10-Q 1 march10q.txt MARCH 2001 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, 2001 -------------------------------------------- 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 0-27738 -------------------------------------------- THE JPM COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 23-1702908 ------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 155 North 15th Street, Lewisburg,PA 17837 ------------------------------------------------------------------------ (Address of principal executive offices) (ZIP Code) Registrants telephone number, including area code 570-524-8225 ---------------------- ------------------------------------------------------------------------ (Former address of principal executive offices) (ZIP Code) Former name, former address and former fiscal year, if changed since last report. 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At May 15, 2001, 7,400,286 shares of common stock, $.000067 par value, were issued and outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements

The accompanying notes are an integral part of these statements. Page-2

The accompanying notes are an integral part of these statements. Page-3

The accompanying notes are an integral part of these statements. Page-4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) Basis of Presentation The consolidated balance sheet as of March 31, 2001, and the related consolidated statements of operations and cash flows for the six month periods ending March 31, 2001 and March 31, 2000 have been prepared by the Company without audit. In the opinion of management, the financial statements include all of the adjustments necessary for fair presentation. All adjustments made were of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. A review of the Company's interim financial information included in the Form 10-Q filing has not been completed by the Company's independent auditors. These financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto for the fiscal year ended September 30, 2000, included in the Company's Form 10-K dated January 24, 2001. Inventories Inventories are valued at the lower of cost or market as determined on the first-in, first-out basis. Cost includes raw materials, direct labor and manufacturing overhead. The Company generally provides reserves for inventory considered to be in excess of 12 months of usage or sale, as well as inventory in excess of forecasted future demand. March 31, September 30, 2001 2000 ------------ ------------ Finished goods $ 8,195 $ 10,604 Work-in-process 2,953 4,323 Raw material and supplies 25,818 26,718 Valuation reserves (6,134) (4,593) ------------ ------------ $ 30,832 $ 37,052 ============ ============ Comprehensive Income The components of accumulated other comprehensive income are as follows: March 31, September 30, 2001 2000 ----------- ---------- Foreign currency translation adjustments $ (3,410) $(1,810) ---------- ---------- Accumulated other comprehensive loss $ (3,410) $ (1,810) ========== ========== The components of comprehensive income of the Company for the three and six month periods ended March 31, 2001 and 2000 are as follows:

Page-5 Earnings Per Share Information The difference between the basic average number of shares outstanding and the diluted average number of shares outstanding is due to the treasury stock method calculation of the impact of unexercised stock options granted under the Company's stock option plans. Financing Arrangements The Company has a $74,850 bank revolving line of credit that expires on December 31, 2001. The interest rate on the line is at the banks' prime lending rate plus 1.0%. The agreement requires mandatory principal payments and certain other principal payments should the Company sell certain assets or collect certain accounts receivable. The agreement includes a number of monthly reporting requirements and financial covenants commencing January 1, 2001 based on monthly net income or net loss projections and three-month rolling EBITDA projections. At March 31, 2001, the Company requested and received from its bank group a waiver for the non-payment of certain accrued interest and of covenants related to net income or net loss projections and three-month rolling EBITDA projections. This waiver is effective until June 30, 2001. Deferred interest payments are waived until the earlier of ten days following receipt by the Company of the banks' written demand or September 30, 2001. At March 31, 2001, the Company had $1,297 available under the bank agreement. Recent Accounting Pronouncements On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (October 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and if it is, the type of hedge transaction. The Company has adopted SFAS 133 effective October 1, 2000. There are no transactions that qualified for or have received hedge accounting. Accordingly, the Company has recorded a non-cash charge to income of $1,339 in the first six months of fiscal 2001 related to the change in fair value of its interest rate swap agreements. In addition, if further reductions in interest rates occur the Company expects to record additional non-cash losses on the swaps. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company expects that the adoption of SAB 101 will not have a material impact on its financial position or results of operations. In March 2000, FASB issued FASB Interpretation (FIN) 44, "Accounting for Certain Transactions Involving Stock Compensation", which clarifies the application of Accounting Principles Board Opinion 25 for certain issues. The interpretation was generally effective July 1, 2000, except for certain provisions which were effective after December 15, 1998. The adoption of FIN 44 did not have a material impact on the Company's financial statements. In October 2000, the Emerging Issues Task Force (EITF) of FASB issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", and EITF 00-14, "Accounting for Certain Sales Incentives". EITF 00-10 addresses the income statement classification for shipping and handling fees and costs. EITF 00-14 addresses recognition, measurement, and income statement classification for certain sales incentives including discounts, coupons, rebates, free products or services. The Company is currently examining its practices in light of this interpretive guidance and does not expect a material impact from the application of EITF 00-10 and EITF 00-14. Reclassification Certain prior year balances have been reclassified for comparative purposes. Page-6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents, in thousands of dollars and as a percentage of sales, certain selected consolidated financial data for the quarters ended March 31, 2001 and 2000. (in thousands of dollars) March 31 March 31 Change in March 31 March 31 2001 2000 Dollars 2001 2000 Net sales $ 32,855 $ 40,634 (7,779) 100.0% 100.0% Cost of sales 33,654 35,802 2,148 102.4 88.1 ------------ ------------ ------------ ------------ ------------ Gross profit (799) 4,832 (5,631) (2.4) 11.9 Selling, general and administrative expenses 3,732 3,905 173 11.4 9.6 ------------ ------------ ------------ ------------ ------------ Income from operations (4,531) 927 (5,458) (13.8) 2.3 Interest expense (1,927) (1,503) (424) (5.9) (3.7) Other income (expense) (1,157) 49 (1,206) (3.5) 0.1 ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interest (7,615) (527) (7,088) (23.2)% (1.3)% ============ ============ ============ ============ ============

Results of Operations Net sales for the three months ended March 31, 2001 decreased by $7,779, or 19.1%, to $32,855 compared to the same period one year earlier. The decrease for the three month period was primarily the result of decreased sales to the Company's telecommunications customers. Net sales for the six months ended March 31, 2001, decreased by $8,566 or 10.0% to $77,487 as compared to the first six months of fiscal 2000. The decrease in sales was attributable to reduced sales to customers in the telecommunications market. Gross profit for the three and six months ended March 31, 2001, decreased $5,631 or 116.5%, and $9,688 or 79.5% respectively, when compared to the corresponding periods one year ealier. Gross profit as a percentage of net sales for the three and six month periods decreased from 11.9% to (2.4%) and from 14.2% to 3.2%, respectively, when compared to the same periods one year earlier. The decrease in gross profit as a percentage of sales was attributable to approximately $2.5 million of non-recurring charges (see below) and to sharply decreased sales to the telecommunications market sector, plant realignment and increased personnel expenses. Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2001, decreased by $173 or 4.4%, compared to the three months ended March 31, 2000. SG&A for the six months ended March 31, 2001, decreased by $742 or 9.2%, compared to the same period in 2000. The decrease in SG&A is due primarily to reduced personnel expenses. Page-7 Non-recurring charges totalling $2.7 million pre-tax were recorded in the three months ended March 31, 2001. The charges included $2.1 million for inventory valuation adjustments related to changes in reserve estimates and other inventory adjustments, and $0.6 million for other valuation reserves and adjustments. Interest expense for the three and six months ended March 31, 2001 increased $424 or 28.2% to $1,927 and $1,351 or 46.0% to $4,286, respectively, compared to the same fiscal 2000 periods. The increase is attributable to the borrowings related to increases in working capital. In the three and six month periods ended March 31, 2001, income tax expense of $532 and $1,147 was recorded on losses of $7,615 and $12,197, respectively, to reflect certain foreign and local taxes. Due to the Company's current net operating loss carry-forward position, the Company did not record future tax benefits that would normally be expected to result from current losses. Net loss for the three and six month periods ended March 31, 2001 amounted to $8,435 and $14,148, respectively. The losses during the three and six month periods were due to decreased gross profit and increased interest expense as discussed above. This compares to net loss of $486 for the three month period and net income of $544 for the six month period one year earlier. Loss per share for the current three and six month periods were ($1.14) and ($1.91), in comparison to loss per share of $(0.07) for the three month period, and earnings per share of $0.07 for the six month period one year earlier. Liquidity and Capital Resources Operating activities during the first six months of fiscal 2001 used cash in the amount of $446 compared to cash utilized of $8,763 during the same period last year. Working capital at March 31, 2001 was a net liability of $45,110 compared to a net asset of $49,887 at March 31, 2000. The decrease in working capital was due to the Company's bank line of credit being classified as a current liability due to its maturity date of December 31, 2001. The Company has a bank revolving line of credit, that was amended on December 22, 2000 and January 23, 2001, for a total of $74,850 that expires on December 31, 2001. The agreement includes an interest rate at the banks' prime lending rate plus 1.0%. The commitment fee on the unused portion of the line is 0.5%. The agreement requires mandatory principal payments of $50 per month for January through March 2001 and $150 per month for April through December 2001. In addition, there are certain other principal payments required should the Company sell certain assets or collect certain account receivables. The agreement includes a number of reporting requirements and financial covenants commencing January 2001, based on monthly net income or net loss projections and three-month rolling earnings before interest, taxes, depreciation and amoritzation ("EBITDA") projections. Because the financial covenants are based on monthly computations with look-back and look-forward provisions, the Company believes there is doubt that it will be able to remain in compliance with the debt covenants through October 1, 2001, and as a result, substantially all of the Company's debt would be callable. If the Company does not remain in compliance with the debt covenants, it would expect to negotiate with its bank group to have the covenants waived or to amend the loan agreement. At March 31, 2001, the Company requested and received from its bank group a waiver for the non-payment of certain accrued interest and of covenants related to net income or net loss projections and three-month rolling EBITDA projections. This waiver is effective until June 30, 2001. Deferred interest payments are waived until the earlier of ten days following receipt by the Company of the banks' written demand or September 30, 2001. At March 31, 2001, the Company had $1,297 available under the bank agreement. The Company expects to refinance its bank line of credit by December 31, 2001. Should the Company not successfully refinance its bank line of credit by December 31, 2001, the Company would not be able to make the debt payment terms and would expect to negotiate with its bank group to amend and extend the loan agreement. The Company believes its cash flow from operations and funds available from its line of credit will be sufficient to satisfy working capital requirements and capital expenditure needs through at least October 1, 2001. The Company expects capital expenditures to be approximately $3,600 for the fiscal year ending September 30, 2001. The Company remains highly leveraged and as a result, access to additional funding sources is limited. If the Company's operating results deteriorate, or product sales and margins do not improve, or the Company is not in compliance with its covenants, or the Company is not successful in refinancing its bank line of credit, the Company could be in default under its loan agreement and any such default, not resolved, could lead to curtailment of certain of its business operations, sale of certain assets or the commencement of insolvency proceedings by its creditors. In July 2000, the Company engaged Lehman Brothers, Inc., an investment banking firm, to review strategic alternatives for financing and partnership. This process has resulted in expressions of interest but there are no assurances that such efforts will result in a financing or sales transaction. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. This report contains forward-looking statements that involve risks and uncertainties. Among the important factors which could cause actual results to differ materially from those forward-looking statements are the ability of the company to meet its bank covenants and meet its needs for additional liquidity; results of a review of strategic alternatives for financing and partnership currently being performed by Lehman Brothers; the ability of the company to effectively realign operations; the risks associated with global operations, including interruptions and delays in delivery and supply and currency fluctuations; costs related to the start-up of new business with new or existing customers; the impact of competitive products and pricing; product demand; the presence of competitors with greater financial resources; availability of additional sources of financing; capacity and supply constraints or difficulties; the difficulty and delays inherent in new product launches; the delay or cancellation of orders; the lack of firm purchase commitments in the industry; the rapid obsolescence of unused electronic inventories; and other factors detailed in the Company's filings with the Securities and Exchange Commission including recent filing of Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes from the information concerning the Company's "Market Risk" as previously reported in the Company's Annual Report on Form 10-K for the year ended September 30, 2000. Page-9 PART II - OTHER INFORMATION Item 1. N/A Item 2. N/A Item 3. N/A Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Shareholders held on March 6, 2001, the following proposals were adopted by the vote specified below: Election of Directors For Vote Withheld --------------------- --- -------------- Janet B. Mathias 5,048,432 66,969 William Rulon-Miller 5,048,432 66,969 Ratification of PricewaterhouseCoopers as the independent auditors for the fiscal year ending September 30, 2001. Number of shares ---------------- For 5,113,301 Against 1,800 Abstain 300 Item 5. N/A Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Amended and Restated Articles of Incorporation of the Company Amended and Restated Bylaws of the Company Specimen Certification of Common Stock of the Company Employment Agreement Addendum dated January 1, 2001 by and between Wayne A. Bromfield and The JPM Company Employment Agreement Addendum dated January 1, 2001 by and between James P. Mathias and The JPM Company (b) Reports on Form 8-K None SIGNATURES 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. THE JPM COMPANY Registrant Date: May 21, 2001 By:/s/ John H. Mathias ------------ ---------------------- John H. Mathias Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: May 21, 2001 By: /s/ Kevin J. Bratton ------------ ------------------------ Kevin J. Bratton Chief Financial Officer (Principal Financial Officer) EXHIBIT INDEX Exhibit numbers are in accordance with the Exhibit Table in Item 601 of Regulation S-K Exhibit No. Exhibit Description 3.1.* Amended and Restated Articles of Incorporation of the Company 3.2.* Amended and Restated Bylaws of the Company 4.1.* Specimen Certification of Common Stock of the Company 99.1 Employment Agreement Addendum dated January 1, 2001 by and between Wayne A. Bromfield and The JPM Company 99.2 Employment Agreement Addendum dated January 1, 2001 by and between James P. Mathias and The JPM Company * Filed as part of the Company's Registration Statement filed on Form S-1 on February 9, 1996 and declared effective April 30, 1996.

JPM CO 10-Q