UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number 0-5896
JACO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1978958
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
145 OSER AVENUE, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 273-5500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at February 7, 2003
Common Stock, $0.10 Par Value 5,770,032 (excluding 655,700 shares
held as treasury stock)
FORM 10-Q December 31, 2002
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
2002 2002
---- ----
ASSETS
Current Assets
Cash $ 351,568 $ 324,447
Restricted cash 800,000 0
Marketable securities 589,982 650,267
Accounts receivable - net 26,474,040 29,095,269
Inventories 37,914,936 42,611,225
Prepaid expenses and other 851,347 1,183,043
Prepaid and refundable income taxes 3,263,001 2,440,055
Deferred income taxes 2,016,000 2,017,000
--------- ---------
Total current assets 72,260,874 78,321,306
Property, plant and equipment - net 5,705,510 6,708,828
Deferred income taxes 437,000 434,000
Excess of cost over net assets acquired - net 22,363,296 22,363,296
Other assets 2,698,980 2,807,451
--------- ---------
Total assets $103,465,660 $110,634,881
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2002
Page 3
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
2002 2002
---- ----
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 22,990,574 $ 25,289,554
Current maturities of long-term debt and
capitalized lease obligations 809,331 897,419
------- -------
Total current liabilities 23,799,905 26,186,973
Long-term debt and capitalized lease obligations 31,741,122 34,879,766
Deferred compensation 925,000 900,000
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 100,000 shares,
$10 par value; none issued
Common stock - authorized, 20,000,000,
$.10 par value; 6,425,732 shares issued
and 5,770,032 and 5,807,432 shares
outstanding, respectively 642,573 642,573
Additional paid-in capital 25,152,010 25,152,010
Retained earnings 23,574,399 25,102,628
Accumulated other comprehensive loss (66,230) (24,554)
Treasury stock (2,303,119) (2,204,515)
---------- ----------
Total shareholders' equity 46,999,633 48,668,142
---------- ----------
Total liabilities and shareholders' equity $103,465,660 $110,634,881
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2002
Page 4
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
2002 2001
---- ----
NET SALES $54,180,114 $42,405,312
COST AND EXPENSES
Cost of goods sold 47,265,256 35,803,750
---------- ----------
Gross profit 6,914,858 6,601,562
Selling, general and administrative expenses 7,348,081 8,193,330
--------- ---------
Operating loss (433,223) (1,591,768)
Interest expense 398,796 539,227
------- -------
Loss before income taxes (832,019) (2,130,995)
Income tax benefit (291,000) (810,000)
-------- --------
NET LOSS $ (541,019) $(1,320,995)
=========== ===========
Net loss per common share:
Basic and Diluted $ (0.09) $ (0.23)
=========== ===========
Weighted average common shares outstanding:
Basic and Diluted 5,791,717 5,707,459
========= =========
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2002
Page 5
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31,
(UNAUDITED)
2002 2001
---- ----
NET SALES $103,223,769 $91,835,835
COST AND EXPENSES
Cost of goods sold 89,961,447 77,218,772
---------- ----------
Gross profit 13,262,322 14,617,063
Selling, general and administrative expenses 14,813,444 17,585,675
---------- ----------
Operating loss (1,551,122) (2,968,612)
Interest expense 800,107 1,308,931
------- ---------
Loss before income taxes (2,351,229) (4,277,543)
Income tax benefit (823,000) (1,454,000)
-------- ----------
NET LOSS $(1,528,229) $(2,823,543)
=========== ===========
Net loss per common share:
Basic and Diluted $ (0.26) $ (0.49)
=========== ===========
Weighted average common shares outstanding:
Basic and Diluted 5,799,574 5,704,198
========= =========
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2002
Page 6
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
Additional
paid-in Retained
Shares Amount capital earnings
--------------- -------------- -------------- --------------
Balance at July 1, 2002 6,425,732 $ 642,573 $ 25,152,010 $ 25,102,628
Net loss (1,528,229)
Unrealized loss on marketable
securities, net of deferred taxes
Purchase of treasury stock
------------ ----------- -------------- --------------
Balance at December 31, 2002 6,425,732 $ 642,573 $ 25,152,010 $ 23,574,399
============ =========== ============== ==============
Accumulated
other Total
comprehensive Treasury shareholders'
loss stock equity
------------------ ---------------- -----------------
Balance at July 1, 2002 $ (24,554) $ (2,204,515) $ 48,668,142
Net loss (1,528,229)
Unrealized loss on marketable
securities, net of deferred taxes (41,676) (41,676)
Purchase of treasury stock (98,604) (98,604)
------------------ ---------------- -----------------
Balance at December 31, 2002 $ (66,230) $ (2,303,119) $ 46,999,633
================== ================ =================
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2002
Page 7
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31,
(UNAUDITED)
2002 2001
---- ----
Cash flows from operating activities
Net loss $ (1,528,229) $ (2,823,543)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 1,122,473 1,189,926
Deferred compensation 25,000 25,000
Deferred income tax expense (benefit) 23,000 (14,968)
Gain on sale of equipment (7,048)
Provision for doubtful accounts 389,200 181,300
Changes in operating assets and liabilities,
Decrease in operating assets - net 6,437,068 21,790,519
Decrease in operating liabilities - net (199,417) (6,591,009)
-------- ----------
Net cash provided by operating activities 6,269,095 13,750,177
-------- ----------
Cash flows from investing activities
Capital expenditures (50,655) (159,169)
Proceeds from sale of equipment 37,673
Purchase of marketable securities (6,391) (11,072)
Business acquisitions - deferred payments (2,099,563) (193,297)
Decrease (increase) in other assets 39,971 (328,852)
------ --------
Net cash used in investing activities (2,116,638) (654,717)
---------- --------
Cash flows from financing activities
Borrowings under line of credit 92,969,790 76,592,648
Payments under line of credit (95,723,054) (89,150,168)
Funding of compensating balance (800,000)
Principal payments under equipment financing
and term loans (473,468) (555,337)
Purchase of treasury stock (98,604)
Proceeds from exercise of stock options 25,000
------ ------
Net cash used in financing activities (4,125,336) (13,087,857)
---------- -----------
NET INCREASE IN CASH 27,121 7,603
------ -----
Cash at beginning of period 324,447 89,523
------- ------
Cash at end of period $ 351,568 $ 97,126
========= ========
Supplemental schedule of non-cash financing and
investing activities:
Equipment acquired under capital lease obligations $ 396,685
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q December 31, 2002
Page 8
JACO ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
1) The accompanying condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring accrual adjustments, which
are in the opinion of management, necessary for a fair presentation of the
consolidated financial position and the results of operations of Jaco
Electronics, Inc. and its subsidiaries (the "Company") at and for the
periods presented. Such financial statements do not include all the
information or footnotes necessary for a complete presentation. Therefore,
they should be read in conjunction with the Company's audited consolidated
statements for the fiscal year ended June 30, 2002 and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2002. The results of operations for the interim periods are
not necessarily indicative of the results for the entire year.
2) The Company's credit agreement with its banks, as amended, provides the
Company with a $45,000,000 revolving line of credit facility. The credit
facility is based principally on eligible accounts receivable and
inventories of the Company as defined in the agreement. The agreement was
amended on September 23, 2002 to (i) extend the maturity date to March 14,
2004, (ii) reduce the credit facility line from $70 million to $45 million,
and (iii) change the requirements of certain financial covenants. The
agreement also requires the Company to establish a $800,000 compensating
balance arrangement with its banks in an interest bearing account, which
was funded during the quarter ended December 31, 2002. The interest rate
was based on the average 30-day LIBOR plus 1% to 2.25% depending on the
Company's performance for the immediately preceding four fiscal quarters
measured by a specified financial ratio. Effective October 1, 2002, the
rate converted to the average 30-day LIBOR plus 2.25% to 2.75%. Borrowings
under this facility are collateralized by substantially all of the assets
of the Company.
3) For interim financial reporting purposes, the Company uses the gross profit
method for computing inventories, which consists principally of goods held
for resale.
4) On September 18, 2001, the Company announced that its Board of Directors
authorized the repurchase of up to 250,000 shares of its outstanding common
stock. Purchases may be made from time to time in market or private
transactions at prevailing market prices. The Company made purchases of
37,400 shares of its common stock from November 5, 2002 through December
31, 2002 for aggregate consideration of $98,604.
5) In June 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"),
"Accounting for Costs Associated with Exit or Disposal Activities," which
addresses accounting for restructuring and similar costs. SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues Task
Force Issue No. 94-3. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS
No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized. SFAS no. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Management
believes that the adoption of SFAS No. 146 will not have a material impact
on its results of operations or financial position.
6) In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The provisions of SFAS 148 are effective for fiscal years
ending after December 15, 2002 and the interim disclosure provisions are
effective for
FORM 10-Q December 31, 2002
Page 9
interim periods beginning after December 15, 2002. The Company currently
plans to continue to apply the intrinsic-value based method to account for
stock options and will comply with the new disclosure requirements
beginning with its quarter ending March 31, 2003.
7) On June 6, 2000, the Company acquired all of the issued and outstanding
shares of common stock, no par value, of Interface Electronics Corp.
("Interface"), a distributor of electronic parts, components and equipment,
located in Massachusetts. The purchase price was $15,400,000 payable in
cash at the closing, plus the assumption of certain liabilities and a
deferred payment of $5,002,860, which has been fully satisfied as of
December 31, 2002. The acquisition has been accounted for as a purchase and
the operations of Interface have been included in the Company's Statement
of Operations since the date of acquisition. Included in other assets on
the Company's condensed consolidated balance sheets are the costs of the
identifiable intangible assets acquired, principally an employment
agreement which is being amortized on a straight-line basis over five
years, and a franchise agreement which was being amortized on a
straight-line basis over fifteen years until the Company's adoption of
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"),
"Goodwill and Other Intangible Assets," on July 1, 2001. The excess of the
purchase price and related expenses over the net tangible and identifiable
intangible assets acquired amounted to approximately $19,703,000 at
December 31, 2002, and was being amortized on a straight-line basis over
twenty years until the Company's adoption of SFAS No. 142.
8) Total comprehensive income and its components for the three and six months
ended December 31, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- ----------------------------------
2002 2001 2002 2001
-------------- -------------- ------------- ---------------
Net loss $(541,019) $(1,320,995) $(1,528,229) $(2,823,543)
Unrealized gain (loss)
on marketable securities 31,302 50,016 (66,676) (59,017)
Deferred tax (expense) benefit (12,000) (18,000) 25,000 21,032
-------------- -------------- ------------- ---------------
Comprehensive loss $(521,717) $(1,288,979) $(1,569,905) $(2,861,528)
============== ============== ============= ===============
Accumulated other comprehensive income is comprised of unrealized gains and losses on marketable securities,
net of the related tax effect.
FORM 10-Q December 31, 2002
Page 10
9) The weighted average common shares outstanding, net of treasury shares,
used in the Company's basic and diluted earnings per share computations on
its condensed consolidated statements of operations were 5,791,717 and
5,799,574 for the three and six months ended December 31, 2002,
respectively, compared to 5,707,459 and 5,704,198 for the three and six
months ended December 31, 2001, respectively. Excluded from the calculation
of earnings per share are options to purchase 1,125,750 and 948,920 shares
of the Company's common stock for the three and six months ended December
31, 2002 and 2001, respectively, as their inclusion would have been
antidilutive. Common stock equivalents for stock options are calculated
using the treasury stock method.
10) The Company has two reportable segments: electronics parts distribution and
contract manufacturing. The Company's primary business activity is
conducted with small and medium size manufacturers, located in North
America, that produce electronic equipment used in a variety of industries.
Information pertaining to the Company's operations in different geographic
areas for the three and six months ended December 31, 2002 and 2001 is not
considered material to the Company's financial statements. The Company's
chief operating decision maker utilizes net sales and net earnings
information in assessing performance and making overall operating decisions
and resource allocations. The accounting policies of the operating segments
are the same as those described in the summary of significant accounting
policies included in the Company's annual report to shareholders for the
fiscal year ended June 30, 2002. Information about the Company's segments
is as follows:
FORM 10-Q December 31, 2002
Page 11
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
Net sales from external customers
Electronics components distribution $49,748 $38,163 $95,835 $80,601
Contract manufacturing 4,432 4,242 7,389 11,235
----- ----- ----- ------
$54,180 $42,405 $103,224 $91,836
======= ======= ======== =======
Intersegment net sales
Electronics components distribution $ 74 $ 54 $ 114 $ 169
Contract manufacturing _____ _____ _____ _____
$ 74 $ 54 $ 114 $ 169
========= ========= ======== ========
Operating (loss) profit
Electronics components distribution $ (439) $ (1,451) $ (1,258) $ (3,025)
Contract manufacturing 6 (141) (293) 56
- ---- ---- --
$ (433) $ (1,592) $ (1,551) $ (2,969)
====== ======== ======== ========
Interest expense
Electronics components distribution $ 287 $ 403 $ 575 $ 1,007
Contract manufacturing 112 136 225 302
--- --- --- ---
$ 399 $ 539 $ 800 $ 1,309
======= ======= ========== ==========
Loss before income taxes
Electronics components distribution $ (726) $ (1,853) $ (1,833) $ (4,031)
Contract manufacturing (106) (278) (518) (247)
---- ---- ---- ----
$ (832) $ (2,131) $ (2,351) $ (4,278)
========= =========== =========== ===========
Identifiable assets
Electronics components distribution $91,642 $99,884 $91,642 $99,884
Contract manufacturing 11,824 14,087 11,824 14,087
------ ------ ------ ------
$103,466 $113,971 $103,466 $113,971
======== ======== ======== ========
Capital expenditures
Electronics components distribution $ 24 $ 58 $ 51 $ 128
Contract manufacturing
31 31
-- -- -- --
$ 24 $ 89 $ 51 $ 159
======= ======= ======= ========
Depreciation and amortization
Electronics components distribution $ 354 $ 373 $ 707 $ 742
Contract manufacturing 209 225 415 448
--- --- --- ---
$ 563 $ 598 $ 1,122 $ 1,190
======== ======== ========== ==========
FORM 10-Q December 31, 2002
Page 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement under the Private Securities Litigation Reform Act of
1995: Certain statements contained in this report or in other written or oral
statements made from time to time by the Company may contain forward-looking
statements as defined in the Private Securities Litigation Act of 1995. Such
statements may use words such as "anticipate," "estimate," "expect," "believe,"
"may," "intend" and similar words or terms. Although we believe that the
expectations in such forward-looking statements are reasonable, we can give no
assurance that such expectations will prove to have been correct. The
forward-looking statements are based upon a number of assumptions and estimates
that, while presented with specificity and considered reasonable by us, are
inherently subject to significant business, economic and competitive risks,
uncertainties and contingencies which are beyond our control, and upon
assumptions with respect to future business decisions which are subject to
change. Accordingly, the forward-looking statements are only an estimate and
actual results will vary from the forward-looking statements, and these
variations may be material. We are not obligated to update any forward-looking
statement, but investors are urged to consult any further disclosures we make in
our subsequent filings with the Securities and Exchange Commission.
Consequently, the inclusion of the forward-looking statements should not be
regarded as a representation by us of results or performance that actually will
be achieved. Forward-looking statements are necessarily speculative in nature,
and it is usually the case that one or more of the assumptions in the
forward-looking statements do not materialize. Investors are cautioned not to
place undue reliance on the forward-looking statements. We caution investors
that the factors set forth below and in our other filings with the Securities
and Exchange Commission could cause our results to differ materially from those
stated in the forward-looking statements. These factors include, among others,
the impact of competitive products, demand for our products and related market
acceptance risks, fluctuations in our operating results, delays in development
of highly complex electronic products, our ability to continue to expand our
operations, the level of costs incurred in connection with our expansion
efforts, the financial strength of our customers and suppliers, and risks
associated with general industry and economic conditions.
GENERAL
Jaco is a distributor of electronic components, provider of contract
manufacturing and value-added services. Products distributed by us include
semiconductors, capacitors, resistors, electromechanical devices, flat panel
displays and monitors, and power supplies used in the assembly and manufacturing
of electronic equipment.
Our customers are primarily small and medium sized manufacturers. The trend
for these customers has been to shift certain manufacturing functions to third
parties (i.e. outsourcing). We intend to seek to capitalize on this trend toward
outsourcing by increasing sales of products enhanced by value-added services.
Value-added services currently provided by us consist of automated inventory
management services, kitting (e.g., supplying sets of specified quantities of
products to a customer that are prepackaged for ease of feeding the customer's
production lines), and contract manufacturing through Nexus Custom Electronics,
Inc., a wholly owned subsidiary of ours. We are also expanding in the flat panel
display value-added market, which includes full system integration, kitting and
the implementation of touch technologies.
FORM 10-Q December 31, 2002
Page 13
Results of Operations
The following table sets forth certain items in our statements of
operations as a percentage of net sales for the periods shown:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 87.2 84.4 87.2 84.1
---------- ---------- ---------- ----------
Gross Profit 12.8 15.6 12.8 15.9
Selling, general and
administrative expenses 13.6 19.3 14.3 19.1
---------- ---------- ---------- ----------
Operating loss (0.8) (3.7) (1.5) (3.2)
Interest expense 0.7 1.3 0.8 1.5
---------- ---------- ---------- ----------
Loss before income taxes (1.5) (5.0) (2.3) (4.7)
Income tax benefit (0.5) (1.9) (0.8) (1.6)
---------- ---------- ---------- ----------
NET LOSS (1.0)% (3.1)% (1.5)% (3.1)%
============ ============ ============ ============
COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31,
2001
Net sales for the three and six months ended December 31, 2002 were $54.2
million and $103.2 million, respectively, compared to $42.4 million and $91.8
million for the three and six months ended December 31, 2001, respectively,
representing increases of 27.8% and 12.4%. The electronics industry appears to
be more stable than last year. At this time, we do not see a general recovery,
although, we have seen certain customers, in different industry segments,
indicate that their business is improving. This selective improvement is
reflected in our increase in net sales. Flat panel displays (FPD) sales
represented approximately 10% of our distribution net sales for both the quarter
and six months ended December 31, 2002. Sequentially, our FPD sales increased
15% compared to the quarter ended September 30, 2002. Active components
represented approximately 67% and passive components approximately 33% of our
distribution net sales for the three and six months ended December 31, 2002,
compared to 55% active components and 45% passive components for the three and
six months ended December 31, 2001. FPD sales are included in active components.
Gross profit was $6.9 million and $13.3 million, or 12.8% for the three and
six months ended December 31, 2002, respectively, compared to $6.6 million or
15.6%, and $14.6 million or 15.9%, for the three and six months ended December
31, 2001, respectively. Pricing of components continues to be extremely
competitive due to the wide availability of product. Also, our product mix has
shifted to more active components, which historically sell at lower margins. We
do not anticipate our margins to improve until demand for product improves.
Selling, general and administrative ("SG&A") expenses were $7.3 million and
$14.8 million for the three and six months ended December 31, 2002,
respectively, compared to $8.2 million and $17.6 million for the three and six
months ended December 31, 2001, representing a decrease of 10.3% and 15.8%,
respectively. The decrease is the result of reduced staffing levels, elimination
of discretionary
FORM 10-Q December 31, 2002
Page 14
costs and a reduction in variable costs such as commissions paid to sales
personnel. As a result of our decrease in SG&A and increase in net sales, SG&A
as a percentage of net sales was 13.6% and 14.4% for the three and six months
ended December 31, 2002, respectively, compared to 19.3% and 19.1% for the
comparable three and six months of last year respectively. Management believes
it is important to maintain an infrastructure to support customers. However,
should net sales not continue to increase, we may be required to implement
further reductions in SG&A.
Interest expense decreased to $0.4 million and $0.8 million for the three
and six months ended December 31, 2002, respectively, compared to $0.5 million
and $1.3 million for the three and six months ended December 31, 2001,
respectively, representing decreases of 26.0% and 38.9%. The reduction in
interest expense is attributable to our ability to reduce bank borrowings as a
result of inventory reductions and lower borrowing rates.
Net loss for the three and six months ended December 31, 2002 was $0.5
million, or $0.09 per share diluted, and $1.5 million, or $0.26 per share
diluted, respectively, compared to a net loss of $1.3 million, or $0.23 per
share diluted, and $2.8 million, or $0.49 per share diluted, for the three and
six months ended December 31, 2001, respectively. As a result of our increase in
net sales and decrease in SG&A and interest expense, we were able to reduce our
net loss by 59.0% and 45.9% for the three and six months ended December 31,
2002, respectively, compared to the comparable period last year.
LIQUIDITY AND CAPITAL RESOURCES
Our credit agreement with our banks, as amended, expires on March 14, 2004.
The agreement provides us with a $45 million revolving line of credit facility
based principally on our eligible accounts receivable and inventories, as
defined in the agreement. The agreement also requires us to establish a $800,000
compensating balance arrangement with our banks in an interest bearing account,
which was funded during the quarter ended December 31, 2002. The interest rate
applicable to borrowings under our credit facility was based on the average
30-day LIBOR rate plus 1% to 2.25%, depending on our performance for the
immediately preceding four fiscal quarters measured by a specified financial
ratio. Effective October 1, 2002, the rate converted to the average 30-day LIBOR
plus 2.25% to 2.75%. The outstanding balance on the revolving line of credit
facility was $31.1 million at December 31, 2002. Borrowings under this facility
are collateralized by substantially all of our assets. The agreement contains
provisions for maintenance of certain financial ratios, all of which we were in
compliance with at December 31, 2002, and prohibits the payment of cash
dividends. Failure to remain in compliance with these covenants could trigger an
acceleration of our obligation to repay all outstanding borrowings under our
credit facility.
For the six months ended December 31, 2002, our cash provided by operating
activities was approximately $6.3 million, as compared to $13.8 million for the
same period last fiscal year. The decrease in net cash provided is primarily
attributable to a smaller decrease in our accounts receivable and inventory for
the six months ended December 31, 2002, as compared to the same period last
fiscal year. This was partially offset by a smaller decrease in our accounts
payable and accrued expenses for the six months ended December 31, 2002, as
compared to the same period last fiscal year. Net cash used in investing
activities increased to $2.1 million for the six months ended December 31, 2002,
as compared to $0.7 million for the six months ended December 31, 2001. The
increase is primarily attributable to deferred payments of $2.1 million for the
six months ended December 31, 2002, related to our acquisition in June 2000 of
Interface Electronics Corp., as compared to deferred payments of $0.2 million
for the six months ended December 31, 2001. Net cash used in financing
activities was $4.1 million for the six months ended December 31, 2002 as
compared to $13.1 million for the same period in our last fiscal year. The
decrease in net cash used is primarily attributable to the increase in net
borrowings under our credit facility of approximately $9.8 million.
For the six months ended December 31, 2002 and December 31, 2001, our
inventory turnover was 4.4x and 2.8x, respectively. The average days outstanding
of our accounts receivable at December 31, 2002 were 48 days, as compared to 63
days at December 31, 2001.
Based upon our present plans, we believe that cash flow from operations and
funds available under our credit facility will be sufficient to fund our capital
needs for the foreseeable future. However, our cash expenditures may vary
significantly from current levels based on a number of factors, including, but
not limited to, future acquisitions and capital expenditures, if any.
Historically, we have been able to obtain
FORM 10-Q December 31, 2002
Page 15
amendments to our existing credit facility to satisfy financial covenants, when
necessary. While we can give no assurances that any such future amendment, if
needed, will be available, management believes we will be able to continue to
obtain financing on acceptable terms under our existing credit facility or
through other external sources.
Inflation
Inflation has not had a significant impact on the Company's operations
during the last three fiscal years.
Critical Accounting Policies and Estimates
We have disclosed in Note A to our consolidated financial statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2002 those accounting policies that we consider to be significant in
determining our results of operations and financial position. There have been no
material changes to the critical accounting policies previously identified and
described in our Form 10-K. The accounting principles we utilized in preparing
our consolidated financial statements conform in all material respects to
generally accepted accounting principles in the United States of America.
The preparation of these consolidated financial statements requires our
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the disclosure of
contingent assets and liabilities at the date of our financial statements. We
base our estimates on historical experience, actuarial valuations and various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis our making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex and, consequently, actual results
may differ from these estimates under different assumptions or conditions. While
for any given estimate or assumption made by our management there may be other
estimates or assumptions that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial statements.
New Accounting Standards
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for interim periods
beginning after December 15, 2002. The Company currently plans to continue to
apply the intrinsic-value based method to account for stock options and will
comply with the new disclosure requirements beginning with its quarter ending
March 31, 2003.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to interest rate changes with respect to borrowings under
our credit facility which bears interest at the higher of the prime rate or the
federal funds rate plus 0.5% or at our option, at a rate equal to the average
30-day LIBOR rate plus 2.25% to 2.75% depending on our performance for the
immediately preceding four fiscal quarters measured by a specified financial
ratio, and may be adjusted quarterly. At January 31, 2003, $26.1 million was
outstanding under the credit facility. Changes in the LIBOR interest rate during
the fiscal year will have a positive or negative
FORM 10-Q December 31, 2002
Page 16
effect on our interest expense. Each 1.0% fluctuation in the LIBOR interest rate
will increase or decrease our interest expense under the credit facility by
approximately $0.3 million based on the amount of outstanding borrowings at
January 31, 2003.
The impact of interest rate fluctuations on other floating rate debt is not
material.
Item 4. Procedures and Controls
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Principal Executive Officer and
Principal Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Principal Executive Officer and Principal Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or other factors that
could significantly affect those controls since the date of the Company's
evaluation and there were no significant deficiencies or material weaknesses in
such controls and, therefore, there were no corrective actions taken.
FORM 10-Q December 31, 2002
Page 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Nothing to Report
Item 2. Changes in Securities and Use of Proceeds
Nothing to Report
Item 3. Defaults Upon Senior Securities
Nothing to Report
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on December 5,
2002. The Shareholders approved the following:
The election of each of the nominees to the Board of
Directors:
Stephen A. Cohen For: 5,460,273 Withheld: 174,116
Edward M. Frankel For: 5,460,273 Withheld: 174,116
Charles B. Girsky For: 5,459,475 Withheld: 174,914
Joel H. Girsky For: 5,459,475 Withheld: 174,914
Joseph F. Hickey, Jr. For: 5,459,475 Withheld: 174,914
Joseph F. Oliveri For: 5,460,273 Withheld: 174,116
Item 5. Other Information
Nothing to Report
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 99.9 - Certification of Principal Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.10 - Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K: No reports on Form 8-K were filed
during the period ended December 31, 2002.
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
February 14, 2003
JACO ELECTRONICS, INC.
(Registrant)
BY: /s/ Jeffrey D. Gash
----------------------------------------------
Jeffrey D. Gash, Executive Vice President,
Finance and Secretary
(Principal Financial Officer)
CERTIFICATIONS
I, Joel H. Girsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jaco Electronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
February 14, 2003
/s/ Joel H. Girsky
------------------------------------
Joel H. Girsky
Chairman, President and Treasurer
(Principal Executive Officer)
CERTIFICATIONS
I, Jeffrey D. Gash, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jaco Electronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
February 14, 2003
/s/ Jeffrey D. Gash
----------------------------------------------
Jeffrey D. Gash
Executive Vice President, Finance and Secretary
(Principal Financial Officer)