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 September 30, 2004
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission File Number 0-5896
JACO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1978958
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
145 OSER AVENUE, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 273-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at November 12, 2004
Common Stock, $0.10 Par Value 6,262,832 (excluding 659,900 shares held
as treasury stock)
FORM 10-Q September 30, 2004
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
2004 2004
---- ----
ASSETS
Current Assets
Cash $ 100,665 $ 552,655
Marketable securities 761,048 770,283
Accounts receivable - net 39,691,342 35,926,553
Inventories 36,555,709 37,017,390
Prepaid expenses and other 2,477,328 1,513,657
Deferred income taxes 2,827,000 2,725,000
Current assets of discontinued operations 12,910,801
---------- ----------
Total current assets 82,413,092 91,416,339
Property, plant and equipment - net 1,848,146 2,003,137
Deferred income taxes 420,000 416,000
Excess of cost over net assets acquired - net 25,416,087 25,416,087
Note receivable 2,750,000
Other assets 2,457,464 2,530,269
---------- ----------
Total assets $115,304,789 $121,781,832
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2004
Page 3
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
2004 2004
---- ----
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 34,310,445 $ 34,068,132
Current maturities of long-term debt and
capitalized lease obligations 33,122,709 37,088,743
Income taxes payable 135,165
Current liabilities of discontinued operations 2,800,664
--------- ---------
Total current liabilities 67,568,319 73,957,539
Long-term debt and capitalized lease obligations 104,006 118,525
Deferred compensation 1,012,500 1,000,000
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 100,000 shares,
$10 par value; none issued
Common stock - authorized, 20,000,000 shares,
$.10 par value; issued 6,922,732 and
6,855,232 shares, respectively,
and 6,262,832 and 6,195,332 shares
outstanding, respectively 692,273 685,523
Additional paid-in capital 26,897,295 26,735,295
Retained earnings 21,314,989 21,562,396
Accumulated other comprehensive income 29,973 37,120
Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566)
` ---------- ----------
Total shareholders' equity 46,619,964 46,705,768
---------- ----------
Total liabilities and shareholders' equity $115,304,789 $121,781,832
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2004
Page 4
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2004 2003
---- ----
Net sales $60,236,637 $67,425,307
Cost of goods sold 52,635,265 58,747,311
---------- ----------
Gross profit 7,601,372 8,677,996
Selling, general and administrative expenses 8,688,497 9,134,178
--------- ---------
Operating loss (1,087,125) (456,182)
Interest expense 361,905 351,419
------- -------
Loss from continuing operations
before income taxes (1,449,030) (807,601)
Income tax benefit (434,700) (283,001)
-------- --------
Loss from continuing operations (1,014,330) (524,600)
Discontinued operations:
(Loss) earnings from operations of discontinued operations,
net of income tax (benefit)provision of $(39,800) and
$55,001 in 2004 and 2003, respectively (63,652) 101,029
Gain on sale of net assets of subsidiary, net of income
Tax provision of $518,500 830,575
------- --------
Earnings from discontinued operations 766,923 101,029
------- -------
NET LOSS $ (247,407) $ (423,571)
=========== ===========
PER SHARE INFORMATION
Basic and diluted (loss) earnings per common share:
Loss from continuing operations $(0.16) $(0.09)
(Loss) earnings from discontinued operations $(0.12) $ 0.02
------ -------
Net loss $(0.04) $(0.07)
====== ======
Weighted-average common shares and common
Equivalent shares outstanding:
Basic and Diluted 6,203,403 5,792,123
========= =========
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2004
Page 5
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Additional
Common stock paid-in Retained
Shares Amount capital earnings
--------------- -------------- ---------------- -------------------
Balance at July 1, 2004 6,855,232 $ 685,523 $ 26,735,295 $ 21,562,396
Net loss (247,407)
Unrealized loss on marketable
securities, net of deferred tax
benefit of $4,000
Exercise of stock options 67,500 6,750 162,000
--------------- -------------- ---------------- -------------------
Balance at September 30, 2004 6,922,732 $ 692,273 $ 26,897,295 $ 21,314,989
=============== ============== ================ ===================
Accumulated
other Total
comprehensive Treasury shareholders'
income stock equity
---------------- ---------------- -----------------
Balance at July 1, 2004 $ 37,120 $ (2,314,566) $ 46,705,768
Net loss (247,407)
Unrealized loss on marketable
securities, net of deferred tax
benefit of $4,000 (7,147) (7,147)
Exercise of stock options 168,750
--------- ---------------- -----------------
Balance at September 30, 2004 $ 29,973 $ (2,314,566) $ 46,619,964
========= ================ =================
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2004
Page 6
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2004 2003
-------------- --------------
Cash flows from operating activities
Net loss $ (247,407) $ (423,571)
Loss (earnings) from discontinued operations 63,652 (101,029)
Gain on sale of subsidiary (830,575)
-------------- --------------
Loss from continuing operations (1,014,330) (524,600)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities
Depreciation and amortization 283,055 328,234
Deferred compensation 12,500 12,500
Deferred income tax benefit (102,000) (44,000)
Gain on sale of equipment - (2,100)
Provision for doubtful accounts 197,800 196,750
Changes in operating assets and liabilities
Increase in operating assets - net (3,968,782) (11,315,125)
(Decrease) increase in operating liabilities - net (456,997) 4,934,629
-------------- --------------
Net cash used in continuing operations (5,048,754) (6,413,712)
Net cash used in discontinuing operations (447,716) (31,662)
-------------- --------------
Net cash used in operating activities (5,496,470) (6,445,374)
-------------- --------------
Cash flows from investing activities
Purchase of marketable securities (1,912) (2,001)
Capital expenditures (51,057) (191,408)
Proceeds from sale of equipment - 2,100
Proceeds from sale of assets of a subsidiary,
net of transaction costs 9,070,000
-------------- --------------
Net cash provided by (used in) continuing operations 9,017,031 (191,309)
Net cash used in discontinuing operations (57,855) (17,999)
-------------- --------------
Net cash provided by (used in) investing activities 8,959,176 (209,308)
-------------- --------------
Cash flows from financing activities
Borrowings under line of credit 65,966,491 67,814,407
Repayments under line of credit (69,930,263) (61,533,924)
Principal payments under equipment financing
and term loans (16,781) (72,688)
Proceeds from exercise of stock options 168,750 443,438
-------------- --------------
Net cash (used in) provided by continuing operations (3,811,803) 6,651,233
Net cash used in discontinuing operations (102,893) (128,657)
-------------- --------------
Net cash (used in) provided by financing activities (3,914,696) 6,522,576
-------------- --------------
NET DECREASE IN CASH (451,990) (132,106)
-------------- --------------
Cash at beginning of period 552,655 157,467
-------------- --------------
Cash at end of period $ 100,665 $ 25,361
============== ==============
Supplemental schedule of non-cash financing and
investing activities:
Note receivable, received in conjunction with the $ 2,750,000
sale of assets of a subsidiary
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2004
Page 7
JACO ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ("Jaco" or the "Company") at the end of
and for all 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, 2004 and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2004. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
2) On September 20, 2004, the Company completed the sale of substantially all of
the assets of its contract manufacturing subsidiary, Nexus Custom Electronics,
Inc. ("Nexus"), to Sagamore Holdings, Inc. for consideration of
$13,000,000, subject to closing adjustments, and the assumption of certain
liabilities. The divestiture of Nexus allows the Company to focus its resources
on its core electronics distribution business. Under the terms of the purchase
agreement relating to this transaction, the Company received $9,250,000 of the
purchase consideration in cash on the closing date. Such cash consideration was
used to repay a portion of the outstanding borrowings under the Company's
line of credit (See Note 3). The balance of the fixed portion of the purchase
consideration was satisfied through the delivery of a $2,750,000 subordinated
note issued by the purchaser. This note has a maturity date of September 1, 2009
and bears interest at the lower of the prime rate or 7%. The note is payable by
the purchaser in quarterly cash installments ranging from $156,250 to $500,000
commencing September 2006 and continuing for each quarter thereafter until
maturity. Prepayment of the principal of and accrued interest on the note is
permitted. Additionally, the Company is entitled to receive additional
consideration in the form of a six-year earn-out based on 5% of the annual net
sales of Nexus after the closing date, up to $1,000,000 in the aggregate.
Pursuant to the purchase agreement, the purchaser has also entered into
a contract that designates the Company as a key supplier of electronic
components to Nexus for a period of five years following the closing date. The
gain on the sale of Nexus as of September 30, 2004, net of transaction
costs and applicable taxes was approximately $831,000.
As a result of the sale of Nexus, the Company will no longer engage in
contract manufacturing. In accordance with the provisions of SFAS No, 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), the Company has accounted for the results of operations of Nexus as
discontinued in the accompanying consolidated statements of operations. The
Company has also classified the assets sold and liabilities assumed of Nexus
(the disposal group) as part of assets and liabilities of discontinued
operations in the June 30, 2004 balance sheet.
FORM 10-Q September 30, 2004
Page 8
A summary of the assets and liabilities included in the disposal group as of
June 30, 2004 is as follows:
Accounts receivable, net $ 2,407,527
Inventories 7,923,578
Prepaid expenses and other 75,429
Property, plant and equipment, net 2,504,267
Total assets 12,910,801
Accounts payable 2,240,314
Accrued compensation 218,209
Accrued expenses 27,942
Long-term debt and capitalized lease obligations 314,199
-------
Total liabilities 2,800,664
---------
Net assets sold $10,110,137
===========
A summary of operating results of Nexus for the three months ended September 30,
2004 and 2003 were as follows:
2004 2003
---- ----
Net sales $5,208,184 $4,843,237
(Loss) earnings before income taxes $ (103,452) $ 156,030
3) To provide additional liquidity and flexibility in funding its operations,
the Company borrows amounts under credit facilities and other external sources
of financing. On December 22, 2003, the Company entered into a Third Restated
and Amended Loan and Security Agreement with GMAC Commercial Finance LLC and PNC
Bank, National Association providing for a $50,000,000 revolving secured line of
credit. This credit facility has a maturity date of December 31, 2006.
Borrowings under the credit facility are based principally on eligible accounts
receivable and inventories of the Company, as defined in the credit agreement,
and are collateralized by substantially all of the assets of the Company.
FORM 10-Q September 30, 2004
Page 9
At September 30, 2004, the outstanding balance on this new revolving line
of credit facility was $33.0 million, with an additional $7.4 million available.
The interest rate on the outstanding borrowings at September 30, 2004 was
approximately 5.1%. The credit agreement contains provisions for maintenance of
certain financial covenants, including, among others EBITDA and Minimum Net
Worth. At September 30, 2004, we were in compliance with all such covenants.
Failure to remain in compliance with these covenants could trigger an
acceleration of our obligation to repay all outstanding borrowings under our
credit facility, limit our ability to borrow additional amounts under the line
of credit and put a requirement that we maintain an aggregate undrawn
availability of $1.5 million until certain financial requirements are achieved,
which would reduce the undrawn availability requirement to $500,000. The credit
agreement includes both a subjective acceleration clause and requires the
deposit of customer receipts to be directed to a blocked account and applied
directly to the revolving credit facility. Accordingly, the debt is classified
as a current liability.
On September 20, 2004, our credit facility was amended to provide the
lenders' consent to our sale of our contract manufacturing subsidiary, Nexus,
and to (1) change our (a) EBITDA (b) Fixed Charge Ratio and (c) Minimum Net
Worth convents (2) eliminate the remaining portion of the additional $732,000
of the additional available amount under the facility to zero, and (3) require
the cash proceeds from the sale of Nexus to be used to repay indebtedness
outstanding under the facility, (4) and put a requirement that we maintain an
aggregate undrawn availability of $1.5 million until certain financial
requirements are achieved which would reduce the undrawn availability
requirement to $500,000.
4) On September 18, 2001, the Company's Board of Directors authorized the
repurchase of up to 250,000 shares of its outstanding common stock. Purchases
may be made from time to time in market or private transactions at prevailing
market prices. The Company made purchases of 41,600 shares of its common stock
from November 5, 2002 through September 30, 2004 for aggregate consideration of
$110,051. There were no purchases of the Company's common stock during the three
months ended September 30, 2004.
5) Total comprehensive loss and its components for the three months ended
September 30, 2004 and 2003 are as follows:
Three Months Ended
September 30,
--------------------------------
2004 2003
-------------- -------------
Net loss $ (247,407) $ (423,571)
Unrealized (loss) gain
on marketable securities (11,147) 16,772
Deferred tax benefit (expense) 4,000 (6,000)
-------------- -------------
Comprehensive loss $ (254,554) $ (412,799)
============== =============
Accumulated other comprehensive income is comprised of unrealized gains
and losses on marketable securities, net of the related tax effect.
FORM 10-Q September 30, 2004
Page 10
6) The Company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations ("APB
No. 25") and has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an Amendment of FASB Statement No. 123" ("SFAS No.
148"). Under APB No. 25, compensation expense is only recognized when the market
value of the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock. Accordingly, no compensation expense has
been recognized in the Company's condensed consolidated financial statements in
connection with employee stock option grants.
During the three months ended September 30, 2004 there were no stock
options granted to employees or directors of the Company.
The following table illustrates the effect on net income and earnings
per share for the three months ended September 30, 2004 and 2003 had the Company
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" to
stock-based employee compensation.
Three Months Ended
September 30,
--------------------------------
2004 2003
-------------- -------------
Net loss, as reported $ (247,407) $(423,571)
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (71,911) (73,044)
-------------- -------------
Pro forma net loss $(319,318) $(496,615)
============== =============
Net loss per common share:
Basic - as reported $(0.04) $(0.07)
============== =============
Basic - pro forma $(0.05) $(0.09)
============== =============
Diluted - as reported $(0.04) $(0.07)
============== =============
Diluted - pro forma $(0.05) $(0.09)
============== =============
7) The weighted average common shares outstanding, net of treasury shares, used
in the Company's basic and diluted loss per share computations on its condensed
consolidated statements of operations were 6,203,403 and 5,792,123 for the three
months ended September 30, 2004 and 2003, respectively. Excluded from the
calculation of loss per share are options to purchase 677,250 and 939,750 shares
of the Company's common stock for the three months ended September 30, 2004 and
2003, respectively, as their inclusion would have been antidilutive. Common
stock equivalents for stock options are calculated using the treasury stock
method.
FORM 10-Q September 30, 2004
Page 11
8) The Company is a party to legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on the Company's business, results of operations or
financial position.
9) Certain reclassifications have been made to prior year amounts to conform to
the current year's presentation.
10) During the three months ended September 30, 2004 and 2003, the Company
recorded sales of $1,040,127 and $1,188,220, respectively, from a customer,
Frequency Electronics, Inc. ("Frequency"). The Company's Chairman of the Board
of Directors and President serves on the Board of Directors of Frequency.
Amounts included in accounts receivable from Frequency at September 30, 2004 and
June 30, 2004 aggregate $1,587 and $188,720 respectively.
FORM 10-Q September 30, 2004
Page 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The following discussion contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Act of 1934, as amended, or
the Exchange Act, which represent our management's beliefs and assumptions
concerning future events. When used in this report and in documents incorporated
herein by reference, forward-looking statements include, without limitation,
statements regarding our financial forecasts or projections, our expectations,
beliefs, intentions or future strategies that are signified by the words
"expects", "anticipates", "estimates", "intends" or similar language. These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties that could cause our actual results and the timing of certain
events to differ materially from those expressed in the forward-looking
statements.
Potential factors that could cause our actual results to differ
materially from those contemplated by the forward-looking statements include,
among others, the following:
o We are dependent on a limited number of suppliers for our
products, which generate a significant portion of our sales. As
a result, to the extent that these suppliers are not willing to
do business with us in the future on terms acceptable to us, the
loss of these suppliers could materially adversely affect our
business, results of operations and financial condition.
o Most of our distributorship agreements are cancelable upon short
notice. While these agreements typically provide for certain
protections in the event of termination to reduce our exposure
to losses from unsold inventory (such as price protection and
rights of return), we cannot assure you that we will not
experience significant losses from unsold inventory in the
future.
o The market for our products and services is very competitive and
subject to rapid technological advances. We compete with many
other distributors of electronic components, many of which are
larger and have significantly greater name recognition and
greater financial and other resources than we have. Failure to
maintain and enhance our competitive position could adversely
affect our business.
o Some of our customer base is transferring to the Far East in
order to reduce production costs. If we are unsuccessful in
expanding our Far East operations in response to this trend, our
sales could be negatively impacted.
o Downturns in the electronic components industry and in the
general economy have in the past, and could in the future,
adversely affect our business, results of operations and
financial condition.
o Strikes or other delays or disruptions in air or sea
transportation and possible future legislative or regulatory
changes with respect to pricing and/or import quotas on products
we import from foreign countries could adversely affect our
business.
o Terrorist attacks may create instability and uncertainty in the
electronic components industry.
o Volatile pricing of electronic components may reduce our profit
margins.
o Costs or difficulties related to the integration of the
operations and personnel of businesses we acquire may be greater
than expected.
o Limited allocation of products by our suppliers may reduce the
availability of certain products we offer.
o Adverse changes may occur in the securities markets.
FORM 10-Q September 30, 2004
Page 13
In light of these and other risks and uncertainties, you are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report. We do not undertake any obligation to update
publicly or revise any forward-looking statements to reflect new information or
events or circumstances occurring after the date of this report.
GENERAL
Jaco is a distributor of electronic components, and provider of
value-added services. Products distributed by us include semiconductors,
capacitors, resistors, electromechanical devices, flat panel displays 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, and kitting (e.g., supplying sets of specified
quantities of products to a customer that are prepackaged in kits for ease of
feeding the customer's production lines). We are also expanding in the flat
panel display value-added market, which includes full system integration,
kitting and the implementation of touch technologies.
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, 2004, as amended, 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 2004 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 for 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. 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.
FORM 10-Q September 30, 2004
Page 14
Results of Operations
The following table sets forth certain items in our statements of operations as
a percentage of net sales for the periods shown:
Three Months Ended
September 30,
------------------------------
2004 2003
---------- ----------
Net sales 100.0% 100.0%
Cost of goods sold 87.4 87.1
---------- ----------
Gross profit 12.6 12.9
Selling, general and
administrative expenses 14.4 13.6
---------- ----------
Operating loss (1.8) (0.7)
Interest expense 0.6 0.5
---------- ----------
Loss from continuing operations
before income taxes (2.4) (1.2)
Income tax benefit (0.7) (0.4)
---------- ----------
Loss from continuing operations (1.7) (0.8)
(Loss) earnings from discontinued
operations, net of income taxes (0.1) (0.2)
Gain on sale of net assets of subsidiary,
net of income taxes 1.4
---------- ----------
Net loss (0.4) % (0.6) %
==== ====
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
Results from Continuing Operations:
Net sales for the three months ended September 30, 2004 were $60.2
million, a decrease of $7.2 million, or 10.7%, compared to $67.4 million for the
three months ended September 30, 2003. Although our net sales decreased compared
to last year, we have increased our net sales sequentially compared to the June
2004 quarter by approximately $3.2 million, or 5.6%. We continue to market our
flat panel display (FPD) product through component sales and integration
projects. FPD sales were approximately 21% of our net sales for the three months
ended September 30, 2004. It is our belief that FPD product will continue to be
the fastest growing product for our Company. Passive components have become more
of a commodity item. This has resulted in price reductions that have made
marketing efforts difficult especially when competing with off shore
manufacturing. As a result, passive components decreased to 17.1% of our net
sales for the three months ended September 30, 2004. To further support our
marketing efforts with our FPD, semiconductor and electromechanical products, we
have expanded our field application engineer (FAE) program. This program enables
us to work with our customers to design in our suppliers' products.
Electromechanical product, which includes such items as power supplies, printer
heads and relays,
FORM 10-Q September 30, 2004
Page 15
represented 7.6% of our net sales during the quarter ended September 30, 2004.
As a result of our strong semiconductor product offering, semiconductors
represents 53.9% of our net sales during the current quarter. In the future, our
growth will be partially dependent on our ability to increase sales globally. In
response to this opportunity, we recently opened our first sales office in
Beijing, China. In addition, we have begun to employ direct sales personnel and
are utilizing a third party warehouse to support certain customers in the Far
East.
Gross profit was $7.6 million, or 12.6% of net sales for the three
months ended September 30, 2004, as compared to $8.7 million or 12.9% of net
sales for the three months ended September 30, 2003. Management considers gross
profit to be a key performance indicator in managing our business. Gross profit
margins are usually a factor of product mix and demand for product. During the
quarter we experienced a shift in our product mix. We had high demand and sales
for semiconductor product at low gross profit margin. Also, we experienced a
decrease in demand for memory product. This resulted in price reductions that
contributed to the decrease in gross profit margin. We do not anticipate any
material change in our margins for the foreseeable future. In addition demand
for our products may be adversely affected by events beyond our control.
Selling, general and administrative expenses ("SG&A") were $8.7
million, or 14.4% of net sales for the three months ended September 30, 2004, as
compared to $9.1 million, or 13.6% of net sales for the three months ended
September 30, 2003. We reduced our SG&A by $0.4 million or 4.9%. We continue our
ongoing efforts to reduce discretionary spending. Management considers SG&A as a
percentage of net sales to be a key performance indicator in managing our
business. We believe our infrastructure is sufficient to support our sales
growth for the foreseeable future. Therefore, an increase in our net sales
should result in a decrease in SG&A as a percentage of net sales. Should our net
sales not increase we will continue to eliminate spending.
Interest expense was $0.4 million for the three months ended September
30, 2004 and $0.3 million for the three months ended September 30, 2003. We
support our growth through bank borrowings. Therefore an increase in sales could
result in an increase in borrowings. Any significant increase in our borrowing
rates could significantly increase our interest expense, which would have a
negative impact on our results of operations.
Net loss from continuing operations for the three months ended
September 30, 2004 was $1.0 million, or $0.16 per diluted share, as compared to
$0.5 million, or $0.09 per diluted share, for the three months ended September
30, 2003. The increase in our net loss from continuing operations was primarily
due to a decrease in our net sales. This was partially offset by the decrease in
SG&A expenses.
Discontinued Operations:
On September 20, 2004, the Company completed the sale of substantially all
of the assets of its contract manufacturing subsidiary, Nexus Custom
Electronics, Inc. ("Nexus"), to Sagamore Holdings, Inc. for consideration of
$13,000,000, subject to closing adjustments, and the assumption of certain
liabilities. The divestiture of Nexus allows the Company to focus its resources
on its core electronics distribution business. Under the terms of the purchase
agreement relating to this transaction, the Company received $9,250,000 of the
purchase consideration in cash on the closing date. Such cash consideration was
used to repay a portion of the outstanding borrowings under the Company's
line of credit (See Note 3). The balance of the fixed portion of the purchase
consideration was satisfied through the delivery of a $2,750,000 subordinated
note issued by the purchaser. This note has a maturity date of September 1, 2009
and bears interest at the lower of the prime rate or 7%. The note is payable by
the purchaser in quarterly cash installments ranging from $156,250 to $500,000
commencing September 2006 and continuing for each quarter thereafter until
maturity. Prepayment of the principal of and accrued interest on the note is
permitted. Additionally, the Company is entitled to receive additional
consideration in the form of a six-year earn-out based on 5% of the annual net
sales of Nexus after the closing date, up to $1,000,000 in the aggregate.
Net loss from these discontinued operations was $0.1 million, or $0.01 per
diluted share, for the three months ended September 30,2004, compared to net
income of $0.1 million, or $0.02 per diluted share for the comparable period in
our last fiscal year. The loss from discontinued operations was primarily due to
a decrease in gross profit margin for the three months ended September 30, 2004
as compared to the three months ended September 30, 2003.
FORM 10-Q September 30, 2004
Page 16
Combined Net Loss:
The net loss from both the continuing and discontinued operations for
the three months ended September 30, 2004 was $0.2 million, or $0.04 per diluted
share, compared to $0.4 million, or $0.07 per diluted share for the comparable
period in our last fiscal year. The improved results were attributable to the
gain on the sale of our Nexus subsidiary, partially offset by an increased loss
from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
To provide additional liquidity and flexibility in funding its operations,
the Company borrows amounts under credit facilities and other external sources
of financing. On December 22, 2003, the Company entered into a Third Restated
and Amended Loan and Security Agreement with GMAC Commercial Finance LLC and PNC
Bank, National Association providing for a $50,000,000 revolving secured line of
credit. This credit facility has a maturity date of December 31, 2006.
Borrowings under the credit facility are based principally on eligible accounts
receivable and inventories of the Company, as defined in the credit agreement,
and are collateralized by substantially all of the assets of the Company. At
September 30, 2004, the outstanding balance on this new revolving line of credit
facility was $33.0 million, with an additional $7.4 million available. The
interest rate on the outstanding borrowings at September 30, 2004 was
approximately 5.1%. The credit agreement contains provisions for maintenance of
certain financial covenants, including, among others EBITDA and Minimum Net
Worth. At September 30, 2004, we were in compliance with all such covenants.
Failure to remain in compliance with these covenants could trigger an
acceleration of our obligation to repay all outstanding borrowings under our
credit facility, limit our ability to borrow additional amounts under the line
of credit and put a requirement that we maintain an aggregate undrawn
availability of $1.5 million until certain financial requirements are achieved,
which would reduce the undrawn availability requirement to $500,000. The credit
agreement includes both a subjective acceleration clause and requires the
deposit of customer receipts to be directed to a blocked account and applied
directly to the revolving credit facility. Accordingly, the debt is classified
as a current liability.
On September 20, 2004, our credit facility was amended to provide the
lenders' consent to our sale of our contract manufacturing subsidiary, Nexus,
and to (1) change our (a) EBITDA (b) Fixed Charge Ratio and (c) Minimum Net
Worth convents (2) eliminate the remaining portion of the additional $732,000
of the additional available amount under the facility to zero, and (3) require
the cash proceeds from the sale of Nexus to be used to repay indebtedness
outstanding under the facility, (4) and put a requirement that we maintain an
aggregate undrawn availability of $1.5 million until certain financial
requirements are achieved which would reduce the undrawn availability
requirement to $500,000.
For the three months ended September 30, 2004, our net cash used in
operating activities was approximately $5.5 million, as compared to $6.4 million
for the three months ended September 30, 2003. The decrease in net cash used is
primarily attributable to a smaller increase in our accounts receivable and
inventory for the three months ended September 30, 2004, as compared to the same
period in our last fiscal year. This was partially offset by a smaller decrease
in our accounts payable for the three months ended September 30, 2004, as
compared to the same period in our last fiscal year. Net cash provided by
investing activities was approximately $9.0 million for the three months ended
September 30, 2004 as compared to net cash used in investing activities of $0.2
million for the three months ended September 30, 2003. The increase in net cash
provided by is primarily attributable to $9.1 million related to the sale of
substantially all of the assets of Nexus. Net cash used in financing activities
was approximately $3.9 million for the three months ended September 30, 2004 as
compared to net cash provided by financing activities of $6.5 million for the
three months ended September 30, 2003. The increase in net cash used is
primarily attributable to the decrease in net borrowings under our credit
facility of approximately $10.2 million.
FORM 10-Q September 30, 2004
Page 17
For the three months ended September 30, 2004 and 2003, our inventory
turnover was 5.7 times and 6.8 times, respectively. The average days outstanding
of our accounts receivable at September 30, 2004 was 57 days, as compared to 48
days at September 30, 2003. Inventory turnover and average days outstanding are
key ratios that management relies on to monitor our business.
In fiscal 2005, we plan to make certain leasehold improvements to construct
an FPD facility that will allow us to vertically integrate our entire FPD
operation. When the facility is completed, we will offer customers a one-stop
source for their FPD supply and integration needs. The cost of this project is
not expected to be material. Based upon our present plans, including no
anticipated material capital expenditures, we believe that cash flow from
operations and funds available under our credit facility will be sufficient to
fund our capital needs for the next twelve months and for the foreseeable
future. However, our ability to maintain sufficient liquidity depends partially
on our ability in achieving anticipated revenue and managing costs as well. Our
planned expansion to the Far East and construction of an integration center for
our FPD sales will require capital expenditures that have been planned for by
the sale of our contract manufacturing subsidiary Nexus. 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, when necessary, been able to obtain
amendments to our credit facilities to satisfy instances of non-compliance with
financial covenants. While we cannot assure you that any such future amendments,
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. Failure to maintain financing arrangements on
acceptable terms would have a material adverse effect on our business, results
of operations and financial condition.
Based on the sale of Nexus, on September 20, 2004, the Company received
$9.25 million cash at closing plus a subordinated note for $2.75 million. The
cash at closing was applied against the Company's outstanding line of credit.
This will increase availability, except for certain restrictions (outlined
previously in this section) that were established in the bank amendment
approving the sale. These proceeds will be available to fund the anticipated
expansion into the Far East and construction of an integration center to support
the anticipated growth of the FPD product.
Inflation
Inflation has not had a significant impact on our operations during the
last three fiscal years.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes with respect to borrowings
under our credit facility, which bears interest at the higher of the prime rate
plus 0.75% or the federal funds rate plus 1.25%. At October 31, 2004, $29.3
million was outstanding under the credit facility. Changes in the prime interest
rate or the federal funds rate during the current fiscal year will have a
positive or negative effect on our interest expense. Each 1.0% fluctuation in
the prime interest rate or the federal funds 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 October 31, 2004.
The impact of interest rate fluctuations on our other floating rate
debt is not material.
FORM 10-Q September 30, 2004
Page 18
Item 4. Controls and Procedures
An evaluation was performed, under the supervision and with the
participation of the Company's management, including the Company's Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of September 30, 2004. Based upon that evaluation, the Company's
management, including its Principal Executive Officer and Principal Financial
Officer, has concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
changes in the Company's internal control over financial reporting or in other
factors identified in connection with this evaluation that occurred during the
three months ended September 30, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
FORM 10-Q September 30, 2004
Page 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Nothing to Report
Item 2. Changes in Securities and Use of Proceeds
Nothing to Report
Item 3. Defaults Upon Senior Securities
Nothing to Report
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to Report
Item 5. Other Information
Nothing to Report
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 10.25 - 2000 Stock Option Plan,
incorporated by reference to Exhibit A to the
Company's Definitive Proxy Statement on Schedule
14A, dated November 17, 2000, for the Company's
Annual Meeting of Shareholders held on December 12,
2000.
Exhibit 31.1 - Rule 13a-14 (a) / 15d-14 (a)
Certification of Principal Executive Officer.
Exhibit 31.2 - Rule 13a-14 (a) / 15d-14 (a)
Certification of Principal Financial Officer.
Exhibit 32.1 - Section 1350 Certification of Principal
Executive Officer.
Exhibit 32.2 - Section 1350 Certification of Principal
Financial Officer.
FORM 10-Q September 30, 2004
Page 20
b) Reports on Form 8-K
(1) On September 23, 2004, a Current Report on Form 8K
was filed under Item 2.01. "Completion of Acquisition or
Disposition of Assets" to report the Company's completion of
the sale of its contract manufacturing subsidiary, Nexus
Custom Electronics, Inc. ("Nexus") to Sagamore Holdings,
Inc.
(2) On September 27, 2004, a Current Report on Form 8-K
was filed under Item 2.02. "Results of Operations and
Financial Condition" to report the Company's results for its
fourth quarter and fiscal year ending June 30,2004
(3) On October 5, 2004, a Current Report on Form 8-K
was filed under Item 9.01. "Financial Statements and
Exhibits" to furnish pro forma financial statements in
connection with the sale of substantially all of the assets
of Nexus.
(4) On November 12, 2004, a Current Report on Form 8-K
was filed under Item 2.02. "Results of Operations and
Financial Condition" to report the Company's results for its
first quarter of the fiscal year ending June 30, 2005.
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.
November 15, 2004
JACO ELECTRONICS, INC.
(Registrant)
BY: /s/ Jeffrey D. Gash
------------------------------------------
Jeffrey D. Gash, Executive Vice President,
Finance and Secretary
(Principal Financial Officer)