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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 [FEE REQUIRED]
For the fiscal year ended
June 30, 1999
[ ] 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 24, 1999
was $10,206,301
Number of shares outstanding of each class of Common Stock, as of September
24, 1999: 3,653,521 shares (excluding 412,200 shares of treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE:
PartIII: Definitive Proxy Statement to be filed on or before October 28,
1999, under Regulation 14A, in connection with the Company's 1999
Annual Meeting of Shareholders.
1
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 is a distributor of electronic components and a provider of
contract manufacturing and value-added services 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 panel displays and monitors and power supplies, which are used in
the manufacture and assembly of electronic products. The Company also provides a
variety of value-added services including automated inventory management
services, integrating and assembling various custom components with flat panel
displays (FPD's) to customer specifications (box-build), kitting the component
requirements of 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 that by expanding the range of value-added services it will
enhance its value to customers.
2
The Company's core customer base consists primarily of small and
medium-sized manufacturers ("OEMs") that produce electronic equipment used in a
wide variety of industries, including manufacturers of telecommunication,
computer networking, computer peripheral, medical instrumentation and aerospace
equipment. In the fiscal year ended June 30, 1999, the Company distributed
electronic components to thousands of customers, none of which individually
represented more than 5% of net sales.
Jaco is a service-oriented company, built on strong customer and
supplier relationships. The Company's inventory management and information
systems assist its customers in controlling materials costs, in reducing cycle
times and in keeping pace with rapidly occurring technological developments. The
Company utilizes a computerized inventory control system to assist in the
marketing of its products. During the fiscal year ended June 30, 1999, Jaco
added several strategic suppliers to its line card, including Fairchild's power
semiconductor product line that Fairchild acquired from Samsung during the first
half of the fiscal year ended June 30, 1999, and Xecom, a manufacturer of
miniaturized modems. 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 communication
with customers from computer to computer or through electronic data interchange
("EDI"), and through technically competent product managers and Field
Application Engineers (FAE's). Jaco's FAE's located across the United States,
provide design support and technical assistance to Jaco's customers with
detailed data solutions employing the latest technologies. In many cases Jaco's
FAE's are factory-trained.
3
Industry Overview
The electronics distribution industry has become an increasingly
important sales channel for component manufacturers. Distributors market
manufacturers' products to a broader range of OEMs than such manufacturers could
economically serve with their direct sales forces. Today, distributors have
become an integral part of their customers purchasing and inventory process.
Distributors offer customers the ability to outsource their purchasing and
warehousing responsibilities. EDI permits distributors to receive timely
scheduling of component requirements from customers enabling them to provide
these value-added services. Distributors also work with their suppliers to
ensure that manufacturers' components are integrated into the design of new
products.
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.
4
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 51%, 52%
and 47% of the Company's net distribution sales in the fiscal years ended June
30, 1997, June 30, 1998 and June 30, 1999, 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, touchscreens and controllers. These
products represented approximately 49%, 48% and 53% of the Company's net
distribution sales in the fiscal years ended June 30, 1997, June 30, 1998 and
June 30, 1999, 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:
o Automated Inventory Management Services. Comprehensive,
state-of-the-art solutions that effortlessly manage the
customers inventory reordering, stocking and administration.
These services reduce paperwork, inventory, cycle time, and
the overall cost of doing business. It is a fully integrated
solution to a customers inventory management.
o 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.
o
5
o 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.
o Flat Panel Display. The Company provides turnkey integration
utilizing flat panel displays. FPDs and other devices such as
touchscreen and cables are integrated to customer's
specifications providing an assembled product "Box Build".
Sales and Marketing
Management believes the Company has developed valuable long-term
customer relationships and an in-depth understanding of its customers' needs and
purchasing patterns. Jaco serves a broad range of customers in the computer,
computer-related, telecommunications, data transmission, defense, aerospace,
medical equipment and other industries. None of the Company's customers
individually represented more than 3%, 4% and 5% respectively, of net sales in
the fiscal years ended June 30, 1997, June 30, 1998 and June 30, 1999
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.
6
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 and
Illinois. Sales are made primarily through personal visits by the Company's
employees and by a staff of trained telephone sales personnel who answer
inquiries and receive and process orders from customers. In addition, the
Company utilizes the services of independent sales representatives whose
territories include parts of the United States, Canada, and several foreign
countries. These sales representatives operate under agreements which are
terminable by either party upon 30 days' notice. Independent sales
representatives are authorized to solicit sales of all of the Company's product
lines and are prohibited from representing competing product lines.
In the fiscal year ended June 30, 1999, 93% of the Company's sales were
produced by Company sales personnel and 7% 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. Orders
constituting the Company's backlog are subject to delivery rescheduling, price
negotiations and cancellations by the customer, sometimes without penalty or
notice. Therefore, backlog is not necessarily indicative of future sales for any
particular period.
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.
7
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 eight (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 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 3.3
times for the fiscal year ended June 30, 1999.
Approximately 71% of the Company's component distribution inventory is
maintained at its East Coast distribution center in Hauppauge, New York. Most of
the remaining inventory is maintained at the Company's West Coast facility in
Westlake Village, California. The Company also monitors supplier stock rotation
programs, inventory price protection, rejected material and other factors
related to inventory quality and quantity.
8
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, 1999, the Company invested approximately $1.2 million primarily in SMT
machinery and equipment, as part of the Company's ongoing program to expand
Nexus' operations.
Nexus maintains strict quality control procedures for its products,
including use of total quality management ("TQM") systems. Incoming raw material
and components are checked by the Nexus quality control personnel. During the
production stage, quality control personnel check all work in process at several
points in the production process. Finally, after the assembly stage, Nexus
conducts random testing of finished products.
Nexus' manufacturing facility has earned ISO 9002 certification by the
Geneva-based organization dedicated to the development of worldwide standards
for quality management guidelines and quality assurance. Nexus' receipt of ISO
9002 certification demonstrates that Nexus' manufacturing operations meet
established world standards. Management believes sophisticated customers
increasingly are requiring their manufacturers to be ISO 9002-certified for
purposes of quality assurance.
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.
9
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
will strengthen the Company's presence in the Southern California marketplace.
Suppliers
Manufacturers of 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 California Micro Devices Corporation, 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, 1999, 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 1.1% of net sales. As is
common in the electronics distribution industry, from time to time the Company
has experienced terminations of relationships with suppliers which may affect
its results of operations in post-termination periods.
10
The Company generally purchases products from manufacturers pursuant to
non-exclusive distributor agreements. Selection as an authorized distributor is
a valuable marketing tool for the Company because customers receive warranty
protection and support from manufacturers when they purchase products from the
Company. As an authorized distributor, the Company is able to offer customers
marketing and engineering support from the product manufacturers, which enhances
the Company's ability to attract new customers and close sales.
Most of the Company's distributor agreements are cancelable by either
party, typically upon 30 to 90 days' notice. These agreements typically provide
for price protection, stock rotation privileges and the right to return
inventory. Price protection is typically in the form of a credit to the
distributor for any inventory in the distributor's possession for which the
manufacturer reduces its prices. Stock rotation privileges typically allow the
Company to exchange inventory in an amount up to 5% of a prior period's
purchases. Upon termination of a distributor agreement, the right of return
typically requires the manufacturer to repurchase the Company's inventory at the
Company's adjusted purchase price. The Company believes that the above-described
provisions of its distributorship agreements generally have served to reduce the
Company's exposure to loss from unsold inventory. As such price protection and
stock rotation privileges are limited in scope, there can be no 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.
11
The PCB contract manufacturing industry is highly fragmented and is
characterized by relatively high levels of volatility, competition and pricing
and margin pressure. Many large contract manufacturers operate high-volume
facilities and primarily focus on high-volume product runs. In contrast, certain
contract manufacturers, such as Nexus, focus on low-to-medium volume and
service-intensive products, where the finished product often requires a greater
amount of overall labor.
The Company believes that contract manufacturers which are affiliated
or integrated with electronics distributors have competitive advantages over
comparably-sized, stand-alone contract manufacturers. Distributors can reduce
the risk of inventory obsolescence through stock rotation privileges and
inventory price protection and can also take advantage of material acquisition
skills, just-in-time delivery expertise and broad supplier relationships.
Employees
At August 31, 1999, the Company had a total of 393 employees, of which
114 were employed by Nexus. Of total employees, 10 were engaged in
administration, 50 were managerial and supervisory employees, 149 were in sales
and 184 performed warehouse, manufacturing and clerical functions. Of these
employees, Nexus employed two in administration, 14 in management and
supervisory positions, one in sales and 97 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
12
All of the Company's facilities are leased except for the Brandon, Vermont
property which is owned by Nexus. Jaco currently leases 16 facilities located in
the States of Arizona, California, Florida, Illinois, Maryland, Massachusetts,
Minnesota, New York, North Carolina, Oregon, Texas and Washington, two 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 500 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 one year 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.
(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.
13
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.
14
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 1998.
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
Fiscal Year 1999: High Low
First quarter ended September 30, 1998 $6.38 $2.50
Second quarter ended December 31, 1998 $6.88 $3.31
Third quarter ended March 31, 1999 $5.09 $2.50
Fourth quarter ended June 30, 1999 $4.31 $2.50
(b) As of September 23, 1999 there were approximately 120 holders of
record of the Company's Common Stock who management believes held for more than
1,300 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.
15
Item 6. Selected Consolidated Financial Data.
Year ended June 30,
1995 1996 1997 1998 1999
-------- -------- -------- -------- -----
(in thousands, except per share data)
Statement of operations data
Net sales $138,683 $167,149 $155,098 $153,674 $140,711
Cost of goods sold 109,902 133,105 122,993 121,796 113,335
------- ------- ------- --------- -------
Gross profit 28,781 34,044 32,105 31,878 27,376
Selling, general and administrative
expenses 23,552 26,247 27,640 28,707 27,642
-------- -------- -------- ----------- --------
Operating profit (loss) 5,229 7,797 4,465 3,171 (266)
Interest expense 2,010 1,347 971 1,140 1,309
--------- --------- ---------- ------------ --------
Earnings (loss)before income taxes 3,219 6,450 3,494 2,031 (1,575)
Income tax expense (benefit) 1,303 2,600 1,415 847 (418)
--------- --------- --------- ------------- ---------
NET EARNINGS $ 1,916 $ 3,850 $ 2,079 $ 1,184 $ (1,157)
========= ========= ========= ============ =========
Earnings per common share*
Net earnings per common share $.78 $1.11 $.53 $.31 $(.31)
=== ==== === === ====
Earnings per common share -
assuming dilution
Net earnings per common share $.78 $1.08 $.53 $.30 $(.31)
=== ==== === === ======
Weighted average common and
Common equivalent shares
Outstanding
Basic 2,440,841 3,479,707 3,899,181 3,836,700 3,698,270
========= ========= ========= ========= =========
Diluted 2,461,091 3,554,018 3,947,687 3,921,518 3,698,270
========= ========= ========= ========= ==========
Balance sheet data
Working capital $ 30,741 $ 36,964 $ 41,146 $ 42,481 $41,998
Total assets 56,323 61,143 69,996 73,419 72,931
Long-term obligations 23,666 8,791 15,553 17,037 18,886
Shareholders' equity 13,227 34,304 35,892 36,625 34,868
* 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.
16
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 automated inventory management services, kitting
(e.g. supplying sets of specified quantities of products to a customer that are
prepackaged for ease of feeding the customer's production lines), and contract
manufacturing through Nexus.
17
Results of Operations
The following table sets forth certain items in the Company's statement
of operations as a percentage of net sales for the periods shown:
1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 80.5 79.3 79.3
----- ----- -----
Gross profit 19.5 20.7 20.7
Selling, general and administrative expenses 19.7 18.7 17.8
----- ----- -----
Operating profit (loss) (0.2) 2.0 2.9
Interest expense 0.9 0.7 0.6
----- ----- -----
Earnings (loss) before income taxes (1.1) 1.3 2.3
Income tax expense (benefit) (0.3) 0.5 1.0
----- ----- -----
NET EARNINGS (LOSS) (0.8%) 0.8% 1.3%
===== ===== =====
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1999 ("FISCAL 1999") WITH FISCAL YEAR
ENDED JUNE 30, 1998 ("FISCAL 1998")
Net sales for the fiscal year ended June 30, 1999 were $140,711,000, a
decrease of $12,963,000, or 8.4%, as compared to $153,674,000 reported for
Fiscal 1998. The Company's net sales were impacted throughout the fiscal year by
continued industry wide pricing pressures, compounded by weak demand for
components which has impacted the electronics industry for over three years.
Toward the end of Fiscal 1999, the Company experienced an increase in activity
in many product sectors. As the new fiscal year begins, demand for product
continues to be strong. The Company believes it is positioned well for growth,
having continued expanding its Flat Panel Display Group, strengthening its Field
Application Engineering (FAE) Program, and by adding sales and marketing
personnel.
18
Gross profit margins as a percentage of net sales were 19.5% in Fiscal
1999 compared to 20.7% in Fiscal 1998. The decrease was attributable to industry
wide pressures and a shift in product mix toward a greater amount of active
components, including flat panel devices, which historically, have a lower gross
profit margin compared to passive components.
Selling, General and Administrative expenses ("SG&A") were $27.6
million in Fiscal 1999, a decrease of $1.1 million, or 3.7%, compared to $28.7
million in Fiscal 1998. Due to the weakness in the electronics industry during
Fiscal 1999, the Company had implemented cost containment measures.
Additionally, SG&A decreased as a result of the decrease in gross profit dollars
compared to Fiscal 1998. Variable costs such as commissions paid to sales
personnel decreased. The decreases were partially offset by a bad debt of
approximately $630,000 during the fourth quarter of fiscal 1999 and additional
staffing of sales and marketing personnel toward the end of Fiscal 1999 in
anticipation of an improvement in demand for electronic components.
Interest expense increased to approximately $1.3 million in Fiscal
1999, as compared to $1.1 million in Fiscal 1998. The 14.8% increase in interest
expense was primarily attributable to increased net borrowings due to the
Company's purchases of its common stock under its stock repurchase program,
fixed asset additions primarily for contract manufacturing, operational
expenditures made to upgrade the Company's core financial and reporting
software, and an increase in borrowing rates.
Net loss for Fiscal 1999 was $1,157,000, or $.31 per share diluted, as
compared to net earnings for Fiscal 1998 of $1,184,000, or $.30 per share
diluted. During Fiscal 1999, the decrease in net earnings was primarily
attributable to the decrease in net sales and decrease in gross profit dollars
attributable to the overall industry weakness as it related to electronic
components. The Company is cautiously optimistic that it is better positioned
for increased performance during the future period based on the strengthening of
the electronics industry and expenditures made during Fiscal 1999.
19
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1998 WITH FISCAL YEAR ENDED JUNE 30,
1997 ("FISCAL 1997")
Net sales for the 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 $6.4 million, or 64%, increase in 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 (SG&A) expenses 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 closely reviewed SG&A and implemented cost containment measures in the
fiscal year ended June 30, 1998, which, it believed, would not have a negative
impact on sales.
20
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 believed that the addition of such product
lines would 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 fully diluted, as compared to $2.1 million, or approximately $.53 per
share fully diluted for Fiscal 1997. During Fiscal 1998, the decrease in net
earnings was primarily attributable to the increase in SG&A.
Liquidity and Capital Resources
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 agreement which expires 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
$16,963,575 at June 30, 1999. The term loan, with a remaining balance of
$375,000 at June 30, 1999, 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, 1999, and prohibits the payment of
cash dividends.
21
During Fiscal 1999, the Company's net cash provided by operating
activities was approximately $1.4 million, as compared to net cash provided by
operating activities of approximately $1.6 million for Fiscal 1998, a decrease
of $.2 million. The principal portion of the cash flow resulted from the
decrease in inventory. This was offset by an increase in accounts receivable.
Net borrowing under the Company's line of credit was approximately $1.5 million.
The additional borrowing is partially attributable to the purchase of $.8
million of treasury stock along with capital expenditures for equipment required
to support the contract manufacturing business, and software developed to
operate the Company's distribution business. 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 1999 and Fiscal 1998, inventory turnover was 3.3x and 3.5x,
respectively. The average days outstanding of the Company's accounts receivable
at June 30, 1999 was 59 days, as compared to 52 days at June 30, 1998.
The Board of Directors of the Company had authorized the purchase of up
to 250,000 shares of its common stock under a stock repurchase program. During
Fiscal 1999 the Board of Directors authorized the repurchase of up to an
additional 400,000 shares of the Company's common stock. The purchase 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 24,
1999, the Company has purchased 412,200 shares of its common stock for aggregate
consideration of $2,204,515 under this program.
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
22
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 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 operation since 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 complaint
as of September 1, 1998.
Jaco's distribution facilities: warehouse, shipping and other physical
handling have been tested and are believed to be 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 late 1999. As a contingency plan, these systems can
be performed manually. The costs relating to Y2K compliance in the contract
manufacturing area are not expected to be material to the Company. In the third
party area, the Company has contacted most of its major suppliers and vendors.
These parties state that they intend to be Y2K compliant by the year 2000.
The Company's management is in the process of developing a "worst-case
scenario" with respect to Y2K non-compliance and to develop contingency plans
designed to minimize the effects of such scenario. Although management believes
that it is very unlikely that the worst-case scenario will occur, contingency
plans will be developed and will address both IT (Information Technology)
system and non-IT system (items containing embedded chips, such as elevators
electronic door locks, telephone, etc.)failure.
In the event of Y2K - related IT system failure, the Company would be
unable to ship orders because its power system would not be functioning. In such
event, the Company plans to use its own generators as a back-up power source.
In terms of non-IT and third-party Y2K non compliance, the worst - case
scenario for the Company would involve the loss of supply of component parts or
other materials from one or more of its major suppliers. The Company believes it
has made contingency plans with its vendors to have product available.
There is still uncertainty about the broader scope of the Year 2000 issue
as it may affect the Company and third parties that are critical to our
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, governmental agencies or other providers of general
infrastructure could pose significant impediments to the Company's ability to
carry on our normal operations. The Company intends to request assurances of Y2K
readiness from its telephone and utilities suppliers. However, management has
been informed that some suppliers have either declined to provide the requested
assurances, or have limited the scope of assurances to which they are willing to
permit. If suppliers of services that are critical to the Company's operations
were to experience business disruptions as a result of their lack of Y2K
readiness their problems could have a material adverse affect on the financial
position and results of operations of the Company. The impact of a failure of
readiness by critical suppliers cannot be estimated with confidence, and the
effectiveness of contingency plans to mitigate the effect of any such failure is
largely untested. Management cannot provide an assurance that there will be no
material adverse effects to the financial condition or results of operations of
the Company as a result of Y2K issues.
The Company has spent to date approximately $1.8 million to replace the
core financial and reporting software systems for its distribution business. The
Company has utilized outside consultants to undertake a portion of the work.
23
Inflation
Inflation has not had a significant impact on the Company's operations
during the last three fiscal years.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The Company is exposed to interest rate change market risk with respect
to its credit facility with a financial institution which is priced 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. At August 31, 1999,
$17,083,821 was outstanding under the credit facility. Changes in the LIBOR
interest rate during the fiscal year ending June 30, 2000 will have a positive
or negative effect on the Company's interest expense. Each 1% fluctuation in the
LIBOR interest rate will increase or decrease interest expense for the Company
by approximately $171,000.
The impact of interest rate fluctuations on other floating rate debt of
the Company is not material.
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.
24
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, 1999.
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, 1999.
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,
1999.
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, 1999.
25
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 Operations 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-26
(a) (2) Financial Statement Schedule included in Part IV of this Report
Report of Independent Certified Public Accountants on Schedule II F-27
Schedule II - Valuation and Qualifying Accounts F-28
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
26
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.
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.
27
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).
10.6.2 1993 Non-Qualified Stock Option Plan, as amended (filed as Exhibit
A to the Company's Definitive Proxy Statement, dated November 2,
1998 for the Annual Meeting of Shareholders held on December 7,
1998)
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.
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
No. 333 -49877, filed April 10, 1998 Exhibit 4.4.
10.12.4 Restricted Stock Plan (filed as Exhibit B to the Company's
Definitive Proxy Statement, dated November 2, 1998 for the Annual
Meeting of Shareholders held on December 7, 1998).
10.13 Employment agreement between Joel Girsky and the Company,
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.13
10.14 Employment agreement between Charles Girsky and the Company,
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.14
10.15 Employment agreement between Jeffrey D. Gash and the Company,
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, Exhibit 10.15
21.1 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.
28
27. Financial Data Schedule.
99.1 General Loan and Security Agreement dated January 20, 1989,
between the Company as borrower and The Bank of New York
Commercial Corporation ("BNYCC") as secured party, incorporated
by reference to the Company's Current Report on Form
8-K, filed January 31, 1989, Exhibit 28(1).
99.2 Loan and Security Agreement - Accounts Receivable and Inventory,
dated January 20, 1989, between the Company and BNYCC,
incorporated by reference to the Company's Current Report on Form
8-K filed January 31, 1989, Exhibit 28(2).
99.3 Letter of Credit and Security Agreement, dated January 20,
1989, between the Company and BNYCC, incorporated by
reference to the Company's Current Report on Form 8-K filed
January 31, 1989, Exhibit 28(3).
99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the
Company in favor of BNYCC dated January 13, 1992, together with
Letters from R.C. Components, Inc., Quality Components, Inc.,
Micatron, Inc. and Distel, Inc., each a subsidiary of the Company
and a guarantor of the obligations evidenced by the Term Notes, to
BNYCC acknowledging the amendment to the Term Notes for the
extension of the maturity date of each such note, incorporated by
reference to the Company's 1992 10-K, Exhibit 28.4.
99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement
between the Company and BNYCC, incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended June
30, 1994, Exhibit 99.5.
99.6 $1,500,000 Additional Term Loan Note, executed by the Company in
favor of BNYCC, dated March 11, 1994, incorporated by
reference to the Company's Annual Report on Form 10-K for the yea
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.
29
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, incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1998, Exhibit 99.8.2
99.8.3 Amendment to Second Restated and Amended Loan and Security
Agreement dated July 1, 1998, incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, Exhibit 99.8.3
99.8.4 Amendment to Second Restated and Amended Loan and Security
Agreement dated September 21, 1998 incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, Exhibit 99.8.4
(b) Reports on Form 8-K filed during last quarter of the period
covered by this Report:
None.
30
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 Operations 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-26
Report of Independent Certified Public Accountants
on Schedule F-27
Schedule II - Valuation and Qualifying Accounts F-28
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, 1998 and 1999
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1999. 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, 1998 and 1999, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Melville, New York
August 20, 1999
F-2
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1998 1999
------------- -------------
CURRENT ASSETS
Cash $ 562,556 $922,247
Marketable securities 764,810 881,622
Accounts receivable, less allowance for doubtful
accounts of $1,268,000 in 1998 and $440,000
in 1999 21,887,618 23,408,900
Inventories 35,737,288 33,224,719
Prepaid expenses and other 1,203,198 660,782
Prepaid and refundable income taxes 610,132 990,855
Deferred income taxes 772,500 336,000
------------ -------------
Total current assets 61,538,102 60,425,125
PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 6,102,445 6,983,761
DEFERRED INCOME TAXES 333,000 390,000
EXCESS OF COST OVER NET ASSETS ACQUIRED, less accumulated amortization of
$719,000 in 1998
and $895,000 in 1999 3,776,912 3,588,449
OTHER ASSETS 1,668,830 1,543,328
----------- ------------
$73,419,289 $ 72,930,663
========== ===========
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 1998 1999
-------------- -------------
CURRENT LIABILITIES
Accounts payable $16,633,389 $15,923,157
Current maturities of long-term debt and
capitalized lease obligations 663,198 791,814
Accrued expenses 1,760,862 1,712,162
----------- ------------
Total current liabilities 19,057,449 18,427,133
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 17,036,593 18,885,664
DEFERRED COMPENSATION 700,000 750,000
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; 4,065,721
shares issued and 3,866,221 and
3,653,521 shares outstanding, respectively 406,572 406,572
Additional paid-in capital, net 22,396,295 22,531,295
Retained earnings 15,077,957 13,920,807
Accumulated other comprehensive income 164,385 213,707
Treasury stock - 199,500 and 412,200 shares, respectively,
at cost (1,419,962) (2,204,515)
----------- ------------
36,625,247 34,867,866
------------ -------------
$73,419,289 $72,930,663
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
1997 1998 1999
------------- ------------- --------------
Net sales $155,097,745 $153,674,226 $140,710,825
Cost of goods sold 122,993,172 121,796,083 113,334,627
----------- ----------- ------------
Gross profit 32,104,573 31,878,143 27,376,198
Selling, general and administrative expenses 27,639,567 28,706,520 27,642,724
------------ ------------ ------------
Operating profit (loss) 4,465,006 3,171,623 (266,526)
Interest expense 971,253 1,140,362 1,308,624
-------------- ------------- -------------
Earnings (Loss) before income taxes 3,493,753 2,031,261 (1,575,150)
Income tax provision (benefit) 1,415,000 847,000 (418,000)
------------- -------------- ----------------
NET EARNINGS (LOSS) $ 2,078,753 $ 1,184,261 $ (1,157,150)
============= ============= ==============
Net earnings per common share
Basic $0.53 $0.31 $(0.31)
==== ==== =====
Diluted $0.53 $0.30 $(0.31)
==== ==== ======
Weighted-average common shares and common
equivalent shares outstanding
Basic 3,899,181 3,836,700 3,698,270
========= ========= =========
Diluted 3,947,687 3,921,518 3,698,270
========= ========= ==========
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, 1997, 1998 and 1999
Accumulated
Additional other
paid-in Retained comprehensive
Shares Amount capital Earnings income
-------- -------- ---------------- --------- ------------
Balance at July 1, 1996 3,955,721 $395,572 $22,024,795 $11,814,943 $ 68,245
Net earnings 2,078,753
Unrealized gain on marketable
securities - net 51,955
Comprehensive income
Issuance of common stock in connection with
acquisition 20,000 2,000 155,500
Purchase of treasury stock ________ _______ _________ ______ ________
Balance at June 30, 1997 3,975,721 397,572 22,180,295 13,893,696 120,200
Net earnings 1,184,261
Unrealized gain on marketable
securities - net 44,185
Comprehensive income
Issuance of restricted stock 90,000 9,000 621,000
Deferred compensation expense
Purchase of treasury stock ________ _______ _________ _______ _________
Balance at June 30, 1998 4,065,721 406,572 22,801,295 15,077,957 164,385
Net loss (1,157,150)
Unrealized gain on marketable
securities - net 49,322
Comprehensive loss
Deferred compensation expense
Purchase of treasury stock _________ _______ _________ _______ _________
Balance at June 30, 1999 4,065,721 $406,572 $22,801,295 $13,920,807 $213,707
=========== ======== =========== =========== ===========
F-6
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Years ended June 30, 1997, 1998 and 1999
Deferred Total
Treasury compen- shareholders'
stock sation equity
-------- -------- --------------
Balance at July 1, 1996 $ 34,303,555
------------
Net earnings 2,078,753
Unrealized gain on marketable
securities - net 51,955
------------
Comprehensive income 2,130,708
Issuance of common stock in connection with
acquisition 157,500
Purchase of treasury stock $(700,000) (700,000)
------------ ------------
Balance at June 30, 1997 (700,000) 35,891,763
------------
Net earnings 1,184,261
Unrealized gain on marketable
securities - net 44,185
------------
Comprehensive income 1,228,446
Issuance of restricted stock $ (540,000) 90,000
Deferred compensation expense 135,000 135,000
Purchase of treasury stock (719,962) (719,962)
----------- ------------ -----------
Balance at June 30, 1998 (1,419,962) (405,000) 36,625,247
------------
Net loss (1,157,150)
Unrealized gain on marketable
securities - net 49,322
------------
Comprehensive loss (1,107,828)
Deferred compensation expense 135,000 135,000
Purchase of treasury stock (784,553) (784,553)
------------ ------------ -----------
Balance at June 30, 1999 (2,204,515) (270,000) $ 34,867,866
============ ========== ===========
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,
1997 1998 1999
------------- ------------ -----------
Cash flows from operating activities
Net earnings (loss) $ 2,078,753 $ 1,184,261 $ (1,157,150)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities
Depreciation and amortization 1,050,666 1,356,457 1,587,766
Deferred compensation 50,000 185,000 185,000
Deferred income tax (benefit) expense (119,000) 33,000 351,000
Loss (gain)on sale of equipment 9,941 2,717 (918)
Provision for doubtful accounts 255,931 475,816 981,622
Changes in operating assets and liabilities, net of
effects of acquisitions
Decrease (increase) in accounts receivable 1,603,022 (355,660) (2,502,904)
(Increase) decrease in inventories (1,767,196) (2,426,087) 2,512,569
(Increase) decrease in prepaid expenses and other (615,364) 156,419 542,416
Increase in prepaid and refundable income taxes (902,545) (81,889) (380,723)
(Decrease) increase in accounts payable (594,557) 800,191 (710,232)
Increase (decrease) in accrued expenses 235,950 291,933 (48,700)
------------- ------------- -------------
Net cash provided by operating activities 1,285,601 1,622,158 1,359,746
------------- ------------- -------------
Cash flows from investing activities
Increase in marketable securities (59,943) (68,049) (39,139)
Capital expenditures (943,352) (1,068,775) (1,603,361)
Proceeds from the sale of equipment 42,867 120,515 9,689
Business acquisitions, net of cash acquired (4,742,249)
Increase in other assets (176,728) (258,905) (7,834)
------------- ------------- -------------
Net cash used in investing activities (5,879,405) (1,275,214) (1,640,645)
------------- ------------- -------------
Cash flows from financing activities
Borrowings from line of credit 161,931,215 152,258,926 53,507,313
Borrowings under term loan for equipment 575,000
Payments of line of credit (155,834,207) (151,076,073) (51,851,995)
Principal payments under equipment financing (289,727) (586,345) (590,889)
Payments under term loan (214,286) (214,286) (214,286)
Purchase of treasury stock (700,000) (719,962) (784,553)
Proceeds from issuance of restricted stock 90,000
------------- ------------- -------------
Net cash provided by (used in) financing activities 4,892,995 (247,740) 640,590
------------- ------------- -------------
NET INCREASE IN CASH 299,191 99,204 359,691
Cash at beginning of year 164,161 463,352 562,556
------------- ------------- -------------
Cash at end of year $ 463,352 $ 562,556 $ 922,247
============= ============= =============
Supplemental cash flow disclosures:
Interest paid $ 815,000 $ 1,301,000 $ 1,310,000
Income taxes paid 2,502,000 929,000 22,000
Supplemental schedule of noncash financing and investing activities:
Equipment under capital leases $ 531,561 $ 1,165,781 $ 552,544
The accompanying notes are an integral part of these statements.
F-8
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1998 and 1999
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, 1997,
1998 and 1999, export sales amounted to approximately $4,102,000,
$4,537,000 and $4,810,000, 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 $257,782 and $335,455 in 1998 and 1999,
respectively. Changes in the fair value of "available for sale
securities" are included in accumulated other comprehensive income, net
of the 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, 1997, 1998 and 1999
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 are being amortized on a
straight-line basis over the estimated useful life of seven years.
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 (Loss) 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, 1997, 1998 and 1999
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, historically has limited its
accounts receivable credit risk. However, during the fourth quarter of
fiscal 1999 the Company recorded approximately $630,000 of additional
bad debt expense.
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,
1999, purchases from three suppliers accounted for 19%, 14% 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, 1997, 1998 and 1999
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. Comprehensive Income
During 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS
130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS
130 had no impact on the Company's earnings or stockholder's equity.
SFAS 130 requires unrealized holding gains or losses on debt and equity
securities available for sale, which prior to adoption were only
reported separately in stockholder's equity, to be included in
comprehensive income and accumulated other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS 130.
12. Segment Reporting
The Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 requires that the Company disclose certain
information about its operating segments defined as "components of an
enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance."
Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
13. Advertising
Advertising costs are expensed as incurred and totaled $177,575,
$257,281 and $250,198 for the years ended June 30, 1997, 1998 and 1999,
respectively.
F-12
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE B - INVENTORY
Inventories consist of the following:
June 30,
1998 1999
Finished goods and goods held for resale $30,490,288 $29,048,654
Work-in-process 555,000 686,180
Raw materials 4,692,000 3,489,885
----------- ------------
$35,737,288 $33,224,719
========== ==========
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
Useful
Life June 30,
---------------------
in years 1998 1999
---------- ------------ ------------
Land, building and improvements 10 to 30 $1,468,708 $1,468,708
Machinery and equipment 3 to 7 6,028,756 7,488,477
Internally developed software costs 7 1,123,897 1,769,857
Transportation equipment 3 to 5 32,063 64,109
Leasehold improvements 5 to 10 599,757 601,218
---------- ------------
9,253,181 11,392,369
Less accumulated depreciation and amortization
(including $326,134 in 1998 and $635,195
in 1999 of capitalized lease amortization) 3,150,736 4,408,608
--------- ----------
$6,102,445 $6,983,761
========= =========
Included in machinery and equipment are assets recorded under capitalized
leases at June 30, 1998 and 1999 for $1,789,913 and $2,342,457,
respectively.
F-13
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE D - INCOME TAXES
The components of the Company's provision for income taxes is as follows:
June 30,
---------------------------------
1997 1998 1999
------------- ----------- -------------
Federal
Current $1,262,000 $663,000 $(887,000)
Deferred (119,000) 33,000 351,000
---------- -------- ----------
1,143,000 696,000 (536,000)
State 272,000 151,000 118,000
---------- ------- --------
$1,415,000 $847,000 $(418,000)
========= ======= =========
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,
--------------------------------------------
1997 1998 1999
-------- --------- --------
Statutory Federal tax rate 34.0% 34.0% (34.0)%
State income taxes, net of Federal tax benefit 5.1 5.0 5.0
Sales expense for which no tax
benefit arises 1.8 2.4 2.4
Other (.4) .3 .1
------ ------ ------
Effective tax rate 40.5% 41.7% (26.5) %
==== ==== ========
F-14
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE D - INCOME TAXES (continued)
Deferred income tax assets and liabilities resulting from differences
between accounting for financial statement purposes and tax purposes are
summarized as follows:
1998 1999
------------ -------------
Deferred tax assets
Net operating loss carryforwards $ 260,000 $ 389,000
Allowance for bad debts 463,000 161,000
Inventory valuation 874,000 869,000
Deferred compensation 255,000 274,000
Other deferred tax assets 198,500 243,000
---------- ---------
2,050,500 1,936,000
Deferred tax liabilities
Depreciation (458,000) (683,000)
Other (68,000) (80,000)
Unrealized gain on marketable securities
available for sale (94,000) (122,000)
----------- ----------
1,430,500 1,051,000
Valuation allowance (325,000) (325,000)
---------- -----------
Net deferred tax asset $1,105,500 $ 726,000
========= ========
F-15
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE D - INCOME TAXES (continued)
At June 30, 1999, the Company, through an acquisition, has available a
Federal net operating loss carryforward of approximately $714,000. 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-16
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE E - EARNINGS PER COMMON SHARE
For the year ended June 30, For the year ended June 30,
1997 1998
---------------------------------------- ----------------------------------------
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 $2,078,753 3,899,181 $0.53 $1,184,261 3,836,700 $0.31
Effect of dilutive
securities
Stock options 48,506 84,818
---------------- ----------- --------------- ----------
Diluted earnings per
share; income available
to common shareholders
plus assumed
conversions $2,078,753 3,947,687 $0.53 $1,184,261 3,921,518 $0.30
========= ========= ========= =========
For the year ended June 30,
1999
----------------------------------------
Income Shares Per
(Numer- (Denomi- Share
ator) nator) Amount
--------- --------- -------
Basic earnings per share;
income available to
common shareholders $(1,157,150) 3,698,270 $(0.31)
Effect of dilutive
securities
Stock options
---------------- -----------
Diluted earnings per
share; income available
to common shareholders
plus assumed
conversions $(1,157,150) 3,698,270 $(0.31)
=========== =========
Options to purchase 485,296 shares of common stock at a price range of
$2.69 to $12.75 and warrants to purchase 70,000 shares of common stock at
$22.95 were outstanding during fiscal 1999. They were not included in the
computation of diluted earnings per share because the inclusion of common
stock equivalents would have been anti-dilutive.
F-17
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS
Debt and capitalized lease obligations are as follows:
June 30,
---------------------------------
1998 1999
--------- ---------
Term loan and revolving line of credit (a) $15,897,542 $17,338,575
Other term loans (b) 133,863 621,797
Equipment note (c) 115,998 5,251
Capitalized lease obligations (d) 1,825,066 1,966,520
----------- -----------
17,972,469 19,932,143
Less amounts representing interest on capitalized
lease obligations 272,678 254,665
------------ ------------
17,699,791 19,677,478
Less current maturities 663,198 791,814
------------ ------------
$17,036,593 $18,885,664
========== ==========
(a) Term Loan 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) change 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
$16,963,575 at June 30, 1999, with an associated interest rate of
6.28%. Pursuant to the same agreement, at June 30, 1999, a term loan
with a remaining balance of $375,000 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-18
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)
(b) Other Term Loans
Other term loans as of June 30, 1999 are as follows:
Monthly
Date of loan Balance Term payment
March 16, 1995 $ 10,184 60 months $ 1,160
March 16, 1995 83,440 84 months 2,730
January 14, 1999 528,173 60 months 9,829
-------
$621,797
The above loans are collateralized by the related equipment acquired,
having a carrying value of approximately $770,000 at June 30, 1999
and $331,000 at June 30, 1998. 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%, 5.5% and 1% per annum, respectively.
(c) Equipment Note
The equipment note is payable through September 1999, bearing an
implicit interest rate of 9.68%, and is collateralized by the related
equipment.
(d) Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for
as capital leases. During fiscal 1999, the Company acquired
approximately $553,000 of equipment through a capital lease. The
obligations for the equipment require the Company to make monthly
payments through September 2003, with implicit interest rates from
7.0% to 8.5%.
F-19
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
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, 1999:
Capitalized
Debt leases
Year ending June 30,
2000 $ 371,800 $ 532,603
2001 17,269,135 541,368
2002 139,486 501,006
2003 116,628 353,048
2004 68,574 38,495
------------ ---------
$ 17,965,623 $1,966,520
============ =========
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,
2000 $ 1,128,731
2001 990,297
2002 947,108
2003 897,361
2004 354,589
----------
$ 4,318,086
F-20
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
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,
2000 $ 598,000
2001 627,900
2002 659,327
2003 692,293
2004 354,589
----------
$2,932,109
The Company's rent expense was approximately $602,000 for each of the
years ended June 30, 1997, 1998 and 1999, respectively, in connection
with the above lease.
Rent expense on office and warehouse facilities leases for the years
ended June 30, 1997, 1998 and 1999 was approximately $962,000,
$1,033,000 and $1,131,000, respectively, net of sublease income of
approximately $115,000, $115,000 and $110,000, respectively.
2. Other Leases
The Company also leases various office equipment and automobiles under
noncancellable operating leases expiring through June 2004. The minimum
rental commitments required under these leases at June 30, 1999 are as
follows:
Year ending June 30,
2000 $148,419
2001 74,596
2002 55,791
2003 22,075
2004 13,416
--------
$314,297
F-21
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE G - COMMITMENTS AND CONTINGENCIES (continued)
3. Employment Agreements
The Company has entered into employment agreements with certain
executive officers which provide for annual base salary aggregating
$675,000 through June 30, 2003 and contain provisions for severance
payments in the event of a change of control as defined in the
agreements. The Company's agreement with its Chairman and Executive
Vice President provide for cash bonuses equal to 4% and 2%,
respectively, of the Company's earnings before income taxes for each
fiscal year in which such earnings are in excess of $1,000,000 or 6%
and 3%, respectively, of the Company's earnings before income taxes if
such earnings are in excess of $2,500,000 up to a maximum annual cash
bonus of $720,000 and $360,000, respectively. In addition, the
Company's agreement with its Chairman provides for a deferred
compensation which accrues at a rate of $50,000 per year and becomes
payable in a lump sum at the later of (i) the Chairman's attainment of
age 60 (which has occurred), or (ii) his cessation of employment, with
or without cause, at any time.
4. Other Matters
The Company is a party to legal matters arising in the general conduct
of business. The ultimate outcome of such matters is not expected to
have a material adverse effect on the Company's results of operations
or financial position.
NOTE 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, 1997, 1998 and 1999, the Company
contributed to this plan approximately $91,000, $132,000 and $96,000,
respectively.
NOTE I - SHAREHOLDERS' EQUITY
In connection with the Company's 1995 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 $12.75 per share public offering price, which expire on
October 20, 1999.
F-22
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
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 and pricing 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 433,899 are outstanding at June 30,
1999.
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 26,397 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. In September
1998, two outside directors were each granted 7,500 options to purchase the
Company's common stock at the fair market value on the date of grant. These
25,000 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, 1997, 1998 and 1999
NOTE I - SHAREHOLDERS' EQUITY (continued)
Outstanding options granted to employees, directors and officers for the
last three fiscal years are summarized as follows:
Weighted
Nonqualified average
stock options exercise
--------------------------
Price range Shares price
----------- ------- ----------
Outstanding at July 1, 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
Granted $ 2.69 - 4.13 265,000 3.34
Expired $ 4.77 - 12.75 (136,268) 4.79
---------
Outstanding at June 30, 1999 $ 2 .69 - 12.75 485,296 5.68
=========
Amounts exercisable at
June 30, 1999 $ 2 .69 - 12.75 485,296 5.68
=========
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
---------------------------- ------------- -------------- ------------
$2.69 - $ 4.76 265,000 54 months $ 3.34
$4.77 - $ 9.00 162,430 33 months $ 5.32
$9.01 - $12.75 57,866 17 months $ 12.62
F-24
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE I - SHAREHOLDERS' EQUITY (continued)
The weighted-average option fair value on the grant date was $1.82, $1.88
and $1.38 for options issued during the years ended June 30, 1997, 1998 and
1999, 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:
1997 1998 1999
--------------- -------------- ----------------
Net earnings (loss)
As reported $2,078,753 $1,184,261 $(1,157,150)
Pro forma 1,805,602 1,167,761 (1,523,550)
Net earnings (loss) per common share - basic
As reported $.53 $.31 $(.31)
Pro forma .46 .30 (.41)
Net earnings (loss) per common share - diluted
As reported $.53 $.30 $(.31)
Pro forma .46 .30 (.41)
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, 1997, 1998 and 1999, respectively, expected volatility of 25%, 35%
and 55%; risk-free interest rates of 6.32%, 5.42% and 5.08% 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, 1997, 1998 and 1999
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. In
fiscal 1998, 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 412,200 shares of its common stock for aggregate
consideration of $2,204,515 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 1999 and 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.
F-26
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE K - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
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 fiscal years 1997,
1998 and 1999, is not considered material to the financial statements.
The Company's chief operating decision maker utilizes net sales and net earnings
(loss) 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. Information about the Company's segments is as follows:
Year ended June 30,
------------------------------------
1997 1998 1999
--------- --------- -------
(in thousands)
Net sales from external customers
Electronics components distribution $ 145,091 $ 137,297 $ 127,401
Contract manufacturing 10,007 16,377 13,310
--------- --------- ---------
$ 155,098 $ 153,674 $ 140,711
========= ========= =========
Intersegment net sales
Electronics components distribution $ 242 $ 593 $ 336
Contract manufacturing 382 111
--------- ---------
$ 242 $ 975 $ 447
========= ========= =========
Operating profit (loss)
Electronics components distribution $ 3,994 $ 2,251 $ (868)
Contract manufacturing 471 921 602
--------- --------- ---------
$ 4,465 $ 3,172 $ (266)
========= ========= =========
Interest expense
Electronics components distribution $ 532 $ 662 $ 768
Contract manufacturing 439 478 541
--------- --------- ---------
$ 971 $ 1,140 $ 1,309
========= ========= =========
Income tax expense (benefit)
Electronics components distribution $ 1,402 $ 662 $ (374)
Contract manufacturing 13 185 (44)
--------- --------- ---------
$ 1,415 $ 847 $ (418)
========= ========= =========
F-27
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1997, 1998 and 1999
NOTE K - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (continued)
Year ended June 30,
------------------------------------
1997 1998 1999
--------- --------- -------
(in thousands)
Identifiable assets
Electronics components distribution $61,515 $60,929 $62,259
Contract manufacturing 8,481 12,490 10,672
------- ------- -------
$69,996 $73,419 $72,931
======= ======= =======
Capital expenditures
Electronics components distribution $ 810 $ 1,002 $ 396
Contract manufacturing 133 67 1,207
------- ------- -------
$ 943 $ 1,069 $ 1,603
======= ======= =======
Depreciation and amortization
Electronics components distribution $ 742 $ 913 $ 1,049
Contract manufacturing 309 443 539
------- ------- -------
$ 1,051 $ 1,356 $ 1,588
======= ======= =======
F-28
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 20,
1999, 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, 1999. 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 20, 1999
F-29
Jaco Electronics, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1997, 1998 and 1999
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, 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
======= ======= ======= ======== =========
Year ended June 30, 1999 $1,268,000 $982,000 $ 12,000 (a) $1,822,000 (b) $ 440,000
========== ======== ======= ========== =========
(a) Recoveries of accounts.
(b) Represents write-offs of uncollectible accounts. (c) Includes balance
attributable to acquired subsidiary.
F-30
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 27, 1999 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 27, 1999 /s/ Joel H. Girsky
-------------------------------
Joel H. Girsky, Chairman of the
Board, President and Treasurer
(Principal Executive Officer)
Date:September 27, 1999 /s/ Jeffrey D. Gash
-------------------------------
Jeffrey D. Gash, Vice President-Finance
and Secretary
(Principal Financial and Accounting Officer)
Date:September 27, 1999 /s/ Stephen A. Cohen
--------------------------------
Stephen A. Cohen, Director
Date:September 27, 1999 /s/ Edward M. Frankel
---------------------------------
Edward M. Frankel, Director
Date:September 27, 1999 /s/ Charles B. Girsky
----------------------------------
Charles B. Girsky, Executive
Vice President and Director
Date:September 27, 1999 /s/ Joseph F. Hickey, Jr.
----------------------------------
Joseph F. Hickey, Jr., Director