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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, 1997
[ ] 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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:
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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 22, 1997 was
$25,140,827.
Number of shares outstanding of each class of Common Stock, as of
September 22, 1997: 3,888,221 shares (excluding 87,500 shares of treasury
stock).
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Definitive Proxy Statement to be filed on or before October 28, 1997,
under Regulation 14A, in connection with the Company's 1997 Annual
Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
Jaco Electronics, Inc., a New York corporation organized in 1961
(collectively with all of its subsidiaries, unless otherwise noted, "Jaco" or
the "Company").
GENERAL
Jaco markets and distributes passive and active electronic components to
original equipment manufacturers ("OEMs") throughout the United States and
Canada from two distribution centers located on the East and West coasts and 14
sales offices located throughout the United States. The Company distributes
products such as semiconductors, capacitors, resistors, electro-mechanical
devices, flat panels, computers and computer subsystems, which are used in the
manufacture and assembly of electronic products. The Company also provides a
variety of value-added services including configuring complete computer systems
to customers' specifications, kitting the component requirements of certain
customers and furnishing contract manufacturing services. Value-added services
are intended to attract new customers, maintain and increase sales to existing
customers and, where feasible, generate additional revenues and improve margins
from sales of components. In addition, these services are designed to respond to
an industry trend of outsourcing, in which purchasing and warehousing functions
are allocated 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 contract manufacturer of printed circuit boards. Management
believes the acquisition of Nexus has enabled, and will continue to enable, the
Company to expand and broaden its range of value-added service capabilities.
The Company's core customer base consists primarily of small and
medium-sized OEMs that produce electronic equipment used in a wide variety of
industries, including manufacturers of
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telecommunications, computer, computer-related, medical and aerospace equipment
and several Fortune 500 manufacturers. In the fiscal year ended June 30, 1997,
the Company distributed electronic components to thousands of customers, none of
which individually represented more than 3% 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 and coordinate purchases from suppliers with sales to customers.
The Company's computer system provides detailed on-line information regarding
the availability of the Company's entire stock of inventory located at its
stocking facilities as well as on-line access to the inventories of some of the
Company's major suppliers. Through the Company's integrated real-time
information system, customers' orders can readily be tracked through the entire
process of entering the order, reserving products to fill the order, ordering
components from suppliers, if necessary, and shipping products to customers on
scheduled dates. The Company is thus able to provide the type of distributor
service required by its OEM customers that have adopted the "just-in-time"
method of inventory procurement. The "just-in-time" method is utilized in an
effort to operate more efficiently and profitably by relying on scheduled
deliveries of such components at the time they are needed in the production
process and thereby reducing inventories of components.
The Company provides additional customer support through technically
competent product managers, field engineers, value-added services and
communication with customers from computer to computer or through electronic
data interchange ("EDI").
INDUSTRY OVERVIEW
The electronics distribution industry has become an increasingly important
sales channel for the electronics industry because distributors can market
component manufacturers' products to a
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broader range of OEMs than such manufacturers could economically serve with
their direct sales forces. Historically, manufacturers of electronic components
have sold directly to large OEMs and relied upon distributors to serve small
customers. Today, distributors have become more of an extension of component
manufacturers' product delivery channels by providing value-added services and
technical support to customers, by stocking sufficient inventory to ensure
timely delivery of components and by managing customer credit. Distributors also
work with OEMs to ensure that manufacturers' components are integrated into the
design of new products.
According to the National Electronics Distributors Association, an
industry trade association, in 1996 the electronics distribution industry
recorded approximately $24.5 billion in sales. Of these sales, approximately
$7.0 billion of industry sales consisted of sales of interconnect (connectors,
sockets), electromechanical (relays, switches) and passive (resistors,
capacitors) components, which products accounted for approximately $73.9 million
of the Company's net distribution sales in the year ended June 30, 1997.
Approximately $16.6 billion of industry sales consisted of sales of
semiconductors and computer products, which accounted for approximately $71.2
million of the Company's net distribution sales for the year ended June 30,
1997.
PRODUCTS
The Company currently distributes over 60,000 stock items. Management
believes that it is necessary for the Company to carry a wide variety of items
in order to fully service its customers requirements and, in addition, many
suppliers require the Company to carry their full product line.
The components distributed by the Company are used in the assembly and
manufacture of electronic equipment such as computers, data transmission and
telecommunications equipment and transportation equipment, including electronic
signals and aircraft, and a broad variety of other electronic products. The
Company's products fall into two broad categories: "passive" components and
"active" components.
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Passive components consist primarily of capacitors, electromechanical
devices, and resistors. Passive products accounted for approximately 52%, 48%,
and 51% of the Company's net distributor sales in the fiscal years ended June
30, 1995, June 30, 1996 and June 30, 1997, respectively.
Active components include semiconductors and computer subsystems.
Semiconductors consist of such items as integrated circuits and discrete
components, transistors, diodes, dynamic RAMs, static RAMs, video RAMs and
MOSFETs. Computer subsystems are an integral part of personal computers and
computer workstations and incorporate such items as disk drives, tape drives,
flat panels and flat panel monitors, floppy disks and controllers. These
products represented approximately 48%, 52% and 49% of the Company's net
distributor sales in the fiscal years ended June 30, 1995, June 30, 1996 and
June 30, 1997, respectively.
VALUE-ADDED SERVICES
The Company provides a number of value-added services which are intended
to attract new customers, to maintain and increase sales to existing customers
and, where feasible, to generate additional revenues and improve margins from
sales of components. Value-added services include:
- CONFIGURING COMPUTER SYSTEMS. Subsystem integration is a service
offered by the Company where it offers turnkey solutions to
customers' computer requirements by integrating such components as
disks, tapes and floppy disk drives with other components, including
power suppliers, enclosures, interface electronics cables and
converters and active components to configure complete computer
systems to customer specifications, both in tower and desktop
configurations.
- 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.
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- CONTRACT MANUFACTURING. The Company also furnishes turnkey contract
manufacturing printed circuit boards ("PCBs") for OEMs using both
conventional pin-through-hole and, on an increasing basis, more
advanced surface mount technologies. Contract manufacturing
operations involve assembling PCBs to customer specifications
utilizing components from suppliers with whom the Company has
distribution agreements and other suppliers. As a turnkey contract
manufacturer of PCBs, the Company procures the required raw
materials and components, manages the assembly and test operations,
and supplies the PCBs in accordance with the customer's delivery
schedule and quality requirements for the finished product.
SALES AND MARKETING
Management believes the Company has developed valuable long-term customer
relationships and an in-depth understanding of its customers' needs and
purchasing patterns. Jaco serves a broad range of customers in the computer,
computer-related, telecommunications, data transmission, defense, aerospace,
medical equipment and other industries. None of the Company's customers
individually represented more than 3%, 2% and 3%, respectively, of net sales in
the fiscal years ended June 30, 1995, June 30, 1996 and June 30, 1997.
The Company's sales personnel are trained to identify their 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.
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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, Colorado,
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, 1997, 94% of the Company's sales were
produced by Company sales personnel and 6% by independent sales representatives.
No one sales representative produced more than 2% of the Company's sales. The
Company believes that the termination of any independent sales representative
would not have a material adverse effect upon its business.
BACKLOG
As the trend toward outsourcing increases, customers have been entering
into just-in-time contracts with distributors, instead of placing orders. As a
result, the Company's backlog has been reduced. The Company's backlog was $40.6
million at June 30, 1996, compared to $27.1 million at June 30, 1997. Backlog
consists of purchase orders received from customers for products scheduled for
delivery within the next twelve months. Orders constituting the Company's
backlog are subject to delivery rescheduling, price negotiations and
cancellations by the customer, sometimes without penalty or notice. Backlog is
not necessarily indicative of future sales for any particular period and,
therefore, the Company expects that in the normal course of business, less than
all backlogged orders will be filled.
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OPERATIONS
Component Distribution. Inventory management is critical to a
distributor's business. The Company constantly focuses on a high number of
resales or "turns" of existing inventory to reduce exposure to product
obsolescence and changing customer demand.
The Company's central computer system facilitates the control of
purchasing and inventory, accounts payable, shipping and receiving, and
invoicing and collection information of Jaco's distribution business. 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 select 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 3.9 for the
year ended June 30, 1997.
Approximately 80% 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.
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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, 1997, the Company invested approximately $665,000 primarily in SMT
machinery and equipment, as part of the Company's ongoing program to expand
Nexus' operations.
Nexus maintains strict quality control procedures for its products,
including use of total quality management ("TQM") systems. Incoming raw material
and components are checked by the Nexus quality control personnel. During the
production stage, quality control personnel check 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.
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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 expects that the acquisition of QPS will continue to
contribute to the expansion of the Company's national, dedicated distribution
network by firmly establishing the Company's presence in the Midwest
marketplace.
Acquisition of Corona Electronics, Inc. On January 21, 1997, the Company
acquired all of the outstanding shares of capital stock of Corona Electronics,
Inc. ("Corona"), an electronics component distributor located in Orange County,
California. Management expects that the acquisition of Corona will strengthen
the Company's presence in the Southern California marketplace.
SUPPLIERS
Manufacturers of passive and active electronic components are increasingly
relying on the marketing, customer service and other resources of distributors
who market their product lines to customers not normally served by the
manufacturer, and to supplement the manufacturer's direct sales efforts in other
accounts often by providing value-added services not offered by the
manufacturer. Manufacturers seek distributors who have strong relationships with
desirable customers, are financially strong, have the infrastructure to handle
large volumes of products and can assist customers in the design and use of the
manufacturers' products. Currently, the Company has non-exclusive distribution
agreements with many manufacturers, including Deutsch, Inc., International
Resistive Company, Inc., Johanson Dielectric Inc., Kemet Electronics
Corporation, Mitel Inc., Rohm Company, Limited, Samsung Semiconductor, Inc., TDK
Corporation of America, Vishay Intertechnology, Inc., and Zetex, Inc. Management
continuously seeks to identify potential new suppliers and obtain additional
distributorships for new lines of products. Management believes that such
expansion and diversification will increase the Company's sales and market
share.
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In the fiscal year ended June 30, 1997, of the Company's top ten
suppliers, only Kemet accounted for more than 10% of net sales and the
remaining nine each accounted for between 9.5% and 2.0% of net sales. No other
supplier accounted for more than 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 fiscal periods.
The Company generally purchases products from manufacturers pursuant to
non-exclusive distributor agreements. Selection as an authorized distributor is
a valuable marketing tool for the 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 assurance that
the Company will not experience significant losses from unsold inventory in the
future.
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COMPETITION
The electronics distribution industry is highly competitive, primarily
with respect to price and product availability. The Company believes that the
breadth of customer base, services and product lines, its level of technical
expertise and the quality of its services generally are also particularly
important. The Company competes with large national distributors such as Arrow
Electronics, Inc. and Avnet, Inc., as well as regional and specialty
distributors, many of whom distribute the same or competitive products. Many of
the Company's competitors have significantly greater name recognition and
greater financial and other resources than those of the Company.
The PCB contract manufacturing industry is highly fragmented and is
characterized by relatively high levels of volatility, competition and pricing
and margin pressure. Many large contract manufacturers operate high-volume
facilities and primarily focus on high-volume product runs. In contrast, certain
contract manufacturers, such as Nexus, focus on low-to-medium volume and
service-intensive products, where the finished product often requires a greater
amount of overall labor.
The Company believes that contract manufacturers which are affiliated or
integrated with electronics distributors have competitive advantages over
comparably-sized, stand-alone contract manufacturers. Distributors can reduce
the risk of inventory obsolescence through stock rotation privileges and
inventory price protection and can also take advantage of material acquisition
skills, just-in-time delivery expertise and broad supplier relationships.
EMPLOYEES
At August 29, 1997, the Company had a total of 406 employees, of which 110
were employed by Nexus. Of total employees, 11 were engaged in administration,
57 were managerial and supervisory employees, 151 were in sales and 187
performed warehouse, manufacturing and clerical functions. Of these employees,
Nexus employed one in administration, nine in management
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and supervisory positions, four in sales and 96 in warehouse, manufacturing and
clerical functions. There are no collective bargaining contracts covering any of
the Company's employees. The Company believes its relationship with its
employees is satisfactory.
ITEM 2. PROPERTIES
All of the Company's facilities are leased except for the Brandon, VT
property which is owned by Nexus. Jaco currently leases 16 facilities located in
the States of Arizona, California, Colorado, Florida, Illinois, Maryland,
Massachusetts, Minnesota, New York, North Carolina, Oregon, Texas and
Washington, three of which are multipurpose facilities used principally as
administrative, sales, and purchasing offices, as well as warehouses, and the
remainder of which are used exclusively by Jaco as sales offices. Jaco's
satellite sales offices range in size from approximately 1,000 square feet to
approximately 7,200 square feet. Base rents for such properties range from
approximately $1,000 per month to approximately $5,700 per month. Depending on
the terms of each particular lease, in addition to base rent, Jaco may also be
responsible for portions of real estate taxes, utilities and operating costs, or
increases in such costs over certain base levels. The lease terms range from
month-to month to as long as three 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 $42,000 net of all
expenses, including taxes, utilities, insurance, maintenance and repairs, and
has a term which expires on December 31, 2003. In Fiscal 1996, Jaco negotiated a
renewal of the lease and the current rental rate is similar to that currently
being charged for comparable properties in the area. Approximately 26,000 square
feet of space is sublet by Jaco to an unaffiliated third party. In addition to
its headquarters, Jaco maintains purchasing and sales offices and warehouse
facilities at its Hauppauge location.
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(ii) Jaco leases through March 31, 1998, from an unaffiliated party,
approximately 10,000 square feet of office and warehouse space in Westlake
Village, California for a base rent of approximately $9,100 per month. Jaco
maintains both a purchasing and sales office at this location, as well as
warehouse facilities.
Nexus currently owns and occupies a 32,000 square foot facility located in
Brandon, Vermont, that is used for manufacturing, storage and office space. The
building was acquired by the Company on March 11, 1994 as part of the
acquisition of all of the outstanding shares of capital stock of Nexus.
The Company believes that its present facilities will be adequate to meet
its needs for the foreseeable future.
ITEM 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings.
ITEM 4. Submission of Matters To A Vote of Security Holders.
No response to this Item is required.
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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 1996. Stock prices of all periods have been adjusted to give
effect to the 10% stock dividend paid on March 10, 1995 and to give effect to
the 4-for-3 stock split which was distributed to shareholders of record as of
September 22, 1995.
<TABLE>
<CAPTION>
FISCAL YEAR 1996: HIGH LOW
<S> <C> <C>
First quarter ended September 30, 1995 $13.88 $ 6.28
Second quarter ended December 31, 1995 $16.00 $ 10.50
Third quarter ended March 31, 1996 $12.38 $ 9.75
Fourth quarter ended June 30, 1996 $12.63 $ 9.75
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997: HIGH LOW
<S> <C> <C>
First quarter ended September 30, 1996 $10.38 $ 6.25
Second quarter ended December 31, 1996 $ 9.50 $ 7.75
Third quarter ended March 31, 1997 $ 9.12 $ 7.00
Fourth quarter ended June 30, 1997 $ 8.00 $ 6.38
</TABLE>
(b) As of September 17, 1997 there were approximately 172 holders of
record of the Company's Common Stock who management believes held for more than
2,500 beneficial owners.
(c) The Company has never declared or paid cash dividends on its Common
Stock. The Company intends to retain its earnings, if any, for use in its
business and to support growth and does not anticipate paying cash dividends in
the foreseeable future. In addition, the agreement governing
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the Company's credit facility (the "Credit Facility") contains provisions that
prohibit the Company from paying cash dividends on its Common Stock.
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Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 96,675 $ 105,213 $ 138,683 $ 167,149 $ 155,098
Cost of goods sold 75,630 83,038 109,902 133,105 122,993
---------- ---------- ---------- ---------- ----------
Gross profit 21,045 22,175 28,781 34,044 32,105
Selling, general and administrative
expenses 17,786 19,155 23,552 26,247 27,640
---------- ---------- ---------- ---------- ----------
Operating profit 3,259 3,020 5,229 7,797 4,465
Interest expense 1,078 1,117 2,010 1,347 971
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
cumulative effect of a change
in accounting for income taxes 2,181 1,903 3,219 6,450 3,494
Income tax expense 797 714 1,303 2,600 1,415
---------- ---------- ---------- ---------- ----------
Earnings before cumulative
effect of a change in account-
ing for income taxes 1,384 1,189 1,916 3,850 2,079
Cumulative effect of a change in
accounting for income taxes 241
---------- ---------- ---------- ---------- ----------
NET EARNINGS $ 1,384 $ 1,430 $ 1,916 $ 3,850 $ 2,079
========== ========== ========== ========== ==========
PER SHARE DATA*
Earnings per common share before
cumulative effect of a change in
accounting $ .55 $ .47 $ .78 $ 1.08 $ .53
Cumulative effect of a change in
accounting .09
---------- ---------- ---------- ---------- ----------
Net earnings per common share $ .55 $ .56 $ .78 $ 1.08 $ .53
========== ========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding 2,522,980 2,551,173 2,461,091 3,554,018 3,947,687
========== ========== ========== ========== ==========
BALANCE SHEET DATA
Working capital $ 14,910 $ 15,160 $ 30,741 $ 36,964 $ 41,146
Total assets 36,056 45,685 56,323 61,143 69,996
Long-term obligations 8,058 9,694 23,666 8,791 15,553
Shareholders' equity 9,905 11,202 13,227 34,304 35,892
</TABLE>
* 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.
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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 and electromechanical devices and motors
used in the assembly and manufacturing of electronic equipment.
The Company's customers are primarily small and medium sized
manufacturers. The trend for these customers has been to shift certain
manufacturing functions to third parties (outsourcing). The Company intends to
seek to capitalize on this trend toward outsourcing by increasing sales of
products enhanced by value-added services. Value-added services currently
provided by Jaco consist of configuring complete computer systems to customer
specifications both in tower and desktop configurations, kitting (e.g. supplying
sets of specified quantities of products to a customer that are prepackaged for
ease of feeding the customer's production lines), and contract manufacturing
through Nexus.
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During August 1996 and January 1997 the Company acquired the operating
assets of QPS Electronics, Inc. and all of the outstanding common stock of
Corona Electronics, Inc., respectively, both of which are electronic component
distributors. Aggregate consideration paid for the acquisitions approximated
$4.7 million, of which $157,500 was paid through the issuance of 20,000 shares
of the Company's common stock (See Note I of the Notes to the Consolidated
Financial Statements). The addition of these two companies strengthens the
Company's position in Southern California and the Midwest. The Company has
consolidated the operations of these acquired companies in order to reduce
operating costs and create a stronger sales organization.
The Company's sales from value-added services represented $15.7
million, or 10.1% of net sales in the year ended June 30, 1997, $18.0 million,
or 11% of net sales in the year ended June 30, 1996, and $18.1 million or 11% of
net sales in the year ended June 30, 1995. Of these sales, sales from contract
manufacturing were $10.0 million, or 6.4% of net sales in year ended June 30,
1997, and $10.8 million, or 6.5% of net sales in the year ended June 30, 1996,
and $12.1 million, or 8.7% of net sales in the year ended June 30, 1995.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's statement
of earnings as a percentage of net sales for the periods shown:
19
<PAGE> 20
<TABLE>
<CAPTION>
Year Ended June 30,
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 79.2 79.6 79.3
----- ----- -----
Gross profit 20.8 20.4 20.7
Selling, general and administrative expenses 17.0 15.7 17.8
----- ----- -----
Operating profit 3.8 4.7 2.9
Interest expense 1.5 .8 .6
----- ----- -----
Earnings before income taxes 2.3 3.9 2.3
Income tax expense .9 1.6 1.0
----- ----- -----
NET EARNINGS 1.4% 2.3% 1.3%
===== ===== =====
</TABLE>
COMPARISON OF YEAR ENDED JUNE 30, 1997 ("FISCAL 1997") WITH YEAR ENDED
JUNE 30, 1996 ("FISCAL 1996")
Net sales for the fiscal year ended June 30, 1997 decreased 7.2% to
$155,098,000, as compared to $167,149,000 reported for the same fiscal 1996
period. During fiscal 1997, the decrease in sales was primarily the result of an
overall industry weakness as it relates to component pricing. The Company sold a
greater number of components than were sold in its last fiscal year, but has
been unable to offset the price reductions that have occurred. The Company
completed two acquisitions during fiscal 1997 (See Note I of the Notes to the
Consolidated Financial Statements) that expanded its market penetration in the
Midwest and Southern California. Additionally, the Company continued to expand
its marketing efforts in flat panel devices and field application engineers
("FAE's"). FAE's assist in designing components for approval by customer's
engineering departments. Sales from contract manufacturing decreased by
approximately $.8 million during fiscal 1997, compared to fiscal 1996. During
the fiscal year Nexus shifted its sales effort to surface mount technology,
compared to the older pin-through-hole technology. The Company believes that the
shift in technology should produce increases in contract manufacturing sales
during future periods.
20
<PAGE> 21
Gross profit margins, as percentage of net sales, increased slightly
from 20.4% in fiscal 1996 to 20.7% in fiscal 1997. Though unit pricing of
components declined during the fiscal year, both price protection provided to
the Company by its suppliers and increases in the sale of passive components,
which historically have maintained a slightly higher gross profit margin as
compared to active components, resulted in the increase in gross profit margin.
Selling, general and administrative (SG&A) expenses were $27.6 million
in fiscal 1997, an increase of $1.4 million, or 5.3% from $26.2 million in
fiscal 1996. The Company's addition of sales and sales management personnel, the
expansion of the FAE program and the addition of the flat panel display group
have contributed to the increase in SG&A expenses. Additionally, the Company
acquired QPS Electronics, Inc. and Corona Electronics, Inc. during the fiscal
year. The Company will closely monitor SG&A costs during the future periods.
Interest expense decreased to $1.0 million in fiscal 1997, as compared
to $1.3 million in fiscal 1996. The 28% decrease was primarily the result of a
reduction in borrowings, as a result of the reduction in indebtedness under the
Company's credit facility by the application of the net proceeds of $17.1
million from the public offering completed during the second quarter of fiscal
1996. Borrowings under the credit facility include funds used for the
acquisition of Corona and QPS (See Note I of the Notes to the Consolidated
Financial Statements) during fiscal 1997.
Net earnings for fiscal 1997 were $2.1 million, or $.53 per share, as
compared to $3.8 million, or $1.08 per share, during the last fiscal year. The
decrease in net earnings was attributable to the decrease in sales and the
increase in SG&A. The Company believes that the additional expenses incurred
during fiscal 1997 will provide the infrastructure necessary for future
increases in sales.
21
<PAGE> 22
COMPARISON OF YEAR ENDED JUNE 30, 1996 WITH YEAR ENDED JUNE 30, 1995
("FISCAL 1995")
Net sales for the fiscal year ended June 30, 1996 increased 20.5% to
$167,149,000, as compared to $138,683,000 reported for the same fiscal 1995
period. The increase in sales was the result of strong overall demand for
electronic components in the electronics industry, the Company's continued
expansion as a national distributor into new territories, and the addition of
sales personnel in existing locations. The Company has expanded its product
offerings to include the flat panel display market. Sales were minimal during
fiscal 1996. Sales from contract manufacturing (Nexus) decreased by
approximately $1.0 million during fiscal 1996, compared to fiscal 1995, due to
the loss of two major customers.
Gross profit margins, as a percentage of net sales, decreased slightly
from 20.8% in fiscal 1995 to 20.4% in fiscal 1996. This was primarily due to a
softening in demand for components during the second half of fiscal 1996.
Selling, general and administrative (SG&A) expenses were $26.2 million
in fiscal 1996, an increase of $2.7 million, or 11.4%, from $23.6 million in
fiscal 1995. The continued geographic expansion of the Company by opening sales
offices in Arizona and Colorado, the higher commissions paid based on sales
growth, the addition of sales personnel in existing locations and the hiring of
additional support personnel to handle increased sales all attributed to the
increase in SG&A. As a percentage of fiscal 1996 net sales, SG&A declined to
15.7% from 17.0% in fiscal 1995. Close attention to cost containment resulted in
the reduction.
Interest expense decreased to $1.3 million in fiscal 1996 from $2.0
million in fiscal 1995. The 33% decrease was primarily the result of a reduction
in borrowings as a result of the reduction
22
<PAGE> 23
in indebtedness under the Company's Credit Facility by application of the net
proceeds from the public offering completed during the second quarter of fiscal
1996.
Net earnings for fiscal 1996 were $3.8 million, an increase of
approximately $1.9 million, or approximately 101% as compared to the same period
in fiscal 1995. The increase in the net earnings is principally the result of
increases in sales, control of SG&A expenses and a reduction in interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
On October 20, 1995, the Company completed a public offering of
1,600,000 shares of its common stock at $12.75 per share. The offering consisted
of 1,325,000 shares offered by the Company and an aggregate of 275,000 shares
offered by certain officers and directors of the Company. On December 8, 1995,
the underwriters of the public offering exercised a portion of their
overallotment option for an additional 160,000 shares at a price per share equal
to that of the public offering. The Company's net proceeds from the public
offering of approximately $17,140,000, after deducting the underwriters'
commission and cost of the public offering, were used to reduce its bank
indebtedness. In connection with the public offering, the Company also issued
stock warrants, to the representative underwriters, to purchase up to 70,000
shares of common stock at an exercise price per share equal to 180% of the
public offering price, which expire on October 20, 1999.
The Company's agreement with its banks, as amended, provides the
Company with a $30,000,000 term loan and revolving line of credit facility based
principally on eligible accounts receivable and inventories of the Company as
defined in the agreements expiring September 13, 1998. Under a verbal agreement
effective June 1, 1997, borrowings under the credit facility bear interest at
the average 30-day LIBOR rate plus 1%. The outstanding balance on the revolving
line of credit facility was $14,018,312 at June 30, 1997. The term loan, with a
remaining balance of $803,571 at June 30, 1997, requires monthly principal
payments of $17,857, together with interest
23
<PAGE> 24
through September 13, 1998, with a final payment of $533,600 on September 13,
1998. 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, 1997, and prohibits the payment of cash dividends. The agreement also
provides for the issuance of letters of credit by the banks on the Company's
behalf. At June 30, 1997, $500,000 of such letters of credit were outstanding.
During fiscal 1997, the Company's net cash provided by operating
activities was approximately $1.3 million, as compared to net cash used in
operating activities of approximately $1.7 million for fiscal 1996, an increase
of approximately $3.0 million. The increase is primarily attributable to the
decrease in accounts receivable by $1.6 million (net of assets acquired from
business acquisitions) for fiscal 1997, as compared to a $2.5 million increase
during fiscal 1996. In addition, inventory increased by $1.8 million (net of
assets acquired from business acquisitions) for fiscal 1997, as compared to a
$3.4 million increase during fiscal 1996. Net cash used in investing activities
increased to $5.9 million for fiscal 1997, as compared to $.9 million for fiscal
1996, an increase of $5.0 million. The two acquisitions completed during fiscal
1997 required approximately $4.7 million, and were financed through the
Company's line of credit. Fiscal 1996 reflects the proceeds of the Company's
public offering, which reduced cash provided by financing activities by
application of such proceeds against the Company's bank borrowings. The
Company's cash expenditures may vary significantly from current levels, based on
a number of factors, including, but not limited to, future acquisitions, if any.
In connection with the January 1997 acquisition of Corona, the Company
increased its borrowings under its existing revolving line of credit by
approximately $4.2 million. Additionally, the Company increased its borrowings
by approximately $2.6 million to finance an increase in inventory.
For fiscal 1996 and fiscal 1997, inventory turnover was 4.7x and 3.9x,
respectively. The average of the Company's accounts receivable at June 30, 1997
was 52 days, as compared to 48 days
24
<PAGE> 25
at June 30, 1996. The Company did not experience any significant trade
collection difficulties during fiscal 1997.
On April 15, 1996, the Company's Board of Directors authorized the
purchase of up to 250,000 shares of its common stock or approximately 6.3% of
the then outstanding shares, under a stock repurchase program. During fiscal
1997, the Company repurchased 87,500 shares at an average market price of $8.00
per share.
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.
INFLATION
Inflation has not had a significant impact on the Company's operations
during the last three fiscal years.
ITEM 8. Financial Statements and Supplementary Data.
For an index to the financial statements and supplementary data, see
Item 14(a).
ITEM 9. Disagreements on Accounting and Financial Disclosure.
No response to this Item is required.
25
<PAGE> 26
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, 1997.
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, 1997.
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,
1997.
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, 1997.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) (1) Financial Statements included in Part II, Item 8, of this Report:
Index to Consolidated Financial Statements and Schedule F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Earnings F-5
Consolidated Statement of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
(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
</TABLE>
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
Exhibit
No.
- -------
3.1 Restated Certificate of Incorporation adopted November, 1987,
incorporated by reference to the Company's definitive proxy statement
distributed in connection with the Company's annual meeting of
shareholders held in November, 1987, filed with the SEC on November 3,
1986, as set forth in Appendix A to the aforesaid proxy statement.
3.1.1 Certificate of Amendment of the Certificate of Incorporation, adopted
December, 1995, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996 ("the Company's
1996 10-K"), Exhibit 3.1.1.
27
<PAGE> 28
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.
10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference to the
Company's 1993 10-K, Exhibit 10.6.
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.
28
<PAGE> 29
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.
21.1 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.
27. Financial Data Schedule.
99.1 General Loan and Security Agreement dated January 20, 1989, between the
Company as borrower and The Bank of New York Commercial Corporation
("BNYCC") as secured party, incorporated by reference to the Company's
Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1).
99.2 Loan and Security Agreement - Accounts Receivable and Inventory, dated
January 20, 1989, between the Company and BNYCC, incorporated by
reference to the Company's Current Report on Form 8-K filed January 31,
1989, Exhibit 28(2).
99.3 Letter of Credit and Security Agreement, dated January 20, 1989,
between the Company and BNYCC, incorporated by reference to the
Company's Current Report on Form 8-K filed January 31, 1989, Exhibit
28(3).
99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company
in favor of BNYCC dated January 13, 1992, together with Letters from
R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and
Distel, Inc., each a subsidiary of the Company and a guarantor of the
obligations evidenced by the Term Notes, to BNYCC acknowledging the
amendment to the Term Notes for the extension of the maturity date of
each such note, incorporated by reference to the Company's 1992 10-K,
Exhibit 28.4.
99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the
Company and BNYCC, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5.
99.6 $1,500,000 Additional Term Loan Note, executed by the Company in favor
of BNYCC, dated March 11, 1994, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June 30, 1994,
Exhibit 99.5.
29
<PAGE> 30
99.7 Restated and Amended Loan and Security Agreement, dated April 25, 1995,
among the Company, Nexus and BNYCC, together with an Amendment to Term
Loan Note executed by the Company in favor of BNYCC and Letter executed
by R.C. Components, Inc., Quality Components, Inc., Micatron, Inc.,
Distel, Inc. And Jaco Overseas, Inc., incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June 30, 1995,
Exhibit 99.7.
99.8 Second Restated and Amended Loan and Security Agreement dated September
13, 1995 among the Company, Nexus Custom Electronics, Inc., BNYCC and
NatWest Bank, N.A. ("Second Restated and Amended Loan and Security
Agreement"), incorporated by reference to the Company's Registration
Statement on Form S-2, Commission File No. 33-62559, filed October 13,
1995, Exhibit 99.8.
99.8.1 Amendment to the Second Restated and Amended Loan and Security
Agreement, dated as of April 10, 1996, incorporated by reference to the
Company's 1996 10-K, Exhibit 99.8.1.
(b) Reports on Form 8-K filed during last quarter of the period covered by
this Report:
None.
30
<PAGE> 31
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 24, 1997 By: /s/ 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 24, 1997 /s/ Joel H. Girsky
--------------------------------------
Joel H. Girsky, Chairman of the
Board, President and Treasurer
(Principal Executive Officer)
Date: September 24, 1997 /s/ Jeffrey D. Gash
--------------------------------------
Jeffrey D. Gash, Vice President-Finance
(Principal Financial and Accounting Officer)
Date: September 24, 1997 /s/Stephen A. Cohen
--------------------------------------
Stephen A. Cohen, Director
Date: September 24, 1997 /s/Edward M. Frankel
--------------------------------------
Edward M. Frankel, Director
Date: September 24, 1997 /s/Charles B. Girsky
--------------------------------------
Charles B. Girsky, Executive
Vice President and Director
Date: September 24, 1997 /s/ Joseph F. Hickey, Jr.
--------------------------------------
Joseph F. Hickey, Jr., Director
31
<PAGE> 32
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Earnings F-5
Consolidated Statement of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
Report of Independent Certified Public Accountants
on Schedule F-27
Schedule II - Valuation and Qualifying Accounts F-28
</TABLE>
F-1
<PAGE> 33
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, 1996 and 1997
and the related consolidated statements of earnings, changes in shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1997. 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, 1996 and 1997, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended June 30, 1997 in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Melville, New York
August 18, 1997
F-2
<PAGE> 34
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
<TABLE>
<CAPTION>
ASSETS 1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 164,161 $ 463,352
Marketable securities 493,281 627,179
Accounts receivable, less allowance for doubtful
accounts of $758,000 in 1996 and $846,000
in 1997 22,217,130 22,008,210
Inventories 30,089,508 33,311,201
Prepaid expenses and other 739,530 1,359,617
Prepaid income taxes 528,243
Deferred income taxes 708,000 750,000
----------- -----------
Total current assets 54,411,610 59,047,802
PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 4,226,617 5,009,045
DEFERRED INCOME TAXES 189,000 244,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
less accumulated amortization
of $369,200 in 1996
and $501,046 in 1997 1,241,533 4,151,574
OTHER ASSETS 1,073,969 1,543,257
----------- -----------
$61,142,729 $69,995,678
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 35
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30,
LIABILITIES AND
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 15,413,879 $15,833,198
Current maturities of long-term debt and
capitalized lease obligations 474,082 599,239
Accrued expenses 1,175,973 1,468,929
Income taxes payable 383,970
------------ -----------
Total current liabilities 17,447,904 17,901,366
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 8,791,270 15,552,549
DEFERRED COMPENSATION 600,000 650,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 100,000 shares, $10
par value; none issued
Common stock - authorized, 10,000,000 shares, $.10 par value; issued
3,955,721 and 3,975,721 shares, respectively, and 3,955,721 and
3,888,221 shares outstanding, respectively 395,572 397,572
Additional paid-in capital 22,024,795 22,180,295
Unrealized gain on marketable securities 68,245 120,200
Retained earnings 11,814,943 13,893,696
Treasury stock - 87,500 shares, at cost (700,000)
------------ -----------
34,303,555 35,891,763
------------ -----------
$ 61,142,729 $69,995,678
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 36
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $138,683,331 $167,149,385 $155,097,745
Cost of goods sold 109,902,639 133,105,227 122,993,172
------------ ------------ ------------
Gross profit 28,780,692 34,044,158 32,104,573
Selling, general and administrative expenses 23,551,196 26,246,741 27,639,567
------------ ------------ ------------
Operating profit 5,229,496 7,797,417 4,465,006
Interest expense 2,010,554 1,347,639 971,253
------------ ------------ ------------
Earnings before income taxes 3,218,942 6,449,778 3,493,753
Income tax provision 1,303,000 2,600,000 1,415,000
------------ ------------ ------------
NET EARNINGS $ 1,915,942 $ 3,849,778 $ 2,078,753
============ ============ ============
Net earnings per common share $ .78 $ 1.08 $ .53
============ ============ ============
Weighted-average common shares and common
equivalent shares outstanding 2,461,091 3,554,018 3,947,687
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 37
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Years ended June 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Unrealized
Additional gain on
paid-in marketable
Shares Amount capital securities
-------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at July 1, 1994 1,652,309 $ 165,231 $ 3,810,516
Exercise of stock options 28,000 2,800 105,700
10% stock dividend 167,979 16,798 1,159,056
Payment for fractional shares resulting
from 10% stock dividend
4-for-3 stock split 616,096 61,609 (61,609)
Net earnings
---------- ----------- ------------
Balance at June 30, 1995 2,464,384 246,438 5,013,663
Issuance of common stock for cash 1,485,000 148,500 16,991,466
Exercise of stock options 6,415 642 19,658
Payment for fractional shares resulting
from 4-for-3 stock split (78) (8) 8
Unrealized gain on marketable
securities - net $ 68,245
Net earnings
---------- ----------- ------------ --------
Balance at June 30, 1996 3,955,721 395,572 22,024,795 68,245
Issuance of common stock in connection
with acquisition 20,000 2,000 155,500
Purchase of treasury stock
Unrealized gain on marketable
securities - net 51,955
Net earnings
---------- ----------- ------------ --------
BALANCE AT JUNE 30, 1997 3,975,721 $ 397,572 $ 22,180,295 $120,200
========== =========== ============ ========
</TABLE>
<TABLE>
<CAPTION>
Total
Retained Treasury shareholders'
earnings stock equity
-------------- --------------- ------------
<S> <C> <C> <C>
Balance at July 1, 1994 $ 7,226,705 $ 11,202,452
Exercise of stock options 108,500
10% stock dividend (1,175,854)
Payment for fractional shares resulting
from 10% stock dividend (362) (362)
4-for-3 stock split
Net earnings 1,915,942 1,915,942
------------ ------------
Balance at June 30, 1995 7,966,431 13,226,532
Issuance of common stock for cash 17,139,966
Exercise of stock options 20,300
Payment for fractional shares resulting
from 4-for-3 stock split (1,266) (1,266)
Unrealized gain on marketable
securities - net 68,245
Net earnings 3,849,778 3,849,778
------------ ------------
Balance at June 30, 1996 11,814,943 34,303,555
Issuance of common stock in connection
with acquisition 157,500
Purchase of treasury stock $(700,000) (700,000)
Unrealized gain on marketable
securities - net 51,955
Net earnings 2,078,753 2,078,753
------------ --------- ------------
BALANCE AT JUNE 30, 1997 $ 13,893,696 $(700,000) $ 35,891,763
============ ========= ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 38
Jaco Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 1,915,942 $ 3,849,778 $ 2,078,753
Adjustments to reconcile net earnings to net cash
used in operating activities
Depreciation and amortization 693,290 719,899 1,050,666
Deferred compensation 50,000 50,000 50,000
Deferred income tax benefit (31,000) (158,000) (119,000)
Loss on sale of equipment 18,403 8,793 9,941
Provision for doubtful accounts 458,000 761,190 255,931
Changes in operating assets and liabilities, net of
effects of acquisitions
Decrease (increase) in accounts receivable (3,759,741) (2,540,656) 1,603,022
Increase in inventories (6,572,285) (3,435,627) (1,767,196)
(Increase) decrease in prepaid expenses and other (184,100) 516,789 (615,364)
(Decrease) increase in accounts payable 3,057,980 (1,237,895) (594,557)
Increase (decrease) in accrued expenses 37,695 (124,638) 235,950
(Decrease) increase in income taxes payable 328,203 (91,732) (902,545)
----------- ----------- -----------
Net cash (provided by) used in operating activities (3,987,613) (1,682,099) 1,285,601
----------- ----------- -----------
Cash flows from investing activities
Increase in marketable securities (379,036) (59,943)
Capital expenditures (908,153) (789,635) (943,352)
Proceeds from the sale of equipment 20,000 12,047 42,867
Business acquisitions, net of cash acquired (4,742,249)
Decrease (increase) in due from officers, net (18,689) 309,808
Increase in other assets (106,956) (6,328) (176,728)
----------- ----------- -----------
Net cash used in investing activities (1,013,798) (853,144) (5,879,405)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from public offering - net 17,139,966
Borrowings from line of credit 141,391,776 173,061,732 161,931,215
Payments of line of credit (136,774,193) (179,449,087) (155,834,207)
Principal payments under equipment financing (434,854) (251,626) (289,727)
(Payments) borrowings under term loans 669,417 (8,214,286) (214,286)
Purchase of treasury stock (700,000)
Proceeds from exercise of stock option 108,500 20,300
Payments for fractional shares (362) (1,266)
----------- ----------- -----------
Net cash provided by financing activities 4,960,284 2,305,733 4,892,995
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (41,127) (229,510) 299,191
Cash and cash equivalents at beginning of year 434,798 393,671 164,161
----------- ----------- -----------
Cash and cash equivalents at end of year $ 393,671 $ 164,161 $ 463,352
============= ============= =============
Supplemental cash flow disclosures:
Interest paid $ 1,970,000 $ 1,472,000 $ 815,000
Income taxes paid 993,000 2,882,000 2,502,000
Supplemental schedule of noncash financing and investing activities:
Equipment under capital leases $ 288,000 $ $ 531,561
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 39
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995, 1996 and 1997
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, 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,
1995, 1996 and 1997, export sales amounted to approximately $5,032,000,
$4,963,000 and $4,102,000, respectively.
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements
follows:
1. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Jaco Electronics, Inc. and its subsidiaries, all
of which are wholly-owned. All significant intercompany
balances and transactions have been eliminated.
2. Revenue Recognition
The Company recognizes revenue as products are shipped and
title passes to customers.
3. Investments in Marketable Securities
Investments in marketable securities consist of investments in
mutual funds. Such investments have been classified as
"available for sale securities" and are reported at fair
market value which is inclusive of unrealized gains of
approximately $114,245 and $188,200 in 1996 and 1997,
respectively. Changes in the fair value of "available for sale
securities" are classified as a separate component of
shareholders' equity, net of any related deferred tax effects.
4. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out and average cost
methods.
F-8
<PAGE> 40
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
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.
6. Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired is amortized over
periods of ten to forty years using the straight-line method.
The Company periodically reviews and evaluates whether there
has been a permanent impairment in the value of its
intangibles. Factors considered in the valuation include
current operating results, trends and anticipated undiscounted
future cash flows.
7. Income Taxes
Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and
liabilities and net operating loss carryforwards for which
income tax expenses or benefits are expected to be realized in
future years. A valuation allowance has been established to
reduce deferred tax assets attributable to a subsidiary of the
Company, as it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment
date.
8. Earnings Per Common Share
Earnings per common share is based upon the weighted average
number of shares of common stock outstanding during the year
and reflects the dilutive effect of outstanding stock options.
All per share information has been restated to reflect the
Company's fiscal 1995 stock dividend and stock split.
F-9
<PAGE> 41
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the Company's
policy of maintaining credit insurance. The Company routinely
addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure
is limited.
Statement of Financial Accounting Standards No. 107 ("SFAS No.
107"), "Fair Value of Financial Instruments," requires
disclosure of the estimated fair value of an entity's
financial instrument assets and liabilities. The Company's
principal financial instrument consists of a revolving credit
facility, expiring on September 13, 1998, 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, 1997, the Company's top three suppliers
accounted for 18%, 9.5% and 8%, 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.
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.
F-10
<PAGE> 42
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. Accounting Pronouncements Not Yet Adopted
In February 1997, the Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which is effective for financial statements
for both interim and annual periods ending after December 15,
1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per
share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were
computed. The adoption of this standard is not expected to have a
material impact on the disclosure of earnings per share in the
financial statements.
NOTE B - INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Finished goods and goods held for resale $27,025,508 $30,129,201
Work-in-process 477,000 455,000
Raw materials 2,587,000 2,727,000
----------- -----------
$30,089,508 $33,311,201
=========== ===========
</TABLE>
F-11
<PAGE> 43
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
Useful June 30,
life ------------------------
in years 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Land, building and improvements 10 to 30 $1,419,126 $1,468,708
Machinery and equipment 3 to 8 5,193,265 5,247,170
Transportation equipment 3 to 5 108,370 51,050
Leasehold improvements 5 to 10 661,479 569,515
---------- ----------
7,382,240 7,336,443
Less accumulated depreciation and amortization
(including $688,957 in 1996 and $272,500
in 1997 of capitalized lease amortization) 3,155,623 2,327,398
---------- ----------
$4,226,617 $5,009,045
========== ==========
</TABLE>
Included in machinery and equipment are assets recorded under
capitalized leases at June 30, 1996 and 1997 for $943,038 and $949,695,
respectively.
NOTE D - INCOME TAXES
The components of the Company's provision for income taxes is as
follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal
Current $ 1,063,000 $ 2,176,000 $ 1,262,000
Deferred (31,000) (158,000) (119,000)
----------- ----------- -----------
1,032,000 2,018,000 1,143,000
State 271,000 582,000 272,000
----------- ----------- -----------
$ 1,303,000 $ 2,600,000 $ 1,415,000
=========== =========== ===========
</TABLE>
F-12
<PAGE> 44
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE D - INCOME TAXES (CONTINUED)
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Statutory Federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 5.6 6.0 5.1
Sales expense for which no tax
benefit arises 1.7 .1 1.8
Other (.8) .2 (.4)
------ ------ ------
Effective tax rate 40.5% 40.3% 40.5%
====== ====== ======
</TABLE>
Deferred income tax assets and liabilities resulting from differences
between accounting for financial statement purposes and tax purposes are
summarized as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 409,000 $ 409,000
Allowance for bad debts 347,000 308,000
Inventory valuation 582,000 691,000
Deferred compensation 219,000 237,000
Other deferred assets 24,000 65,000
----------- -----------
1,581,000 1,710,000
Deferred tax liabilities
Depreciation (85,000) (104,000)
Other (47,000) (50,000)
Unrealized gain on marketable securities
available for sale (46,000) (68,000)
----------- -----------
1,403,000 1,488,000
Valuation allowance (506,000) (494,000)
----------- -----------
Net deferred tax asset $ 897,000 $ 994,000
=========== ===========
</TABLE>
F-13
<PAGE> 45
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE D - INCOME TAXES (CONTINUED)
At June 30, 1997, the Company, through an acquisition, has available a
Federal net operating loss carryforward of approximately $1,121,000.
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 1997, $12,000 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 the majority of
such deferred tax asset will result in the reduction of the excess of
cost over net assets acquired.
NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS
Debt and capitalized lease obligations are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Term loans and revolving line of credit (a) $ 8,186,172 $14,821,883
Other term loans (b) 424,721 358,073
Equipment notes (c) 373,608 250,165
Capitalized lease obligations (d) 314,945 847,328
----------- -----------
9,299,446 16,277,449
Less amounts representing interest on capitalized
leases 34,094 125,661
----------- -----------
9,265,352 16,151,788
Less current maturities 474,082 599,239
----------- -----------
$ 8,791,270 $15,552,549
=========== ===========
</TABLE>
F-14
<PAGE> 46
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
(a) Term Loans and Revolving Line of Credit Facility
The Company's agreement with its banks, as amended, provides
the Company with a $30,000,000 term loan and revolving line of
credit facility based principally on eligible accounts
receivable and inventories of the Company as defined in the
agreements expiring September 13, 1998. Under a verbal
agreement effective June 1, 1997, borrowings under the credit
facility bear interest at the average 30-day LIBOR rate plus
1%. The outstanding balance on the revolving line of credit
facility, $14,018,312 at June 30, 1997, bears an interest rate
of 6.69%. Pursuant to the same agreement, at June 30, 1997, a
term loan with a remaining balance of $803,571 requires
monthly principal payments of $17,857, together with interest
through September 13, 1998, with a final payment of $553,600
on September 13, 1998. 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, and prohibits the payment of cash dividends.
The agreement also provides for the issuance of letters of
credit by the banks on the Company's behalf. At June 30, 1997,
$500,000 of such letters of credit were outstanding.
(b) Other Term Loans
Other term loans as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Monthly
Date of loan Balance Term payment
------------ --------- --------- -------
<S> <C> <C> <C>
March 16, 1995 $ 35,207 60 months $1,160
March 16, 1995 136,685 84 months 2,730
March 16, 1995 186,181 84 months 4,216
---------
$ 358,073
=========
</TABLE>
The above loans are collateralized by the related equipment
acquired, having a carrying value of approximately $422,000 at
June 30, 1997 and $464,000 at June 30, 1996. 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,
F-15
<PAGE> 47
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
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 1.5% over the bank's prime rate, respectively.
(c) Equipment Notes
The equipment notes are payable through September 1999,
bearing implicit interest rates from 7.55% to 9.68% and are
collateralized by the related equipment.
(d) Capitalized Lease Obligations
The Company leases certain equipment under agreements
accounted for as capital leases. During fiscal 1997, the
Company, through one of its subsidiaries, leased approximately
$532,000 of equipment for its contract manufacturing business
which were accounted for as capital leases. The obligations
for the equipment require the Company to make monthly payments
through June 2002, with implicit interest rates from 7.07% to
8.5%.
The following is a summary of the aggregate annual maturities of
long-term debt and capitalized lease obligations as of June 30, 1997:
<TABLE>
<CAPTION>
Long-term Capitalized
debt leases
------------- -----------
<S> <C> <C>
Year ending June 30,
1998 $ 402,274 $249,466
1999 14,808,036 226,345
2000 86,261 151,532
2001 73,979 130,174
2002 59,572 89,810
------------- --------
$ 15,430,122 $847,327
============= ========
</TABLE>
F-16
<PAGE> 48
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE F - 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:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
1998 $ 961,946
1999 779,450
2000 732,116
2001 681,861
2002 678,184
Thereafter 1,046,882
----------
$4,880,439
==========
</TABLE>
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:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
1998 $ 542,430
1999 569,550
2000 598,000
2001 627,900
2002 659,327
Thereafter 1,046,882
----------
$4,044,089
==========
</TABLE>
The Company's rent expense was approximately $571,000,
$528,000 and $602,000 for the years ended June 30, 1995, 1996
and 1997, respectively, in connection with the above lease.
Rent expense on office and warehouse facilities leases for the
years ended June 30, 1995, 1996 and 1997 was approximately
$909,000, $846,000 and $962,000, respectively, net of sublease
income of approximately $135,000, $120,000 and $115,000,
respectively.
F-17
<PAGE> 49
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE F - COMMITMENTS AND CONTINGENCIES (CONTINUED)
2. Other Leases
The Company also leases various office equipment and
automobiles under noncancellable operating leases expiring
through January 2002. The minimum rental commitments required
under these leases at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
1998 $286,073
1999 185,871
2000 97,318
2001 9,773
2002 756
--------
$579,791
========
</TABLE>
3. Employment Agreement
Effective July 1, 1993, the Company entered into an employment
agreement with its Chairman expiring July 1, 1997, pursuant to
which the Chairman receives a base annual salary of $325,000. In
addition, the Chairman will be entitled to an annual bonus equal
to 4% of earnings before income taxes, if earnings for a
particular fiscal year exceed $1,000,000 or 6% if earnings before
income taxes are in excess of $2,500,000. The agreement also
provides for the continuation of the deferred compensation
arrangement first established in fiscal 1985, whereby $50,000 per
year has been accrued and becomes payable in its entirety no
later than January 15 of the year next following the last to
occur of the following events: (1) the Chairman's attainment of
age 60 (fiscal 1999) or (2) cessation of the Chairman's
employment with or without cause after July 1, 1993. In the event
of a change in control resulting in termination of the Chairman's
employment, the Chairman will receive between $450,000 and
$600,000 depending on the date of termination. For the years
ended June 30, 1995, 1996 and 1997, bonuses of approximately
$193,000, $387,000 and $210,000, respectively, were earned
pursuant to the Chairman's employment agreement. Presently, the
Company is in negotiations with its Chairman to extend his
employment agreement.
F-18
<PAGE> 50
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE F - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 G - 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, 1995, 1996 and 1997,
the Company contributed to this plan approximately $90,000, $104,000
and $91,000, respectively.
NOTE H - SHAREHOLDERS' EQUITY
On October 20, 1995, the Company completed a public offering of
1,600,000 shares of its common stock at $12.75 per share. The offering
consisted of 1,325,000 shares offered by the Company and 275,000 shares
offered by certain officers and directors of the Company. On December
8, 1995, the underwriters of the public offering exercised a portion of
their overallotment option for an additional 160,000 shares at a price
per share equal to that of the public offering. The Company's net
proceeds from the public offering of $17,139,966, after deducting the
underwriters' commission and costs of the public offering, were used to
reduce its bank indebtedness. In connection with the public offering,
the Company also issued stock warrants, to the representative
underwriters, to purchase up to 70,000 shares of common stock at an
exercise price per share equal to 180% of the public offering price,
which expire on October 20, 1999.
On February 3, 1995, the Company declared a 10% stock dividend which
was paid on March 10, 1995. Further, on August 30, 1995, the Company
authorized a 4-for-3 stock split. The 4-for-3 split was distributed on
October 3, 1995 to shareholders of record as of September 22, 1995. All
references to the number of common shares and earnings per common
share have been restated to reflect the 10% stock dividend and the
4-for-3 stock split.
F-19
<PAGE> 51
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE H - SHAREHOLDERS' EQUITY (CONTINUED)
The Company has stock option plans which provide for the granting of
stock options to employees, directors and officers under the following
stock option plans:
In November 1981, the Company approved the adoption of a qualified
incentive stock option plan, hereinafter referred to as the "1981
Plan." The stock options granted under the 1981 Plan were generally
exercisable for a period of five years at a price not less than the
market value on the date of grant. The 1981 Plan terminated in November
1991. Options granted prior to expiration of the 1981 Plan which, by
their terms, do not expire until after November 1991 remain outstanding
in accordance with their terms until their individual expiration dates.
During fiscal 1996, all outstanding options under the 1981 Plan had
been exercised.
In December 1992, the Board of Directors approved the adoption of a
nonqualified stock option plan, known as the "1993 Non-Qualified Stock
Option Plan," hereinafter referred to as the "1993 Plan." The Board of
Directors or Plan Committee is responsible for the granting of and
price of these options. Such price shall be equal to the fair market
value of the common stock subject to such option at the time of grant.
The options expire five years from the date of grant and are
exercisable over the period stated in each option. The Company has
reserved 293,333 shares of common stock for the 1993 Plan, all of which
are outstanding.
In October 1993, the Board of Directors approved the adoption of a
stock option plan for outside directors, known as the "1993 Stock
Option Plan for Outside Directors," hereinafter referred to as the
"Outside Directors Plan." Each outside director who was serving as of
December 31, 1993 was granted a nonqualified stock option to purchase
14,667 shares of the Company's common stock at the fair market value on
the date of grant. The Company has reserved 146,667 shares of common
stock for the Outside Directors Plan of which 46,932 options are
outstanding. Of the 99,735 options currently available for grant under
the Outside Directors Plan, each person who is an outside director on
December 31 of each calendar year subsequent to 1993 shall be granted
options to purchase 2,933 shares of the Company's common stock
annually. Granted options shall expire upon the earlier of five years
after the date of grant or one year following the date on which the
outside director ceases to serve in such capacity.
In June 1997, the Company appointed an additional outside director to
the Board of Directors who received 10,000 options to purchase the
Company's common stock at the fair market value on the date of grant.
These options were not granted pursuant to any stock option plan.
F-20
<PAGE> 52
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE H - SHAREHOLDERS' EQUITY (CONTINUED)
Outstanding options granted to employees, directors and officers for
the last three fiscal years are summarized as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified Weighted
stock options stock options average
----------------------------- ----------------------------- exercise
Price range Shares Price range Shares price
------------ ---------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at June 30, 1994 $1.02 - 2.65 43,817 $ 4.77 - 5.80 129,433 $ 5.06
Granted $ 4.94 5,867 4.94
Exercised $2.65 (41,067)
------- ---------
Outstanding at June 30, 1995 $1.02 2,750 $ 4.77 - 5.80 135,300 5.06
Granted $ 11.50 - 12.75 68,366 12.64
Exercised $1.02 (2,750) $ 4.77 (3,666) 4.77
-------- ---------
Outstanding at June 30, 1996 - 200,000 7.65
Granted $ 7.00 - 8.50 150,265 7.15
Exercised
-------- ---------
OUTSTANDING AT JUNE 30, 1997 - 350,265 7.44
======== =========
AMOUNTS EXERCISABLE AT
JUNE 30, 1997 - 205,866 7.68
======== =========
</TABLE>
F-21
<PAGE> 53
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE H - SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning currently
outstanding and exercisable nonqualified stock options:
<TABLE>
<CAPTION>
Weighted-
Number average Weighted-
outstanding remaining average
and contractual exercise
Range of exercise prices exercisable life (months) price
------------------------ ----------- ------------- --------
<S> <C> <C> <C> <C>
$4.77 - $ 9.00 137,500 22 months $ 5.20
$9.01 - $ 12.75 68,366 41 months $ 12.64
</TABLE>
The weighted-average option fair value on the grant date was $3.10 and
$1.82 for options issued during the years ended June 30, 1996 and 1997,
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:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Net earnings
As reported $ 3,849,778 $ 2,078,753
Pro forma 3,639,117 1,805,602
Earnings per common share
As reported $ 1.08 $ .53
Pro forma 1.02 .46
</TABLE>
F-22
<PAGE> 54
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE H - SHAREHOLDERS' EQUITY (CONTINUED)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before fiscal 1996. The fair value of these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
the fiscal years ended June 30, 1996 and 1997, respectively: expected
volatility of 25% for both years; risk-free interest rates of 5.67% and
6.32%; and expected term of 3 years for both 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.
In April 1996, the Company announced that its Board of Directors has
authorized the purchase of up to 250,000 shares of its common stock or
approximately 6.3% of the then outstanding shares, under a stock
repurchase program. The purchases may be made by the Company from time
to time on the open market at the Company's discretion. During fiscal
1997, the Company purchased 87,500 shares of its common stock for
aggregate consideration of $700,000.
In June 1997, the Company's Board of Directors approved the adoption of
a restricted stock plan. The plan, which is subject to shareholders'
approval at the next scheduled meeting (anticipated to be held in
December 1997), 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 Board of Directors has
authorized, subject to shareholder approval, the purchase of 90,000
shares of the Company's common stock by certain employees at a purchase
price of $1.00 per share. Shares purchased are subject to a four-year
vesting period.
F-23
<PAGE> 55
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE I - ACQUISITIONS
During August 1996 and January 1997, the Company purchased QPS
Electronics, Inc. and Corona Electronics, Inc., respectively, both of
which are electronic component distributors. Aggregate consideration
paid for the acquisitions approximated $4,700,000, of which $157,500 was
paid through the issuance of 20,000 shares of the Company's common
stock. These acquisitions have been accounted for by the purchase method
and, as such, the fair value of the assets and liabilities acquired have
been recorded on the date of the respective acquisitions. The respective
results of their operations are included with those of the Company from
the date of acquisition. The excess of the purchase price over the fair
value of the assets acquired, approximately $3,053,000, is being
amortized using the straight-line method over a period of twenty years.
Pro forma historical results of operations are not presented, as such
results would not be materially different from the historical results of
the Company.
NOTE J - SEGMENT INFORMATION
The Company has two business segments: electronics parts distribution
and contract manufacturing. The following is a summary of selected
consolidated information for the electronics components distribution
and contract manufacturing segments.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1995 1996 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Sales
Electronics components distribution $126,545 $156,303 $145,091
Contract manufacturing 12,138 10,846 10,007
-------- -------- --------
$138,683 $167,149 $155,098
======== ======== ========
Operating profit
Electronics components distribution $ 4,666 $ 7,640 $ 3,994
Contract manufacturing 563 157 471
-------- -------- --------
$ 5,229 $ 7,797 $ 4,465
======== ======== ========
</TABLE>
F-24
<PAGE> 56
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE J - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1995 1996 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Identifiable assets
Electronics components distribution $47,909 $53,600 $61,515
Contract manufacturing 8,414 7,543 8,481
------- ------- -------
$56,323 $61,143 $69,996
======= ======= =======
Capital expenditures
Electronics components distribution $ 342 $ 524 $ 810
Contract manufacturing 566 266 133
------- ------- -------
$ 908 $ 790 $ 943
======= ======= =======
Depreciation and amortization
Electronics components distribution $ 397 $ 422 $ 742
Contract manufacturing 296 298 309
------- ------- -------
$ 693 $ 720 $ 1,051
======= ======= =======
</TABLE>
NOTE J - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL
DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $38,321,790 $38,194,939 $38,661,610 $39,919,406
GROSS PROFIT 8,115,502 8,011,793 7,863,345 8,113,933
NET EARNINGS 787,641 621,281 347,338 322,493
EARNINGS PER COMMON SHARE
NET EARNINGS PER COMMON
SHARE $ .20 $ .16 $ .09 $ .08
=========== =========== =========== ===========
</TABLE>
F-25
<PAGE> 57
Jaco Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1995, 1996 and 1997
NOTE J - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL
DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------------
September 30, December 31, March 31, June 30,
1995 1995 1996 1996
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $40,083,485 $43,589,877 $43,176,834 $40,299,189
Gross profit 8,541,214 8,821,196 8,633,057 8,048,691
Net earnings 807,951 1,079,907 1,112,740 849,180
Earnings per common share
Net earnings per common
share $ .32 $ .30 $ .28 $ .21
=========== =========== =========== ===========
</TABLE>
F-26
<PAGE> 58
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 18,
1997, 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, 1997. 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 18, 1997
F-27
<PAGE> 59
Jaco Electronics, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
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
----------- ------------- ------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended June 30, 1995 $ 610,000 $ 458,000 $ 104,000(b) $ 562,000(a) $610,000
============= ============= ============= ============= ========
Year ended June 30, 1996 $ 610,000 $ 761,000 $ 153,000(b) $ 766,000(a) $758,000
============= ============= ============= ============= ========
Year ended June 30, 1997 $ 758,000 $ 256,000 $ 95,000(b)(c) $ 263,000(a) $846,000
============= ============= ============= ============= ========
</TABLE>
(a) Represents write-offs of uncollectible accounts.
(b) Recoveries of accounts.
(c) Includes balance attributable to acquired subsidiary.
F-28
<PAGE> 60
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
Ex-21.1 Subsidiaries of the Company
Ex-23.1 Consent of Grant Thornton LLP
Ex-27 Financial Data Schedule
<PAGE> 1
EXHIBIT 21.1
The following subsidiaries, all of which were 100% directly owned, were included
in the Registrant's consolidated financial statements.
NAME OF SUBSIDIARY STATE OR JURISDICTION OF INCORPORATION
- ------------------ --------------------------------------
Distel, Inc. California
RC Components, Inc. Massachusetts
Micatron Inc. New York
Quality Components, Inc. Texas
Jaco Overseas, Inc. Virgin Islands
Nexus Custom Electronics, Inc. New Jersey
Jaco Electronics Canada, Inc. Canada
Corona Electronics, Inc. California
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our reports dated August 18, 1997 accompanying the consolidated
financial statements and schedule of Jaco Electronics, Inc. as of June 30, 1996
and 1997 and for each of the three years in the period ended June 30, 1997
contained in this annual report of Jaco Electronics, Inc. on Form 10-K for the
year ended June 30, 1997. We hereby consent to the incorporation by reference of
the aforementioned reports in the Registration Statement of Jaco Electronics,
Inc. on Form S-8/S-3 (File No. 33-89994, effective March 3, 1995).
GRANT THORNTON LLP
Melville, New York
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE AUDITED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITE
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 463,352
<SECURITIES> 627,179
<RECEIVABLES> 22,854,292
<ALLOWANCES> 846,082
<INVENTORY> 33,311,201
<CURRENT-ASSETS> 59,047,802
<PP&E> 7,336,443
<DEPRECIATION> 2,327,398
<TOTAL-ASSETS> 69,995,678
<CURRENT-LIABILITIES> 17,901,366
<BONDS> 16,202,549
0
0
<COMMON> 397,572
<OTHER-SE> 35,494,191
<TOTAL-LIABILITY-AND-EQUITY> 69,995,678
<SALES> 155,097,745
<TOTAL-REVENUES> 155,097,745
<CGS> 122,993,172
<TOTAL-COSTS> 122,993,172
<OTHER-EXPENSES> 27,639,567
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 971,253
<INCOME-PRETAX> 3,493,753
<INCOME-TAX> 1,415,000
<INCOME-CONTINUING> 2,078,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,078,753
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.53
</TABLE>
