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Jaco Electronics 10-Q 2008 UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington D.C. 20549
FORM
10-Q
{X} QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
quarterly period ended March 31, 2008
OR
{ } TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
transition period from ____________________ to
__________________________
Commission
File Number 0-5896
JACO ELECTRONICS,
INC.
(Exact name of
registrant as specified in its charter)
NEW
YORK 11-1978958
(State or other jurisdiction
of
(I.R.S. Employer Identification No.)
incorporation or
organization)
145 OSER AVENUE, HAUPPAUGE, NEW YORK 11788 (Address of principal executive
offices) (Zip
Code)
Registrant's
telephone number, including area code: (631)
273-5500
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or
15 (d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period
that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for
the past
90 days.
Yes X No __
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-
accelerated
filer or a smaller reporting company. See definition of “large
accelerated filer”, “accelerated
filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer o Smaller
reporting company ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
__ No X
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
FORM
10-Q March 31, 2008
Page
2
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
JACO
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
See accompanying notes to condensed
consolidated financial statements
Form
10-Q March 31,
2008
Page
3
JACO
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
See
accompanying notes to condensed consolidated financial statements.
FORM
10-Q March
31, 2008
Page
4
JACO
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
See
accompanying notes to condensed consolidated financial
statements. FORM
10-Q March 31,
2008
Page
5
JACO
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
NINE MONTHS ENDED MARCH 31,
(UNAUDITED)
See
accompanying notes to condensed consolidated financial statements.
FORM
10-Q March 31, 2008
Page
7
JACO
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
NINE MONTHS ENDED MARCH 31,
(UNAUDITED)
See
accompanying notes to condensed consolidated financial statements.
FORM
10-Q March 31, 2008
Page
8
JACO
ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) The
accompanying condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring accrual adjustments, which are,
in the opinion of management, necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows of Jaco
Electronics, Inc. and its subsidiaries (“Jaco” or the “Company”) at the end of
and for all the periods presented. Such financial statements do not
include all the information or footnotes necessary for a complete
presentation. They should be read in conjunction with the Company’s
audited consolidated financial statements for the fiscal year ended June 30,
2007 and the notes thereto included in the Company’s Annual Report on Form 10-K,
as amended, for the fiscal year ended June 30, 2007. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire year or any interim period therein. There have been no changes to
the Company’s significant accounting policies subsequent to June 30, 2007,
except as described in Note 11.
2) As
discussed further in Note 4, the Company maintains a revolving line of credit,
collateralized by substantially all of the assets of the Company, which provides
the Company with bank financing based upon eligible accounts receivable and
inventory, as defined. The credit facility has a maturity date of
December 22, 2009. As of March 31, 2008, the Company was in compliance with all
the covenants contained in its credit agreement, as discussed in Note
4.
Management believes that its ongoing
plan for improved operating controls and a focused sales and marketing effort
should improve results from operations and cash flows in the near term.
Continued achievement of this plan, however, will be dependent upon the
Company's ability to generate sufficient revenues, decrease operating costs and
remain in compliance with the covenants contained in its credit agreement. The
Company’s future operating performance will be subject to financial, economic
and other factors beyond its control, and there can be no assurance that the
Company will be able to achieve these goals. The Company’s failure to achieve
these goals or remain in compliance with the covenants contained in its credit
agreement would have a material adverse effect upon its business, financial
condition and results of operations.
3) On
September 20, 2004, the Company completed the sale of substantially all of the
assets of its contract manufacturing subsidiary, Nexus Custom Electronics, Inc.
("Nexus"), to Sagamore Holdings, Inc. (“Sagamore”) for consideration of up to
$13,000,000, subject to closing adjustments, and the assumption of certain
liabilities. The divestiture of Nexus has allowed the Company to focus its
resources on its core electronics distribution business. As a result of the sale
of Nexus, the Company no longer engages in contract manufacturing.
Under the terms of the purchase
agreement relating to this transaction, the Company received $9,250,000 of the
purchase consideration in cash on the closing date. Such cash consideration was
used to repay a
portion of the outstanding borrowings under the Company's then-existing line of
credit. The balance of the purchase consideration was satisfied through the
delivery of a $2,750,000 subordinated note issued by the purchaser. This note
has a maturity date of September 1, 2009 and bears interest at the lower of the
prime rate or 7%. The note is payable by the purchaser in quarterly cash
installments ranging from $156,250 to $500,000 commencing September 2006 and
continuing for each quarter thereafter until maturity. None of the scheduled
payments on the note have been received by the Company. The purchase agreement
also provided for a working capital adjustment, as defined, of up to $500,000.
As previously reported, each of the Company and the purchaser believe that it
was entitled to the full working capital adjustment. Accordingly, the amount of
the working capital adjustment has been under dispute by both
parties.
Additionally, the Company is entitled
to receive additional consideration in the form of a six-year earn-out based on
5% of the annual net sales in excess of $20,000,000 of Nexus after the closing
date, up to $1,000,000 in the aggregate.
FORM
10-Q March 31,
2008
Page
9
On September 19, 2006, Nexus Nano
Electronics, Inc. (“NNE”), as successor to Sagamore, and its subsidiary filed
suit against the Company in the U.S. District Court for the Southern District of
New York alleging fraud and misrepresentations by the Company in connection with
the sale of Nexus and seeking an unspecified amount of damages. The
parties had entered into settlement discussions and the documentation for an
agreement in principle had been substantially finalized, but prior to approval
by the parties’ respective boards of directors, NNE’s assets were transferred to
Titan Global Holdings, Inc. and/or its subsidiary, Titan Nexus, Inc.
On December 27, 2007, NNE filed an amended complaint adding claims
for breach of contract and breach of warranty in connection with the Company’s
sale to NNE of alleged non-conforming parts. On January 18, 2008, the
Company answered the amended complaint and asserted counterclaims against
plaintiffs and other related entities, including Titan Global Holdings, Inc. and
Titan Nexus, Inc., seeking, among other things, amounts owed to it in connection
with the sale of Nexus. The Company and the plaintiffs have
negotiated a settlement agreement, the terms of which include dismissal of all
claims without payment to any party, exchange of releases and a Supply Agreement
pursuant to which the Company will have the opportunity to sell electronic
components to Titan Nexus and related parties. There can be no assurance that
the settlement agreement will be executed.
The Company’s management previously determined that the note receivable had been
impaired and recorded a full write-off of the note receivable and all other
amounts arising from the sale of Nexus as of June 30, 2007, which amounted to
$3,183,401. Such write-off had been reflected as a loss on sale of subsidiary in
the Company’s consolidated statement of operations for the year ended June 30,
2007. In addition,
the Company is uncertain of its ability to collect accounts receivable due to it
from NNE and, therefore, has set up a reserve against the entire amount of this
receivable, which amounted to $713,000.
4)
The Company borrows amounts under
credit facilities and other external sources of financing with repayments made
from cash flows. On December 22, 2006, the Company entered into a new three-year
credit agreement with CIT Group/Business Credit, Inc. (“CIT”), which provides
for a $55,000,000 revolving line of credit. This credit facility has a due date
of December 22, 2009. On January 23, 2007, CIT assigned $25,000,000 of its
interest in the credit facility to Bank of America, N.A. On March 23, 2007, the
credit facility was amended to provide the Company with a supplemental loan
(“Supplemental Loan”) of $3,000,000, which originally was payable on May 17,
2007. On May 18, 2007, the Supplemental Loan was amended to provide for periodic
payments to be made through July 15, 2007, at which time the Supplemental Loan
was to be paid in full. On July 24, 2007, the Supplemental Loan was further
amended to provide for a $3,000,000 loan at an interest rate equal to the LIBOR
rate plus 5%, payable in seven quarterly installments commencing October 1,
2007. The Company has
currently made all the required installment payments for this Supplemental
Loan. In addition,
mandatory prepayments are to be made based on (i) an amount equal to fifty
percent of Excess Cash Flow, as defined in the credit agreement, and (ii) the
net proceeds of Designated Inventory, as defined in the credit agreement, of
which the last installment is due no later than April 1, 2009. Borrowings under
the new credit facility are based principally on eligible accounts receivable
and inventories of the Company, as defined in the credit agreement, and are
collateralized by substantially all of the assets of the Company. At
March 31, 2008, the outstanding balance on this revolving line of credit
facility was $34,925,000 ($24,000,000 of which is borrowed under a 30-day
LIBOR-based revolver and $2,400,000 under the Supplemental Loan) with an
additional $3,549,000 available. At March 31, 2008, the Company had outstanding
$2,920,000 of stand-by letters of credit on behalf of certain vendors. At March
31, 2008, the interest rates on the outstanding borrowings under the credit
facility were: 5.20% on the borrowings under the 30-day LIBOR-based revolver;
8.12% on the Supplemental Loan; and 6.25% (prime plus 1%) on the balance of the
borrowings.
Under
the credit agreement, the Company is required to comply with one financial
covenant which stipulates that in the event the Company’s additional borrowing
availability under the revolving line of credit facility for any five
consecutive days is less than $5,000,000, the Company is required to
retroactively maintain a Fixed Charge Coverage Ratio (as defined therein) of 1.1
to 1.0 as of the end of the immediately preceding fiscal quarter for the most
recently ended four fiscal quarters. The Fixed Charge Coverage Ratio has been
triggered and as of March 31, 2008, the Company was in compliance with this
financial covenant.
FORM
10-Q March 31, 2008
Page
10
The
credit agreement also provides for a limitation on capital expenditures of
$500,000 for the Company’s 2008 fiscal year and for each remaining fiscal year
in which the credit agreement is in effect.The
credit agreement also contains other covenants and restrictions, including
limitations on: the Company’s incurrence of additional indebtedness unrelated to
the credit facility; its incurrence of liens; mergers, consolidations and sales
of assets by the Company; investments, loans and acquisitions by the Company;
and the Company’s ability to pay cash dividends. In addition, the
credit agreement, as was the case with the Company’s prior credit agreement,
requires the deposit of customer receipts to be directed
to a
blocked account and applied directly to the repayment of indebtedness
outstanding under the credit facility. Accordingly, outstanding
borrowings under the credit agreement are classified as a current
liability.
If the
Company were to be in violation of the financial covenant or any other material
provision contained in the credit agreement in the future and not able to obtain
an amendment or waiver with respect to such noncompliance, the lenders under the
credit facility could declare the Company to be in default under the facility,
resulting in all amounts outstanding under the facility becoming immediately due
and payable and/or limit the Company’s ability to borrow additional amounts
under the facility. If the Company did not have sufficient available cash to pay
all such amounts that became due and payable, it would have to seek additional
debt or equity financing through other external sources, which may not be
available on acceptable terms, or at all. Failure to maintain financing
arrangements on acceptable terms would have a material adverse effect on the
Company’s business, results of operations and financial
condition.
5) The
Company was one of several plaintiffs alleging price fixing claims in violation
of federal and state antitrust laws against a number of component manufacturers
in the dynamic random access memory semiconductor market. The parties have
settled claims with some of the defendants and, in connection with such
settlement, the Company has recorded $480,000 and $0 as a reduction of selling,
general and administrative expenses on its consolidated statement of operations
for the nine and three months ended March 31, 2008.
6) In
October 2000, the Board of Directors approved the adoption of the "2000 Stock
Option Plan," hereinafter referred to as the "2000 Plan." The 2000 Plan
originally provided for the grant of up to 600,000 incentive stock options
("ISOs") and nonqualified stock options ("NQSOs") to employees, officers,
directors, consultants and advisers of the Company. In December 2004, the
shareholders of the Company approved an increase in the amount of shares
reserved for issuance under the 2000 Plan to 1,200,000. The Board of Directors
or the Compensation Committee of the Board is responsible for the granting and
pricing of these
options. The exercise price of the options granted under the 2000 Plan must
equal the fair market value of the Company’s common stock on the date
of grant. In the case of ISOs granted to shareholders owning more than 10% of
the Company's voting securities, the exercise price shall be no less than 110%
of the fair market value of the Company's common stock on the date of grant. All
options expire ten years from the date of grant of such option (five years in
the case of an ISO granted to a 10% shareholder) or on such earlier date as may
be prescribed by the Committee and set forth in the option agreement, and are
exercisable over the period stated in each option. Of the 1,200,000 shares of
the Company's common stock reserved for issuance upon exercise of options
711,750 shares were subject to options outstanding at March 31,
2008.
The
Company measures the cost of employee services received in exchange for an award
of equity instruments based on the fair-value of the award, as determined using
the Black-Scholes Option pricing method, and recognizes such cost over the
requisite service period, which is generally the vesting
period. There were 87,500 stock options granted during the nine
months ended March 31, 2008. The weighted-average fair value of these options
was $1.23, which was estimated at the date of grant using the
Black-Scholes-Merton option pricing model with the following weighted-average
assumptions: expected volatility of 62%; risk-free interest rate of 4.37%;
expected term of 7 years; and expected dividend yield of 0. There
were no stock options granted during the three months ended March 31, 2008.
Compensation expense recognized in the accompanying condensed consolidated
statement of operations was $93,066 and $35,840 for the nine months ended March
31, 2008 and 2007, respectively, and $35,611 and $27,384 for the three months
ended March 31, 2008 and 2007, respectively. At March 31, 2008, there
was an aggregate of $411,287 of compensation expense related to stock options
which will be recognized as an expense over a remaining period of approximately
three years, which represents the remaining requisite service period for such
awards.
FORM
10-Q March 31,
2008
Page
11
Summary
of Stock Option Activity
The
Company issues new shares of common stock upon exercise of stock options. The
following is a summary of option activity for our stock option
plans:
The
aggregate intrinsic value of outstanding and exercisable options at March 31,
2008 was $0 and $0, respectively.
7) The
number of shares used in the Company’s basic and diluted earnings
(loss) per share computations is as follows:
FORM
10-Q March 31, 2008
Page
12
Excluded from the calculation of earnings per share for the nine and three
months ended March 31, 2008 were outstanding options to purchase 711,750 shares
of the Company’s common stock , as their inclusion would have been antidilutive.
Excluded from the calculation of earnings per share for the nine and three
months ended March 31, 2007 were outstanding options to purchase 657,250 shares
of the Company’s common stock , as their inclusion would have been antidilutive.
Common stock equivalents for stock options are calculated using the treasury
stock method.
8) The
Company is a party to various legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on the Company’s business, results of operations or
financial position.
9) During
the three and nine months ended March 31 2008, the Company recorded sales of
$16,901 and $92,986, respectively, compared to $64,991 and $157,582 for the
three and nine months ended March 31, 2007, respectively, from a customer,
Frequency Electronics, Inc. (“Frequency”). The Company’s Chairman of the Board
of Directors and President serves on the Board of Directors of Frequency. Such
sales transactions with Frequency are in the normal course of business. Amounts
included in accounts receivable from Frequency at March 31, 2008 and June 30,
2007 aggregate $1,389 and $15,832, respectively.
The
Company leases office and warehouse facilities from a partnership owned by two
officers and directors of the Company. The lease expires in December 2013.
During the three and nine months ended March 31 2008 rent paid to this
partnership was $175,409 and $522,694, respectively, compared to $173,644 and
$504,394 for the three and nine months ended March 31, 2007,
respectively.
The
son-in-law of the Company’s Chairman and President is a partner of a law firm,
which provides legal services on behalf of the Company. During the three and
nine months ended March 31, 2008 fees paid to such firm were $38,376 and
$127,440, respectively, compared to $17,874 and $67,895 for the three and nine
months ended March 31, 2007, respectively.
10) The
following table provides information regarding approximate product sales to
external customers:
11) Effective July 1,
2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes-An Interpretation of FASB 109” (“FIN
48). FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to
be recognized, a tax position must be more likely than not to be sustained upon
examination by taxing authorities.
The adoption of the provisions of FIN 48 did not have an impact on the Company’s
consolidated financial position and did not result in unrecognized tax benefits
being recorded. FIN 48 also provides guidance on the accounting for potential
interest and penalties. The Company’s historical accounting policy with respect
to interest and penalties related to tax uncertainties has been to classify
these amounts as income taxes, and the Company has continued this classification
upon the adoption of FIN 48. Since no
unrecognized tax benefits are being recorded, no corresponding interest and
penalties have been accrued.
FORM
10-Q March 31,
2008
Page
13
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. There are currently no examinations underway. The Company is no longer
subject to U.S. federal income tax examinations by the Internal Revenue Service
and most state and local authorities for fiscal tax years ending
prior to June 30, 2004. (Certain state authorities may subject the Company to
examination up to the period ending June 30, 2003.)
In,
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) to eliminate the diversity in practice that exists due to the
different definitions of fair value. SFAS No. 157 retains the exchange price
notion in earlier definitions of fair value, but clarifies that the exchange
price is the price in an orderly transaction between market participants to sell
an asset or liability in the principal
or most advantageous market for the asset or liability. SFAS No. 157 states that
the transaction is hypothetical at the measurement date, considered from the
perspective of the market participant who holds the asset or liability. As such,
fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price), as opposed to the price
that would be paid to acquire the asset or received to assume the liability at
the measurement date (an entry price). SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. In February 2008, the FASB issued
FASB Staff Position (FSP FAS 157-2-Effective Date of FASB Statement
No. 157) which delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We are evaluating the impact the adoption
of SFAS No. 157 will have on our consolidated financial statements.
In February
2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets
and Financial Liabilities — Including an amendment of FASB Statement
No. 115” (“SFAS No. 159”). This standard amends SFAS No.115,
“Accounting for Certain Investment in Debt and Equity Securities”, with
respect to accounting for a transfer to the trading category for all entities
with available-for-sale and trading securities electing the fair value option.
This standard allows companies to elect fair value accounting for many financial
instruments and other items that currently are not required to be accounted as
such, allows different applications for electing the option for a single item or
groups of items, and requires disclosures to facilitate comparisons of similar
assets and liabilities that are accounted for differently in relation to the
fair value option. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are evaluating the impact the adoption of
SFAS No.159 will have on our consolidated financial
statements.
On
December 21, 2007, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 110 ("SAB 110") to permit entities, under certain
circumstances to continue to use the "simplified" method, in developing
estimates of expected term of "plain-vanilla" share options in accordance with
Statement No. 123R Share-Based Payment. SAB 110 amended SAB 107 to permit the
use of the "simplified" method beyond December 31, 2007. The Company
believes that the adoption of SAB 110 will not have a material
impact on its consolidated financial statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion contains various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, which represent our management’s beliefs and
assumptions concerning future events. When used in this report and in
other written or oral statements made by us from time to time, forward-looking
statements include, without limitation, statements regarding our financial
forecasts or projections, our expectations, beliefs, intentions or future
strategies that are signified by the words “expects”, “anticipates”,
“estimates”, “intends”, “plans” or similar language. Although we
believe that the expectations in these forward-looking statements are
reasonable, we cannot assure you that such expectations will prove to be
correct. These forward-looking statements are subject to numerous
assumptions, risks and uncertainties, which are subject to change and/or beyond
our control, that could cause our actual results and the timing of certain
events to differ materially from those expressed in the forward-looking
statements. Consequently, the inclusion of the forward-looking statements should
not be regarded as a representation by us of results that actually will be
achieved. For a discussion of important factors that could cause our actual
results to differ materially from those contemplated by the forward-looking
statements, see Item 1A. Risk Factors in our Annual Report on Form 10-K, as
amended,
FORM
10-Q March 31,
2008
Page
14
for the
fiscal year ended June 30, 2007 and our other reports and documents filed with
the Securities and Exchange Commission.
GENERAL
Jaco is a
leading distributor of active and passive electronic components to industrial
original equipment manufacturers (“OEMs”) that are used in the manufacture and
assembly of electronic products in such
industries as telecommunications, medical devices, computers and office
equipment, military/aerospace, and automotive and consumer electronics. Products
distributed by the Company include semiconductors, flat panel displays,
capacitors, resistors, electromechanical devices and power
supplies. Due to the ongoing shift of manufacturing to the Far East,
the Company modified its business model to pursue
the business available in the United States, increase its support of global
contract manufacturers that require its value-added services and logistics
programs, and aggressively promote its flat panel display, or FPD, product
offerings, which have experienced significant growth in recent quarters and
which the Company believes have potential for growth in the future, through its
FPD in-house integration center. This in-house integration center allows
us to provide optimized and efficient design solutions, optical enhancements and
touch screen integrations, as well as to manufacture of FPD subassemblies and
complete displays for commercial, industrial and military
applications.
Critical
Accounting Policies and Estimates
We have disclosed in Note 1 to our
consolidated financial statements and in Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2007 those accounting policies that
we consider to be significant in determining our results of operations and
financial position. There have been no material changes
to the critical accounting policies previously identified and described in our
2007 Form 10-K. The accounting principles we utilized in preparing
our consolidated financial statements conform in all material respects to
generally accepted accounting principles in the United States of
America.
The
preparation of these consolidated financial statements requires our management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as
the disclosure of contingent assets and liabilities at the date of our financial
statements. We base our estimates on historical experience, actuarial
valuations and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex
and, consequently, actual results may differ from these estimates under
different assumptions or conditions. While for any given estimate or
assumption made by our management there may be other estimates or assumptions
that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial
statements.
New
Accounting Standards
Effective
July 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes-An Interpretation of FASB 109” (“FIN
48). FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to
be recognized, a tax position must be more likely than not to be sustained upon
examination by taxing authorities. The adoption of the provisions of FIN 48 did
not have an impact on the Company’s consolidated financial position and did not
result in unrecognized tax benefits being recorded. FIN 48 also provides
guidance on the accounting for potential interest and penalties. The Company’s
historical accounting policy with respect to interest and penalties related to
tax uncertainties has been to classify these amounts as income taxes, and the
Company has continued this classification upon the adoption of FIN 48. Since no
unrecognized tax benefits are being recorded, no corresponding interest and
penalties have been accrued.
FORM
10-Q March 31,
2008
Page
15
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. There are currently no examinations underway. The Company is no longer
subject to U.S. federal income tax examinations by the Internal Revenue Service
and most state and local authorities for fiscal tax years ending
prior to June 30, 2004. (Certain state authorities may subject the Company to
examination up to the period ending June 30, 2003.)
In,
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) to eliminate the diversity in practice that exists due to the
different definitions of fair value. SFAS No. 157 retains the exchange price
notion in earlier definitions of fair value, but clarifies that the exchange
price is the price in an orderly transaction between market participants to sell
an asset or liability in the principal
or most advantageous market for the asset or liability. SFAS No. 157 states that
the transaction is hypothetical at the measurement date, considered from the
perspective of the market participant who holds the asset or liability. As such,
fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price), as opposed to the price
that would be paid to acquire the asset or received to assume the liability at
the measurement date (an entry price). SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. In February 2008, the FASB issued
FASB Staff Position (FSP FAS 157-2-Effective Date of FASB Statement
No. 157) which delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We are evaluating the impact the adoption
of SFAS No. 157 will have on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement
No. 115”, (“SFAS No. 159,”). This standard amends SFAS No.115,
“Accounting for Certain Investment in Debt and Equity Securities”, with
respect to accounting for a transfer to the trading category for all entities
with available-for-sale and trading securities electing the fair value option.
This standard allows companies to elect fair value accounting for many financial
instruments and other items that currently are not required to be accounted as
such, allows different applications for electing the option for a single item or
groups of items, and requires disclosures to facilitate comparisons of similar
assets and liabilities that are accounted for differently in relation
to the fair value option. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We are evaluating the impact the
adoption of SFAS No.159 will have on our consolidated financial
statements.
On
December 21, 2007, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 110 ("SAB 110") to permit entities, under certain
circumstances to continue to use the "simplified" method, in developing
estimates of expected term of "plain-vanilla" share options in accordance with
Statement No. 123R Share-Based Payment. SAB 110 amended SAB 107 to permit the
use of the "simplified" method beyond December 31, 2007. The Company
believes that the adoption of SAB 110 will not have a material
impact on its consolidated financial statements.
FORM
10-Q March 31,
2008
Page
16
Results of
Operations
The
following table sets forth certain items in our statements of operations as a
percentage of net sales for the periods shown:
Comparison
of the three and nine months ended March 31,2008 and March 31,2007
Net
sales for the three and nine months ended March 31, 2008 were $44.5 million and
$142.9 million, respectively, compared to $49.9 million and $185.5 million for
the three and nine months ended March 31 2007, representing decreases of 10.9%
and 23.0 %, respectively. We continue to experience weak demand from our global
contract manufacturers, primarily in the Far East. We support these customers
with logistics programs consisting of inventory management services and
warehousing capabilities. Sales to these global contract manufacturers are
subject to large fluctuations due to the customer’s current demand and our
ability to provide the products that are required at a competitive price. Our
net sales to these customers decreased approximately $6.4 million and $45.4
million for the three and nine months respectively. This accounts for the
decrease in our total net sales partially offset by the increase in our flat
panel display (“FPD”) sales.
We
sell FPD’s as a component through our standard distribution channel and we sell
FPD product as a value-added offering through our in-house integration center.
We provide design capabilities and a “full-solution” capability enabling us to
offer our customers an expanded range of services to integrate FPD product into
their applications. We market our FPD capabilities to a broad range of business
segments, such as electronic kiosk, the fast food industry, signage, the gaming
industry, financial institutions, medical applications, military, and electronic
voting machines. For the three and nine months ended March 31, 2008, FPD sales
increased 10.3% and 11.9% to $14.9 million and $48.9 million,
respectively, compared to $13.5 million and $43.7 million for the three and nine
months ended March 31, 2007. Recently, we announced the award of a
sizable contract to build optical scan voting machines in our integration
center. This contract is expected to increase our FPD sales significantly during
the next two quarters. FPD sales represented approximately 33.4% and
34.2% of our net sales for the three and nine months ended March 31,
2008.
Semiconductors
represented approximately 37.9% and 39.0% of our net sales for the three and
nine months ended March 31, 2008, respectively, compared to 47.8% and 56.3% for
the three and nine months ended March 31, 2007. The decrease is primarily the
result of the decrease in net sales to our global contract manufacturers. We
believe that this decrease is of a cyclical nature and we have taken steps that
we believe will increase these sales. However, there can be no assurances that
these sales will return to levels attained in the past.
FORM
10-Q March 31, 2008
Page
17
Passive
components, which are primarily commodity product such as capacitors and
resistors accounted for approximately 20.8% and 18.9% of our net sales for the
three and nine months ended March 31, 2008,
respectively, compared to 18.5% and 14.6% for the three and nine months ended
March 31, 2007. Our passive net sales have remained constant compared to the
comparable periods last year, however, the percentage of net sales increased due
to the decrease in total net sales. Due to the loss of sales to manufacturers in
the Far East, we do not believe we will materially increase net sales in passive
components for the foreseeable future.
Electromechanical
products, such as power supplies, relays, and printer heads, represented
approximately 7.9% and 7.8% of net sales for the three and nine months ended
March 31, 2008, respectively, compared to 6.7% and 5.5% for the three and nine
months ended March 31, 2007. Net sales for both the three and nine months
increased slightly compared to the comparable period last fiscal year. We
believe we can compete domestically with this product and will continue to
market accordingly.
Gross profit
was $7.2 million, or 16.2% of net sales, and $23.3 million, or 16.3% of net
sales for the three and nine months ended March 31, 2008, respectively, compared
to $7.8 million, or 15.6% of net sales and $25.0 million, or 13.5% of net sales,
for the three and nine months ended March 31, 2007, respectively. The decrease
in gross profit is attributable to the decrease in net sales and corresponding
gross profit of our logistics business. Our core business has
historically operated at higher gross profit margins. This accounted for the
increase in gross profit margins for the three and nine months ended March 31,
2008 compared to the comparable period last fiscal year. Management does not
anticipate any material variances in our gross profit margin based on the
current sales mix. Management considers gross profit to be a key performance
indicator in managing our business. Any future changes in demand for product
through our logistic programs could affect our gross profit margin. In addition,
demand and pricing for our products have been, and in the future may continue to
be, adversely affected by industry-wide trends and events beyond our
control.
Selling,
general and administrative (“SG&A”) expenses were $7.3 million, or 16.4% of
net sales, and $22.3 million, or 15.6% of net sales, respectively, for the three
and nine months ended March 31, 2008 compared
to $7.9 million, or 15.9% of net sales, and $23.1 million, or 12.5% of net sales
for the three and nine months ended March 31, 2007, respectively. Management
considers SG&A as a percentage of net sales to be a key
performance indicator in managing our business. The increase in percentage this
fiscal year compared to the comparable periods last fiscal year is attributable
to the reduction in net sales. Our actual SG&A expenses have
decreased. During the quarter we implemented cost reductions. We do not believe
these reductions will impact our net sales in future periods. We continue to
invest in supporting our FPD product group. We believe these investments have
contributed to the increase in FPD sales.
Interest
expense was $ 0.5 million and $ 1.7 million for the three and nine months ended
March 31, 2008, respectively, compared to $ 0.6 million and $ 2.1 million for
the three and nine months ended March 31, 2007. The decreases of $
0.1 million, or 15.6%, and $ 0.5 million, or 22.4%, are attributable
to lower borrowing rates. Recent reduction in federal lending rates will
favorably impact interest expense for the foreseeable future.
Net
loss for the three and nine months ended March 31, 2008 was $ 0.6 million, or
$0.09 per diluted share, and $0.7 million, or $0.12 per diluted share,
respectively, compared to $0.8 million, or $0.12 per diluted share and $0.4
million, or $0.05 per diluted share, respectively for the three and nine months
ended March 31, 2007. The losses incurred are primarily attributable to the
decrease in net sales. Management believes that the cost reductions implemented
will reduce the losses in future periods.
LIQUIDITY AND CAPITAL
RESOURCES
To provide
liquidity in funding its operations, the Company borrows amounts under credit
facilities and other external sources of financing with repayments made from
cash flows. On December 22, 2006, the Company entered into a new three-year
credit agreement with CIT Group/Business Credit, Inc. (“CIT”), which provides
for a $55,000,000 revolving line of credit. This credit facility has a due date
of December 22, 2009. On January 23, 2007, CIT assigned $25,000,000 of its
interest in the credit facility to Bank of America, N.A. On March 23, 2007, the
credit facility was amended to provide the Company with a
supplemental
FORM
10-Q March 31, 2008
Page
18
loan
(“Supplemental Loan”) of $3,000,000, which originally was payable on May 17,
2007. On May 18, 2007, the Supplemental Loan was amended to provide for periodic
payments to be made through July 15, 2007, at
which time the Supplemental Loan was to be paid in full. On July 24, 2007, the
Supplemental Loan was further amended to provide for a $3,000,000 loan at an
interest rate equal to the LIBOR rate plus 5%,
payable in seven quarterly installments commencing October 1, 2007. The Company
has currently made all the required installment payments for this Supplemental
Loan. In addition, mandatory prepayments are to be made based on (i) an amount
equal to fifty percent of Excess Cash Flow, as defined
in the
credit agreement, and (ii) the net proceeds of Designated Inventory, as defined
in the credit agreement, of which the last installment is due no later than
April 1, 2009. Borrowings under the new credit facility are based principally on
eligible accounts receivable and inventories of the Company, as defined in the
credit agreement, and are collateralized by substantially all of the assets of
the Company. At March 31, 2008, the outstanding balance on this
revolving line of credit facility was $34,925,000 ($24,000,000 of which is
borrowed under a 30-day LIBOR-based revolver and $2,400,000 under the
Supplemental Loan) with an additional $3,549,000 available. At March 31, 2008,
the Company had outstanding $2,920,000 of stand-by letters of credit on behalf
of certain vendors. At March 31, 2008, the interest rates on the
outstanding borrowings under the credit facility were: 5.20% on the borrowings
under the 30-day LIBOR-based revolver; 8.12% on the Supplemental Loan; and 6.25%
(prime plus 1.0%) on the balance of the borrowings.
Under the
credit agreement, the Company is required to comply with one financial covenant
which stipulates that in the event the Company’s borrowing availability
under the revolving line of credit
facility for any five consecutive days is less than $5,000,000, the Company is
required to retroactively maintain a Fixed Charge Coverage Ratio (as defined in
the credit agreement) of 1.1 to 1.0 as of the end of the immediately preceding
fiscal quarter for the most recently ended four fiscal quarters. The Fixed
Charge Coverage Ratio has been triggered and as of March 31, 2008, the Company
was in compliance with this financial covenant.
For
the nine months ended March 31, 2008, our net cash provided by operating
activities was approximately $2.9 million as compared to $0.5 million for
the nine months ended March 31, 2007. The increase
in net cash provided by operating activities is primarily attributable to the
decrease in our accounts payable
for the nine months ended March 31, 2008. Net cash used in investing activities
was approximately $78,000 for the nine months ended March 31, 2008 as compared
to net cash used in investing activities of $216,000 for the nine months ended
March 31, 2007. Net cash used in financing activities was
approximately $2.8 million for the nine months ended March 31, 2008 as
compared to $0.3 million for the nine months ended March 31, 2007. The
increase in net cash used is primarily attributable to the decrease in net
borrowings under our credit facility of approximately $2.8 million in the nine
months ended March 31, 2008 as compared to $0.2 million in the nine months ended
March 31, 2007.
For the
nine months ended March 31, 2008 and 2007, our inventory turnover was 5.4 times
and 6.5 times, respectively. The average days outstanding of our accounts
receivable at March 31, 2008 were 58 days, as compared to 52 days at March
31, 2007. Inventory turnover and average days outstanding are key ratios that
management relies on to monitor our business.
Based
upon our present plans, including no anticipated material capital expenditures,
we believe that cash flow from operations and funds available under our credit
facility will be sufficient to fund our capital needs for the next twelve
months. However, our ability to maintain sufficient liquidity depends
partially on our ability to achieve anticipated levels of revenue, while
continuing to control cost, and remaining in compliance with the covenants
contained in the credit agreement. As previously discussed, we were able to
obtain an amendment from our lenders to satisfy our noncompliance with a
financial covenant contained in our credit agreement as of December 31, 2007.
While we cannot assure that any such amendments and/or waivers, if needed, will
be available in the future, management believes we will be able to continue to
obtain financing
on acceptable terms under our existing credit facility or through other external
sources. In the event that in the future we are unable to obtain such
an amendment and/or waiver of our non-compliance with our financial covenants,
the lenders under our credit facility could declare us to be in default under
the facility, requiring all amounts outstanding under the facility to be
immediately due and payable and/ or limit the Company’s ability to borrow
additional amounts under the facility. If we did not have sufficient available
cash to pay all such amounts that become due and payable, we would have to seek
additional debt or equity financing through other external sources, which may
not be available on
FORM
10-Q March 31,
2008
Page
19
acceptable
terms, or at all. Failure to maintain financing arrangements on acceptable terms
would have a material adverse effect on our business, results of operations and
financial condition.
Contractual
Obligations
This
table summarizes our known contractual obligations and commercial commitments at
March 31, 2008.
Inflation
and Seasonality
Inflation
and seasonality have not had a significant impact on our operations during the
last three fiscal years.
We are exposed to interest rate changes
with respect to borrowings under our credit facility, which bears interest at a
variable rate dependent upon either the prime rate, federal funds rate or the
LIBOR rate (“rates”). At April 30, 2008, $32.2 million was
outstanding under the credit facility. Changes in any of the rates during the
current fiscal year will have a positive or negative effect on our interest
expense. Each 1.0% fluctuation in the rate will increase or decrease our
interest expense under the credit facility by approximately
$0.3 million based on the amount of outstanding borrowings at April 30, 2008.
The impact of interest rate fluctuations on our other floating rate debt is not
material.
Item
4. Controls and Procedures.
An evaluation was performed, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of March 31, 2008. Based upon that
evaluation, the Company’s management, including its Chief Executive Officer and
Chief Financial Officer, has concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
in the reports that the Company files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and is accumulated and communicated to the Company’s management, including its
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure. There have been no changes in the
Company's internal control over financial reporting or in other factors
identified in connection with this evaluation that occurred during the three
months ended March 31, 2008 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
For information related to legal
proceedings, see Note 3 and Note 8 of the Notes to Consolidated Financial
Statements presented in Part 1, Item 1 of this report on Form 10-Q.
FORM
10-Q March 31,
2008
Page
20
Item
1A. Risk
Factors
See
“Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year
ended June 30, 2007.
Item
6. Exhibits.
Exhibit 31.1 - Rule 13a-14 (a) / 15d-14 (a)
Certification of Principal Executive Officer
Exhibit
31.2 - Rule 13a-14 (a) / 15d-14 (a)
Certification of Principal Financial Officer.
Exhibit
32.1 - Section 1350 Certification of
Principal Executive Officer.
Exhibit
32.2 - Section 1350 Certification of
Principal Financial Officer.
S
I G N A T U R E
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
May 15,
2008
JACO ELECTRONICS, INC.
(Registrant)
BY: /s/ Jeffrey D. Gash
Jeffrey D. Gash, Executive Vice
President,
Finance and
Secretary
(Principal Financial
Officer)
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