular lease, in addition to base rent, Jaco may also be responsible for portions of real estate taxes, utilities and operating costs, or increases in such costs over certain base levels. The lease terms range from month-to month to as long as three years. All facilities are linked by computer terminals to Jaco's Hauppauge, New York headquarters. The following paragraphs set forth certain information regarding Jaco's two principal leased facilities: (i) Jaco leases from Bemar Realty Company, a partnership consisting of Messrs. Joel H. Girsky and Charles B. Girsky, approximately 72,000 square feet of office and warehouse space at 145 Oser Avenue, Hauppauge, New York. The lease provides for a current monthly base rent of approximately $42,000 net of all expenses, including taxes, utilities, insurance, maintenance and repairs, and has a term which expires on December 31, 2003. In Fiscal 1996, Jaco negotiated a renewal of the lease and the current rental rate is similar to that currently being charged for comparable properties in the area. Approximately 26,000 square feet of space is sublet by Jaco to an unaffiliated third party. In addition to its headquarters, Jaco maintains purchasing and sales offices and warehouse facilities at its Hauppauge location. 13 14 (ii) Jaco leases through March 31, 1998, from an unaffiliated party, approximately 10,000 square feet of office and warehouse space in Westlake Village, California for a base rent of approximately $9,100 per month. Jaco maintains both a purchasing and sales office at this location, as well as warehouse facilities. Nexus currently owns and occupies a 32,000 square foot facility located in Brandon, Vermont, that is used for manufacturing, storage and office space. The building was acquired by the Company on March 11, 1994 as part of the acquisition of all of the outstanding shares of capital stock of Nexus. The Company believes that its present facilities will be adequate to meet its needs for the foreseeable future. ITEM 3. Legal Proceedings. The Company is not a party to any material pending legal proceedings. ITEM 4. Submission of Matters To A Vote of Security Holders. No response to this Item is required. 14 15 PART II ITEM 5. Market For the Company's Common Stock and Related Security Holder Matters. (a) The Company's common stock (the "Common Stock") is traded on The Nasdaq National Market under the symbol "JACO". The stock prices listed below represent the high and low closing sale prices of the Common Stock, as reported by The Nasdaq National Market, for each fiscal quarter beginning with the first fiscal quarter of 1996. Stock prices of all periods have been adjusted to give effect to the 10% stock dividend paid on March 10, 1995 and to give effect to the 4-for-3 stock split which was distributed to shareholders of record as of September 22, 1995.
FISCAL YEAR 1996: HIGH LOW First quarter ended September 30, 1995 $13.88 $ 6.28 Second quarter ended December 31, 1995 $16.00 $ 10.50 Third quarter ended March 31, 1996 $12.38 $ 9.75 Fourth quarter ended June 30, 1996 $12.63 $ 9.75
FISCAL YEAR 1997: HIGH LOW First quarter ended September 30, 1996 $10.38 $ 6.25 Second quarter ended December 31, 1996 $ 9.50 $ 7.75 Third quarter ended March 31, 1997 $ 9.12 $ 7.00 Fourth quarter ended June 30, 1997 $ 8.00 $ 6.38
(b) As of September 17, 1997 there were approximately 172 holders of record of the Company's Common Stock who management believes held for more than 2,500 beneficial owners. (c) The Company has never declared or paid cash dividends on its Common Stock. The Company intends to retain its earnings, if any, for use in its business and to support growth and does not anticipate paying cash dividends in the foreseeable future. In addition, the agreement governing 15 16 the Company's credit facility (the "Credit Facility") contains provisions that prohibit the Company from paying cash dividends on its Common Stock. 16 17 Item 6. Selected Consolidated Financial Data
Year ended June 30, ---------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA Net sales $ 96,675 $ 105,213 $ 138,683 $ 167,149 $ 155,098 Cost of goods sold 75,630 83,038 109,902 133,105 122,993 ---------- ---------- ---------- ---------- ---------- Gross profit 21,045 22,175 28,781 34,044 32,105 Selling, general and administrative expenses 17,786 19,155 23,552 26,247 27,640 ---------- ---------- ---------- ---------- ---------- Operating profit 3,259 3,020 5,229 7,797 4,465 Interest expense 1,078 1,117 2,010 1,347 971 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of a change in accounting for income taxes 2,181 1,903 3,219 6,450 3,494 Income tax expense 797 714 1,303 2,600 1,415 ---------- ---------- ---------- ---------- ---------- Earnings before cumulative effect of a change in account- ing for income taxes 1,384 1,189 1,916 3,850 2,079 Cumulative effect of a change in accounting for income taxes 241 ---------- ---------- ---------- ---------- ---------- NET EARNINGS $ 1,384 $ 1,430 $ 1,916 $ 3,850 $ 2,079 ========== ========== ========== ========== ========== PER SHARE DATA* Earnings per common share before cumulative effect of a change in accounting $ .55 $ .47 $ .78 $ 1.08 $ .53 Cumulative effect of a change in accounting .09 ---------- ---------- ---------- ---------- ---------- Net earnings per common share $ .55 $ .56 $ .78 $ 1.08 $ .53 ========== ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding 2,522,980 2,551,173 2,461,091 3,554,018 3,947,687 ========== ========== ========== ========== ========== BALANCE SHEET DATA Working capital $ 14,910 $ 15,160 $ 30,741 $ 36,964 $ 41,146 Total assets 36,056 45,685 56,323 61,143 69,996 Long-term obligations 8,058 9,694 23,666 8,791 15,553 Shareholders' equity 9,905 11,202 13,227 34,304 35,892
* All per share information has been restated to give effect to a 10% stock dividend paid on March 10, 1995 and a 4-for-3 stock split distributed to shareholders of record as of September 22, 1995. 18 ITEM 7. 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 and provider of contract manufacturing and value-added services. Products distributed by Jaco include semiconductors, capacitors, resistors and electromechanical devices and motors 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 Nexus. 18 19 During August 1996 and January 1997 the Company acquired the operating assets of QPS Electronics, Inc. and all of the outstanding common stock of Corona Electronics, Inc., respectively, both of which are electronic component distributors. Aggregate consideration paid for the acquisitions approximated $4.7 million, of which $157,500 was paid through the issuance of 20,000 shares of the Company's common stock (See Note I of the Notes to the Consolidated Financial Statements). The addition of these two companies strengthens the Company's position in Southern California and the Midwest. The Company has consolidated the operations of these acquired companies in order to reduce operating costs and create a stronger sales organization. The Company's sales from value-added services represented $15.7 million, or 10.1% of net sales in the year ended June 30, 1997, $18.0 million, or 11% of net sales in the year ended June 30, 1996, and $18.1 million or 11% of net sales in the year ended June 30, 1995. Of these sales, sales from contract manufacturing were $10.0 million, or 6.4% of net sales in year ended June 30, 1997, and $10.8 million, or 6.5% of net sales in the year ended June 30, 1996, and $12.1 million, or 8.7% of net sales in the year ended June 30, 1995. 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: 19 20
Year Ended June 30, 1995 1996 1997 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of goods sold 79.2 79.6 79.3 ----- ----- ----- Gross profit 20.8 20.4 20.7 Selling, general and administrative expenses 17.0 15.7 17.8 ----- ----- ----- Operating profit 3.8 4.7 2.9 Interest expense 1.5 .8 .6 ----- ----- ----- Earnings before income taxes 2.3 3.9 2.3 Income tax expense .9 1.6 1.0 ----- ----- ----- NET EARNINGS 1.4% 2.3% 1.3% ===== ===== =====
COMPARISON OF YEAR ENDED JUNE 30, 1997 ("FISCAL 1997") WITH YEAR ENDED JUNE 30, 1996 ("FISCAL 1996") Net sales for the fiscal year ended June 30, 1997 decreased 7.2% to $155,098,000, as compared to $167,149,000 reported for the same fiscal 1996 period. During fiscal 1997, the decrease in sales was primarily the result of an overall industry weakness as it relates to component pricing. The Company sold a greater number of components than were sold in its last fiscal year, but has been unable to offset the price reductions that have occurred. The Company completed two acquisitions during fiscal 1997 (See Note I of the Notes to the Consolidated Financial Statements) that expanded its market penetration in the Midwest and Southern California. Additionally, the Company continued to expand its marketing efforts in flat panel devices and field application engineers ("FAE's"). FAE's assist in designing components for approval by customer's engineering departments. Sales from contract manufacturing decreased by approximately $.8 million during fiscal 1997, compared to fiscal 1996. During the fiscal year Nexus shifted its sales effort to surface mount technology, compared to the older pin-through-hole technology. The Company believes that the shift in technology should produce increases in contract manufacturing sales during future periods. 20 21 Gross profit margins, as percentage of net sales, increased slightly from 20.4% in fiscal 1996 to 20.7% in fiscal 1997. Though unit pricing of components declined during the fiscal year, both price protection provided to the Company by its suppliers and increases in the sale of passive components, which historically have maintained a slightly higher gross profit margin as compared to active components, resulted in the increase in gross profit margin. Selling, general and administrative (SG&A) expenses were $27.6 million in fiscal 1997, an increase of $1.4 million, or 5.3% from $26.2 million in fiscal 1996. The Company's addition of sales and sales management personnel, the expansion of the FAE program and the addition of the flat panel display group have contributed to the increase in SG&A expenses. Additionally, the Company acquired QPS Electronics, Inc. and Corona Electronics, Inc. during the fiscal year. The Company will closely monitor SG&A costs during the future periods. Interest expense decreased to $1.0 million in fiscal 1997, as compared to $1.3 million in fiscal 1996. The 28% decrease was primarily the result of a reduction in borrowings, as a result of the reduction in indebtedness under the Company's credit facility by the application of the net proceeds of $17.1 million from the public offering completed during the second quarter of fiscal 1996. Borrowings under the credit facility include funds used for the acquisition of Corona and QPS (See Note I of the Notes to the Consolidated Financial Statements) during fiscal 1997. Net earnings for fiscal 1997 were $2.1 million, or $.53 per share, as compared to $3.8 million, or $1.08 per share, during the last fiscal year. The decrease in net earnings was attributable to the decrease in sales and the increase in SG&A. The Company believes that the additional expenses incurred during fiscal 1997 will provide the infrastructure necessary for future increases in sales. 21 22 COMPARISON OF YEAR ENDED JUNE 30, 1996 WITH YEAR ENDED JUNE 30, 1995 ("FISCAL 1995") Net sales for the fiscal year ended June 30, 1996 increased 20.5% to $167,149,000, as compared to $138,683,000 reported for the same fiscal 1995 period. The increase in sales was the result of strong overall demand for electronic components in the electronics industry, the Company's continued expansion as a national distributor into new territories, and the addition of sales personnel in existing locations. The Company has expanded its product offerings to include the flat panel display market. Sales were minimal during fiscal 1996. Sales from contract manufacturing (Nexus) decreased by approximately $1.0 million during fiscal 1996, compared to fiscal 1995, due to the loss of two major customers. Gross profit margins, as a percentage of net sales, decreased slightly from 20.8% in fiscal 1995 to 20.4% in fiscal 1996. This was primarily due to a softening in demand for components during the second half of fiscal 1996. Selling, general and administrative (SG&A) expenses were $26.2 million in fiscal 1996, an increase of $2.7 million, or 11.4%, from $23.6 million in fiscal 1995. The continued geographic expansion of the Company by opening sales offices in Arizona and Colorado, the higher commissions paid based on sales growth, the addition of sales personnel in existing locations and the hiring of additional support personnel to handle increased sales all attributed to the increase in SG&A. As a percentage of fiscal 1996 net sales, SG&A declined to 15.7% from 17.0% in fiscal 1995. Close attention to cost containment resulted in the reduction. Interest expense decreased to $1.3 million in fiscal 1996 from $2.0 million in fiscal 1995. The 33% decrease was primarily the result of a reduction in borrowings as a result of the reduction 22 23 in indebtedness under the Company's Credit Facility by application of the net proceeds from the public offering completed during the second quarter of fiscal 1996. Net earnings for fiscal 1996 were $3.8 million, an increase of approximately $1.9 million, or approximately 101% as compared to the same period in fiscal 1995. The increase in the net earnings is principally the result of increases in sales, control of SG&A expenses and a reduction in interest expense. LIQUIDITY AND CAPITAL RESOURCES On October 20, 1995, the Company completed a public offering of 1,600,000 shares of its common stock at $12.75 per share. The offering consisted of 1,325,000 shares offered by the Company and an aggregate of 275,000 shares offered by certain officers and directors of the Company. On December 8, 1995, the underwriters of the public offering exercised a portion of their overallotment option for an additional 160,000 shares at a price per share equal to that of the public offering. The Company's net proceeds from the public offering of approximately $17,140,000, after deducting the underwriters' commission and cost of the public offering, were used to reduce its bank indebtedness. In connection with the public offering, the Company also issued stock warrants, to the representative underwriters, to purchase up to 70,000 shares of common stock at an exercise price per share equal to 180% of the public offering price, which expire on October 20, 1999. 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, 1998. Under a verbal agreement effective June 1, 1997, borrowings under the credit facility bear interest at the average 30-day LIBOR rate plus 1%. The outstanding balance on the revolving line of credit facility was $14,018,312 at June 30, 1997. The term loan, with a remaining balance of $803,571 at June 30, 1997, requires monthly principal payments of $17,857, together with interest 23 24 through September 13, 1998, with a final payment of $533,600 on September 13, 1998. 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 June 30, 1997, and prohibits the payment of cash dividends. The agreement also provides for the issuance of letters of credit by the banks on the Company's behalf. At June 30, 1997, $500,000 of such letters of credit were outstanding. During fiscal 1997, the Company's net cash provided by operating activities was approximately $1.3 million, as compared to net cash used in operating activities of approximately $1.7 million for fiscal 1996, an increase of approximately $3.0 million. The increase is primarily attributable to the decrease in accounts receivable by $1.6 million (net of assets acquired from business acquisitions) for fiscal 1997, as compared to a $2.5 million increase during fiscal 1996. In addition, inventory increased by $1.8 million (net of assets acquired from business acquisitions) for fiscal 1997, as compared to a $3.4 million increase during fiscal 1996. Net cash used in investing activities increased to $5.9 million for fiscal 1997, as compared to $.9 million for fiscal 1996, an increase of $5.0 million. The two acquisitions completed during fiscal 1997 required approximately $4.7 million, and were financed through the Company's line of credit. Fiscal 1996 reflects the proceeds of the Company's public offering, which reduced cash provided by financing activities by application of such proceeds against the Company's bank borrowings. 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. In connection with the January 1997 acquisition of Corona, the Company increased its borrowings under its existing revolving line of credit by approximately $4.2 million. Additionally, the Company increased its borrowings by approximately $2.6 million to finance an increase in inventory. For fiscal 1996 and fiscal 1997, inventory turnover was 4.7x and 3.9x, respectively. The average of the Company's accounts receivable at June 30, 1997 was 52 days, as compared to 48 days 24 25 at June 30, 1996. The Company did not experience any significant trade collection difficulties during fiscal 1997. On April 15, 1996, the Company's Board of Directors authorized the purchase of up to 250,000 shares of its common stock or approximately 6.3% of the then outstanding shares, under a stock repurchase program. During fiscal 1997, the Company repurchased 87,500 shares at an average market price of $8.00 per share. The Company believes that cash flow from operations and funds available under its credit facility will be sufficient to fund the Company's capital needs for at least the next twelve months. INFLATION Inflation has not had a significant impact on the Company's operations during the last three fiscal years. ITEM 8. Financial Statements and Supplementary Data. For an index to the financial statements and supplementary data, see Item 14(a). ITEM 9. Disagreements on Accounting and Financial Disclosure. No response to this Item is required. 25 26 PART III ITEM 10. Directors and Executive Officers of the Company. Incorporated herein by reference is the information to appear under the caption "Election of Directors" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1997. ITEM 11. Executive Compensation. Incorporated herein by reference is the information to appear under the caption "Executive Compensation" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1997. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated herein by reference is the information to appear under the caption "Principal Shareholders; Shares Held by Management" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1997. ITEM 13. Certain Relationships and Related Transactions. Incorporated herein by reference is the information to appear under the caption "Certain Transactions" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1997. 26 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page ---- (a) (1) Financial Statements included in Part II, Item 8, of this Report: Index to Consolidated Financial Statements and Schedule F-1 Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Earnings F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 (a) (2) Financial Statement Schedule included in Part IV of this Report: Report of Independent Certified Public Accountants on Schedule II F-27 Schedule II - Valuation and Qualifying Accounts F-28
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. Exhibit No. - ------- 3.1 Restated Certificate of Incorporation adopted November, 1987, incorporated by reference to the Company's definitive proxy statement distributed in connection with the Company's annual meeting of shareholders held in November, 1987, filed with the SEC on November 3, 1986, as set forth in Appendix A to the aforesaid proxy statement. 3.1.1 Certificate of Amendment of the Certificate of Incorporation, adopted December, 1995, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 ("the Company's 1996 10-K"), Exhibit 3.1.1. 27 28 3.2 Restated By-Laws adopted June 18, 1987, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1987 ("the Company's 1987 10- K"), Exhibit 3.2. 4.1 Form of Common Stock Certificate, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 4.1. 10.1 Sale and leaseback with Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1983, Exhibit 10(1), pages 48-312. 10.2 Amendment No. 1 to Lease between the Company and Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.2. 10.2.2 Lease Between the Company and Bemar Realty Company, dated January 1, 1996, incorporated by reference to the Company's 1996 10-K, Exhibit 10.2.2. 10.3 Employment Agreement between Joel Girsky and the Company, dated December 29, 1989, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1990 ("the Company's 1990 10-K"), Exhibit 10.3 pages 47-52. 10.4 1980 Stock Incentive Plan, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.4, pages 168-172. 10.5 Restated 1981 Incentive Stock Option Plan, incorporated by reference to the Company's 1987 10-K, Exhibit 10.1. 10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference to the Company's 1993 10-K, Exhibit 10.6. 10.7 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. 10.9 Employment Agreement between Joel Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.9. 28 29 10.10 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.10. 10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.11. 21.1 Subsidiaries of the Company. 23.1 Consent of Grant Thornton LLP. 27. Financial Data Schedule. 99.1 General Loan and Security Agreement dated January 20, 1989, between the Company as borrower and The Bank of New York Commercial Corporation ("BNYCC") as secured party, incorporated by reference to the Company's Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1). 99.2 Loan and Security Agreement - Accounts Receivable and Inventory, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(2). 99.3 Letter of Credit and Security Agreement, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(3). 99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company in favor of BNYCC dated January 13, 1992, together with Letters from R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and Distel, Inc., each a subsidiary of the Company and a guarantor of the obligations evidenced by the Term Notes, to BNYCC acknowledging the amendment to the Term Notes for the extension of the maturity date of each such note, incorporated by reference to the Company's 1992 10-K, Exhibit 28.4. 99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the Company and BNYCC, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5. 99.6 $1,500,000 Additional Term Loan Note, executed by the Company in favor of BNYCC, dated March 11, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5. 29 30 99.7 Restated and Amended Loan and Security Agreement, dated April 25, 1995, among the Company, Nexus and BNYCC, together with an Amendment to Term Loan Note executed by the Company in favor of BNYCC and Letter executed by R.C. Components, Inc., Quality Components, Inc., Micatron, Inc., Distel, Inc. And Jaco Overseas, Inc., incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 99.7. 99.8 Second Restated and Amended Loan and Security Agreement dated September 13, 1995 among the Company, Nexus Custom Electronics, Inc., BNYCC and NatWest Bank, N.A. ("Second Restated and Amended Loan and Security Agreement"), incorporated by reference to the Company's Registration Statement on Form S-2, Commission File No. 33-62559, filed October 13, 1995, Exhibit 99.8. 99.8.1 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of April 10, 1996, incorporated by reference to the Company's 1996 10-K, Exhibit 99.8.1. (b) Reports on Form 8-K filed during last quarter of the period covered by this Report: None. 30 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: September 24, 1997 By: /s/ Joel H. Girsky ----------------------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: September 24, 1997 /s/ Joel H. Girsky -------------------------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer (Principal Executive Officer) Date: September 24, 1997 /s/ Jeffrey D. Gash -------------------------------------- Jeffrey D. Gash, Vice President-Finance (Principal Financial and Accounting Officer) Date: September 24, 1997 /s/Stephen A. Cohen -------------------------------------- Stephen A. Cohen, Director Date: September 24, 1997 /s/Edward M. Frankel -------------------------------------- Edward M. Frankel, Director Date: September 24, 1997 /s/Charles B. Girsky -------------------------------------- Charles B. Girsky, Executive Vice President and Director Date: September 24, 1997 /s/ Joseph F. Hickey, Jr. -------------------------------------- Joseph F. Hickey, Jr., Director 31 32 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page ---- Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Earnings F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 Report of Independent Certified Public Accountants on Schedule F-27 Schedule II - Valuation and Qualifying Accounts F-28
F-1 33 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders JACO ELECTRONICS, INC. We have audited the accompanying consolidated balance sheets of Jaco Electronics, Inc. and Subsidiaries (the "Company") as of June 30, 1996 and 1997 and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jaco Electronics, Inc. and Subsidiaries as of June 30, 1996 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. GRANT THORNTON LLP Melville, New York August 18, 1997 F-2 34 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30,
ASSETS 1996 1997 ----------- ----------- CURRENT ASSETS Cash $ 164,161 $ 463,352 Marketable securities 493,281 627,179 Accounts receivable, less allowance for doubtful accounts of $758,000 in 1996 and $846,000 in 1997 22,217,130 22,008,210 Inventories 30,089,508 33,311,201 Prepaid expenses and other 739,530 1,359,617 Prepaid income taxes 528,243 Deferred income taxes 708,000 750,000 ----------- ----------- Total current assets 54,411,610 59,047,802 PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 4,226,617 5,009,045 DEFERRED INCOME TAXES 189,000 244,000 EXCESS OF COST OVER NET ASSETS ACQUIRED, less accumulated amortization of $369,200 in 1996 and $501,046 in 1997 1,241,533 4,151,574 OTHER ASSETS 1,073,969 1,543,257 ----------- ----------- $61,142,729 $69,995,678 =========== ===========
The accompanying notes are an integral part of these statements. F-3 35 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (CONTINUED) June 30, LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1997 ------------ ----------- CURRENT LIABILITIES Accounts payable $ 15,413,879 $15,833,198 Current maturities of long-term debt and capitalized lease obligations 474,082 599,239 Accrued expenses 1,175,973 1,468,929 Income taxes payable 383,970 ------------ ----------- Total current liabilities 17,447,904 17,901,366 LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS 8,791,270 15,552,549 DEFERRED COMPENSATION 600,000 650,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued Common stock - authorized, 10,000,000 shares, $.10 par value; issued 3,955,721 and 3,975,721 shares, respectively, and 3,955,721 and 3,888,221 shares outstanding, respectively 395,572 397,572 Additional paid-in capital 22,024,795 22,180,295 Unrealized gain on marketable securities 68,245 120,200 Retained earnings 11,814,943 13,893,696 Treasury stock - 87,500 shares, at cost (700,000) ------------ ----------- 34,303,555 35,891,763 ------------ ----------- $ 61,142,729 $69,995,678 ============ ===========
The accompanying notes are an integral part of these statements. F-4 36 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30,
1995 1996 1997 ------------ ------------ ------------ Net sales $138,683,331 $167,149,385 $155,097,745 Cost of goods sold 109,902,639 133,105,227 122,993,172 ------------ ------------ ------------ Gross profit 28,780,692 34,044,158 32,104,573 Selling, general and administrative expenses 23,551,196 26,246,741 27,639,567 ------------ ------------ ------------ Operating profit 5,229,496 7,797,417 4,465,006 Interest expense 2,010,554 1,347,639 971,253 ------------ ------------ ------------ Earnings before income taxes 3,218,942 6,449,778 3,493,753 Income tax provision 1,303,000 2,600,000 1,415,000 ------------ ------------ ------------ NET EARNINGS $ 1,915,942 $ 3,849,778 $ 2,078,753 ============ ============ ============ Net earnings per common share $ .78 $ 1.08 $ .53 ============ ============ ============ Weighted-average common shares and common equivalent shares outstanding 2,461,091 3,554,018 3,947,687 ============ ============ ============
The accompanying notes are an integral part of these statements. F-5 37 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 1995, 1996 and 1997
Unrealized Additional gain on paid-in marketable Shares Amount capital securities -------- -------------- --------------- -------------- Balance at July 1, 1994 1,652,309 $ 165,231 $ 3,810,516 Exercise of stock options 28,000 2,800 105,700 10% stock dividend 167,979 16,798 1,159,056 Payment for fractional shares resulting from 10% stock dividend 4-for-3 stock split 616,096 61,609 (61,609) Net earnings ---------- ----------- ------------ Balance at June 30, 1995 2,464,384 246,438 5,013,663 Issuance of common stock for cash 1,485,000 148,500 16,991,466 Exercise of stock options 6,415 642 19,658 Payment for fractional shares resulting from 4-for-3 stock split (78) (8) 8 Unrealized gain on marketable securities - net $ 68,245 Net earnings ---------- ----------- ------------ -------- Balance at June 30, 1996 3,955,721 395,572 22,024,795 68,245 Issuance of common stock in connection with acquisition 20,000 2,000 155,500 Purchase of treasury stock Unrealized gain on marketable securities - net 51,955 Net earnings ---------- ----------- ------------ -------- BALANCE AT JUNE 30, 1997 3,975,721 $ 397,572 $ 22,180,295 $120,200 ========== =========== ============ ========
Total Retained Treasury shareholders' earnings stock equity -------------- --------------- ------------ Balance at July 1, 1994 $ 7,226,705 $ 11,202,452 Exercise of stock options 108,500 10% stock dividend (1,175,854) Payment for fractional shares resulting from 10% stock dividend (362) (362) 4-for-3 stock split Net earnings 1,915,942 1,915,942 ------------ ------------ Balance at June 30, 1995 7,966,431 13,226,532 Issuance of common stock for cash 17,139,966 Exercise of stock options 20,300 Payment for fractional shares resulting from 4-for-3 stock split (1,266) (1,266) Unrealized gain on marketable securities - net 68,245 Net earnings 3,849,778 3,849,778 ------------ ------------ Balance at June 30, 1996 11,814,943 34,303,555 Issuance of common stock in connection with acquisition 157,500 Purchase of treasury stock $(700,000) (700,000) Unrealized gain on marketable securities - net 51,955 Net earnings 2,078,753 2,078,753 ------------ --------- ------------ BALANCE AT JUNE 30, 1997 $ 13,893,696 $(700,000) $ 35,891,763 ============ ========= ============
The accompanying notes are an integral part of this statement. F-6 38 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30,
1995 1996 1997 ------------- ------------- ------------- Cash flows from operating activities Net earnings $ 1,915,942 $ 3,849,778 $ 2,078,753 Adjustments to reconcile net earnings to net cash used in operating activities Depreciation and amortization 693,290 719,899 1,050,666 Deferred compensation 50,000 50,000 50,000 Deferred income tax benefit (31,000) (158,000) (119,000) Loss on sale of equipment 18,403 8,793 9,941 Provision for doubtful accounts 458,000 761,190 255,931 Changes in operating assets and liabilities, net of effects of acquisitions Decrease (increase) in accounts receivable (3,759,741) (2,540,656) 1,603,022 Increase in inventories (6,572,285) (3,435,627) (1,767,196) (Increase) decrease in prepaid expenses and other (184,100) 516,789 (615,364) (Decrease) increase in accounts payable 3,057,980 (1,237,895) (594,557) Increase (decrease) in accrued expenses 37,695 (124,638) 235,950 (Decrease) increase in income taxes payable 328,203 (91,732) (902,545) ----------- ----------- ----------- Net cash (provided by) used in operating activities (3,987,613) (1,682,099) 1,285,601 ----------- ----------- ----------- Cash flows from investing activities Increase in marketable securities (379,036) (59,943) Capital expenditures (908,153) (789,635) (943,352) Proceeds from the sale of equipment 20,000 12,047 42,867 Business acquisitions, net of cash acquired (4,742,249) Decrease (increase) in due from officers, net (18,689) 309,808 Increase in other assets (106,956) (6,328) (176,728) ----------- ----------- ----------- Net cash used in investing activities (1,013,798) (853,144) (5,879,405) ----------- ----------- ----------- Cash flows from financing activities Proceeds from public offering - net 17,139,966 Borrowings from line of credit 141,391,776 173,061,732 161,931,215 Payments of line of credit (136,774,193) (179,449,087) (155,834,207) Principal payments under equipment financing (434,854) (251,626) (289,727) (Payments) borrowings under term loans 669,417 (8,214,286) (214,286) Purchase of treasury stock (700,000) Proceeds from exercise of stock option 108,500 20,300 Payments for fractional shares (362) (1,266) ----------- ----------- ----------- Net cash provided by financing activities 4,960,284 2,305,733 4,892,995 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH (41,127) (229,510) 299,191 Cash and cash equivalents at beginning of year 434,798 393,671 164,161 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 393,671 $ 164,161 $ 463,352 ============= ============= ============= Supplemental cash flow disclosures: Interest paid $ 1,970,000 $ 1,472,000 $ 815,000 Income taxes paid 993,000 2,882,000 2,502,000 Supplemental schedule of noncash financing and investing activities: Equipment under capital leases $ 288,000 $ $ 531,561
The accompanying notes are an integral part of these statements. F-7 39 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1995, 1996 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily engaged in the distribution of semiconductors, capacitors, resistors, electromechanical devices, computers and computer subsystems, produced by others, for the manufacture and assembly of electronic products. In addition, the Company provides contract manufacturing services. Electronics parts distribution sales include exports made principally to customers located in Western Europe. For the years ended June 30, 1995, 1996 and 1997, export sales amounted to approximately $5,032,000, $4,963,000 and $4,102,000, respectively. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Jaco Electronics, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. 2. Revenue Recognition The Company recognizes revenue as products are shipped and title passes to customers. 3. Investments in Marketable Securities Investments in marketable securities consist of investments in mutual funds. Such investments have been classified as "available for sale securities" and are reported at fair market value which is inclusive of unrealized gains of approximately $114,245 and $188,200 in 1996 and 1997, respectively. Changes in the fair value of "available for sale securities" are classified as a separate component of shareholders' equity, net of any related deferred tax effects. 4. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and average cost methods. F-8 40 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 5. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful life of the assets. 6. Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired is amortized over periods of ten to forty years using the straight-line method. The Company periodically reviews and evaluates whether there has been a permanent impairment in the value of its intangibles. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. 7. Income Taxes Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and net operating loss carryforwards for which income tax expenses or benefits are expected to be realized in future years. A valuation allowance has been established to reduce deferred tax assets attributable to a subsidiary of the Company, as it is more likely than not that all, or some portion, of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 8. Earnings Per Common Share Earnings per common share is based upon the weighted average number of shares of common stock outstanding during the year and reflects the dilutive effect of outstanding stock options. All per share information has been restated to reflect the Company's fiscal 1995 stock dividend and stock split. F-9 41 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 9. Financial Instruments and Business Concentrations Financial instruments which potentially subject the Company to concentration of credit risk consist principally of accounts receivable. Concentration of credit risk with respect to accounts receivable is generally mitigated due to the large number of entities comprising the Company's customer base, their dispersion across geographic areas and the Company's policy of maintaining credit insurance. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Fair Value of Financial Instruments," requires disclosure of the estimated fair value of an entity's financial instrument assets and liabilities. The Company's principal financial instrument consists of a revolving credit facility, expiring on September 13, 1998, with two participating banks. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rate approximates the current prevailing interest rate. The Company generally purchases products from manufacturers pursuant to nonexclusive distributor agreements. During the year ended June 30, 1997, the Company's top three suppliers accounted for 18%, 9.5% and 8%, respectively, of net sales. As is common in the electronics distribution industry, from time to time the Company has experienced terminations of relationships with suppliers. There can be no assurance that, in the event a supplier cancelled its distributor agreement with the Company, the Company will be able to replace the sales with sales of other products. 10. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-10 42 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 11. Accounting Pronouncements Not Yet Adopted In February 1997, the Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The adoption of this standard is not expected to have a material impact on the disclosure of earnings per share in the financial statements. NOTE B - INVENTORY Inventories consist of the following:
June 30, -------------------------- 1996 1997 ----------- ----------- Finished goods and goods held for resale $27,025,508 $30,129,201 Work-in-process 477,000 455,000 Raw materials 2,587,000 2,727,000 ----------- ----------- $30,089,508 $33,311,201 =========== ===========
F-11 43 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE C - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
Useful June 30, life ------------------------ in years 1996 1997 ---------- ---------- ---------- Land, building and improvements 10 to 30 $1,419,126 $1,468,708 Machinery and equipment 3 to 8 5,193,265 5,247,170 Transportation equipment 3 to 5 108,370 51,050 Leasehold improvements 5 to 10 661,479 569,515 ---------- ---------- 7,382,240 7,336,443 Less accumulated depreciation and amortization (including $688,957 in 1996 and $272,500 in 1997 of capitalized lease amortization) 3,155,623 2,327,398 ---------- ---------- $4,226,617 $5,009,045 ========== ==========
Included in machinery and equipment are assets recorded under capitalized leases at June 30, 1996 and 1997 for $943,038 and $949,695, respectively. NOTE D - INCOME TAXES The components of the Company's provision for income taxes is as follows:
June 30, --------------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Federal Current $ 1,063,000 $ 2,176,000 $ 1,262,000 Deferred (31,000) (158,000) (119,000) ----------- ----------- ----------- 1,032,000 2,018,000 1,143,000 State 271,000 582,000 272,000 ----------- ----------- ----------- $ 1,303,000 $ 2,600,000 $ 1,415,000 =========== =========== ===========
F-12 44 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE D - INCOME TAXES (CONTINUED) The Company's effective income tax rate differs from the statutory U.S. Federal income tax rate as a result of the following:
June 30, ------------------------------- 1995 1996 1997 ------ ------ ------ Statutory Federal tax rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 5.6 6.0 5.1 Sales expense for which no tax benefit arises 1.7 .1 1.8 Other (.8) .2 (.4) ------ ------ ------ Effective tax rate 40.5% 40.3% 40.5% ====== ====== ======
Deferred income tax assets and liabilities resulting from differences between accounting for financial statement purposes and tax purposes are summarized as follows:
1996 1997 ----------- ----------- Deferred tax assets Net operating loss carryforwards $ 409,000 $ 409,000 Allowance for bad debts 347,000 308,000 Inventory valuation 582,000 691,000 Deferred compensation 219,000 237,000 Other deferred assets 24,000 65,000 ----------- ----------- 1,581,000 1,710,000 Deferred tax liabilities Depreciation (85,000) (104,000) Other (47,000) (50,000) Unrealized gain on marketable securities available for sale (46,000) (68,000) ----------- ----------- 1,403,000 1,488,000 Valuation allowance (506,000) (494,000) ----------- ----------- Net deferred tax asset $ 897,000 $ 994,000 =========== ===========
F-13 45 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE D - INCOME TAXES (CONTINUED) At June 30, 1997, the Company, through an acquisition, has available a Federal net operating loss carryforward of approximately $1,121,000. Such net operating loss is subject to certain limitations and expires in varying amounts during the fiscal years 2007 through 2009. Further, the Company has established a valuation allowance with respect to the net deferred tax assets attributable to this acquired subsidiary. During fiscal 1997, $12,000 of such net deferred tax asset was recognized as a reduction of the excess of cost over net assets acquired attributable to the acquired subsidiary. The subsequent realization of the majority of such deferred tax asset will result in the reduction of the excess of cost over net assets acquired. NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS Debt and capitalized lease obligations are as follows:
June 30, --------------------------- 1996 1997 ----------- ----------- Term loans and revolving line of credit (a) $ 8,186,172 $14,821,883 Other term loans (b) 424,721 358,073 Equipment notes (c) 373,608 250,165 Capitalized lease obligations (d) 314,945 847,328 ----------- ----------- 9,299,446 16,277,449 Less amounts representing interest on capitalized leases 34,094 125,661 ----------- ----------- 9,265,352 16,151,788 Less current maturities 474,082 599,239 ----------- ----------- $ 8,791,270 $15,552,549 =========== ===========
F-14 46 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED) (a) Term Loans and Revolving Line of Credit Facility 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, 1998. Under a verbal agreement effective June 1, 1997, borrowings under the credit facility bear interest at the average 30-day LIBOR rate plus 1%. The outstanding balance on the revolving line of credit facility, $14,018,312 at June 30, 1997, bears an interest rate of 6.69%. Pursuant to the same agreement, at June 30, 1997, a term loan with a remaining balance of $803,571 requires monthly principal payments of $17,857, together with interest through September 13, 1998, with a final payment of $553,600 on September 13, 1998. 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, and prohibits the payment of cash dividends. The agreement also provides for the issuance of letters of credit by the banks on the Company's behalf. At June 30, 1997, $500,000 of such letters of credit were outstanding. (b) Other Term Loans Other term loans as of June 30, 1997 are as follows:
Monthly Date of loan Balance Term payment ------------ --------- --------- ------- March 16, 1995 $ 35,207 60 months $1,160 March 16, 1995 136,685 84 months 2,730 March 16, 1995 186,181 84 months 4,216 --------- $ 358,073 =========
The above loans are collateralized by the related equipment acquired, having a carrying value of approximately $422,000 at June 30, 1997 and $464,000 at June 30, 1996. The agreements contain, among other things, restrictive covenants on one of the Company's subsidiaries, which place limitations on: (i) consolidations, mergers and acquisitions, (ii) additional indebtedness, F-15 47 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED) encumbrances and guarantees, (iii) loans to shareholders, officers or directors, (iv) dividends and stock redemptions, and (v) transactions with affiliates, all as defined in the agreements. The loans bear interest payable monthly, at 6%, 5.5% and 1.5% over the bank's prime rate, respectively. (c) Equipment Notes The equipment notes are payable through September 1999, bearing implicit interest rates from 7.55% to 9.68% and are collateralized by the related equipment. (d) Capitalized Lease Obligations The Company leases certain equipment under agreements accounted for as capital leases. During fiscal 1997, the Company, through one of its subsidiaries, leased approximately $532,000 of equipment for its contract manufacturing business which were accounted for as capital leases. The obligations for the equipment require the Company to make monthly payments through June 2002, with implicit interest rates from 7.07% to 8.5%. The following is a summary of the aggregate annual maturities of long-term debt and capitalized lease obligations as of June 30, 1997:
Long-term Capitalized debt leases ------------- ----------- Year ending June 30, 1998 $ 402,274 $249,466 1999 14,808,036 226,345 2000 86,261 151,532 2001 73,979 130,174 2002 59,572 89,810 ------------- -------- $ 15,430,122 $847,327 ============= ========
F-16 48 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE F - COMMITMENTS AND CONTINGENCIES 1. Leases The Company leases certain office and warehouse facilities under noncancellable operating leases. The leases also provide for the payment of real estate taxes and other operating expenses of the buildings. The minimum annual lease payments under such leases are as follows:
Year ending June 30, 1998 $ 961,946 1999 779,450 2000 732,116 2001 681,861 2002 678,184 Thereafter 1,046,882 ---------- $4,880,439 ==========
In addition, the Company leases office and warehouse facilities from a partnership owned by two officers and directors of the Company. The lease expires in December 2003 and requires minimum annual lease payments as follows:
Year ending June 30, 1998 $ 542,430 1999 569,550 2000 598,000 2001 627,900 2002 659,327 Thereafter 1,046,882 ---------- $4,044,089 ==========
The Company's rent expense was approximately $571,000, $528,000 and $602,000 for the years ended June 30, 1995, 1996 and 1997, respectively, in connection with the above lease. Rent expense on office and warehouse facilities leases for the years ended June 30, 1995, 1996 and 1997 was approximately $909,000, $846,000 and $962,000, respectively, net of sublease income of approximately $135,000, $120,000 and $115,000, respectively. F-17 49 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE F - COMMITMENTS AND CONTINGENCIES (CONTINUED) 2. Other Leases The Company also leases various office equipment and automobiles under noncancellable operating leases expiring through January 2002. The minimum rental commitments required under these leases at June 30, 1997 are as follows:
Year ending June 30, 1998 $286,073 1999 185,871 2000 97,318 2001 9,773 2002 756 -------- $579,791 ========
3. Employment Agreement Effective July 1, 1993, the Company entered into an employment agreement with its Chairman expiring July 1, 1997, pursuant to which the Chairman receives a base annual salary of $325,000. In addition, the Chairman will be entitled to an annual bonus equal to 4% of earnings before income taxes, if earnings for a particular fiscal year exceed $1,000,000 or 6% if earnings before income taxes are in excess of $2,500,000. The agreement also provides for the continuation of the deferred compensation arrangement first established in fiscal 1985, whereby $50,000 per year has been accrued and becomes payable in its entirety no later than January 15 of the year next following the last to occur of the following events: (1) the Chairman's attainment of age 60 (fiscal 1999) or (2) cessation of the Chairman's employment with or without cause after July 1, 1993. In the event of a change in control resulting in termination of the Chairman's employment, the Chairman will receive between $450,000 and $600,000 depending on the date of termination. For the years ended June 30, 1995, 1996 and 1997, bonuses of approximately $193,000, $387,000 and $210,000, respectively, were earned pursuant to the Chairman's employment agreement. Presently, the Company is in negotiations with its Chairman to extend his employment agreement. F-18 50 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE F - COMMITMENTS AND CONTINGENCIES (CONTINUED) 4. Other Matters 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 results of operations or financial position. NOTE G - RETIREMENT PLAN The Company maintains a 401(k) Plan that is available to all employees, to which the Company contributes up to a maximum of 1% of each employee's salary. For the years ended June 30, 1995, 1996 and 1997, the Company contributed to this plan approximately $90,000, $104,000 and $91,000, respectively. NOTE H - SHAREHOLDERS' EQUITY On October 20, 1995, the Company completed a public offering of 1,600,000 shares of its common stock at $12.75 per share. The offering consisted of 1,325,000 shares offered by the Company and 275,000 shares offered by certain officers and directors of the Company. On December 8, 1995, the underwriters of the public offering exercised a portion of their overallotment option for an additional 160,000 shares at a price per share equal to that of the public offering. The Company's net proceeds from the public offering of $17,139,966, after deducting the underwriters' commission and costs of the public offering, were used to reduce its bank indebtedness. In connection with the public offering, the Company also issued stock warrants, to the representative underwriters, to purchase up to 70,000 shares of common stock at an exercise price per share equal to 180% of the public offering price, which expire on October 20, 1999. On February 3, 1995, the Company declared a 10% stock dividend which was paid on March 10, 1995. Further, on August 30, 1995, the Company authorized a 4-for-3 stock split. The 4-for-3 split was distributed on October 3, 1995 to shareholders of record as of September 22, 1995. All references to the number of common shares and earnings per common share have been restated to reflect the 10% stock dividend and the 4-for-3 stock split. F-19 51 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE H - SHAREHOLDERS' EQUITY (CONTINUED) The Company has stock option plans which provide for the granting of stock options to employees, directors and officers under the following stock option plans: In November 1981, the Company approved the adoption of a qualified incentive stock option plan, hereinafter referred to as the "1981 Plan." The stock options granted under the 1981 Plan were generally exercisable for a period of five years at a price not less than the market value on the date of grant. The 1981 Plan terminated in November 1991. Options granted prior to expiration of the 1981 Plan which, by their terms, do not expire until after November 1991 remain outstanding in accordance with their terms until their individual expiration dates. During fiscal 1996, all outstanding options under the 1981 Plan had been exercised. In December 1992, the Board of Directors approved the adoption of a nonqualified stock option plan, known as the "1993 Non-Qualified Stock Option Plan," hereinafter referred to as the "1993 Plan." The Board of Directors or Plan Committee is responsible for the granting of and price of these options. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. The options expire five years from the date of grant and are exercisable over the period stated in each option. The Company has reserved 293,333 shares of common stock for the 1993 Plan, all of which are outstanding. In October 1993, the Board of Directors approved the adoption of a stock option plan for outside directors, known as the "1993 Stock Option Plan for Outside Directors," hereinafter referred to as the "Outside Directors Plan." Each outside director who was serving as of December 31, 1993 was granted a nonqualified stock option to purchase 14,667 shares of the Company's common stock at the fair market value on the date of grant. The Company has reserved 146,667 shares of common stock for the Outside Directors Plan of which 46,932 options are outstanding. Of the 99,735 options currently available for grant under the Outside Directors Plan, each person who is an outside director on December 31 of each calendar year subsequent to 1993 shall be granted options to purchase 2,933 shares of the Company's common stock annually. Granted options shall expire upon the earlier of five years after the date of grant or one year following the date on which the outside director ceases to serve in such capacity. In June 1997, the Company appointed an additional outside director to the Board of Directors who received 10,000 options to purchase the Company's common stock at the fair market value on the date of grant. These options were not granted pursuant to any stock option plan. F-20 52 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE H - SHAREHOLDERS' EQUITY (CONTINUED) Outstanding options granted to employees, directors and officers for the last three fiscal years are summarized as follows:
Incentive Nonqualified Weighted stock options stock options average ----------------------------- ----------------------------- exercise Price range Shares Price range Shares price ------------ ---------- --------------- --------- --------- Outstanding at June 30, 1994 $1.02 - 2.65 43,817 $ 4.77 - 5.80 129,433 $ 5.06 Granted $ 4.94 5,867 4.94 Exercised $2.65 (41,067) ------- --------- Outstanding at June 30, 1995 $1.02 2,750 $ 4.77 - 5.80 135,300 5.06 Granted $ 11.50 - 12.75 68,366 12.64 Exercised $1.02 (2,750) $ 4.77 (3,666) 4.77 -------- --------- Outstanding at June 30, 1996 - 200,000 7.65 Granted $ 7.00 - 8.50 150,265 7.15 Exercised -------- --------- OUTSTANDING AT JUNE 30, 1997 - 350,265 7.44 ======== ========= AMOUNTS EXERCISABLE AT JUNE 30, 1997 - 205,866 7.68 ======== =========
F-21 53 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE H - SHAREHOLDERS' EQUITY (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable nonqualified stock options:
Weighted- Number average Weighted- outstanding remaining average and contractual exercise Range of exercise prices exercisable life (months) price ------------------------ ----------- ------------- -------- $4.77 - $ 9.00 137,500 22 months $ 5.20 $9.01 - $ 12.75 68,366 41 months $ 12.64
The weighted-average option fair value on the grant date was $3.10 and $1.82 for options issued during the years ended June 30, 1996 and 1997, respectively. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"); it applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the Plan and does not recognize compensation expense for such Plan. If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company's reported net earnings and earnings per share would be reduced to the pro forma amount indicated below for the years ended June 30:
1996 1997 ------------- ------------- Net earnings As reported $ 3,849,778 $ 2,078,753 Pro forma 3,639,117 1,805,602 Earnings per common share As reported $ 1.08 $ .53 Pro forma 1.02 .46
F-22 54 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE H - SHAREHOLDERS' EQUITY (CONTINUED) These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before fiscal 1996. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the fiscal years ended June 30, 1996 and 1997, respectively: expected volatility of 25% for both years; risk-free interest rates of 5.67% and 6.32%; and expected term of 3 years for both years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. In April 1996, the Company announced that its Board of Directors has authorized the purchase of up to 250,000 shares of its common stock or approximately 6.3% of the then outstanding shares, under a stock repurchase program. The purchases may be made by the Company from time to time on the open market at the Company's discretion. During fiscal 1997, the Company purchased 87,500 shares of its common stock for aggregate consideration of $700,000. In June 1997, the Company's Board of Directors approved the adoption of a restricted stock plan. The plan, which is subject to shareholders' approval at the next scheduled meeting (anticipated to be held in December 1997), enables the Board of Directors or Plan Committee to have sole discretion and authority to determine who may purchase restricted stock, the number of shares, the price to be paid and the restrictions placed upon the stock. Pursuant to this plan, the Board of Directors has authorized, subject to shareholder approval, the purchase of 90,000 shares of the Company's common stock by certain employees at a purchase price of $1.00 per share. Shares purchased are subject to a four-year vesting period. F-23 55 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE I - ACQUISITIONS During August 1996 and January 1997, the Company purchased QPS Electronics, Inc. and Corona Electronics, Inc., respectively, both of which are electronic component distributors. Aggregate consideration paid for the acquisitions approximated $4,700,000, of which $157,500 was paid through the issuance of 20,000 shares of the Company's common stock. These acquisitions have been accounted for by the purchase method and, as such, the fair value of the assets and liabilities acquired have been recorded on the date of the respective acquisitions. The respective results of their operations are included with those of the Company from the date of acquisition. The excess of the purchase price over the fair value of the assets acquired, approximately $3,053,000, is being amortized using the straight-line method over a period of twenty years. Pro forma historical results of operations are not presented, as such results would not be materially different from the historical results of the Company. NOTE J - SEGMENT INFORMATION The Company has two business segments: electronics parts distribution and contract manufacturing. The following is a summary of selected consolidated information for the electronics components distribution and contract manufacturing segments.
Year ended June 30, ---------------------------------- 1995 1996 1997 -------- -------- -------- (in thousands) Sales Electronics components distribution $126,545 $156,303 $145,091 Contract manufacturing 12,138 10,846 10,007 -------- -------- -------- $138,683 $167,149 $155,098 ======== ======== ======== Operating profit Electronics components distribution $ 4,666 $ 7,640 $ 3,994 Contract manufacturing 563 157 471 -------- -------- -------- $ 5,229 $ 7,797 $ 4,465 ======== ======== ========
F-24 56 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE J - SEGMENT INFORMATION (CONTINUED)
Year ended June 30, ------------------------------- 1995 1996 1997 ------- ------- ------- (in thousands) Identifiable assets Electronics components distribution $47,909 $53,600 $61,515 Contract manufacturing 8,414 7,543 8,481 ------- ------- ------- $56,323 $61,143 $69,996 ======= ======= ======= Capital expenditures Electronics components distribution $ 342 $ 524 $ 810 Contract manufacturing 566 266 133 ------- ------- ------- $ 908 $ 790 $ 943 ======= ======= ======= Depreciation and amortization Electronics components distribution $ 397 $ 422 $ 742 Contract manufacturing 296 298 309 ------- ------- ------- $ 693 $ 720 $ 1,051 ======= ======= =======
NOTE J - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ----------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1996 1996 1997 1997 ------------ ------------ ----------- ----------- NET SALES $38,321,790 $38,194,939 $38,661,610 $39,919,406 GROSS PROFIT 8,115,502 8,011,793 7,863,345 8,113,933 NET EARNINGS 787,641 621,281 347,338 322,493 EARNINGS PER COMMON SHARE NET EARNINGS PER COMMON SHARE $ .20 $ .16 $ .09 $ .08 =========== =========== =========== ===========
F-25 57 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995, 1996 and 1997 NOTE J - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Quarter ended ----------------------------------------------------------- September 30, December 31, March 31, June 30, 1995 1995 1996 1996 ------------- ------------ ----------- ----------- Net sales $40,083,485 $43,589,877 $43,176,834 $40,299,189 Gross profit 8,541,214 8,821,196 8,633,057 8,048,691 Net earnings 807,951 1,079,907 1,112,740 849,180 Earnings per common share Net earnings per common share $ .32 $ .30 $ .28 $ .21 =========== =========== =========== ===========
F-26 58 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors and Shareholders JACO ELECTRONICS, INC. In connection with our audit of the consolidated financial statements of Jaco Electronics, Inc. and Subsidiaries referred to in our report dated August 18, 1997, which is included in this annual report on Form 10-K, we have also audited Schedule II for each of the three years in the period ended June 30, 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Melville, New York August 18, 1997 F-27 59 Jaco Electronics, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 1995, 1996 and 1997
Column A Column B Column C Column D Column E -------- -------- ----------------------------- -------- -------- Additions ----------------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts - Deductions - at end of Description of period expenses describe describe period ----------- ------------- ------------- ------------- ------------- -------- Allowance for doubtful accounts Year ended June 30, 1995 $ 610,000 $ 458,000 $ 104,000(b) $ 562,000(a) $610,000 ============= ============= ============= ============= ======== Year ended June 30, 1996 $ 610,000 $ 761,000 $ 153,000(b) $ 766,000(a) $758,000 ============= ============= ============= ============= ======== Year ended June 30, 1997 $ 758,000 $ 256,000 $ 95,000(b)(c) $ 263,000(a) $846,000 ============= ============= ============= ============= ========
(a) Represents write-offs of uncollectible accounts. (b) Recoveries of accounts. (c) Includes balance attributable to acquired subsidiary. F-28 60 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- Ex-21.1 Subsidiaries of the Company Ex-23.1 Consent of Grant Thornton LLP Ex-27 Financial Data Schedule EX-21.1 2 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 The following subsidiaries, all of which were 100% directly owned, were included in the Registrant's consolidated financial statements. NAME OF SUBSIDIARY STATE OR JURISDICTION OF INCORPORATION - ------------------ -------------------------------------- Distel, Inc. California RC Components, Inc. Massachusetts Micatron Inc. New York Quality Components, Inc. Texas Jaco Overseas, Inc. Virgin Islands Nexus Custom Electronics, Inc. New Jersey Jaco Electronics Canada, Inc. Canada Corona Electronics, Inc. California EX-23.1 3 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated August 18, 1997 accompanying the consolidated financial statements and schedule of Jaco Electronics, Inc. as of June 30, 1996 and 1997 and for each of the three years in the period ended June 30, 1997 contained in this annual report of Jaco Electronics, Inc. on Form 10-K for the year ended June 30, 1997. We hereby consent to the incorporation by reference of the aforementioned reports in the Registration Statement of Jaco Electronics, Inc. on Form S-8/S-3 (File No. 33-89994, effective March 3, 1995). GRANT THORNTON LLP Melville, New York September 25, 1997 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE AUDITED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITE ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 463,352 627,179 22,854,292 846,082 33,311,201 59,047,802 7,336,443 2,327,398 69,995,678 17,901,366 16,202,549 0 0 397,572 35,494,191 69,995,678 155,097,745 155,097,745 122,993,172 122,993,172 27,639,567 0 971,253 3,493,753 1,415,000 2,078,753 0 0 0 2,078,753 0.53 0.53
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