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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934]
For the fiscal year ended
June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________to____________________
Commission File Number 0-5896
JACO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
New York 11-1978958
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
145 Oser Avenue, Hauppauge, New York 11788
- -----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (516) 273-5500
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of
the Company, computed by reference to the closing price on September 23, 1998
was $10,527,674.
Number of shares outstanding of each class of Common Stock, as of
September 23, 1998: 3,661,221 shares (excluding 404,500 shares of treasury
stock).
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Definitive Proxy Statement to be filed on or before October 28,
1998, under Regulation 14A, in connection with the Company's 1998
Annual Meeting of Shareholders.
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PART I
Item 1. Business
Jaco Electronics, Inc., a New York corporation organized in 1961
(collectively with all of its subsidiaries, unless otherwise noted, "Jaco" or
the "Company").
General
Jaco markets and distributes passive and active electronic components
to original equipment manufacturers ("OEMs") throughout the United States and
Canada from two distribution centers located on the East and West coasts and 14
sales offices located throughout the United States. The Company distributes
products such as semiconductors, capacitors, resistors, electro-mechanical
devices, flat panels, computers and computer subsystems, which are used in the
manufacture and assembly of electronic products. The Company also provides a
variety of value-added services including configuring complete computer systems
to customers' specifications, kitting the component requirements of certain
customers and furnishing contract manufacturing services. Value-added services
are intended to attract new customers and increase sales to existing customers.
In addition, these services are designed to respond to an industry trend of
outsourcing, in which purchasing and warehousing functions are shifted by
customers to the most efficient provider. The Company entered the contract
manufacturing business in March 1994, when it acquired all of the outstanding
capital stock of Nexus Custom Electronics, Inc. ("Nexus"), a Vermont-based
turnkey contract manufacturer of printed circuit boards. Management believes the
acquisition of Nexus has enabled, and will continue to enable, the Company to
expand and broaden its range of value-added service capabilities (See Note K of
the Notes to the Consolidated Financial Statements).
The Company's core customer base consists primarily of small and
medium-sized OEMs that produce electronic equipment used in a wide variety of
industries, including manufacturers of telecommunication, computer, computer
peripheral, medical and aerospace equipment and several Fortune 500
manufacturers. In the fiscal year ended June 30, 1998, the Company distributed
electronic components to thousands of customers, none of which individually
represented more than 4.1% of net sales.
Jaco is a service-oriented company, built on strong customer and
supplier relationships. The Company's inventory management and information
systems assist its customers in controlling material costs, in reducing cycle
times and in keeping pace with rapidly occurring technological developments. The
Company utilizes a computerized inventory control system to assist in the
marketing of its products and coordinate purchases from suppliers with sales to
customers. During the fiscal year ended June 30 1998, Jaco also added
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several strategic suppliers to its line card including Telefunken and Siliconix
(subsidiaries of Vishay), Communications Instruments Inc. (CII), Samsung
Electronics' and CTX Opto's LCD flat panel monitor lines, and Lambda
Electronics' power supply line, a new product for Jaco. Lamda is one of the
world's leading manufacturers of power supplies. The Company's computer system
provides detailed on-line information regarding the availability of the
Company's entire inventory located at its stocking facilities as well as on-line
access to the inventories of some of the Company's major suppliers. Through the
Company's integrated real-time information system, customers' orders can readily
be tracked through the entire process of entering the order, reserving products
to fill the order, ordering components from suppliers, if necessary, and
shipping products to customers on scheduled dates. The Company is thus able to
provide the type of distributor service required by its OEM customers that have
adopted the "just-in-time" method of inventory procurement. The "just-in-time"
method is utilized in an effort to operate more efficiently and profitably by
relying on scheduled deliveries of such components at the time they are needed
in the production process and thereby reducing inventories of components.
The Company provides additional customer support through technically
competent product managers, field engineers, value-added services and
communication with customers from computer to computer or through electronic
data interchange ("EDI").
Industry Overview
The electronics distribution industry has become an increasingly
important sales channel for the electronics industry because distributors can
market component manufacturers' products to a broader range of OEMs than such
manufacturers could economically serve with their direct sales forces.
Historically, manufacturers of electronic components have sold directly to large
OEMs and relied upon distributors to serve small customers. Today, distributors
have become more of an extension of component manufacturers' product delivery
channels by providing value-added services and technical support to customers,
by stocking sufficient inventory to ensure timely delivery of components and by
managing customer credit. Distributors also work with OEMs to ensure that
manufacturers' components are integrated into the design of new products.
According to the National Electronics Distributors Association, an
industry trade association, in 1997 the electronics distribution industry
recorded approximately $26.9 billion in sales. Of these sales, approximately
$7.9 billion of industry sales consisted of sales of interconnect (connectors,
sockets), electromechanical (relays, switches) and passive (resistors,
capacitors) components, which products accounted for approximately $72.5 million
of the Company's net distribution sales for the fiscal year ended June 30, 1998.
Approximately $18.1 billion of industry sales consisted of sales of
semiconductors and
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computer products, which accounted for approximately $65.6 million of the
Company's net distribution sales for the fiscal year ended June 30, 1998.
Products
The Company currently distributes over 60,000 stock items. Management
believes that it is necessary for the Company to carry a wide variety of items
in order to fully service its customers requirements and, in addition, many
suppliers require the Company to carry their full product line.
The components distributed by the Company are used in the assembly and
manufacture of electronic equipment such as computers, data transmission and
telecommunications equipment and transportation equipment, including electronic
signals and aircraft, and a broad variety of other electronic products. The
Company's products fall into two broad categories: "passive" components and
"active" components.
Passive components consist primarily of capacitors, electromechanical
devices, and resistors. Passive products accounted for approximately 48%, 51%
and 52% of the Company's net distribution sales in the fiscal years ended June
30, 1996, June 30, 1997 and June 30, 1998, respectively.
Active components include semiconductors and computer subsystems.
Semiconductors consist of such items as integrated circuits and discrete
components, transistors, diodes, dynamic RAMs, static RAMs, video RAMs and
MOSFETs. Computer subsystems are an integral part of personal computers and
computer workstations and incorporate such items as disk drives, tape drives,
flat panels and flat panel monitors, floppy disks and controllers. These
products represented approximately 52%, 49% and 48% of the Company's net
distribution sales in the fiscal years ended June 30, 1996, June 30, 1997 and
June 30, 1998, respectively.
Value-Added Services
The Company provides a number of value-added services which are
intended to attract new customers, to maintain and increase sales to existing
customers and, where feasible, to generate additional revenues and improve
margins from sales of components. Value-added services include:
Configuring Computer Systems. Subsystem integration is a
service offered by the Company where it offers turnkey
solutions to customers' computer requirements by integrating
such components as disks, tapes and floppy disk drives with
other components, including power suppliers, enclosures,
interface electronic cables and converters and active
components to configure complete computer systems to customer
specifications, both in tower and desktop configurations.
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Kitting. Kitting of customer component product requirements is
provided to fill a segment or a complete order of products to
a select customer base. Kitting consists of assembling to a
customer's specifications two or more of the Company's 60,000
stock items into pre-packaged kits ready for use in the
customer's assembly line.
Contract Manufacturing. The Company also furnishes turnkey
contract manufacturing printed circuit boards ("PCBs") for
OEMs using both conventional pin-through-hole and, on an
increasing basis, more advanced surface mount technologies.
Contract manufacturing operations involve assembling PCBs to
customer specifications utilizing components from suppliers
with whom the Company has distribution agreements and other
suppliers. As a turnkey contract manufacturer of PCBs, the
Company procures the required raw materials and components,
manages the assembly and test operations, and supplies the
PCBs in accordance with the customer's delivery schedule and
quality requirements for the finished product.
Sales and Marketing
Management believes the Company has developed valuable long-term
customer relationships and an in-depth understanding of its customers' needs and
purchasing patterns. Jaco serves a broad range of customers in the computer,
computer-related, telecommunications, data transmission, defense, aerospace,
medical equipment and other industries. None of the Company's customers
individually represented more than approximately 2%, 3% and 4% respectively, of
net sales in the fiscal years ended June 30, 1996, June 30, 1997 and June 30,
1998, respectively.
The Company's sales personnel are trained to identify the Company's
customers' requirements and to actively market the Company's entire product line
to satisfy those needs. For example, the Company's sales staff and field
engineers regularly meet with customers' engineers and designers to discuss
prospective needs and potential design or procurement problems and enable the
sales personnel to understand which products will meet the customers'
performance criteria, are cost-effective and target specifically identified
problems.
Sales are made throughout the United States and Canada from the sales
departments maintained at the Company's two distribution facilities located on
the East and West Coasts of the United States in California and New York and
from 14 additional sales offices located in California, Florida, Maryland,
Massachusetts, Minnesota, North Carolina, Oregon, Texas, Washington, Arizona,
Alabama and Illinois. Sales are made primarily through personal visits by the
Company's employees and by a staff of trained
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telephone sales personnel who answer inquiries and receive and process orders
from customers. In addition, the Company utilizes the services of independent
sales representatives whose territories include parts of the United States,
Canada, and several foreign countries. These sales representatives operate under
agreements which are terminable by either party upon 30 days' notice.
Independent sales representatives are authorized to solicit sales of all of the
Company's product lines and are prohibited from representing competing product
lines.
In the fiscal year ended June 30, 1998, 94% of the Company's sales were
produced by Company sales personnel and 6% by independent sales representatives.
No one sales representative produced more than 2% of the Company's sales. The
Company believes that the termination of any independent sales representative
would not have a material adverse effect upon its business.
Backlog
As the trend toward outsourcing increases, customers have been entering
into just-in-time contracts with distributors, instead of placing orders. The
Company's backlog was $27.1 million at June 30, 1997, compared to $27.4 million
at June 30, 1998. Backlog consists of purchase orders received from customers
for products scheduled for delivery within the next twelve months. Orders
constituting the Company's backlog are subject to delivery rescheduling, price
negotiations and cancellations by the customer, sometimes without penalty or
notice. Backlog is not necessarily indicative of future sales for any particular
period and, therefore, the Company expects that in the normal course of
business, less than all backlogged orders will be filled.
Operations
Component Distribution. Inventory management is critical to a
distributor's business. The Company constantly focuses on a high number of
resales or "turns" of existing inventory to reduce exposure to product
obsolescence and changing customer demand.
The Company's central computer system facilitates the control of
purchasing and inventory, accounts payable, shipping and receiving, and
invoicing and collection information of Jaco's distribution business. Jaco has
completed the redesign and development of an entirely new Distribution Software
System. All of the dates in this new database are 8 characters, including the
century. The system has been tested and has been in place since September 1,
1998. The system includes financial systems, Electronic Data Interchange (EDI),
customer order entry, purchase order entry to manufacturers, warehousing and
inventory control. Each of the Company's sales departments and offices is
electronically linked to the Company's central computer systems which provides
fully integrated on-line real-time data with respect to the Company's inventory
levels. The Company's inventory management system was developed internally by
Jaco and is considered proprietary. Inventory turns are tracked by vendor, and
the Company's inventory management system provides immediate information to
assist in making purchasing decisions and decisions as to which inventory to
exchange with suppliers under stock rotation programs. The Company's inventory
management system also uses bar-code technology along
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with scanning devices, which are supplied by Jaco to certain customers, and is
networked to the facilities of such customers. In some cases, customers use
computers that interface directly with the Company's computers to identify
available inventory and rapidly process orders. This system enables the Company
to more effectively manage its inventory and to respond more quickly to customer
requirements for timely and reliable delivery of components. The Company's
inventory turnover was approximately 3.5 times for the fiscal year ended June
30, 1998.
Approximately 81% of the Company's component distribution inventory is
maintained at its East Coast distribution center in Hauppauge, New York. Most of
the remaining inventory is maintained at the Company's West Coast facility in
Westlake Village, California. The Company also monitors supplier stock rotation
programs, inventory price protection, rejected material and other factors
related to inventory quality and quantity.
Contract Manufacturing. The Company conducts its contract manufacturing
operations through Nexus at an approximately 32,600 square foot facility located
in Brandon, Vermont. Nexus provides turnkey and consigned contract manufacturing
of PCBs for OEMs. "Turnkey" is an industry term that describes a contract
manufacturer that buys customer-specified components from suppliers, assembles
the components onto finished PCBs and performs post-assembly testing, while
"consigned" refers to a contract manufacturer that provides the assembly and
testing elements only. OEMs then incorporate the PCBs into finished products. In
assembling PCBs, Nexus is capable of employing both pin-through-hole ("PTH") and
surface mount technologies ("SMT"). PTH is a method of assembling PCBs in which
component leads are inserted and soldered into plated holes in the board. SMT is
a method of assembling PCBs in which components are fixed directly to the
surface of the board, rather than being inserted into holes. The SMT process
allows for more miniaturization, cost savings and shorter lead paths between
components (which results in greater signal speed). In the fiscal year ended
June 30, 1998, the Company invested approximately $681,000 primarily in SMT
machinery and equipment, as part of the Company's ongoing program to expand
Nexus' operations.
Nexus maintains strict quality control procedures for its products,
including use of total quality management ("TQM") systems. Incoming raw material
and components are checked by the Nexus quality control personnel. During the
production stage, quality control personnel check the work in process at several
points in the production process.
Finally, after the assembly stage, Nexus conducts random testing of finished
products.
Nexus' manufacturing facility has earned ISO 9002 certification by the
Geneva-based organization dedicated to the development of worldwide standards
for quality management guidelines and quality assurance. Nexus' receipt of ISO
9002 certification demonstrates that Nexus' manufacturing operations meet
established world standards. Management believes sophisticated customers
7
increasingly are requiring their manufacturers to be ISO 9002-certified for
purposes of quality assurance.
Acquisition of Q.P.S. Electronics, Inc. On August 2, 1996, the Company acquired
the operating assets of Q.P.S. Electronics, Inc. ("QPS"), a distributor of
quality active and passive electronic components based in Schaumburg, Illinois.
Management believes that the acquisition of QPS has contributed to the expansion
of the Company's national, dedicated distribution network by firmly establishing
the Company's presence in the Midwest marketplace.
Acquisition of Corona Electronics, Inc. On January 21, 1997, the
Company acquired all of the outstanding shares of capital stock of Corona
Electronics, Inc. ("Corona"), an electronics component distributor located in
Orange County, California. Management believes that the acquisition of Corona
has strengthened the Company's presence in the Southern California marketplace.
Suppliers
Manufacturers of passive and active electronic components are
increasingly relying on the marketing, customer service and other resources of
distributors who market their product lines to customers not normally served by
the manufacturer, and to supplement the manufacturer's direct sales efforts in
other accounts often by providing value-added services not offered by the
manufacturer. Manufacturers seek distributors who have strong relationships with
desirable customers, are financially strong, have the infrastructure to handle
large volumes of products and can assist customers in the design and use of the
manufacturers' products. Currently, the Company has non-exclusive distribution
agreements with many manufacturers, including Epson America, Inc., International
Resistive Company, Inc., Johanson Dielectric Inc., Kemet Electronics
Corporation, Mitel Inc., Rohm Company, Limited, Samsung Semiconductor, Inc., TDK
Corporation of America, Vishay Intertechnology, Inc. and Zetex, Inc. Management
continuously seeks to identify potential new suppliers and obtain additional
distributorships for new lines of products. Management believes that such
expansion and diversification will increase the Company's sales and market
share.
In the fiscal year ended June 30, 1998, of the Company's top ten
suppliers, only Kemet and Samsung accounted for more than 10% of net sales and
the remaining eight each accounted for between 8.7% and 1.5% of net sales. As is
common in the electronics distribution industry, from time to time the Company
has experienced termination of relationships with suppliers which may affect its
results of operations in post-termination fiscal periods.
The Company generally purchases products from manufacturers pursuant to
non-exclusive distributor agreements. Selection as an authorized distributor is
a valuable marketing tool for the
8
Company because customers receive warranty protection and support from
manufacturers when they purchase products from the Company. As an authorized
distributor, the Company is able to offer customers marketing and engineering
support from the product manufacturers, which enhances the Company's ability to
attract new customers and close sales.
Most of the Company's distributor agreements are cancelable by either
party, typically upon 30 to 90 days' notice. These agreements typically provide
for price protection, stock rotation privileges and the right to return
inventory. Price protection is typically in the form of a credit to the
distributor for any inventory in the distributor's possession for which the
manufacturer reduces its prices. Stock rotation privileges typically allow the
Company to exchange inventory in an amount up to 5% of a prior period's
purchases. Upon termination of a distributor agreement, the right of return
typically requires the manufacturer to repurchase the Company's inventory at the
Company's adjusted purchase price. The Company believes that the above-described
provisions of its distributorship agreements generally have served to reduce the
Company's exposure to loss from unsold inventory. As such price protection and
stock rotation privileges are limited in scope, there can be no assurances that
the Company will not experience significant losses from unsold inventory in the
future.
Competition
The electronics distribution industry is highly competitive, primarily
with respect to price and product availability. The Company believes that the
breadth of customer base, services and product lines, its level of technical
expertise and the quality of its services generally are also particularly
important. The Company competes with large national distributors such as Arrow
Electronics, Inc. and Avnet, Inc., as well as regional and specialty
distributors, many of whom distribute the same or competitive products. Many of
the Company's competitors have significantly greater name recognition and
greater financial and other resources than those of the Company.
The PCB contract manufacturing industry is highly fragmented and is
characterized by relatively high levels of volatility, competition and pricing
and margin pressure. Many large contract manufacturers operate high-volume
facilities and primarily focus on high-volume product runs. In contrast, certain
contract manufacturers, such as Nexus, focus on low-to-medium volume and
service-intensive products, where the finished product often requires a greater
amount of overall labor.
The Company believes that contract manufacturers which are affiliated
or integrated with electronics distributors have competitive advantages over
comparably-sized, stand-alone contract manufacturers. Distributors can reduce
the risk of inventory obsolescence through stock rotation privileges and
inventory price protection and can also take advantage of material acquisition
skills, just-in-time delivery expertise and broad supplier relationships.
9
Employees
At August 31, 1998, the Company had a total of 392 employees, of which
122 were employed by Nexus. Of total employees, 11 were engaged in
administration, 58 were managerial and supervisory employees, 125 were in sales
and 198 performed warehouse, manufacturing and clerical functions. Of these
employees, Nexus employed 1 in administration, 9 in management and supervisory
positions, 2 in sales and 110 in warehouse, manufacturing and clerical
functions. There are no collective bargaining contracts covering any of the
Company's employees. The Company believes its relationship with its employees is
satisfactory.
Item 2. Properties
All of the Company's facilities are leased except for the Brandon, VT
property which is owned by Nexus. Jaco currently leases 16 facilities located in
the States of Alabama, Arizona, California, Colorado, Florida, Illinois,
Maryland, Massachusetts, Minnesota, New York, North Carolina, Oregon, Texas and
Washington, three of which are multipurpose facilities used principally as
administrative, sales, and purchasing offices, as well as warehouses, and the
remainder of which are used exclusively by Jaco as sales offices. Jaco's
satellite sales offices range in size from approximately 185 square feet to
approximately 4,000 square feet. Base rents for such properties range from
approximately $400 per month to approximately $9,000 per month. Depending on the
terms of each particular lease, in addition to base rent, Jaco may also be
responsible for portions of real estate taxes, utilities and operating costs, or
increases in such costs over certain base levels. The lease terms range from
month-to-month to as long as five years. All facilities are linked by computer
terminals to Jaco's Hauppauge, New York headquarters. The following paragraphs
set forth certain information regarding Jaco's two principal leased facilities:
(i) Jaco leases from Bemar Realty Company, a partnership consisting of
Messrs. Joel H. Girsky and Charles B. Girsky, approximately 72,000 square feet
of office and warehouse space at 145 Oser Avenue, Hauppauge, New York. The lease
provides for a current monthly base rent of approximately $46,000 net of all
expenses, including taxes, utilities, insurance, maintenance and repairs, and
has a term which expires on December 31, 2003. In Fiscal 1996, Jaco negotiated a
renewal of the lease and the current rental rate is similar to that currently
being charged for comparable properties in the area. Approximately 26,000 square
feet of space is sublet by Jaco to an unaffiliated third party. In addition to
its headquarters, Jaco maintains purchasing and sales offices and warehouse
facilities at its Hauppauge location.
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(ii) Jaco leases through April 30, 2003, from an unaffiliated party,
approximately 10,000 square feet of office and warehouse space in Westlake
Village, California for a base rent of approximately $10,550 per month. Jaco
maintains both a purchasing and sales office at this location, as well as
warehouse facilities.
Nexus currently owns and occupies a 32,000 square foot facility located
in Brandon, Vermont, that is used for manufacturing, storage and office space.
The building was acquired by the Company on March 11, 1994 as part of the
acquisition of all of the outstanding shares of capital stock of Nexus.
The Company believes that its present facilities will be adequate to
meet its needs for the foreseeable future.
Item 3. Legal Proceedings.
The Company is a party to legal matters arising in the general
conduct of business. The ultimate outcome of such matters is not
expected to have a material adverse effect on the Company's results of
operations or financial position.
Item 4. Submission of Matters To A Vote of Security Holders.
No response to this Item is required.
11
PART II
Item 5.Market For the Company's Common Stock and Related Security Holder
Matters.
(a) The Company's common stock (the "Common Stock") is traded on The
Nasdaq National Market under the symbol "JACO". The stock prices listed below
represent the high and low closing sale prices of the Common Stock, as reported
by The Nasdaq National Market, for each fiscal quarter beginning with the first
fiscal quarter of 1997.
Fiscal Year 1997: High Low
First quarter ended September 30, 1996 $10.38 $ 6.25
Second quarter ended December 31, 1996 $ 9.50 $ 7.75
Third quarter ended March 31, 1997 $ 9.12 $ 7.00
Fourth quarter ended June 30, 1997 $ 8.00 $ 6.38
Fiscal Year 1998: High Low
First quarter ended September 30, 1997 $ 8.12 $ 7.25
Second quarter ended December 31, 1997 $ 7.31 $ 6.00
Third quarter ended March 31, 1998 $ 7.50 $ 6.12
Fourth quarter ended June 30, 1998 $ 7.00 $ 5.62
(b) As of September 23, 1998 there were approximately 160 holders of
record of the Company's Common Stock who management believes held for more than
1,500 beneficial owners.
(c) The Company has never declared or paid cash dividends on its Common
Stock. The Company intends to retain its earnings, if any, for use in its
business and to support growth and does not anticipate paying cash dividends in
the foreseeable future. In addition, the agreement governing the Company's
credit facility (the "Credit Facility") contains provisions that prohibit the
Company from paying cash dividends on its Common Stock.
12
.
Year ended June 30,
1994 1995 1996 1997 1998
------- -------- -------- -------- ------
(in thousands, except per share data)
Statement of operations data
Net sales $105,213 $138,683 $167,149 $155,098 $ 153,674
Cost of goods sold 83,038 109,902 133,105 122,993 121,796
-------- ------- ------- ------- ---------
Gross profit 22,175 28,781 34,044 32,105 31,878
Selling, general and administrative
expenses 19,155 23,552 26,247 27,640 28,707
-------- -------- -------- -------- -----------
Operating profit 3,020 5,229 7,797 4,465 3,171
Interest expense 1,117 2,010 1,347 971 1,140
--------- --------- --------- ---------- ------------
Earnings before income taxes and
cumulative effect of a change
in accounting for income taxes 1,903 3,219 6,450 3,494 2,031
Income tax expense 714 1,303 2,600 1,415 847
---------- --------- --------- --------- -------------
Earnings before cumulative
effect of a change in accounting
for income taxes 1,189 1,916 3,850 2,079 1,184
Cumulative effect of a change in
accounting for income taxes 241
NET EARNINGS $ 1,430 $ 1,916 $ 3,850 $ 2,079 $ 1,184
========= ========= ========= ========= ============
Earnings per common share*
Earnings per common share before
cumulative effect of a change in
accounting $.47 $.78 $1.11 $.53 $.31
Cumulative effect of a change in
accounting .10
Net earnings per common share $.57 $.78 $1.11 $.53 $.31
=== === ==== === ===
Earnings per common share -
assuming dilution
Earnings per common share before
cumulative effect of a change in
accounting $.47 $.78 $1.08 $.53 $.30
Cumulative effect of a change in
accounting .09
Net earnings per common share $.56 $.78 $1.08 $.53 $.30
=== === ==== === ===
Weighted average common and
common equivalent shares
outstanding
Basic 2,505,409 2,440,841 3,479,707 3,899,181 3,836,700
========= ========= ========= ========= =========
Diluted 2,551,173 2,461,091 3,554,018 3,947,687 3,921,518
========= ========= ========= ========= =========
Balance sheet data
Working capital $ 15,160 $ 30,741 $ 36,964 $ 41,146 $ 42,481
Total assets 45,685 56,323 61,143 69,996 73,419
Long-term obligations 9,694 23,666 8,791 15,553 17,037
Shareholders' equity 11,202 13,227 34,304 35,892 36,625
* All per share information has been restated to give effect to a 10% stock
dividend paid on March 10, 1995 and a 4-for-3 stock split distributed to
shareholders of record as of September 22, 1995. In addition, all earnings
per common share amounts for all periods have been restated to conform to the
SFAS No. 128 computation.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements in this filing, and elsewhere, which look forward in time
involve risks and uncertainties which may effect the actual results of
operations. The following important factors, among others, have affected and, in
the future, could affect the Company's actual results: dependence on a limited
number of suppliers for products which generate a significant portion of the
Company's sales, the effect upon the Company of increases in tariffs or duties,
changes in trade treaties, strikes or delays in air or sea transportation and
possible future United States legislation with respect to pricing and/or import
quotas on products imported from foreign countries, and general economic
downturns in the electronics distribution industry which may have an adverse
economic effect upon manufacturers, end-users of electronic components and
electronic component distributors.
General
Jaco is a distributor of electronic components and provider of contract
manufacturing and value-added services. Products distributed by Jaco include
semiconductors, capacitors, resistors, electromechanical devices flat panel
displays and monitors, and power supplies used in the assembly and manufacturing
of electronic equipment.
The Company's customers are primarily small and medium sized
manufacturers. The trend for these customers has been to shift certain
manufacturing functions to third parties (outsourcing). The Company intends to
seek to capitalize on this trend toward outsourcing by increasing sales of
products enhanced by value-added services. Value-added services currently
provided by Jaco consist of configuring complete computer systems to customer
specifications both in tower and desktop configurations, kitting (e.g. supplying
sets of specified quantities of products to a customer that are prepackaged for
ease of feeding the customer's production lines), and contract manufacturing
through Nexus.
During August 1996 and January 1997, the Company acquired the operating
assets of QPS Electronics, Inc. and all of the outstanding common stock of
Corona Electronics, Inc., respectively, both of which are electronic component
distributors. Aggregate consideration paid for the acquisitions approximated
$4.7 million, of which $157,500 was paid through the issuance of 20,000 shares
of the Company's common stock (See Note J of the Notes to the Consolidated
Financial Statements). The addition of these two companies strengthens the
Company's position in Southern California and the Midwest. The Company has
consolidated the operations of these acquired companies in order to reduce
operating costs and create a stronger sales organization.
14
The Company's sales from value-added services represented $18.2
million, or 11.8% of net sales in the fiscal year ended June 30, 1998, $15.7
million, or 10.1% of net sales in the fiscal year ended June 30, 1997 and $18.0
million, or 11% of net sales in the fiscal year ended June 30, 1996. Of these
sales, sales from contract manufacturing were $16.4 million, or 10.7% of net
sales in the fiscal year ended June 30, 1998, $10.0 million, or 6.4% of net
sales in fiscal year ended June 30, 1997, and $10.8 million, or 6.5% of net
sales in the fiscal year ended June 30, 1996.
Results of Operations
The following table sets forth certain items in the Company's statement
of earnings as a percentage of net sales for the periods shown:
1996 1997 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 79.6 79.3 79.3
---- ---- ----
Gross profit 20.4 20.7 20.7
Selling, general and administrative expenses 15.7 17.8 18.7
---- ---- ----
Operating profit 4.7 2.9 2.0
Interest expense .8 .6 .7
---- ---- ----
Earnings before income taxes 3.9 2.3 1.3
Income tax expense 1.6 1.0 .5
---- ---- ----
NET EARNINGS 2.3% 1.3% .8%
==== ==== ====
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1998 ("FISCAL 1998") WITH FISCAL YEAR
ENDED JUNE 30, 1997 ("FISCAL 1997")
Net sales for the fiscal year ended June 30, 1998 decreased
approximately 1.0% to $153,674,000 as compared to $155,098,000 reported for the
same Fiscal 1997 period. Fiscal 1998 results reflect the continuing
industry-wide pressures on pricing, compounded by the softening demand for
electronic components. The decrease in component sales through the Company's
distribution operations was partially offset by a $6.8 million, or 68%, increase
in
15
sales from contract manufacturing. The Company's long term plan includes
optimizing value-added services, such as Flat Panel Displays and contract
manufacturing.
Gross profit margins, as a percentage of net sales, remained constant
at 20.7% in Fiscal 1998, compared to Fiscal 1997. While unit pricing continued
to decline during Fiscal 1998, as a result of price protection and inventory
rotation extended to the Company by its suppliers, the Company was able to
maintain gross profit margins.
Selling, General and Administrative expenses ("SG&A") were $28.7
million in Fiscal 1998, an increase of $1.1 million, or 3.9% from $27.6 million
in Fiscal 1997. The Company's addition of sales and sales management personnel,
the expansion of the Field Application Engineering (FAE) Program, and the
addition of the Flat Panel Display Group have contributed to the increase in
SG&A expenses. Due to the continuing weakness in the electronics industry, the
Company is closely reviewing SG&A and anticipates implementing cost containment
measures in the fiscal year ending June 30, 1999, which, it believes, will not
have a negative impact on sales.
Interest expense increased to approximately $1.1 million in Fiscal
1998, as compared to approximately $1.0 million in Fiscal 1997. The 17% increase
in interest expense was primarily the result of additional borrowings under the
credit facility for the acquisition of new inventory as further franchises were
added in Fiscal 1998. The Company believes that the addition of such product
lines will have a favorable impact on sales during future periods. The Company's
acquisition of approximately $700,000 of new equipment to support the growth in
contract manufacturing also contributed to the increase in interest expense.
Net earnings for Fiscal 1998 were $1.2 million, or approximately $.30
per share diluted, as compared to $2.1 million, or approximately $.53 per share
diluted for Fiscal 1997. During the last fiscal year, the decrease in net
earnings was primarily attributable to the increase in SG&A. The Company
believes it is better positioned for future growth and will benefit from
expenditures made during the fiscal year ended June 30, 1998.
16
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1997 WITH FISCAL YEAR ENDED JUNE 30,
1996 ("FISCAL 1996")
Net sales for the fiscal year ended June 30, 1997 decreased 7.2% to
$155,098,000, as compared to $167,149,000 reported for the same Fiscal 1996
period. During Fiscal 1997, the decrease in sales was primarily the result of an
overall industry weakness as it relates to component pricing. The Company sold a
greater number of components than were sold in its last fiscal year, but has
been unable to offset the price reductions that have occurred. The Company
completed two acquisitions during Fiscal 1997 (See Note J of the Notes to the
Consolidated Financial Statements) that expanded its market penetration in the
Midwest and Southern California. Additionally, the Company continued to expand
its marketing efforts in flat panel devices and field application engineers
("FAE's"). FAE's assist in designing components for approval by customer's
engineering departments. Sales from contract manufacturing decreased by
approximately $.8 million during Fiscal 1997, compared to Fiscal 1996. During
the Fiscal 1997 Nexus shifted its sales effort to surface mount technology,
compared to the older pin-through-hole technology. The Company believed that the
shift in technology should produce increases in contract manufacturing sales
during future periods.
Gross profit margins, as a percentage of net sales, increased slightly
from 20.4% in Fiscal 1996 to 20.7% in Fiscal 1997. Though unit pricing of
components declined during Fiscal 1997, both price protection provided to the
Company by its suppliers and increases in the sale of passive components, which
historically have maintained a slightly higher gross profit margin as compared
to active components, resulted in the increase in gross profit margin.
Selling, general and administrative expenses ("SG&A") were $27.6
million in Fiscal 1997, an increase of $1.4 million, or 5.3% from $26.2 million
in Fiscal 1996. The Company's addition of sales and sales management personnel,
the expansion of the FAE program and the addition of the flat panel display
group have contributed to the increase in SG&A. Additionally, the Company
acquired QPS Electronics, Inc. and Corona Electronics Inc. during the Fiscal
1997.
Interest expense decreased to $1.0 million in Fiscal 1997, as compared
to $1.3 million in Fiscal 1996. The 28% decrease was primarily the result of a
reduction in borrowings, as a result of the reduction in indebtedness under the
Company's credit facility by the application of the net proceeds of $17.1
million from the public offering completed during the second quarter of Fiscal
1996. Borrowings under the credit facility include funds used for the
acquisition of Corona and QPS (See Note J of the Notes to the Consolidated
Financial Statements) during Fiscal 1997.
17
Net earnings for Fiscal 1997 were $2.1 million, or $.53 per share, as
compared to $3.8 million, or $1.08 per share diluted, during Fiscal 1996. The
decrease in net earnings was attributable to the decrease in sales and the
increase in SG&A. The Company believes that the additional expenses incurred
during Fiscal 1997 will provide the infrastructure necessary for future
increases in sales.
Liquidity and Capital Resources
On October 20, 1995, the Company completed a public offering of
1,600,000 shares of its common stock at $12.75 per share. The offering consisted
of 1,325,000 shares offered by the Company and an aggregate of 275,000 shares
offered by certain officers and directors of the Company. On December 8, 1995,
the underwriters of the public offering exercised a portion of their
overallotment option for an additional 160,000 shares at a price per share equal
to that of the public offering. The Company's net proceeds from the public
offering of approximately $17,140,000, after deducting the underwriters'
commission and cost of the public offering, were used to reduce its bank
indebtedness. In connection with the public offering, the Company also issued
stock warrants, to the representative underwriters, to purchase up to 70,000
shares of common stock at an exercise price per share equal to 180% of the
public offering price, which expire on October 20, 1999.
The Company's agreement with its banks, as amended, provides the
Company with a $30,000,000 term loan and revolving line of credit facility based
principally on eligible accounts receivable and inventories of the Company as
defined in the agreements expiring September 13, 2000. The interest rate of the
credit facility is based on the average 30 day LIBOR rate plus 3/4% to 1-1/4%
depending on the Company's performance for the immediately preceding four fiscal
quarters measured by a certain financial ratio, and may be adjusted quarterly.
The outstanding balance on the revolving line of credit facility was $15,308,260
at June 30, 1998. The term loan, with a remaining balance of $589,282 at June
30, 1998, requires monthly principal payments of $17,857, together with interest
through September 13, 2000, with a final payment of $107,146 due on September
13, 2000. Borrowings under this facility are collateralized by substantially all
of the assets of the Company. The agreement contains provisions for maintenance
of certain financial ratios, all of which the Company is in compliance with at
June 30, 1998, and prohibits the payment of cash dividends.
18
During Fiscal 1998, the Company's net cash provided by operating
activities was approximately $1.6 million, as compared to net cash provided by
operating activities of approximately $1.3 million for Fiscal 1997, an increase
of approximately $.3 million. The increase is primarily attributable to the
increase in accounts payable by $.8 million for Fiscal 1998, as compared to a
$.6 million (net of liabilities acquired from business acquisitions) decrease
during Fiscal 1997. In addition, inventory increased by $2.4 million for Fiscal
1998, as compared to a $1.8 million (net of assets acquired from business
acquisitions) increase during Fiscal 1997. Net cash used in investing activities
decreased to $1.3 million for Fiscal 1998, as compared to $5.9 million for
Fiscal 1997, a decrease of $4.6 million. The two acquisitions completed during
Fiscal 1997 required approximately $4.7 million, and were financed principally
through the Company's line of credit. Additionally, in Fiscal 1998, the Company
increased its borrowings by approximately $2.4 million principally to finance an
increase in inventory. Fiscal 1996 reflects the proceeds of the Company's public
offering, which reduced cash provided by financing activities by application of
such proceeds against the Company's bank borrowings. The Company's cash
expenditures may vary significantly from current levels, based on a number of
factors, including, but not limited to, future acquisitions, if any.
For Fiscal 1997 and Fiscal 1998, inventory turnover was 3.9x and 3.5x,
respectively. The average of the Company's accounts receivable at both June 30,
1998 and June 30, 1997 was 52 days. The Company did not experience any
significant trade collection difficulties during Fiscal 1998.
The Board of Directors of the Company has authorized the purchase of up
to 250,000 shares of its common stock under a stock repurchase program.
Subsequent to year end, the Board of Directors authorized the repurchase of up
to an additional 400,000 shares of the Company's common stock. The purchases may
be made by the Company from time to time on the open market at the Company's
discretion and will be dependent on market conditions. Through September 23,
1998, the Company has purchased 404,500 shares of its common stock for aggregate
consideration of $2,176,342 under this program.
19
The Company believes that cash flow from operations and funds available
under its credit facility will be sufficient to fund the Company's capital needs
for at least the next twelve months.
Year 2000 Compliance
The year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations. In April 1996, the Company developed a three-phase program for Y2K
information systems compliance. Phase I was to identify those systems with which
the Company has exposure to Y2K issues. Phase II was the development and
implementation of action plans to be Y2K compliant in all areas by late 1998.
Phase III, to be fully completed by mid 1999, is the final major area of
exposure to ensure compliance. The Company has identified three major areas
determined to be critical for successful Y2K compliance: (1) financial and
informational system applications, (2) manufacturing applications and (3) third
party relationships.
As of September 1, 1998, Jaco has completed the redesign and
development of an entirely new distribution software system. All of the dates in
this new database are 8 characters, including the century. The system has been
tested and has been in production as of September 1, 1998. The systems include
customer order entry, purchase order entry to the Company's manufacturers,
warehousing and inventory control.
The financial systems, Accounts Payable and General Ledger have been
Y2K compliant since April 1997. The Accounts Receivable system is Y2K compliant
as of September 1, 1998.
Jaco's distribution facilities: warehouse, shipping and other physical
handling have been tested and are Y2K compliant.
The Company, as it relates to the contract manufacturing operations in
accordance with Phase I of the program, is in the process of conducting an
internal review of all systems and contacting all software suppliers to
determine major areas of exposure to Y2K issues. In the financial and
information system area a number of applications have been identified as Y2K
compliant due to their recent implementation. The contract manufacturing core
financial and reporting systems are not Y2K compliant but are scheduled to be
complete and fully tested by mid 1999. In the third party area, the Company has
contacted most of its major third parties. These parties state that they intend
to be Y2K compliant by the year 2000.
The Company believes it will cost approximately $1.5 million to replace
the core financial, reporting and distribution software systems. The Company
utilized outside consultants to undertake a portion of the work. The Company
does not expect the cost that will be incurred to be material in connection with
the contract manufacturing area and the third party area.
20
Inflation
Inflation has not had a significant impact on the Company's operations
during the last three fiscal years.
Item 8. Financial Statements and Supplementary Data.
For an index to the financial statements and supplementary data, see
Item 14(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No response to this Item is required.
21
PART III
Item 10. Directors and Executive Officers of the Company.
Incorporated herein by reference is the information to appear under the
caption "Election of Directors" in the Company's definitive proxy statement for
its Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission not later than October 28, 1998.
Item 11. Executive Compensation.
Incorporated herein by reference is the information to appear under the
caption "Executive Compensation" in the Company's definitive proxy statement for
its Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission not later than October 28, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference is the information to appear under the
caption "Principal Shareholders; Shares Held by Management" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders which will be
filed with the Securities and Exchange Commission not later than October 28,
1998.
Item 13. Certain Relationships and Related Transactions.
Incorporated herein by reference is the information to appear under the
caption "Certain Transactions" in the Company's definitive proxy statement for
its Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission not later than October 28, 1998.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Page
(a) (1) Financial Statements included in Part II, Item 8, of this Report:
Index to Consolidated Financial Statements and Schedule F- 1
Report of Independent Certified Public Accountants F- 2
Consolidated Balance Sheets F- 3
Consolidated Statements of Earnings F- 5
Consolidated Statement of Changes in Shareholders' Equity F- 6
Consolidated Statements of Cash Flows F- 7
Notes to Consolidated Financial Statements F- 8 F-27
(a) (2) Financial Statement Schedule included in Part IV of this Report:
Report of Independent Certified Public Accountant on Schedule II F-28
Schedule II - Valuation and Qualifying Accounts F-29
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto. Exhibit No.
3.1 Restated Certificate of Incorporation adopted November, 1987,
incorporated by reference to the Company's definitive proxy statement
distributed in connection with the Company's annual meeting of
shareholders held in November, 1987, filed with the SEC on November 3,
1986, as set forth in Appendix A to the aforesaid proxy statement.
3.1.1 Certificate of Amendment of the Certificate of Incorporation, adopted
December, 1995, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996 ("the Company's
1996 10-K"), Exhibit 3.1.1.
3.2 Restated By-Laws adopted June 18, 1987, incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended June 30,
1987 ("the Company's 1987 10-K"), Exhibit 3.2.
4.1 Form of Common Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form S-1, Commission File No.
2-91547, filed June 9, 1984, Exhibit 4.1.
23
10.1 Sale and leaseback with Bemar Realty Company (as assignee of Hi-Tech
Realty Company), incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1983, Exhibit 10(1),
pages 48-312.
10.2 Amendment No. 1 to Lease between the Company and Bemar Realty Company
(as assignee of Hi-Tech Realty Company), incorporated by reference to
the Company's Registration Statement on Form S-1, Commission File No.
2-91547, filed June 9, 1984, Exhibit 10.2.
10.2.2 Lease Between the Company and Bemar Realty Company, dated January 1,
1996, incorporated by reference to the Company's 1996 10-K, Exhibit
10.2.2.
10.3 Employment Agreement between Joel Girsky and the Company, dated
December 29, 1989, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1990 ("the Company's
1990 10-K"), Exhibit 10.3 pages 47-52.
10.4 1980 Stock Incentive Plan, incorporated by reference to the Company's
Registration Statement on Form S-1, Commission File No. 2-91547, filed
June 9, 1984, Exhibit 10.4, pages 168-172.
10.5 Restated 1981 Incentive Stock Option Plan, incorporated by
reference to the Company's 1987 10-K, Exhibit 10.1.
10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference
to the Company's 1993 10-K, Exhibit 10.6.
10.6.1 1993 Non-Qualified Stock Option Plan, as amended (filed as Exhibit A to
the Company's Definitive Proxy Statement, dated November 3, 1997 for
the Annual Meeting of Shareholders held on December 9, 1997).
10.7 Stock Purchase Agreement, dated as of February 8, 1994 by and among the
Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings
PLC, incorporated by reference to the Company's Current Report on Form
8-K, dated March 11, 1994.
10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended June 30,
1994, Exhibit 10.8.
10.9 Employment Agreement between Joel Girsky and the Company, dated October
5, 1994, incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1994, Exhibit 10.9.
10.10 Authorized Electronic Industrial Distributor Agreement, dated as of
August 24, 1970 by and between AVX and the Company, incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended June 30, 1995, Exhibit 10.10.
24
10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974,
by and between Kemet and the Company, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June 30, 1995,
Exhibit 10.11.
10.12 Restricted Stock Plan (filed as Exhibit B to the Company's Definitive
Proxy Statement, dated November 3, 1997 for the Annual Meeting of
Shareholders held on December 9, 1997).
10.12.1 Form of Escrow Agreement under the Restricted Stock Plan, incorporated
by reference to the Company's Registration Statement on Form S-8/S-3,
Commission File No. 333-49877,
filed April 10, 1998 Exhibit 4.2.
10.12.2 Form of Stock Purchase Agreement under the Restricted Stock Plan,
incorporated by reference to the Company's Registration Statement on
Form S-8/S-3 Commission File No. 333-49877, filed April 10, 1998,
Exhibit 4.3.
10.12.3 Form of Stock Option Agreement, incorporated by reference to the
Company's Registration Statement on Form S-8/S-3, Commission File
No333-49877, filed April 10, 1998, Exhibit 4.4.
21.1 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.
27. Financial Data Schedule.
99.1 General Loan and Security Agreement dated January 20, 1989, between the
Company as borrower and The Bank of New York Commercial Corporation
("BNYCC") as secured party, incorporated by reference to the Company's
Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1).
99.2 Loan and Security Agreement - Accounts Receivable and Inventory, dated
January 20, 1989, between the Company and BNYCC, incorporated by
reference to the Company's Current Report on Form 8-K filed January 31,
1989, Exhibit 28(2).
99.3 Letter of Credit and Security Agreement, dated January 20, 1989,
between the Company and BNYCC, incorporated by reference to the
Company's Current Report on Form 8-K filed January 31, 1989, Exhibit
28(3).
99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company
in favor of BNYCC dated January 13, 1992, together with Letters from
R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and
Distel, Inc., each a subsidiary of the Company and a guarantor of the
obligations evidenced by the Term Notes, to BNYCC
25
acknowledging the amendment to the Term Notes for the extension of the maturity
date of each such note, incorporated by reference to the Company's 1992
10-K, Exhibit 28.4.
99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the
Company and BNYCC, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5.
99.6 $1,500,000 Additional Term Loan Note, executed by the Company in favor
of BNYCC, dated March 11, 1994, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June 30, 1994,
Exhibit 99.5.
99.7 Restated and Amended Loan and Security Agreement, dated April 25, 1995,
among the Company, Nexus and BNYCC, together with an Amendment to Term
Loan Note executed by the Company in favor of BNYCC and Letter executed
by R.C. Components, Inc., Quality Components, Inc., Micatron, Inc.,
Distel, Inc. and Jaco Overseas, Inc., incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June 30, 1995,
Exhibit 99.7.
99.8 Second Restated and Amended Loan and Security Agreement dated September
13, 1995 among the Company, Nexus Custom Electronics, Inc., BNYCC and
NatWest Bank, N.A. ("Second Restated and Amended Loan and Security
Agreement"), incorporated by reference to the Company's Registration
Statement on Form S-2, Commission File No. 33-62559, filed October 13,
1995, Exhibit 99.8.
99.8.1 Amendment to the Second Restated and Amended Loan and Security
Agreement, dated as of April 10, 1996, incorporated by reference to
the Company's 1996 10-K, Exhibit 99.8.1.
99.8.2 Amendment to the Second Restated and Amended Loan and Security
Agreement, dated as of August 1, 1997. (b) Reports on Form 8-K filed
during last quarter of the period covered by this Report:
None.
26
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Earnings F-5
Consolidated Statement of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-27
Report of Independent Certified Public Accountants
on Schedule F-28
Schedule II - Valuation and Qualifying Accounts F-29
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Jaco Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Jaco
Electronics, Inc. and Subsidiaries (the "Company") as of June 30, 1997 and 1998
and the related consolidated statements of earnings, changes in shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Jaco Electronics,
Inc. and Subsidiaries as of June 30, 1997 and 1998, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Melville, New York
August 21, 1998
F-2
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1997 1998
------------- --------
CURRENT ASSETS
Cash $ 463,352 $ 562,556
Marketable securities 627,179 764,810
Accounts receivable, less allowance for doubtful
accounts of $846,000 in 1997 and $1,268,000
in 1998 22,008,210 21,887,618
Inventories 33,311,201 35,737,288
Prepaid expenses and other 1,359,617 1,203,198
Prepaid income taxes 528,243 610,132
Deferred income taxes 750,000 772,500
------------ ------------
Total current assets 59,047,802 61,538,102
PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 5,009,045 6,102,445
DEFERRED INCOME TAXES 244,000 333,000
EXCESS OF COST OVER NET ASSETS ACQUIRED, less accumulated amortization of
$501,000 in 1997
and $719,000 in 1998 4,151,574 3,776,912
OTHER ASSETS 1,543,257 1,668,830
----------- -----------
$69,995,678 $73,419,289
========== ==========
The accompanying notes are an integral part of these statements.
F-3
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
June 30,
LIABILITIES AND
SHAREHOLDERS' EQUITY 1997 1998
------------- ---------
CURRENT LIABILITIES
Accounts payable $15,833,198 $16,633,389
Current maturities of long-term debt and
capitalized lease obligations 599,239 663,198
Accrued expenses 1,468,929 1,760,862
----------- -----------
Total current liabilities 17,901,366 19,057,449
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 15,552,549 17,036,593
DEFERRED COMPENSATION 650,000 700,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 100,000 shares, $10
par value; none issued
Common stock - authorized, 10,000,000 shares, $.10 par value; issued
3,975,721 and 4,065,721 shares, respectively, and 3,888,221 and 3,866,221
shares
outstanding, respectively 397,572 406,572
Additional paid-in capital, net 22,180,295 22,396,295
Unrealized gain on marketable securities 120,200 164,385
Retained earnings 13,893,696 15,077,957
Treasury stock - 87,500 and 199,500 shares, respectively,
at cost (700,000) (1,419,962)
------------ -----------
35,891,763 36,625,247
---------- ----------
$69,995,678 $73,419,289
========== ==========
The accompanying notes are an integral part of these statements.
F-4
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
1996 1997 1998
-------------- ------------- --------
Net sales $167,149,385 $155,097,745 $153,674,226
Cost of goods sold 133,105,227 122,993,172 121,796,083
----------- ----------- -----------
Gross profit 34,044,158 32,104,573 31,878,143
Selling, general and administrative expenses 26,246,741 27,639,567 28,706,520
------------ ------------ ------------
Operating profit 7,797,417 4,465,006 3,171,623
Interest expense 1,347,639 971,253 1,140,362
------------- -------------- -------------
Earnings before income taxes 6,449,778 3,493,753 2,031,261
Income tax provision 2,600,000 1,415,000 847,000
------------- ------------- --------------
NET EARNINGS $ 3,849,778 $ 2,078,753 $ 1,184,261
============= ============= =============
Net earnings per common share
Basic $1.11 $0.53 $0.31
==== ==== ====
Diluted $1.08 $0.53 $0.30
==== ==== ====
Weighted-average common shares and common
equivalent shares outstanding
Basic 3,479,707 3,899,181 3,836,700
========= ========= =========
Diluted 3,554,018 3,947,687 3,921,518
========= ========= =========
The accompanying notes are an integral part of these statements.
F-5
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Years ended June 30, 1996, 1997 and 1998
Unrealized
Additional gain on
paid-in marketable Retained
Shares Amount capital securities earnings
-------- -------- ------------- ------------------- ----------------
Balance at July 1, 1995 2,464,384 $246,438 $ 5,013,663 $ 7,966,431
Issuance of common stock for cash 1,485,000 148,500 16,991,466
Exercise of stock options 6,415 642 19,658
Payment for fractional shares resulting
from
4-for-3 stock split (78) (8) 8 (1,266)
Unrealized gain on marketable securities $ 68,245
- - net
Net earnings 3,849,778
--------------- ------------- ---------------- ------------- -----------
Balance at June 30, 1996 3,955,721 395,572 22,024,795 68,245 11,814,943
Issuance of common stock in connection
with
acquisition 20,000 2,000 155,500
Purchase of treasury stock
Unrealized gain on marketable
securities - net 51,955
Net earnings 2,078,753
--------------- ------------- --------------- -------------- -----------
Balance at June 30, 1997 3,975,721 397,572 22,180,295 120,200 13,893,696
Issuance of restricted stock 90,000 9,000 621,000
Deferred compensation expense
Purchase of treasury stock
Unrealized gain on marketable
securities - net 44,185
Net earnings 1,184,261
--------------- ------------- ---------------- ------------- -----------
Balance at June 30, 1998 4,065,721 $406,572 $22,801,295 $164,385 $15,077,957
========= ======= ========== ======= ==========
F-6
Deferred Total
Treasury compen- shareholders'
stock sation equity
-------- -------- ----------------
Balance at July 1, 1995 $13,226,532
Issuance of common stock for cash 17,139,966
Exercise of stock options 20,300
Payment for fractional shares resulting
from
4-for-3 stock split (1,266)
Unrealized gain on marketable securities 68,245
- - net
Net earnings 3,849,778
--------------- ------------- ---------------
Balance at June 30, 1996 34,303,555
Issuance of common stock in connection
with
acquisition 157,500
Purchase of treasury stock $ (700,000) (700,000)
Unrealized gain on marketable
securities - net 51,955
Net earnings 2,078,753
--------------- ------------- ----------------
Balance at June 30, 1997 (700,000) 35,891,763
Issuance of restricted stock $(540,000) 90,000
Deferred compensation expense 135,000 135,000
Purchase of treasury stock (719,962) (719,962)
Unrealized gain on marketable
securities - net 44,185
Net earnings 1,184,261
--------------- ------------- -----------------
Balance at June 30, 1998 $(1,419,962) $(405,000) $36,625,247
========= ======= =============
The accompanying notes are an integral part of this statement.
F-7
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
1996 1997 1998
------------ ------------- --------
Cash flows from operating activities
Net earnings $ 3,849,778 $ 2,078,753 $ 1,184,261
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities
Depreciation and amortization 719,899 1,050,666 1,356,457
Deferred compensation 50,000 50,000 185,000
Deferred income tax benefit (158,000) (119,000) 33,000
Loss on sale of equipment 8,793 9,941 2,717
Provision for doubtful accounts 761,190 255,931 475,816
Changes in operating assets and liabilities, net of
effects of acquisitions
(Increase) decrease in accounts receivable (2,540,656) 1,603,022 (355,660)
Increase in inventories (3,435,627) (1,767,196) (2,426,087)
Decrease (increase) in prepaid expenses and other 516,789 (615,364) 156,419
Increase (decrease) in accounts payable (1,237,895) (594,557) 800,191
Increase (decrease) in accrued expenses (124,638) 235,950 291,933
Decrease in income taxes payable (91,732) (902,545) (81,889)
---------------- --------------- ----------------
Net cash provided by (used in) operating activities (1,682,099) 1,285,601 1,622,158
-------------- -------------- --------------
Cash flows from investing activities
Increase in marketable securities (379,036) (59,943) (68,049)
Capital expenditures (789,635) (943,352) (1,068,775)
Proceeds from the sale of equipment 12,047 42,867 120,515
Business acquisitions, net of cash acquired (4,742,249)
Decrease in due from officers, net 309,808
Increase in other assets (6,328) (176,728) (258,905)
----------------- --------------- ---------------
Net cash used in investing activities (853,144) (5,879,405) (1,275,214)
--------------- -------------- --------------
Cash flows from financing activities
Proceeds from public offering - net 17,139,966
Borrowings from line of credit 173,061,732 161,931,215 152,258,926
Payments of line of credit (179,449,087) (155,834,207) (151,076,073)
Principal payments under equipment financing (251,626) (289,727) (586,345)
Payments under term loans (8,214,286) (214,286) (214,286)
Purchase of treasury stock (700,000) (719,962)
Proceeds from issuance of restricted stock 90,000
Proceeds from exercise of stock option 20,300
Payments for fractional shares (1,266)
-------------- -------------- -----------------
Net cash (used in) provided by financing activities 2,305,733 4,892,995 (247,740)
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH (229,510) 299,191 99,204
Cash at beginning of year 393,671 164,161 463,352
--------------- --------------- ---------------
Cash at end of year $ 164,161 $ 463,352 $ 562,556
=============== =============== ===============
Supplemental cash flow disclosures:
Interest paid $ 1,472,000 $ 815,000 $ 1,301,000
Income taxes paid 2,882,000 2,502,000 929,000
Supplemental schedule of noncash financing and investing activities:
Equipment under capital leases $ $ 531,561 $ 1,165,781
-
The accompanying notes are an integral part of these statements.
F-8
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1997 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily
engaged in the distribution of semiconductors, capacitors, resistors,
electromechanical devices, flat panel displays, power supplies, computers and
computer subsystems, produced by others, for the manufacture and assembly of
electronic products. In addition, the Company provides contract manufacturing
services.
Electronics parts distribution sales include exports made principally to
customers located in Western Europe. For the years ended June 30, 1996, 1997 and
1998, export sales amounted to approximately $4,963,000, $4,102,000 and
$4,537,000, respectively.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Jaco Electronics, Inc. and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions
have been eliminated.
2. Revenue Recognition
The Company recognizes revenue as products are shipped and title passes
to customers.
3. Investments in Marketable Securities
Investments in marketable securities consist of investments in mutual
funds. Such investments have been classified as "available for sale
securities" and are reported at fair market value which is inclusive of
unrealized gains of approximately $188,200 and $257,782 in 1997 and
1998, respectively. Changes in the fair value of "available for sale
securities" are classified as a separate component of shareholders'
equity, net of any related deferred tax effects.
4. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out and average cost methods.
F-9
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided for using the straight-line method over the estimated useful
life of the assets.
The Company capitalizes costs incurred for internally developed
software where economic and technological feasibility has been
established. These capitalized software costs will be amortized on a
straight-line basis over the estimated useful life of the software,
which will be five to seven years. Amortization will begin in the
period in which the software is available for use.
6. Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired is amortized over periods
of ten to forty years using the straight-line method. The Company
periodically reviews and evaluates whether there has been a permanent
impairment in the value of its intangibles. Factors considered in the
valuation include current operating results, trends and anticipated
undiscounted future cash flows.
7. Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
net operating loss carryforwards for which income tax expenses or
benefits are expected to be realized in future years. A valuation
allowance has been established to reduce deferred tax assets
attributable to a subsidiary of the Company, as it is more likely than
not that all, or some portion, of such deferred tax assets will not be
realized. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
8. Earnings Per Common Share
In fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per
Share." SFAS No. 128 replaces the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects
F-10
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods have been
presented, and, where appropriate, restated to conform to the SFAS No.
128 computation.
9. Financial Instruments and Business Concentrations
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of accounts
receivable. Concentration of credit risk with respect to accounts
receivable is generally mitigated due to the large number of entities
comprising the Company's customer base, their dispersion across
geographic areas and industries, along with the Company's policy of
maintaining credit insurance. The Company routinely addresses the
financial strength of its customers and, as a consequence, believes
that its accounts receivable credit risk exposure is limited.
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Fair Value of Financial Instruments," requires disclosure of the
estimated fair value of an entity's financial instrument assets and
liabilities. The Company's principal financial instrument consists of a
revolving credit facility, expiring on September 13, 2000, with two
participating banks. The Company believes that the carrying amount of
such debt approximates the fair value as the variable interest rate
approximates the current prevailing interest rate.
The Company generally purchases products from manufacturers pursuant to
nonexclusive distributor agreements. During the year ended June 30,
1998, the Company's top three suppliers accounted for 16%, 13% and 9%,
respectively, of net sales. As is common in the electronics
distribution industry, from time to time the Company has experienced
terminations of relationships with suppliers. There can be no assurance
that, in the event a supplier cancelled its distributor agreement with
the Company, the Company will be able to replace the sales with sales
of other products.
F-11
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
11. Accounting Pronouncements Not Yet Adopted
In July 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information". Statement No.130, which must
be adopted by the Company in fiscal year 1999, establishes standards for the
reporting and display of comprehensive income and its components in a complete
set of financial statements. Statement No. 131, which must also be adopted by
the Company in fiscal year 1999, changes the way segment information is reported
and establishes standards for related disclosures about products and services,
geographic areas, and major customers.
The adoption of these new standards will not have a material impact on
the Company's financial position or results of operations.
NOTE B - INVENTORY
Inventories consist of the following:
June 30,
1997 1998
Finished goods and goods held for resale $30,129,201 $30,490,288
Work-in-process 455,000 555,000
Raw materials 2,727,000 4,692,000
----------- -----------
$33,311,201 $35,737,288
========== ==========
F-12
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
Useful June 30,
life ---------------------
in years 1997 1998
---------- ------------ --------
Land, building and improvements 10 to 30 $1,468,708 $1,468,708
Machinery and equipment 3 to 8 4,698,011 6,028,756
Internally developed software costs 5 to 7 549,159 1,123,897
Transportation equipment 3 to 5 51,050 32,063
Leasehold improvements 5 to 10 569,515 599,757
---------- ----------
7,336,443 9,253,181
Less accumulated depreciation and amortization
(including $272,500 in 1997 and $326,134
in 1998 of capitalized lease amortization) 2,327,398 3,150,736
--------- ---------
$5,009,045 $6,102,445
========= =========
Included in machinery and equipment are assets recorded under capitalized
leases at June 30, 1997 and 1998 for $949,695 and $1,789,913, respectively.
NOTE D - INCOME TAXES
The components of the Company's provision for income taxes is as follows:
June 30,
1996 1997 1998
------------- ------------- -------
Federal
Current $2,176,000 $1,262,000 $663,000
Deferred (158,000) (119,000) 33,000
---------- ---------- --------
2,018,000 1,143,000 696,000
State 582,000 272,000 151,000
---------- ---------- -------
$2,600,000 $1,415,000 $847,000
========= ========= =======
F-13
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE D - INCOME TAXES (continued)
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
June 30,
--------------------------------------------
1996 1997 1998
------ -------- ------
Statutory Federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 6.0 5.1 5.0
Sales expense for which no tax
benefit arises .1 1.8 2.4
Other .2 (.4) .3
------ ------ ------
Effective tax rate 40.3% 40.5% 41.7%
==== ==== ====
Deferred income tax assets and liabilities resulting from differences
between accounting for financial statement purposes and tax purposes are
summarized as follows:
1997 1998
------------- ------------
Deferred tax assets
Net operating loss carryforwards $ 409,000 $ 260,000
Allowance for bad debts 308,000 463,000
Inventory valuation 691,000 874,000
Deferred compensation 237,000 255,000
Other deferred assets 65,000 198,500
----------- ----------
1,710,000 2,050,500
Deferred tax liabilities
Depreciation (104,000) (458,000)
Other (50,000) (68,000)
Unrealized gain on marketable securities
available for sale (68,000) (94,000)
----------- -----------
1,488,000 1,430,500
Valuation allowance (494,000) (325,000)
---------- ----------
Net deferred tax asset $ 994,000 $1,105,500
========== =========
F-14
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE D - INCOME TAXES (continued)
At June 30, 1998, the Company, through an acquisition, has available a
Federal net operating loss carryforward of approximately $713,000. Such net
operating loss is subject to certain limitations and expires in varying
amounts during the fiscal years 2007 through 2009. Further, the Company has
established a valuation allowance with respect to the net deferred tax
assets attributable to this acquired subsidiary. During fiscal 1998,
$169,000 of such net deferred tax asset was recognized as a reduction of
the excess of cost over net assets acquired attributable to the acquired
subsidiary. The subsequent realization of such deferred tax asset will
result in the reduction of the excess of cost over net assets acquired.
F-15
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE E - EARNINGS PER COMMON SHARE
For the year ended June 30,
1996 1997
---------------------------------------- ----------------------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount ator) nator) Amount
--------- --------- ------- --------- --------- -------
Basic earnings per share;
income available to
common shareholders $3,849,778 3,479,707 $1.11 $2,078,753 3,899,181 $0.53
Effect of dilutive
securities
Stock options 74,311 48,506
--------------- ----------- ---------------- -----------
Diluted earnings per
share; income
available
to common shareholders
plus assumed
conversions $3,849,778 3,554,018 $1.08 $2,078,753 3,947,687 $0.53
========= ========= ========= =========
For the year ended June 30,
1998
----------------------------------------
Income Shares Per
(Numer- (Denomi- Share
ator) nator) Amount
--------- --------- -------
Basic earnings per share;
income available to
common shareholders $1,184,261 3,836,700 $0.31
Effect of dilutive
securities
Stock options 84,818
--------------- ----------- -
Diluted earnings per
share; income
available
to common shareholders
plus assumed
conversions $1,184,261 3,921,518 $0.30
========= =========
Options to purchase 217,631 shares of common stock at a price range of
$7.00 to $12.75 and warrants to purchase 70,000 shares of common stock at
$22.95 were outstanding during the year. They were not included in the
computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares.
F-16
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS
Debt and capitalized lease obligations are as follows:
June 30,
1997 1998
------------ -----------
Term loans and revolving line of credit (a) $14,821,883 $15,897,542
Other term loans (b) 358,073 133,863
Equipment notes (c) 250,165 115,998
Capitalized lease obligations (d) 847,328 1,825,066
------------ -----------
16,277,449 17,972,469
Less amounts representing interest on capitalized
leases 125,661 272,678
------------ ------------
16,151,788 17,699,791
Less current maturities 599,239 663,198
------------ ------------
$15,552,549 $17,036,593
========== ==========
(a) Term Loans and Revolving Line of Credit Facility
The Company's agreement with its banks, as amended, provides the
Company with a $30,000,000 term loan and revolving line of credit
facility based principally on eligible accounts receivable and
inventories of the Company as defined in the agreements. The
agreement was amended to: (i) extend the maturity date to September
13, 2000, (ii) change the interest rate to a rate based on the
average 30 day LIBOR rate plus 3/4% to 1-1/4% depending on the
Company's performance for the immediately preceding four fiscal
quarters measured by a certain financial ratio, and (iii) changed the
requirements of certain financial covenants. The applicable interest
rate may be adjusted quarterly and borrowings under this facility are
collateralized by substantially all of the assets of the Company. The
outstanding balance on the revolving line of credit facility was
$15,308,260 at June 30, 1998, with an associated interest rate of
6.91%. Pursuant to the same agreement, at June 30, 1998, a term loan
with a remaining balance of $589,282 requires monthly principal
payments of $17,857, together with interest through September 13,
2000, with a final payment of $107,146 due on September 13, 2000. The
agreement contains provisions for maintenance of certain financial
ratios, all of which the Company is in compliance with, and prohibits
the payment of cash dividends.
F-17
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)
(b) Other Term Loans
Other term loans as of June 30, 1998 are as follows:
Monthly
Date of loan Balance Term payment
March 16, 1995 $ 23,070 60 months $1,160
March 16, 1995 110,793 84 months 2,730
-------
$133,863
The above loans are collateralized by the related equipment acquired,
having a carrying value of approximately $331,000 at June 30, 1998
and $422,000 at June 30, 1997. The agreements contain, among other
things, restrictive covenants on one of the Company's subsidiaries,
which place limitations on: (i) consolidations, mergers and
acquisitions, (ii) additional indebtedness, encumbrances and
guarantees, (iii) loans to shareholders, officers or directors, (iv)
dividends and stock redemptions, and (v) transactions with
affiliates, all as defined in the agreements. The loans bear interest
payable monthly, at 6% and 5.5%, respectively.
(c) Equipment Notes
The equipment notes are payable through September 1999, bearing
implicit interest rates from 7.55% to 9.68%, and are collateralized
by the related equipment.
(d) Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for
as capital leases. During fiscal 1998, the Company acquired
approximately $1,166,000 of equipment through capital leases. The
obligations for the equipment require the Company to make monthly
payments through July 2003, with implicit interest rates from 7.0% to
8.5%.
F-18
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)
The following is a summary of the aggregate annual maturities of debt and
capitalized lease obligations as of June 30, 1998:
Capitalized
Debt leases
Year ending June 30,
1999 $ 357,850 $ 406,439
2000 261,211 407,189
2001 15,504,324 407,189
2002 24,018 366,828
2003 218,869
2004 18,552
---------- ---------
$16,147,403 $1,825,066
========== =========
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company leases certain office and warehouse facilities under
noncancellable operating leases. The leases also provide for the
payment of real estate taxes and other operating expenses of the
buildings. The minimum annual lease payments under such leases are as
follows:
Year ending June 30,
1999 $1,117,447
2000 1,084,685
2001 949,898
2002 922,080
2003 897,361
Thereafter 354,589
----------
$5,326,060
==========
F-19
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE G - COMMITMENTS AND CONTINGENCIES (continued)
In addition, the Company leases office and warehouse facilities from a
partnership owned by two officers and directors of the Company. The
lease expires in December 2003 and requires minimum annual lease
payments as follows:
Year ending June 30,
1999 $ 569,550
2000 598,000
2001 627,900
2002 659,327
2003 692,293
Thereafter 354,589
----------
$3,501,659
==========
The Company's rent expense was approximately $528,000, $602,00 and
$602,000 for the years ended June 30, 1996, 1997 and 1998,
respectively, in connection with the above lease.
Rent expense on office and warehouse facilities leases for the years
ended June 30, 1996, 1997 and 1998 was approximately $846,000 $962,000
and $1,033,000, respectively, net of sublease income of approximately
$120,000, $115,000 and $115,000, respectively.
2. Other Leases
The Company also leases various office equipment and automobiles under
noncancellable operating leases expiring through April 2003. The
minimum rental commitments required under these leases at June 30, 1998
are as follows:
Year ending June 30,
1999 $219,448
2000 128,922
2001 29,613
2002 15,096
2003 8,659
---------
$401,738
=========
F-20
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE G - COMMITMENTS AND CONTINGENCIES (continued)
3. Employment Agreement
Effective July 1, 1993, the Company entered into an employment
agreement with its Chairman which expired July 1, 1997, pursuant to
which the Chairman received a base annual salary of $325,000. In
addition, the Chairman was entitled to an annual bonus equal to 4% of
earnings before income taxes, if earnings for a particular fiscal year
exceed $1,000,000 or 6% if earnings before income taxes are in excess
of $2,500,000. The agreement also provided for the continuation of the
deferred compensation arrangement first established in fiscal 1985,
whereby $50,000 per year has been accrued and becomes payable in its
entirety no later than January 15 of the year next following the last
to occur of the following events: (1) the Chairman's attainment of age
60 (fiscal 1999) or (2) cessation of the Chairman's employment with or
without cause after July 1, 1993. In the event of a change in control
resulting in termination of the Chairman's employment, the Chairman
will receive between $450,000 and $600,000 depending on the date of
termination. For the years ended June 30, 1996, 1997 and 1998, bonuses
of approximately $387,000, $210,000 and $81,000, respectively, were
earned pursuant to the Chairman's employment agreement. Presently, the
Company is operating pursuant to the terms of the expired agreement and
is in negotiations with its Chairman to extend his employment agreement
under terms substantially similar to the above.
4. Other Matters
The Company is a party to legal matters arising in the general conduct
of business. The ultimate outcome of such matters is not expected to
have a material adverse effect on the Company's results of operations
or financial position.
F-21
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE H - RETIREMENT PLAN
The Company maintains a 401(k) Plan that is available to all employees, to
which the Company contributes up to a maximum of 1% of each employee's
salary. For the years ended June 30, 1996, 1997 and 1998, the Company
contributed to this plan approximately $104,000, $91,000 and $132,000,
respectively.
NOTE I - SHAREHOLDERS' EQUITY
On October 20, 1995, the Company completed a public offering of 1,600,000
shares of its common stock at $12.75 per share. The offering consisted of
1,325,000 shares offered by the Company and 275,000 shares offered by
certain officers and directors of the Company. On December 8, 1995, the
underwriters of the public offering exercised a portion of their
overallotment option for an additional 160,000 shares at a price per share
equal to that of the public offering. The Company's net proceeds from the
public offering of $17,139,966, after deducting the underwriters'
commission and costs of the public offering, were used to reduce its bank
indebtedness. In connection with the public offering, the Company also
issued stock warrants, to the representative underwriters, to purchase up
to 70,000 shares of common stock at an exercise price per share equal to
180% of the public offering price, which expire on October 20, 1999.
The Company has stock option plans which provide for the granting of stock
options to employees, directors and officers under the following stock option
plans:
In November 1981, the Company approved the adoption of a qualified
incentive stock option plan, hereinafter referred to as the "1981 Plan."
The stock options granted under the 1981 Plan were generally exercisable
for a period of five years at a price not less than the market value on the
date of grant. The 1981 Plan terminated in November 1991. Options granted
prior to expiration of the 1981 Plan which, by their terms, do not expire
until after November 1991 remain outstanding in accordance with their terms
until their individual expiration dates. During fiscal 1996, all
outstanding options under the 1981 Plan had been exercised.
F-22
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE I - SHAREHOLDERS' EQUITY (continued)
In December 1992, the Board of Directors approved the adoption of a
nonqualified stock option plan, known as the "1993 Non-Qualified Stock
Option Plan," hereinafter referred to as the "1993 Plan." The Board of
Directors or Plan Committee is responsible for the granting of and price of
these options. Such price shall be equal to the fair market value of the
common stock subject to such option at the time of grant. The options
expire five years from the date of grant and are exercisable over the
period stated in each option. In December 1997, the shareholders of the
Company approved an increase in the amount of shares reserved for the 1993
plan to 600,000 from 293,333, of which 290,833 are outstanding.
In October 1993, the Board of Directors approved the adoption of a stock
option plan for outside directors, known as the "1993 Stock Option Plan for
Outside Directors," hereinafter referred to as the "Outside Directors
Plan." Each outside director who was serving as of December 31, 1993 was
granted a nonqualified stock option to purchase 14,667 shares of the
Company's common stock at the fair market value on the date of grant. Each
outside director who was serving on December 31 of each calendar year
subsequent to 1993 was granted options to purchase 2,933 shares of the
Company's common stock annually. The Outside Directors Plan expired on
January 1, 1998, with a total of 55,731 options outstanding. Granted
options shall expire upon the earlier of five years after the date of grant
or one year following the date on which the outside director ceases to
serve in such capacity.
In June 1997, the Company appointed an additional outside director to the
Board of Directors who received 10,000 options to purchase the Company's
common stock at the fair market value on the date of grant. These options
were not granted pursuant to any of the Company's existing stock option
plans.
F-23
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE I - SHAREHOLDERS' EQUITY (continued)
Outstanding options granted to employees, directors and officers for the
last three fiscal years are summarized as follows:
Weighted
Incentive Nonqualified average
stock options stock options exercise
Price range Shares Price range Shares price
Outstanding at June 30, 1995 $1.02 2,750 $ 4.77 - 5.80 135,300 $ 5.06
Granted $ 11.50 - 12.75 68,366 12.64
Exercised $1.02 (2,750) $ 4.77 (3,666) 4.77
------ ---------
Outstanding at June 30, 1996 - $ 4.77 - 12.75 200,000 7.65
Granted $ 7.00 - 8.50 150,265 7.15
Exercised
Outstanding at June 30, 1997 - $ 4.77 - 12.75 350,265 7.44
Granted $ 6.25 8,799 6.25
Expired $ 12.75 (2,500) 12.75
------------ --------- -----
Outstanding at June 30, 1998 - $ 4.77 - 12.75 356,564 7.37
============ =======
Amounts exercisable at
June 30, 1998 - $ 4.77 - 12.75 356,564 7.37
============ =======
The following table summarizes information concerning currently outstanding
and exercisable nonqualified stock options:
Weighted-
Number average Weighted-
outstanding remaining average
and contractual exercise
Range of exercise prices exercisable life (months) price
$4.77 - $ 9.00 290,698 29 months $ 6.18
$9.01 - $12.75 65,866 29 months $12.64
F-24
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE I - SHAREHOLDERS' EQUITY (continued)
The weighted-average option fair value on the grant date was $3.10, $1.82
and $1.88 for options issued during the years ended June 30, 1996, 1997 and
1998, respectively.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"); it applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for the
Plan and does not recognize compensation expense for such Plan. If the
Company had elected to recognize compensation expense based upon the fair
value at the grant dates for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's reported net earnings
and earnings per share would be reduced to the pro forma amount indicated
below for the years ended June 30:
1996 1997 1998
--------------- --------------- ---------
Net earnings
As reported $3,849,778 $2,078,753 $1,184,261
Pro forma 3,639,117 1,805,602 1,167,761
Net earnings per common share - basic
As reported $1.11 $.53 $.31
Pro forma 1.05 .46 .30
Net earnings per common share - diluted
As reported $1.08 $.53 $.30
Pro forma 1.02 .46 .30
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before fiscal 1996. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the fiscal years ended
June 30, 1996, 1997 and 1998, respectively: expected volatility of 25%, 25%
and 35%; risk-free interest rates of 5.67%, 6.32% and 5.42% and expected
term of 3 years for all years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the use of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
F-25
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE I - SHAREHOLDERS' EQUITY (continued)
The Board of Directors of the Company has authorized the purchase of up to
250,000 shares of its common stock under a stock repurchase program.
Subsequent to year-end, the Board of Directors authorized the repurchase of
up to an additional 400,000 shares of the Company's common stock. The
purchases may be made by the Company from time to time on the open market
at the Company's discretion and will be dependent on market conditions. To
date, the Company has purchased 404,500 shares of its common stock for
aggregate consideration of $2,176,342 under this program.
In June 1997, the Company's Board of Directors approved the adoption of a
restricted stock plan, which was subsequently ratified by shareholders
during the Company's December 1997 annual meeting. The plan enables the
Board of Directors or Plan Committee to have sole discretion and authority
to determine who may purchase restricted stock, the number of shares, the
price to be paid and the restrictions placed upon the stock. Pursuant to
this plan, the Company has issued 90,000 shares of common stock to certain
employees at a purchase price of $1.00 per share. Shares purchased are
subject to a four-year vesting period and the Company recognized $135,000
of compensation expense during fiscal 1998 in connection with this plan.
NOTE J - ACQUISITIONS
During August 1996 and January 1997, the Company purchased QPS Electronics,
Inc. and Corona Electronics, Inc., respectively, both of which are
electronic component distributors. Aggregate consideration paid for the
acquisitions approximated $4,700,000, of which $157,500 was paid through
the issuance of 20,000 shares of the Company's common stock. These
acquisitions have been accounted for by the purchase method and, as such,
the fair value of the assets and liabilities acquired have been recorded on
the date of the respective acquisitions. The respective results of their
operations are included with those of the Company from the date of
acquisition. The excess of the purchase price over the fair value of the
assets acquired, approximately $3,053,000, is being amortized using the
straight-line method over a period of twenty years. Pro forma historical
results of operations are not presented, as such results would not be
materially different from the historical results of the Company.
F-26
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE K - SEGMENT INFORMATION
The Company has two business segments: electronics parts distribution and
contract manufacturing. The following is a summary of selected consolidated
information for the electronics components distribution and contract
manufacturing segments.
Year ended June 30,
------------------------------------
1996 1997 1998
--------- --------- -------
(in thousands)
Sales
Electronics components distribution $156,303 $145,091 $137,297
Contract manufacturing 10,846 10,007 16,377
-------- -------- --------
$167,149 $155,098 $153,674
======= ======= =======
Operating profit
Electronics components distribution $ 7,640 $ 3,994 $ 2,251
Contract manufacturing 157 471 921
---------- ---------- ----------
$ 7,797 $ 4,465 $ 3,172
========= ========= =========
Identifiable assets
Electronics components distribution $ 53,600 $ 61,515 $ 60,929
Contract manufacturing 7,543 8,481 12,490
--------- --------- --------
$ 61,143 $ 69,996 $ 73,419
======== ======== ========
Capital expenditures
Electronics components distribution $ 524 $ 810 $ 1,002
Contract manufacturing 266 133 67
---------- ---------- -----------
$ 790 $ 943 $ 1,069
========== ========= =========
Depreciation and amortization
Electronics components distribution $ 422 $ 742 $ 913
Contract manufacturing 298 309 443
---------- ---------- ----------
$ 720 $ 1,051 $ 1,356
========== ========= =========
F-27
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996, 1997 and 1998
NOTE L - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL
DATA (UNAUDITED)
Quarter ended
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
Net sales $36,878,534 $39,787,894 $38,334,936 $38,672,862
Gross profit 7,817,154 8,198,631 7,913,643 7,948,715
Net earnings 398,030 463,183 262,859 60,189
Earnings per common share
Net earnings per common
share - basic and diluted $.10 $.12 $.07 $.02
=== === === ===
Quarter ended
September 30, December 31, March 31, June 30,
1996 1996 1997 1997
Net sales $38,321,790 $38,194,939 $38,661,610 $39,919,406
Gross profit 8,115,502 8,011,793 7,863,345 8,113,933
Net earnings 787,641 621,281 347,338 322,493
Earnings per common share
Net earnings per common
share - basic and diluted $.20 $.16 $.09 $.08
=== === === ===
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors and Shareholders
Jaco Electronics, Inc.
In connection with our audit of the consolidated financial statements of Jaco
Electronics, Inc. and Subsidiaries referred to in our report dated August 21,
1998, which is included in this annual report on Form 10-K, we have also audited
Schedule II for each of the three years in the period ended June 30, 1998. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Melville, New York
August 21, 1998
F-28
Jaco Electronics, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1996, 1997 and 1998
Column A Column B Column C Column D Column E
-------- -------- ---------------------------- -------- --------
Additions
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts - Deductions - at end of
Description of period expenses describe describe period
Allowance for doubtful accounts
Year ended June 30, 1996 $610,000 $761,000 $153,000 (a) $766,000 (b) $ 758,000
======= ======= ======= ======= ==========
Year ended June 30, 1997 $758,000 $256,000 $ 95,000 (a)(c) $263,000 (b) $ 846,000
======= ======= ======== ======= ==========
Year ended June 30, 1998 $846,000 $476,000 $226,000 (a) $280,000 (b) $1,268,000
======= ======= ======= ======== =========
(a) Recoveries of accounts.
(b) Represents write-offs of uncollectible accounts. (c) Includes balance
attributable to acquired subsidiary.
F-29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JACO ELECTRONICS, INC.
Date: September 28, 1998 By: Joel H. Girsky
--------------------
Joel H. Girsky, Chairman of the
Board, President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 28, 1998 Joel H. Girsky
---------------------
Joel H. Girsky, Chairman of the
Board, President and Treasurer
(Principal Executive Officer)
Date: September 28, 1998 Jeffrey D. Gash
---------------------
Jeffrey D. Gash, Vice President
Finance
Principal Financial and Accounting
Officer)
Date: September 28, 1998 Stephen A. Cohen
---------------------
Stephen A. Cohen, Director
Date: September 28, 1998 Edward M. Frankel
---------------------
Edward M. Frankel, Director
Date: September 28, 1998 Charles B. Girsky
---------------------
Charles B. Girsky, Executive
Vice President and Director
Date: September 28, 1998 Joseph F. Hickey, Jr.
-------------------------------
Joseph F. Hickey, Jr., Director