UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number 0-5896
JACO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1978958
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
145 OSER AVENUE, HAUPPAUGE, NEW YORK 11788
------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 273-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
-------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
-------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at November 7, 2003
----- --------------------------------------
Common Stock, $0.10 Par Value 5,927,082 (excluding 659,900 shares
held as treasury stock)
FORM 10-Q September 30, 2003
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
2003 2003
--------------- -----------
ASSETS
Current Assets
Cash $ 25,361 $ 157,467
Restricted cash 800,000 800,000
Marketable securities 671,381 652,608
Accounts receivable - net 43,033,476 31,997,984
Inventories 40,962,835 40,493,508
Prepaid expenses and other 1,127,585 1,036,856
Prepaid and refundable income taxes 1,251,253 1,059,897
Deferred income taxes 2,606,000 2,555,000
--------- ---------
Total current assets 90,477,891 78,753,320
Property, plant and equipment - net 5,318,932 5,559,122
Deferred income taxes 418,000 431,000
Excess of cost over net assets acquired - net 25,599,082 25,599,082
Other assets 3,810,509 3,869,254
----------- -----------
Total assets $125,624,414 $114,211,778
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2003
Page 3
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
2003 2003
---------------- ----------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 36,444,603 $ 31,154,244
Current maturities of long-term debt and
capitalized lease obligations 612,816 679,552
------------- ------------
Total current liabilities 37,057,419 31,833,796
Long-term debt and capitalized lease obligations 42,006,199 35,860,325
Deferred compensation 962,500 950,000
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 100,000 shares,
$10 par value; none issued
Common stock - authorized, 20,000,000,
$.10 par value; issued 6,586,982 and
6,425,732 shares, respectively,
and 5,927,082 and 5,765,832 shares
outstanding, respectively 658,698 642,573
Additional paid-in capital 25,579,323 25,152,010
Retained earnings 21,694,396 22,117,967
Accumulated other comprehensive loss (19,555) (30,327)
Treasury stock - 659,900 shares at cost (2,314,566) (2,314,566)
---------- -----------
Total shareholders' equity 45,598,296 45,567,657
---------- ----------
Total liabilities and shareholders' equity $125,624,414 $114,211,778
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2003
Page 4
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2003 2002
-------------- -------------
NET SALES $72,268,544 $49,043,655
COST AND EXPENSES
Cost of goods sold 63,064,859 42,696,191
---------- ----------
Gross profit 9,203,685 6,347,464
Selling, general and administrative expenses 9,411,462 7,465,363
------------ ------------
Operating loss (207,777) (1,117,899)
Interest expense 443,794 401,311
------------ ------------
Loss before income taxes (651,571) (1,519,210)
Income tax benefit (228,000) (532,000)
------------ ------------
NET LOSS $ (423,571) $ (987,210)
============ ============
Net loss per common share:
Basic and Diluted $ (0.07) $ (0.17)
============ ============
Weighted average common shares outstanding:
Basic and Diluted 5,792,123 5,807,432
============ ============
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2003
Page 5
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Additional
paid-in Retained
Shares Amount capital earnings
--------------- -------------- ---------------- -------------------
Balance at July 1, 2003 6,425,732 $ 642,573 $ 25,152,010 $ 22,117,967
Net loss (423,571)
Unrealized gain on marketable
securities, net of deferred taxes
Exercise of stock options 161,250 16,125 427,313
--------------- -------------- ---------------- -------------------
Balance at September 30, 2003 6,586,982 $ 658,698 $ 25,579,323 $ 21,694,396
=============== ============== ================ ===================
Accumulated
other Total
comprehensive Treasury shareholders'
loss stock equity
---------------- ---------------- -----------------
Balance at July 1, 2003 $ (30,327) $ (2,314,566) $ 45,567,657
Net loss (423,571)
Unrealized gain on marketable
securities, net of deferred taxes 10,772 10,772
Exercise of stock options 443,438
---------- ---------------- -----------------
Balance at September 30, 2003 $ (19,555) $ (2,314,566) $ 45,598,296
========== ================ =================
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2003
Page 6
JACO ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2003 2002
------------------ -----------------
Cash flows from operating activities
Net loss $ (423,571) $ (987,210)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 526,603 559,246
Deferred compensation 12,500 12,500
Deferred income tax (benefit) expense (44,000) 25,000
Gain on sale of equipment (2,100)
Provision for doubtful accounts 201,250 192,500
Changes in operating assets and liabilities
(Increase) decrease in operating assets - net (11,988,154) 2,424,187
Increase in operating liabilities - net 5,290,359 502,655
------------------ -----------------
Net cash (used in) provided by operating activities (6,427,113) 2,728,878
------------------ -----------------
Cash flows from investing activities
Capital expenditures (209,406) (27,121)
Proceeds from sale of equipment 2,100
Purchase of marketable securities (2,001) (1,916)
Business acquisitions - deferred payments (2,099,563)
(Increase) decrease in other assets (18,262) 62,391
------------------ -----------------
Net cash used in investing activities (227,569) (2,066,209)
------------------ -----------------
Cash flows from financing activities
Borrowings under line of credit 67,814,407 46,162,798
Payments under line of credit (61,533,924) (46,545,132)
Principal payments under equipment financing
and term loans (201,345) (223,080)
Proceeds from exercise of stock options 443,438
------------------ -----------------
Net cash provided by (used in) financing activities 6,522,576 (605,414)
------------------ -----------------
NET (DECREASE) INCREASE IN CASH (132,106) 57,255
------------------ -----------------
Cash at beginning of period 157,467 324,447
------------------ -----------------
Cash at end of period $ 25,361 $ 381,702
================== =================
See accompanying notes to condensed consolidated financial statements.
FORM 10-Q September 30, 2003
Page 7
JACO ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
1) The accompanying condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring accrual adjustments, which are,
in the opinion of management, necessary for a fair presentation of the
consolidated financial position and the results of operations of Jaco
Electronics, Inc. and its subsidiaries (the "Company") at and for the periods
presented. Such financial statements do not include all the information or
footnotes necessary for a complete presentation. Therefore, they should be read
in conjunction with the Company's audited consolidated statements for the fiscal
year ended June 30, 2003 and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2003. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire year.
2) The Company's credit agreement with its banks, as amended, provides the
Company with a $45,000,000 revolving line of credit facility. The credit
facility is based principally on eligible accounts receivable and inventories of
the Company as defined in the agreement. The agreement was amended on September
19, 2003 to extend the maturity date to October 1, 2004. The agreement was
subsequently amended on November 7, 2003 to provide a waiver for noncompliance
of a certain financial covenant for the quarter ended September 30, 2003.
Further, the Company is actively pursuing a replacement lender for one of its
two lenders. If the Company is unable to replace this lender by December 31,
2003, the Company will be required to pay $125,000 to its banks. In addition,
for any subsequent completed quarters without a replacement lender, an
additional $125,000 must be paid to its banks. The agreement also requires the
Company to maintain an $800,000 compensating balance arrangement with its banks
in an interest bearing account, which was funded during the quarter ended
December 31, 2002. The interest rate was based on the average 30-day LIBOR plus
2.25% to 2.75% depending on the Company's performance for the immediately
preceding four fiscal quarters measured by a specified financial ratio.
Effective September 19, 2003, the rate converted to the higher of the prime rate
plus 0.75% or the federal funds rate plus 1.25%. Effective November 7, 2003, the
rate converted to the higher of the prime rate plus 1% or the federal funds rate
plus 1.50%. In addition, the rate will convert to the higher of the prime rate
plus 2% or the federal funds rate plus 2.50% if certain terms under the
agreement are not met by December 31, 2003. The outstanding balance on the
revolving line of credit facility was $41.8 million with an additional $3.2
million available at September 30, 2003. Borrowings under this facility are
collateralized by substantially all of the assets of the Company.
3) For interim financial reporting purposes, the Company uses the gross profit
method for computing inventories, which consists principally of goods held for
resale.
4) On September 18, 2001, the Company announced that its Board of Directors
authorized the repurchase of up to 250,000 shares of its outstanding common
stock. Purchases may be made from time to time in market or private transactions
at prevailing market prices. The Company made purchases of 41,600 shares of its
common stock from November 5, 2002 through September 30, 2003 for aggregate
consideration of $110,051.
FORM 10-Q September 30, 2003
Page 8
5) Total comprehensive loss and its components for the three months ended
September 30, 2003 and 2002 are as follows:
Three Months Ended
September 30,
--------------------------------
2003 2002
-------------- -------------
Net loss $ (423,571) $ (987,210)
Unrealized gain (loss)
on marketable securities 16,772 (97,978)
Deferred tax (expense) benefit (6,000) 37,000
-------------- -------------
Comprehensive loss $ (412,799) $ (1,048,188)
============== =============
Accumulated other comprehensive income (loss) is comprised of
unrealized gains and losses on marketable securities, net of the related tax
effect.
6) The company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employess," and related Interpretations ("APB
No. 25") and has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an Amendment of FASB Statement No. 123" ("SFAS No.
148"). Under APB No. 25, compensation expense is only recognized when the market
value of the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock. Accordingly, no compensation expense has
been recognized in the Company's condensed consolidated financial statements in
connection with employee stock option grants.
The following table illustrates the effect on net income and earnings
per share for the three months ended September 30, 2003 and 2002 had the Company
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" to
stock-based employee compensation.
FORM 10-Q September 30, 2003
Page 9
Three Months Ended
September 30,
--------------------------------
2003 2002
-------------- -------------
Net loss, as reported $(423,571) $(987,210)
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (73,044)
-------------- -------------
Pro forma net loss $(496,615) $(987,210)
============== =============
Net loss per common share:
Basic - as reported $(0.07) $(0.17)
============== =============
Basic - pro forma $(0.09) $(0.17)
============== =============
Diluted - as reported $(0.07) $(0.17)
============== =============
Diluted - pro forma $(0.09) $(0.17)
============== =============
7) The weighted average common shares outstanding, net of treasury shares, used
in the Company's basic and diluted earnings per share computations on its
condensed consolidated statements of operations were 5,792,123 and 5,807,432 for
the three months ended September 30, 2003 and 2002, respectively. Excluded from
the calculation of earnings per share are options to purchase 939,750 and
844,548 shares of the Company's common stock for the three months ended
September 30, 2003 and 2002, respectively, as their inclusion would have been
antidilutive. Common stock equivalents for stock options are calculated using
the treasury stock method.
8) In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. Management does not expect the adoption of SFAS No. 149 to
have a material impact on its consolidated financial position, results of
operations or cash flows.
9) In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
The new Statement requires that those instruments be classified as liabilities
in statements of financial position. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Management does not expect the adoption of SFAS No. 150 to have a material
impact on its consolidated financial position, results of operations or cash
flows.
FORM 10-Q September 30, 2003
Page 10
10) In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No. 46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
does not have any variable interest entities which would require consolidation
under FIN No. 46. Accordingly, the adoption of FIN No. 46 has had no effect on
the Company's consolidated financial position, results of operations or cash
flows.
11) 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.
12) The Company has two reportable segments: electronics parts distribution and
contract manufacturing. The Company's primary business activity is conducted
with small and medium size manufacturers, located in North America, that produce
electronic equipment used in a variety of industries. Information pertaining to
the Company's operations in different geographic areas for the three months
ended September 30, 2003 and 2002 is not considered material to the Company's
financial statements.
The Company's chief operating decision maker utilizes net sales and
net earnings information in assessing performance and making overall operating
decisions and resource allocations. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies included in the Company's annual report to shareholders for
the fiscal year ended June 30, 2003. Information about the Company's segments is
as follows:
FORM 10-Q September 30, 2003
Page 11
Three Months Ended
September 30,
2003 2002
--------- -------
(in thousands)
Net sales from external customers
Electronics components distribution $67,428 $46,086
Contract manufacturing 4,841 2,958
------- -------
$72,269 $49,044
====== ======
Intersegment net sales
Electronics components distribution $ 759 $ 40
Contract manufacturing 3 ___
------ -------
$ 762 $ 40
======== ========
Operating (loss) profit
Electronics components distribution $ (456) $ (819)
Contract manufacturing 248 (299)
------- ---------
$ (208) $ (1,118)
===== =======
Interest expense
Electronics components distribution $ 352 $ 288
Contract manufacturing 92 113
------- --------
$ 444 $ 401
====== ======
(Loss) earnings before income taxes
Electronics components distribution $ (808) $ (1,107)
Contract manufacturing 156 (412)
--------- -----------
$ (652) $ (1,519)
========= ===========
Identifiable assets
Electronics components distribution $114,003 $ 94,884
Contract manufacturing 11,621 12,513
-------- --------
$125,624 $107,397
======= =======
Capital expenditures
Electronics components distribution $ 191 $ 27
Contract manufacturing 18 __
------- -------
$ 209 $ 27
====== ======
Depreciation and amortization
Electronics components distribution $ 328 $ 353
Contract manufacturing 199 206
-------- --------
$ 527 $ 559
======= =======
FORM 10-Q September 30, 2003
Page 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement under the Private Securities Litigation Reform Act of 1995:
Certain statements contained in this report or in other written or oral
statements made from time to time by the Company may contain forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
Such statements may use words such as "anticipate," "estimate," "expect,"
"believe," "may," "intend" and similar words or terms. Although we believe that
the expectations in such forward-looking statements are reasonable, we can give
no assurance that such expectations will prove to have been correct. The
forward-looking statements are based upon a number of assumptions and estimates
that, while presented with specificity and considered reasonable by us, are
inherently subject to significant business, economic and competitive risks,
uncertainties and contingencies which are beyond our control, and upon
assumptions with respect to future business decisions which are subject to
change. Accordingly, the forward-looking statements are only an estimate and
actual results will vary from the forward-looking statements, and these
variations may be material. We are not obligated to update any forward-looking
statement, but investors are urged to consult any further disclosures we make in
our subsequent filings with the Securities and Exchange Commission.
Consequently, the inclusion of the forward-looking statements should not be
regarded as a representation by us of results or performance that actually will
be achieved. Forward-looking statements are necessarily speculative in nature,
and it is usually the case that one or more of the assumptions in the
forward-looking statements do not materialize. Investors are cautioned not to
place undue reliance on the forward-looking statements. We caution investors
that the factors set forth below and in our other filings with the Securities
and Exchange Commission could cause our results to differ materially from those
stated in the forward-looking statements. These factors include, among others,
the impact of competitive products, demand for our products and related market
acceptance risks, fluctuations in our operating results, delays in development
of highly complex electronic products, our ability to continue to expand our
operations, the level of costs incurred in connection with our expansion
efforts, the financial strength of our customers and suppliers, and risks
associated with general industry and economic conditions.
GENERAL
Jaco is a distributor of electronic components, and provider of
contract manufacturing and value-added services. Products distributed by us
include semiconductors, capacitors, resistors, electromechanical devices, flat
panel displays and monitors, and power supplies used in the assembly and
manufacturing of electronic equipment.
Our customers are primarily small and medium sized manufacturers. The
trend for these customers has been to shift certain manufacturing functions to
third parties (i.e., outsourcing). We intend to seek to capitalize on this trend
toward outsourcing by increasing sales of products enhanced by value-added
services. Value-added services currently provided by us consist of automated
inventory management services, kitting (e.g., supplying sets of specified
quantities of products to a customer that are prepackaged in kits for ease of
feeding the customer's production lines), and contract manufacturing through
Nexus Custom Electronics, Inc., a wholly owned subsidiary of ours. We are also
expanding in the flat panel display value-added market, which includes full
system integration, kitting and the implementation of touch technologies.
FORM 10-Q September 30, 2003
Page 13
Results of Operations
The following table sets forth certain items in our statements of operations as
a percentage of net sales for the periods shown:
Three Months Ended
September 30,
------------------------------
2003 2002
---------- ----------
Net sales 100.0% 100.0%
Cost of goods sold 87.3 87.1
---------- ----------
Gross profit 12.7 12.9
Selling, general and
administrative expenses 13.0 15.2
---------- ----------
Operating loss (0.3) (2.3)
Interest expense 0.6 0.8
---------- ----------
Loss before income taxes (0.9) (3.1)
Income tax benefit (0.3) (1.1)
---------- ----------
NET LOSS (0.6)% (2.0)%
============ ============
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Net sales for the three months ended September 30, 2003 were $72.3
million compared to $49.1 million for the three months ended September 30, 2002,
representing a 47.4% increase. The $23.2 million increase represents both
internal growth and the additional sales resulting from the purchase of certain
assets of the electronics distribution business of Reptron Electronics, Inc.
("Reptron). We still are not certain if we are seeing the beginning of a general
recovery. However, we continue to see business improve at certain customers in
different business segments. We are also experiencing increased demand for
certain products, specifically semiconductors and flat panel displays ("FPD").
We continue to focus on our FPD sales. We have had success in marketing our
integration capabilities for our FPD product in addition to the sale of FPD
components. During the quarter, our FPD sales were approximately $15.1 million,
or 22.2% of distribution sales. We market our other passive and active
components through various inventory management programs. Active components
including FPD sales represented 75.3% and passive components represented 24.7%
for the three months ended September 30, 2003.
Gross profit was $9.2 million, or 12.7% for the three months ended
September 30, 2003, as compared to $6.3 million, or 12.9% for the three months
ended September 30,2002. The increase in gross profit is a result of the
increase in net sales. Though we have seen an increase in demand for product,
pricing continues to be highly competitive. Our product mix continues to
increase as it relates to active components. Active components historically sell
at lower margins than passive components.
FORM 10-Q September 30, 2003
Page 14
Selling, general and administrative ("SG&A") expenses were $9.4
million, or 13.0% of net sales for the three months ended September 30, 2003,
compared to $7.5 million, or 15.2% of net sales for the three months ended
September 30, 2002. Almost all of the increase is attributed to the acquisition
of Reptron. We continue to strive to operate more efficiently. The core
competencies of the consolidation with Reptron is seen by the reduction in SG&A
as a percentage of sales to 13.0% this quarter compared to 15.2% for the
comparable quarter last year.
Interest expense increased slightly to $444,000 for the three months
ended September 30, 2003 compared to $401,000 for the three months ended
September 30, 2002.The increase in interest expense is primarily attributable to
the increase in bank borrowings. The acquisition of Reptron and growth in
accounts receivable based on the increase in net sales, which was partially
offset by the increase in accounts payable, resulted in the increase in bank
borrowings.
Net loss for the three months ended September 30, 2003 was $0.4
million, or $0.07 per diluted share, compared to a net loss for the three months
ended September 30, 2002 of $1.0 million, or $0.17 per diluted share. We were
able to reduce our net loss approximately 57.1% during the current quarter
compared to the comparable quarter last year, primarily as a result of the
increase in net sales and the decrease in SG&A as a percentage of net sales.
LIQUIDITY AND CAPITAL RESOURCES
Our credit agreement with our banks, as amended, provides us with a $45
million revolving line of credit facility. The credit facility is based
principally on our eligible accounts receivable and inventories, as defined in
the agreement. The agreement was amended on September 19, 2003 to extend the
maturity date to October 1, 2004. The agreement was subsequently amended on
November 7, 2003 to provide a waiver for noncompliance of a certain financial
covenant for the quarter ended September 30, 2003. Further, the Company is
actively pursuing a replacement lender for one of its two lenders. If the
Company is unable to replace this lender by December 31, 2003, the Company will
be required to pay $125,000 to its banks. In addition, for any subsequent
completed quarters without a replacement lender, an additional $125,000 must be
paid to its banks. The agreement also requires us to maintain an $800,000
compensating balance arrangement with our banks in an interest bearing account,
which was funded during the quarter ended December 31, 2002. The interest rate
applicable to borrowings under our credit facility was based on the average
30-day LIBOR rate plus 2.25% to 2.75%, depending on our performance for the
immediately preceding four fiscal quarters measured by a specified financial
ratio. Effective September 19, 2003, the rate converted to the higher of the
prime rate plus 0.75% or the federal funds rate plus 1.25%. Effective November
7, 2003, the rate converted to the higher of the prime rate plus 1% or the
federal funds rate plus 1.50%. In addition, the rate will convert to the higher
of the prime rate plus 2% or the federal funds rate plus 2.50% if certain terms
under the agreement are not met by December 31, 2003. The outstanding balance on
the revolving line of credit facility was $41.8 million with an additional $3.2
million available at September 30, 2003. Borrowings under this facility are
collateralized by substantially all of our assets. The agreement contains
provisions for maintenance of certain financial ratios and prohibits the payment
of cash dividends. Failure to remain in compliance with these covenants could
trigger an acceleration of our obligation to repay all outstanding borrowings
under our credit facility.
For the three months ended September 30, 2003, our net cash used in
operating activities was approximately $6.4 million, as compared to net cash
provided by operating activities of $2.7 million for the same period in our last
fiscal year. The increase in net cash used is primarily attributable to an
increase in our accounts receivable and inventory. This was partially offset by
an increase in our accounts payable and accrued expenses. The increase in our
accounts receivable was the result of the increase of our net sales during the
quarter. Net cash used in investing activities decreased to $0.2 million for the
three months ended September 30, 2003, as compared to $2.1 million for the three
months ended September 30, 2002. The decrease is primarily attributable to
deferred payments of $2.1 million for the three months ended September 30, 2002
related to our acquisition in June 2000 of Interface Electronics Corp. Net cash
provided by financing activities was $6.5 million for the three months ended
September 30, 2003 as compared to net cash used in financing activities of $0.6
million for the same period in our last fiscal year. The increase in net cash
provided is primarily attributable to the increase in net borrowings under our
credit facility of approximately $5.9 million.
FORM 10-Q September 30, 2003
Page 15
For the three months ended September 30, 2003 and 2002, our inventory
turnover was 6.2x and 4.0x, respectively. The average days outstanding of our
accounts receivable at September 30, 2003 was 47 days, as compared to 51 days at
September 30, 2002. Based upon our present plans, we believe that cash flow from
operations and funds available under our credit facility will be sufficient to
fund our capital needs for the foreseeable future. However, our cash
expenditures may vary significantly from current levels based on a number of
factors, including, but not limited to, future acquisitions and capital
expenditures, if any. Historically, we have been able to obtain amendments to
our existing credit facility to satisfy financial covenants, when necessary.
While we can give no assurance that any such future amendment, if needed, will
be available, management believes we will be able to continue to obtain
financing on acceptable terms under our existing credit facility or through
other external sources.
Inflation
Inflation has not had a significant impact on our operations during the
last three fiscal years.
Critical Accounting Policies and Estimates
We have disclosed in Note A to our consolidated financial statements
and in Management's Discussion and Analysis of Financial Condition and Results
of Operations included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2003 those accounting policies that we consider to be significant
in determining our results of operations and financial position. There have been
no material changes to the critical accounting policies previously identified
and described in our Form 10-K. The accounting principles we utilized in
preparing our consolidated financial statements conform in all material respects
to generally accepted accounting principles in the United States of America.
The preparation of these consolidated financial statements requires our
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the disclosure of
contingent assets and liabilities at the date of our financial statements. We
base our estimates on historical experience, actuarial valuations and various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis our making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex and, consequently, actual results
may differ from these estimates under different assumptions or conditions. While
for any given estimate or assumption made by our management there may be other
estimates or assumptions that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial statements.
New Accounting Standards
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. Management does not expect the adoption of SFAS No. 149 to
have a material impact on its consolidated financial position, results of
operations or cash flows.
In May 2003, the FASB issued Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 improves the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Management does not expect the adoption of SFAS No. 150 to
have a material impact on its consolidated financial position, results of
operations or cash flows.
FORM 10-Q September 30, 2003
Page 16
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No.
46"), "Consolidation of Variable Interest Entities." In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN No. 46's consolidation
requirements apply immediately to variable interest entities created or acquired
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company does not have any variable interest entities which
would require consolidation under FIN No. 46. Accordingly, the adoption of FIN
No. 46 has had no effect on the Company's consolidated financial position,
results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes with respect to borrowings
under our credit facility, which bears interest at the higher of the prime rate
plus 1% or the federal funds rate plus 1.50%. At October 31, 2003, $38.2 million
was outstanding under the credit facility. Changes in the prime interest rate or
the federal funds rate during the fiscal year will have a positive or negative
effect on our interest expense. Each 1.0% fluctuation in the prime interest rate
or the federal funds rate will increase or decrease our interest expense under
the credit facility by approximately $0.4 million based on the amount of
outstanding borrowings at October 31, 2003.
The impact of interest rate fluctuations on our other floating rate
debt is not material.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Principal Executive Officer
and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based
upon that evaluation, the Principal Executive Officer and Principal Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or other factors that
could significantly affect those controls since the date of the Company's
evaluation and there were no significant deficiencies or material weaknesses in
such controls and, therefore, there were no corrective actions taken.
FORM 10-Q September 30, 2003
Page 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Nothing to Report
Item 2. Changes in Securities and Use of Proceeds
Nothing to Report
Item 3. Defaults Upon Senior Securities
Nothing to Report
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to Report
Item 5. Other Information
Nothing to Report
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 31.1 - Certification of President and Principal Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31.2 - Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of President and Principal Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.2 - Certification of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.8.18 - Amendment to Second Restated and Amended Loan
and Security Agreement dated November 7, 2003.
b) Reports on Form 8-K
(1) On August 27, 2003, a Current Report on Form 8-K was filed
amending the Company's Current Report on Form 8-K filed June
26, 2003.
(2) On September 29, 2003, a Current Report on Form 8-K was
filed to announce the Company's results for its fourth
quarter and fiscal year ending June 30, 2003.
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2003
JACO ELECTRONICS, INC.
(Registrant)
BY: /s/ Jeffrey D. Gash
---------------------------------------
Jeffrey D. Gash, Executive Vice President,
Finance and Secretary
(Principal Financial Officer)