0000950123-95-002599.txt : 19950920 0000950123-95-002599.hdr.sgml : 19950920 ACCESSION NUMBER: 0000950123-95-002599 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950912 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACO ELECTRONICS INC CENTRAL INDEX KEY: 0000052971 STANDARD INDUSTRIAL CLASSIFICATION: 5065 IRS NUMBER: 111978958 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05896 FILM NUMBER: 95573021 BUSINESS ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162735500 MAIL ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 JACO ELECTRONICS, INC. 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 1995 / / 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 . ----------------------------- FORM 10-K ----------------------------- 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)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-5500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.10 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of Common Stock held by non-affiliates of the Company, computed by reference to the closing price on September 8, 1995 was $19,015,808. Number of shares outstanding of each class of common stock, as of September 8, 1995: 1,848,288 DOCUMENTS INCORPORATED BY REFERENCE: Part III: Definitive Proxy Statement to be filed on or before October 30, 1995, under Regulation 14A, in connection with the Company's 1995 Annual Meeting of Shareholders. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 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 12 sales offices located throughout the United States. The Company distributes products such as semiconductors, capacitors, resistors, electro-mechanical devices, 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, assembling fractional-horsepower electric motors to customers' specifications 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, manufacturing and distribution 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 turnkey contract manufacturer of printed circuit boards ("PCBs"). 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. In the year ended June 30, 1995, Nexus products accounted for approximately 9% of the Company's total sales. 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 telecommunications, computer, computer-related, medical and aerospace equipment. In addition, over the past three years, the Company has added larger, higher volume customers, including accounts with several Fortune 500 manufacturers. In the fiscal year ended June 30, 1995, 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 and field engineers, value-added services and electronic data interchange. Management believes that the Company's logo, "Today Isn't Soon Enough," is widely recognized in the electronics 2 3 distribution industry and articulates the Company's approach and commitment to servicing its customers. INDUSTRY OVERVIEW Over the past 30 years, the electronics industry has grown significantly as a result of increased demand for products incorporating sophisticated electronic components, such as telecommunications, computer and medical equipment. This industry growth has been matched by an increase in the number of products, component manufacturers and OEMs. The electronics distribution industry has become an increasingly important sales channel for the electronics industry because distributors can market component manufacturers' products to a 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 smaller 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 1994 the electronics distribution industry recorded approximately $17 billion in sales. Of these sales, approximately $10.9 billion consisted of sales of semiconductors and computer products, which accounted for approximately 48% of the Company's net distribution sales for the year ended June 30, 1995. Approximately $5.4 billion of industry sales consisted of sales of interconnect (connectors, sockets), electromechanical (relays, switches) and passive (resistors, capacitors) components, which products accounted for approximately 52% of the Company's net distribution sales in the year ended June 30, 1995. 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. Passive components consist primarily of capacitors, electromechanical devices, fractional-horsepower motors and resistors. Passive products accounted for approximately 57%, 52% and 52% of the Company's net distributor sales in the fiscal years ended June 30, 1993, June 30, 1994 and June 30, 1995, respectively. The Company believes that the number of passive components of the types distributed by the Company that are used in personal computers has been increasing as the speed and capacity of semiconductors has increased. 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, floppy disks and controllers. These products represented approximately 43%, 48% and 48% of the Company's net distributor sales in the fiscal years ended June 30, 1993, June 30, 1994 and June 30, 1995, respectively. 3 4 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. - Motor Assembly. The Company assembles fractional-horsepower electric motors in conformity with customer specifications. The Company's Hauppauge, New York distribution center is one of only two authorized by the Globe Motors division of Labinal Components and Systems, Inc. as a Globe Motors assembly center. - Contract Manufacturing. The Company also furnishes turnkey contract manufacturing of PCBs for OEMs using both conventional pin-through-hole and 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% of net sales in the fiscal years ended June 30, 1994 and June 30, 1995. 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 recommend use of products which meet the customers' performance criteria, are cost-effective and target specifically identified problems. 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 12 additional sales offices located in Florida, Maryland, Massachusetts, Minnesota, North Carolina, Oregon, Texas, Washington and Colorado (established in September 1995). The Company currently has plans to open a total of three additional sales offices in the Rocky Mountain States, the Midwest and the Southeast. 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 4 5 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, 1995, 92% of the Company's sales were produced by Company sales personnel and 8% by independent sales representatives, one of whom produced approximately $4.7 million in revenue. No other representative produced more than $2 million in revenue. The Company believes that the termination of any independent sales representative would not have a material adverse effect upon its business. BACKLOG The Company's backlog consists of purchase orders received from customers for products scheduled for delivery within the next twelve months. The Company's backlog was $31.3 million at June 30, 1994, compared to $44.9 million at June 30, 1995. Orders constituting the Company's backlog are subject to delivery rescheduling, price negotiations and cancellations by the buyer, sometimes without penalty or notice. Backlog is not necessarily indicative of future sales for any particular period and, the Company expects that in the normal course of business, less than all backlogged orders will be filled. 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 system 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 turnover ratio was approximately 4.6x for the year ended June 30, 1995. Approximately 75% 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, approximately 35 miles north of Los Angeles. The Company also monitors supplier stock rotation programs, inventory price protection, rejected material and other factors related to inventory quality and quantity. 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 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. 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 5 6 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, 1995, the Company borrowed $500,000 to purchase machinery and equipment in order to expand Nexus' SMT assembly capability and plans in the fiscal year ending June 30, 1996 to invest approximately $500,000 in additional machinery and equipment as part of the Company's ongoing program to upgrade Nexus' operations. Nexus maintains strict quality control procedures for its products, including use of total quality management ("TQM") systems. All incoming raw materials 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. When requested by OEM customers, Nexus provides a limited warranty for products it manufactures. Nexus' manufacturing facility has earned ISO 9002 certification. The ISO is a Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. ISO 9002 is the ISO level appropriate for manufacturers like Nexus. Nexus' receipt of ISO 9002 certification demonstrates that Nexus' manufacturing operations meet the established world standards. Management believes sophisticated customers increasingly are requiring their manufacturers to be ISO 9002-certified and that OEMs that are not so qualified are increasingly looking to manufacturers like Nexus that have done so, rather than undertaking the expensive and time-consuming process of qualifying their own operations. SUPPLIERS Manufacturers of passive and active electronic components are increasingly relying on the marketing, customer service and other resources of a limited number 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. 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 Globe Motors (a division of Labinal Components and Systems, Inc.), International Resistive Company, Inc., Kemet Electronics Corporation, Micropolis Corporation, Mitel Inc., Rohm Company, Limited, Samsung Semiconductor, Inc., Vishay Intertechnology, Inc., and Zetex, Inc. Management continuously seeks to identify potential new suppliers and obtain additional distributorships for new lines of products. Management believes that such expansion and diversification will increase the Company's sales and market share. In the fiscal year ended June 30, 1995, of the Company's top ten suppliers, three, AVX, Kemet and Samsung, accounted for 14%, 13%, and 9% respectively, of net sales and the remaining seven each accounted for between 2% and 5% of net sales. No other supplier accounted for more than 2% 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 affected its results of operations in post-termination fiscal periods. For example, in June 1995, the Company's largest supplier, AVX, canceled its distributor agreement with the Company. While the Company believes that it will be able to replace a major portion of those sales with sales of other product lines from other suppliers and in August 1995 the Company entered into distribution agreements with Sprague, Inc. and Johanson Dielectric, Inc., there can be no assurance that it will, in fact, be able to replace the AVX sales. The Company generally purchases products from manufacturers pursuant to nonexclusive 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 6 7 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 certain inventory if the agreement is canceled. 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. 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 Company encounters some competition from products manufactured abroad and distributed domestically. Such foreign-manufactured products are often sold at prices below the Company's prices for comparable products. The Company competes by providing its customers with reliable, rapid delivery of products that meet strict quality control standards and by providing value-added services not available from foreign distributors. The PCB contract manufacturing industry is highly fragmented. Many large contract manufacturers operate high-volume facilities and primarily focus on high-volume markets, such as the personal computer and disk drive industries. This segment of the contract manufacturing industry is characterized by relatively high levels of volatility, competition and pricing and margin pressure. In contrast, other contract manufacturers focus on low-to-medium volume and service-intensive products, where the value-added component represents a relatively high percentage of the overall value of the finished product. The Company believes that contract manufacturers which are affiliated or integrated with electronics distributors have competitive advantages over comparably-sized, stand-alone contract manufacturers. Distributors can reduce the risk of inventory obsolescence through stock rotation privileges and inventory price protection and can also take advantage of material acquisition skills, just-in-time delivery expertise and broad supplier relationships. EMPLOYEES At August 31, 1995, the Company had a total of 404 employees, of which 128 were employed by Nexus. Of total employees, 11 were engaged in administration, 55 were managerial and supervisory employees, 128 were in sales and 210 performed warehouse, manufacturing and clerical functions. Of these employees, Nexus employed one in administration, 14 in management and supervisory positions, six in sales and 108 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. 7 8 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 14 facilities located in the States of California, Colorado, Florida, Maryland, Massachusetts, Minnesota, New York, North Carolina, Oregon, Texas and Washington, two of which are multipurpose facilities used principally as administrative, sales, and purchasing offices, as well as warehouses, and the remainder of which are used exclusively by Jaco as sales offices. Jaco's satellite sales offices range in size from approximately 1,000 square feet to approximately 7,200 square feet. Base rents for such properties range from approximately $1,000 per month to approximately $3,400 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 respecting 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 $56,250, net of all expenses, including taxes, utilities, insurance, maintenance and repairs, and has a term which expires on December 31, 1995. Jaco is currently negotiating a renewal of that lease. Such renewal is anticipated to be at a rental rate similar to that currently being charged for comparable properties in the area and, as a result, the Company expects that the new rental rate will be slightly lower than the current rate. Approximately 26,000 square feet of space is sublet by Jaco to an unaffiliated third party. In addition to its headquarters, Jaco maintains purchasing and sales offices and warehouse facilities at its Hauppauge location. (ii) Jaco leases from an unaffiliated party approximately 10,000 square feet of office and warehouse space in Westlake Village, California, approximately 35 miles north of Los Angeles, for a base rent of approximately $7,800 per month. The lease expires on March 31, 1996. 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. 8 9 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 1994. Stock prices prior to February 14, 1995 have been adjusted to give effect to the 10% stock dividend paid on March 10, 1995 and stock prices for all periods have been adjusted to give effect to the declared 4-for-3 stock split to be effective on September 22, 1995.
HIGH LOW ------ ----- FISCAL YEAR 1994: First quarter ended September 30, 1993............................ $ 7.84 $4.94 Second quarter ended December 31, 1993............................ $ 8.01 $5.28 Third quarter ended March 31, 1994................................ $ 6.48 $4.43 Fourth quarter ended June 30, 1994................................ $ 5.97 $4.26 FISCAL YEAR 1995: First quarter ended September 30, 1994............................ $ 5.28 $3.75 Second quarter ended December 31, 1994............................ $ 5.45 $3.92 Third quarter ended March 31, 1995................................ $ 5.54 $4.26 Fourth quarter ended June 30, 1995................................ $ 7.31 $5.06
(b) As of August 31, 1995, there were approximately 172 holders of record of the Company's Common Stock who management believes held for more than 950 beneficial owners. (c) The Company has never declared or paid cash dividends on its Common Stock. The Company intends to retain earnings, if any, for use in its business and to support growth and does not anticipate paying cash dividends in the foreseeable future. In addition, the agreement governing the Company's credit facility (the "Credit Facility") contains provisions that prohibit the Company from paying cash dividends on its Common Stock. 9 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
YEAR ENDED JUNE 30, ----------------------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATING DATA Net sales......................... $ 78,856 $ 77,358 $ 96,675 $ 105,213 $ 138,683 Cost of goods sold................ 61,244 59,951 75,630 83,038 109,902 ---------- ---------- ---------- ---------- ---------- Gross profit...................... 17,612 17,407 21,045 22,175 28,781 Selling, general and administrative expenses......... 17,436 15,753 17,786 19,155 23,552 ---------- ---------- ---------- ---------- ---------- Operating profit.................. 176 1,654 3,259 3,020 5,229 Interest expense.................. 1,551 1,172 1,078 1,117 2,010 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes and cumulative effect of a change in accounting for income taxes........................... (1,375) 482 2,181 1,903 3,219 Income tax expense (benefit)...... (357) 170 797 714 1,303 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before cumulative effect of a change in accounting for income taxes................ (1,018) 312 1,384 1,189 1,916 Cumulative effect of a change in accounting for income taxes..... -- -- -- 241 -- ---------- ---------- ---------- ---------- ---------- Net earnings (loss)............... $ (1,018) $ 312 $ 1,384 $ 1,430 $ 1,916 ========== ========== ========== ========== ========== PER SHARE DATA* Earnings (loss) per common share before cumulative effect of a change in accounting............ $ (0.40) $ 0.12 $ 0.55 $ 0.47 $ 0.78 Cumulative effect of accounting change.......................... -- -- -- 0.09 -- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) per common share........................... $ (0.40) $ 0.12 $ 0.55 $ 0.56 $ 0.78 ========== ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding... 2,523,400 2,506,001 2,522,980 2,551,173 2,461,091 ========== ========== ========== ========== ==========
JUNE 30, ----------------------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA Working capital................... $ 13,187 $ 13,614 $ 14,910 $ 15,160 $ 30,741 Total assets...................... 34,076 35,547 36,056 45,685 56,323 Long-term obligations............. 8,375 8,225 8,058 9,694 23,666 Shareholders' equity.............. 8,208 8,520 9,905 11,202 13,227
--------------- * All per share information has been restated to give effect to a 10% stock dividend paid on March 10, 1995 and a declared 4-for-3 stock split to be effective on September 22, 1995. 10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 electro-mechanical 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), assembling fractional-horsepower electric motors and turnkey contract manufacturing through Nexus. In March 1994, the Company entered the contract manufacturing business through the acquisition of all the outstanding shares of capital stock of Nexus, paying approximately $1,800,000 which was financed in part from a $1,500,000 term loan obtained under the Company's Credit Facility. See Notes E and I of Notes to Consolidated Financial Statements. During the year ended June 30, 1995, the Company devoted significant efforts to improving the performance of Nexus including: capital expenditures in excess of $500,000 to improve Nexus' capabilities for surface mount technology in the assembly of PCBs; consolidation of Nexus' operational facilities from three buildings into one building; utilization of Jaco's sales force in the Northeast to generate new customers for Nexus; and reduction in the cost of components purchased by Nexus by consolidating such purchases with other components purchased by Jaco. The Company's sales from value-added services represented $18.1 million, or 13% of net sales in the year ended June 30, 1995, $8.9 million or 8% of net sales in the year ended June 30, 1994, and $5.4 million or 6% of net sales in the year ended June 30, 1993. Of these sales, sales from contract manufacturing through Nexus, which was acquired in March 1994, were $2.7 million or 2.6% of net sales in the year ended June 30, 1994 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 statements of earnings as a percentage of net sales for the periods shown:
YEAR ENDED JUNE 30, --------------------------- 1993 1994 1995 ----- ----- ----- Net sales................................................. 100.0% 100.0% 100.0% Cost of goods sold........................................ 78.2 78.9 79.2 ----- ----- ----- Gross profit.............................................. 21.8 21.1 20.8 Selling, general and administrative expenses.............. 18.4 18.2 17.0 ----- ----- ----- Operating profit.......................................... 3.4 2.9 3.8 Interest expense.......................................... 1.2 1.1 1.5 ----- ----- ----- Earnings before income taxes and cumulative effect of a change in accounting........................ 2.2 1.8 2.3 Income tax expense........................................ .8 .7 .9 ----- ----- ----- Earnings before cumulative effect of a change in accounting........................................... 1.4 1.1 1.4 Cumulative effect of a change in accounting for income taxes........................................ -- .3 -- ----- ----- ----- Net earnings.............................................. 1.4% 1.4% 1.4% ===== ===== =====
11 12 COMPARISON OF YEAR ENDED JUNE 30, 1995 ("FISCAL 1995") WITH YEAR ENDED JUNE 30, 1994 ("FISCAL 1994") Net sales were $138.7 million for fiscal 1995, an increase of $33.5 million or 32% as compared to $105.2 million for fiscal 1994. The increase in sales is the result of several factors, including strong overall demand for components in the electronics industry generally, and the establishment of new offices and expansion of sales forces in existing offices to grow the distribution business. In addition, revenue from contract manufacturing by Nexus increased to approximately $12.1 million in fiscal 1995, from $2.7 million in fiscal 1994. Nexus was acquired in March 1994. Accordingly, the results of its operations for only three and a half months of fiscal 1994 were included in fiscal 1994 results of operations. Gross profit margins, as a percentage of net sales, decreased slightly from 21.1% in fiscal 1994 to 20.8% in fiscal 1995. This was primarily due to intense price competition relating to disk drives. The Company realized an improvement in gross profit margins in its distribution business during the second half of fiscal 1995 as a result of strong demand for products other than disk drives, which have lower gross profit margins. The Company believes that the continuation of such demand, combined with emphasis on components which are more profitable than disk drives, should enable gross profit margins to improve. Selling, general and administrative expenses were $23.6 million in fiscal 1995, an increase of $4.4 million, or 22.9%, from $19.2 million in fiscal 1994. The addition of two new sales offices, coupled with the hiring of additional sales personnel both for the new offices and existing sales offices and the inclusion of a full year of Nexus' operating results, produced the increase. Selling, general and administrative expenses, as a percentage of 1995 net sales, declined to 17.0% from 18.2% in fiscal 1994. Strict attention to cost containment resulted in the reduction. The Company believes that if net sales continue to increase then selling, general and administrative expenses will decrease as a percentage of net sales. Interest expense increased to $2.0 million in fiscal 1995 from $1.1 million in fiscal 1994. This increase was primarily attributable to rising interest rates, borrowings to support sales growth and additional borrowings used in connection with the acquisition of Nexus. Nexus recently moved operations from two formerly leased facilities in Vermont and Massachusetts and consolidated such operations at its Brandon, Vermont headquarters. Net earnings for fiscal 1995 were $1.9 million, an increase of approximately $500,000 or 34.0%, as compared to $1.4 million for fiscal 1994, after taking into account the cumulative effect of a change in accounting for income taxes of $241,000 in the fiscal year ended June 30, 1994. Earnings before the change in accounting for income taxes increased $727,000 (61%) in fiscal 1995 as compared to fiscal 1994. Growth in the Company's distribution business was primarily responsible for the growth in earnings. Nexus currently is realizing modest profits after its first full year as a subsidiary. COMPARISON OF YEAR ENDED JUNE 30, 1994 WITH YEAR ENDED JUNE 30, 1993 ("FISCAL 1993") Net sales were $105.2 million for fiscal 1994, an increase of $8.5 million or 8.8% as compared to $96.7 million for fiscal 1993. Management attributes the increase to continued penetration in existing markets, the opening of sales offices in Minnesota and Oregon, and the acquisition of Nexus. Net sales of Nexus were $2.7 million for the period following its acquisition (March 11 -- June 30, 1994) or 2.6% of consolidated fiscal 1994 net sales. Nexus, as a contract manufacturer, competes in a rapidly growing segment of the electronics market. Fiscal 1994 gross profit margins, as a percentage of net sales, decreased compared to fiscal 1993. This was primarily attributable to active components having represented an increasing percentage of the Company's product mix in fiscal 1994. These products are historically sold at lower margins than passive components. 12 13 Selling, general and administrative expenses were $19.2 million in fiscal 1994, an increase of $1.4 million, or 8.0% compared to $17.8 million in fiscal 1993. Increases in selling, general and administrative expenses resulted from an expanded sales and support workforce, the establishment of additional sales offices and the incremental selling, general and administrative expenses incurred as a result of the acquisition of Nexus. Interest expense increased 3.7% to $1.1 million in fiscal 1994 compared to fiscal 1993 due to rising interest rates and additional borrowings to support sales growth and used in connection with the acquisition of Nexus. While net income was approximately $1.4 million both in fiscal 1994 and fiscal 1993, fiscal 1994 included a $241,000 benefit resulting from the Company's adoption of Financial Accounting Standard No. 109, "Accounting for Income Taxes". The benefit derived from sales growth was more than offset by decreases in gross profit margins and increased selling, general and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES The Company maintains a total credit facility of $30,000,000, $8,000,000 of which is structured as a term loan, $1,500,000 (the outstanding balance of which at August 31, 1995 was approximately $1,196,000) of which is structured as a term loan, payable in equal monthly installments of $17,857 and the balance of which is structured as a revolving line of credit. During fiscal 1995, the borrowing rate was reduced from prime +1% to a rate equal to the higher of prime rate or the federal funds rate + 1/2% or, at the Company's option, LIBOR plus 2.5% for fixed periods of time. The Company must comply with various financial covenants, with all of which the Company believes itself to be in compliance. As of August 31, 1995, the Company had outstanding borrowings of $25.3 million, with additional borrowing capacity of $4.7 million available under the revolving line of credit. Working capital increased to $30.7 million as of June 30, 1995, as compared to $15.2 million as of June 30, 1994, an increase of $15.5 million or 102%. The increase was primarily attributable to the Company's restructuring of its Credit Facility which, among other things, extended its maturity date to April 1998; the Company's profitable results during fiscal 1995; and higher inventory necessary to support the Company's increased level of sales and resulting increased accounts receivable. During fiscal 1995, the Company's net cash used in operating activities was $4.0 million, compared to $127,000 in fiscal 1994. Increases in accounts payable and additional bank borrowings offset increases in accounts receivable and inventory, all of which are a reflection of higher sales. In March 1995, Nexus borrowed $500,000 to purchase machinery and equipment in order to expand Nexus' surface mount assembly capacity. Management anticipates investing approximately $500,000 in fiscal 1996 for additional machinery and equipment as part of an ongoing program to upgrade Nexus' operations. The Company's cash expenditures may vary significantly from its current expectations, based on a number of factors, including but not limited to, future acquisitions, if any. For both fiscal 1994 and 1995, inventory turnover was 4.6x. The average age of the Company's accounts receivable at June 30, 1995 was 50 days, as compared to 52 days at June 30, 1994. The Company did not experience any significant trade collection difficulties during fiscal 1995. The Company expects 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 12 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. 13 14 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 30, 1995. 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 30, 1995. 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 30, 1995. 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 30, 1995. 14 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE ------- (a)(1) Financial Statements included in Part II, Item 8, of this Report: Index to Consolidated Financial Statements and Schedule..................... F-1 Report of Independent Certified Public Accountants.......................... F-2 Consolidated Balance Sheets................................................. F-3 Consolidated Statements of Earnings......................................... F-4 Consolidated Statement of Changes in Shareholders' Equity................... F-5 Consolidated Statements of Cash Flows....................................... F-6 Notes to Consolidated Financial Statements.................................. F-7 (a)(2) Financial Statement Schedule included in Part IV of this Report: Report of Independent Certified Public Accountants on Schedule.............. F-18 Schedule II -- Valuation and Qualifying Accounts............................ F-19
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. 3.2 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. 10.3 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, 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 Annual Report on Form 10-K for the year ended June 30, 1993, 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.
15 16
EXHIBIT NO. ---------- 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. 10.9 Employment Agreement between Joel Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.9. 10.10 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company. 10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company. 21.1 Subsidiaries of the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 21. 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 Annual Report on Form 10-K for the year ended June 30, 1992, 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 99.6. 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.
(b) Reports on Form 8-K filed during last quarter of the period covered by this Report: None. 16 17 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE ---- Consolidated Financial Statements Report of Independent Certified Public Accountants.................................. F-2 Consolidated Balance Sheets......................................................... F-3 Consolidated Statements of Earnings................................................. F-4 Consolidated Statement of Changes in Shareholders' Equity........................... F-5 Consolidated Statements of Cash Flows............................................... F-6 Notes to Consolidated Financial Statements.......................................... F-7 Schedule Report of Independent Certified Public Accountants on Schedule...................... F-18 Schedule II -- Valuation and Qualifying Accounts.................................... F-19
F-1 18 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, 1994 and 1995, 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, 1995. 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, 1994 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for income taxes in fiscal 1994. GRANT THORNTON LLP Melville, New York August 15, 1995, except for Note H, as to which the date is August 30, 1995 F-2 19 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30,
1994 1995 ---------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents...................................... $ 434,798 $ 393,671 Accounts receivable, less allowance for doubtful accounts of $610,000 in 1994 and 1995................................... 17,135,923 20,437,664 Inventories.................................................... 20,081,596 26,653,881 Prepaid expenses and other..................................... 1,072,219 1,256,319 Due from officers.............................................. 291,119 309,808 Deferred income taxes.......................................... 433,000 571,000 ----------- ----------- Total current assets........................................ 39,448,655 49,622,343 PROPERTY, PLANT AND EQUIPMENT -- AT COST, NET.................... 3,560,786 4,106,221 DEFERRED INCOME TAXES............................................ 199,000 174,000 EXCESS OF COST OVER NET ASSETS ACQUIRED, less accumulated amortization of $216,800 in 1994 and $297,700 in 1995............................................... 1,515,900 1,353,031 OTHER ASSETS..................................................... 960,687 1,067,643 ----------- ----------- $45,685,028 $56,323,238 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................... $13,593,794 $16,651,774 Notes payable -- bank.......................................... 8,938,087 Current maturities of long-term debt and capitalized lease obligations............................... 346,172 452,995 Accrued expenses............................................... 1,262,916 1,300,611 Income taxes payable........................................... 147,499 475,702 ----------- ----------- Total current liabilities................................... 24,288,468 18,881,082 LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS................. 9,694,108 23,665,624 DEFERRED COMPENSATION............................................ 500,000 550,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock -- authorized, 100,000 shares, $10 par value; none issued Common stock -- authorized, 5,000,000 shares, $.10 par value; issued and outstanding, 1,652,309 and 2,464,384 shares, respectively................................................ 165,231 246,438 Additional paid-in capital..................................... 3,810,516 5,013,663 Retained earnings.............................................. 7,226,705 7,966,431 ----------- ----------- 11,202,452 13,226,532 ----------- ----------- $45,685,028 $56,323,238 =========== ===========
The accompanying notes are an integral part of these statements. F-3 20 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEAR ENDED JUNE 30,
1993 1994 1995 ---------- ----------- ----------- Net sales.......................................... $96,675,405 $105,213,077 $138,683,331 Cost of goods sold................................. 75,630,576 83,038,254 109,902,639 ----------- ------------ ------------ Gross profit..................................... 21,044,829 22,174,823 28,780,692 Selling, general and administrative expenses....... 17,785,532 19,154,802 23,551,196 ----------- ------------ ------------ Operating profit................................. 3,259,297 3,020,021 5,229,496 Interest expense................................... 1,077,902 1,117,354 2,010,554 ----------- ------------ ------------ Earnings before income taxes and cumulative effect of a change in accounting for income taxes......................................... 2,181,395 1,902,667 3,218,942 Income tax provision............................... 797,000 714,000 1,303,000 ----------- ------------ ------------ Earnings before cumulative effect of a change in accounting for income taxes................... 1,384,395 1,188,667 1,915,942 Cumulative effect of a change in accounting for income taxes..................................... 241,000 ----------- ------------ ------------ NET EARNINGS..................................... $ 1,384,395 $ 1,429,667 $ 1,915,942 =========== ============ ============ Earnings per common share: Earnings before cumulative effect of a change in accounting for income taxes...................... $ .55 $ .47 $ .78 Cumulative effect of a change in accounting for income taxes.................................. .09 ----------- ------------ ------------ Net earnings per common share.................... $ .55 $ .56 $ .78 =========== ============ ============ Weighted average common and common equivalent shares outstanding............................... 2,522,980 2,551,173 2,461,091 =========== ============ ============
The accompanying notes are an integral part of these statements. F-4 21 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 1993, 1994 AND 1995
ADDITIONAL TOTAL PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY --------- -------- ---------- --------- ------------- Balance at July 1, 1992............... 1,708,637 $170,864 $3,936,613 $4,412,643 $ 8,520,120 Net earnings.......................... 1,384,395 1,384,395 --------- -------- ---------- --------- ------------- Balance at June 30, 1993.............. 1,708,637 170,864 3,936,613 5,797,038 9,904,515 Cancellation of shares in satisfaction of amounts due in connection with a previous acquisition................ (56,953) (5,695) (126,972) (132,667) Exercise of stock options............. 625 62 875 937 Net earnings.......................... 1,429,667 1,429,667 --------- -------- ---------- --------- ------------- Balance at June 30, 1994.............. 1,652,309 165,231 3,810,516 7,226,705 11,202,452 Exercise of stock options............. 28,000 2,800 105,700 108,500 10% stock dividend.................... 167,979 16,798 1,159,056 (1,175,854) Payment for fractional shares resulting from 10% stock dividend... (362) (362) 4-for-3 stock split................... 616,096 61,609 (61,609) Net earnings.......................... 1,915,942 1,915,942 --------- -------- ---------- --------- ------------- Balance at June 30, 1995.............. 2,464,384 $246,438 $5,013,663 $7,966,431 $ 13,226,532 ======== ======== ========= ========= ==========
The accompanying notes are an integral part of this statement. F-5 22 JACO ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED JUNE 30,
1993 1994 1995 ------------ ------------ ------------ Cash flows from operating activities Net earnings.................................... $ 1,384,395 $ 1,429,667 $ 1,915,942 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization................ 300,780 412,704 693,290 Deferred compensation........................ 50,000 50,000 50,000 Deferred income tax expense (benefit)........ 50,000 (111,000) (31,000) Loss on sale of equipment.................... 12,447 35,006 18,403 Provision for doubtful accounts.............. 549,000 160,000 458,000 Changes in operating assets and liabilities, net of effects of acquisition Increase in accounts receivable............ (2,287,602) (1,807,919) (3,759,741) (Increase) decrease in inventories......... 1,281,159 (1,936,676) (6,572,285) Increase in prepaid expenses and other..... (16,490) (224,965) (184,100) Increase (decrease) in accounts payable.... (265,606) 2,493,897 3,057,980 Increase (decrease) in accrued expenses.... 176,204 (234,864) 37,695 Increase (decrease) in income taxes payable................................. 341,066 (392,514) 328,203 ------------ ------------ ------------ Net cash provided by (used in) operating activities.............................. 1,575,353 (126,664) (3,987,613) ------------ ------------ ------------ Cash flows from investing activities Capital expenditures............................ (155,628) (875,797) (908,153) Proceeds from the sale of equipment............. 36,058 49,302 20,000 Purchase of subsidiary, net..................... (1,796,355) (Increase) decrease in due from officers, net... 123,263 (101,878) (18,689) (Increase) decrease in other assets............. (215,533) 16,452 (106,956) ------------ ------------ ------------ Net cash used in investing activities...... (211,840) (2,708,276) (1,013,798) ------------ ------------ ------------ Cash flows from financing activities Borrowings from line of credit.................. 95,927,072 110,434,283 141,391,776 Payments of line of credit...................... (96,954,529) (109,501,754) (136,774,193) Principal payments under equipment financing.... (148,959) (269,613) (434,854) Borrowings from term loans...................... 1,982,071 669,417 Proceeds from exercise of stock option.......... 937 108,500 Payments for fractional shares.................. (362) ------------ ------------ ------------ Net cash (used in) provided by financing activities.............................. (1,176,416) 2,645,924 4,960,284 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH............ 187,097 (189,016) (41,127) Cash and cash equivalents at beginning of year.... 436,717 623,814 434,798 ------------ ------------ ------------ Cash and cash equivalents at end of year.......... $ 623,814 $ 434,798 $ 393,671 ============ ============ ============ Supplemental cash flow disclosures: Interest paid................................... $ 1,096,000 $ 1,126,000 $ 1,970,000 Income taxes paid............................... 484,000 660,000 993,000 Supplemental schedule of noncash financing and investing activities: Equipment under capital leases.................. $ 86,000 $ 288,000
The accompanying notes are an integral part of these statements. F-6 23 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1993, 1994 AND 1995 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily engaged in the distribution of electronic components, electromechanical devices and computer subsystems, produced by others, to numerous manufacturing companies. Further, through a fiscal 1994 acquisition, 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, 1993, 1994 and 1995, export sales amounted to approximately $5,356,000, $5,289,000 and $5,032,000, 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. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and average cost methods. 4. Property, Plant and Equipment Depreciation is provided for using accelerated methods, principally the double-declining balance method over the estimated useful life of the assets related to the Company's distribution business. Plant and equipment related to the Company's manufacturing business is depreciated using the straight-line method. 5. 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. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") that establishes accounting standards for the impairment of long-lived assets, certain intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. In accordance with SFAS No. 121, it is the Company's policy to periodically review and evaluate whether there has been a permanent impairment in the value of intangibles. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. 6. Income Taxes The Company has adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," as of July 1, 1993 and recorded income of $241,000 as the cumulative effect of a change in accounting for income taxes. Pursuant to SFAS No. 109, 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 F-7 24 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) reduce deferred tax assets attributable to the Company's acquired subsidiary, 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. 7. 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 stock dividends and stock splits. 8. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 9. Concentration of Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of receivables. Concentration of credit risk with respect to these receivables is generally diversified 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. The Company generally purchases products from manufacturers pursuant to nonexclusive distributor agreements. During the year ended June 30, 1995, the Company's top three suppliers accounted for 14%, 13% and 9%, respectively, of net sales. In June 1995 the Company's largest supplier canceled its distributor agreement with the Company. While the Company believes that it will be able to replace a major portion of those sales with sales of other product lines from other suppliers, there can be no assurance that it will, in fact, be able to replace these sales. NOTE B -- INVENTORY Inventories consist of the following:
JUNE 30, ------------------------- 1994 1995 ---------- ---------- Finished goods and goods held for resale.................... $18,092,596 $23,374,881 Work-in-process............................................. 742,000 718,000 Raw materials............................................... 1,247,000 2,561,000 ----------- ----------- $20,081,596 $26,653,881 =========== ===========
F-8 25 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE C -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
JUNE 30, USEFUL LIFE ----------------------- IN YEARS 1994 1995 ----------- --------- --------- Land, building and improvements................... 10 to 30 $1,259,781 $1,389,603 Machinery and equipment........................... 3 to 8 3,721,215 4,699,761 Transportation equipment.......................... 3 to 5 186,060 134,997 Leasehold improvements............................ 5 to 10 600,780 687,566 ---------- ---------- 5,767,836 6,911,927 Less accumulated depreciation and amortization (including $496,884 in 1994 and $607,851 in 1995 of capitalized lease amortization).............. 2,207,050 2,805,706 ---------- ---------- $3,560,786 $4,106,221 ========== ==========
Included in machinery and equipment is computer equipment recorded under capitalized leases at June 30, 1994 and 1995 for $654,933 and $943,038, respectively. NOTE D -- INCOME TAXES The provision for income taxes for the fiscal years ended June 30, 1993, 1994 and 1995, respectively, is as follows:
JUNE 30, ------------------------------------- 1993 1994 1995 --------- --------- --------- Federal Current........................................ $ 645,000 $ 505,000 $1,063,000 Deferred....................................... 50,000 111,000 (31,000) --------- --------- ---------- 695,000 616,000 1,032,000 State............................................ 102,000 98,000 271,000 --------- --------- ---------- $ 797,000 $ 714,000 $1,303,000 ========= ========= ==========
The Company's effective income tax rate differs from the statutory U.S. Federal income tax rate as a result of the following:
JUNE 30, ------------------------- 1993 1994 1995 ----- ----- ----- Statutory Federal tax rate................................... 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit............... 3.5 5.0 5.6 Prior period tax adjustments................................. (3.7) Earnings of foreign sales corporation........................ (.9) (1.0) (.6) Sales expense for which no tax benefit arises................ 1.0 2.4 1.7 Other........................................................ (1.1) .8 (.2) ----- ----- ----- Effective tax rate........................................... 36.5% 37.5% 40.5% ===== ===== =====
F-9 26 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE D -- INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities resulting from differences between accounting for financial statement purposes and tax purposes, pursuant to SFAS No. 109, at June 30, 1994 and 1995, are summarized as follows:
1994 1995 --------- --------- Deferred tax assets Net operating loss carryforwards............................ $ 528,000 $ 521,000 Allowance for bad debts..................................... 223,000 222,000 Inventory valuation......................................... 465,000 532,000 Deferred compensation....................................... 195,000 201,000 Other deferred assets....................................... 60,000 30,000 --------- --------- 1,471,000 1,506,000 Deferred tax liabilities Depreciation................................................ (46,000) (56,000) Other....................................................... (53,000) (47,000) --------- --------- 1,372,000 1,403,000 Valuation allowance........................................... (740,000) (658,000) --------- --------- Net deferred tax asset........................................ $ 632,000 $ 745,000 ========= =========
At June 30, 1995, the Company, through an acquisition (see Note I), has available a Federal net operating loss carryforward of approximately $1,426,000. 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 1995, $82,000 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. The components of the deferred income tax expense (benefit) for the year ended June 30, 1993 are comprised of the following: Deferred compensation............................ $(17,000) Inventory capitalization......................... 19,000 Bad debts........................................ 49,000 Other............................................ (1,000) -------- $ 50,000 ========
F-10 27 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE E -- DEBT AND CAPITALIZED LEASE OBLIGATIONS Debt and capitalized lease obligations are as follows:
JUNE 30, ------------------------- 1994 1995 ---------- ---------- Term loans and revolving line of credit(a).................. $9,446,429 $22,787,811 Other term loans(b)......................................... 485,646 Equipment notes(c).......................................... 469,191 487,189 Capitalized lease obligations(d)............................ 143,900 413,722 ---------- ---------- 10,059,520 24,174,368 Less amounts representing interest on capitalized leases.... 19,240 55,749 ---------- ---------- 10,040,280 24,118,619 Less current maturities..................................... 346,172 452,995 ---------- ---------- $9,694,108 $23,665,624 ========== ===========
(a) Term Loans and Revolving Line of Credit Facility On April 25, 1995, the Company amended its agreement with a bank which, as amended, provides the Company with a $30,000,000 term loan and revolving line of credit facility based principally on eligible accounts receivable and inventories of the Company as defined in the agreement. The amendment increased the credit facility to $30,000,000 from $24,500,000 and bears interest at the higher of the (1) bank's prime rate or the Federal funds rate plus 1/2% or (2) at the Company's option LIBOR plus 2.5% for fixed time periods, and extended the maturity date of the term loan to January 31, 1998 and the revolving line of credit to April 30, 1998. The agreement contains provisions for maintenance of certain financial ratios and prohibits the payment of cash dividends. The outstanding balance on the revolving line of credit facility, $13,555,670 at June 30, 1995, bears interest at the bank's prime rate. Pursuant to the same agreement, at June 30, 1995, there are two outstanding term loans in the amounts of: (1) $8,000,000 due January 31, 1998, and (2) $1,232,141 payable in eighty-four consecutive monthly installments of $17,857, which commenced on April 1, 1994, both bearing interest at the bank's prime rate (9% at June 30, 1995). These borrowings are collateralized by substantially all of the assets of the Company. (b) Other Term Loans Other term loans as of June 30, 1995 are as follows:
MONTHLY DATE OF LOAN BALANCE TERM PAYMENT ------------- -------- --------- ------- March 16, 1995................................... $ 57,407 60 months $1,160 March 16, 1995................................... 184,396 84 months 2,730 March 16, 1995................................... 243,843 84 months 4,216 -------- $485,646 ========
The above loans are collateralized by the related equipment acquired, having a carrying value of approximately $495,000 at June 30, 1995. The agreements contain, among other things, restrictive covenants on one of the Company's subsidiaries, which place limitations on: (i) consolidations, F-11 28 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE E -- DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED) mergers and acquisitions, (ii) additional indebtedness, encumbrances and guarantees, (iii) loans to shareholders, officers or directors, (iv) dividends and stock redemptions, and (v) transactions with affiliates, all as defined in the agreements. The loans bear interest payable monthly, at 6%, 5.5% and 1.5% over a bank's prime rate, respectively. (c) Equipment Notes The equipment notes are payable through September 1999, bearing implicit interest rates from 7.55% to 13.25%. (d) Capitalized Lease Obligations The Company leases certain equipment under agreements accounted for as capital leases. The obligations for the equipment require the Company to make monthly payments through June 1999, with implicit interest rates from 7.55% to 13.20%. The following is a summary of the aggregate annual maturities of long-term debt and capitalized lease obligations as of June 30, 1995:
LONG-TERM CAPITALIZED DEBT LEASES ---------- ----------- Year ending June 30, 1996...................................................... $ 377,278 $ 97,035 1997...................................................... 401,863 99,014 1998...................................................... 21,973,472 99,014 1999...................................................... 410,097 97,300 2000...................................................... 302,138 21,359 Thereafter................................................ 295,798 ----------- -------- $23,760,646 $413,722 =========== ========
NOTE F -- COMMITMENTS AND CONTINGENCIES 1. Leases The Company leases 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 at June 30, 1995 are as follows: Year ending June 30, 1996........................................... $592,000 1997........................................... 124,000 1998........................................... 50,000 1999........................................... 4,000 -------- $770,000 ========
F-12 29 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company leases office and warehouse facilities from a partnership owned by two officers and directors of the Company. The lease expires in December 1995 and requires minimum annual lease payments of $337,500 for the year ending June 30, 1996. In addition, the Company is contingently liable as a guarantor of a mortgage on such property in the amount of approximately $396,000 as of June 30, 1995. The Company's rent expense was approximately $583,000, $571,000 and $571,000 for the years ended June 30, 1993, 1994 and 1995, respectively, in connection with the above lease. Rent expense on office and warehouse facilities leases for the years ended June 30, 1993, 1994 and 1995 was approximately $834,000, $872,000 and $909,000, respectively, net of sublease income of approximately $194,000, $147,000 and $135,000, respectively. 2. Other Leases The Company also leases various office equipment and automobiles under noncancellable operating leases expiring through December 1999. The minimum rental commitments required under these leases at June 30, 1995 are as follows: Year ending June 30, 1996........................................... $305,000 1997........................................... 242,000 1998........................................... 157,000 1999........................................... 64,000 2000........................................... 12,000 -------- $780,000 ========
3. Employment Agreement Effective July 1, 1993, the Company entered into a new employment agreement with the Chairman which expires July 1, 1997. Pursuant to this agreement, he received a base salary of $250,000 and $300,000 in 1994 and 1995, respectively, and will receive a base salary of $325,000 for each of the years ending June 30, 1996 and 1997. 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, 1994 and 1995, bonuses of approximately $76,000 and $193,000, respectively, were earned pursuant to the Chairman's employment agreement. Further, the Chairman has outstanding demand loans at June 30, 1995 aggregating $309,808 which bear interest at 9 3/4% per annum. F-13 30 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 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, 1993, 1994 and 1995, the Company contributed to this plan approximately $60,000, $61,000 and $90,000, respectively. NOTE H -- SHAREHOLDERS' EQUITY 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 will be effective on September 22, 1995. All references to the number of common shares and earnings per common shares have been restated to reflect the 10% stock dividend and the 4-for-3 stock split. 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 are generally exercisable for a period of five years at a price not less than the market value on the date of grant. A total of 2,750 shares are reserved for issuance upon exercise of stock options under this plan. 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, of which 100,100 options 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. Of the 111,467 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. The Company has reserved 146,667 shares of common stock for the Outside Directors Plan of which 35,200 options are outstanding. F-14 31 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE H -- SHAREHOLDERS' EQUITY (CONTINUED) Outstanding options granted to employees, directors and officers for the last three fiscal years are summarized as follows:
NONQUALIFIED STOCK INCENTIVE STOCK OPTIONS OPTIONS ------------------------ ------------------------ PRICE RANGE SHARES PRICE RANGE SHARES ------------ ------- ------------ ------- Outstanding at July 1, 1992........... $1.02 - 2.65 44,734 Granted............................... Exercised............................. ------- Outstanding at June 30, 1993.......... $1.02 - 2.65 44,734 Granted............................... $4.77 - 5.80 129,433 Exercised............................. $1.02 (917) ------- ------- Outstanding at June 30, 1994.......... $1.02 - 2.65 43,817 $4.77 - 5.80 129,433 Granted............................... $4.94 5,867 Exercised............................. $2.65 (41,067) ------- ------- Outstanding at June 30, 1995.......... $1.02 2,750 $4.77 - 5.80 135,300 ======= ======= Amounts exercisable at June 30, 1995................................ $1.02 2,750 $4.77 - 5.80 135,300 ======= =======
NOTE I -- ACQUISITION On March 11, 1994, the Company purchased all of the outstanding common stock of a contract manufacturer for $1,796,355 in cash, financed in part by the Company obtaining a term loan (see Note E). The acquisition was accounted for by the purchase method and, accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their fair market value as of the date of acquisition. The amount paid in excess of the fair market value, $418,478, as adjusted to reflect the realization of deferred tax assets not previously recognized, is being amortized over a ten-year period and is included in the accompanying consolidated financial statements as of June 30, 1995, net of accumulated amortization of $62,580. The operations of the contract manufacturer are included in the accompanying financial statements from the date of acquisition. The fair market values of the assets and the liabilities assumed at the date of acquisition were as follows: Fair value of assets acquired............................................. $5,455,526 Liabilities assumed....................................................... (3,659,171) ---------- Purchase price............................................................ $1,796,355 ==========
The pro forma unaudited results of operations for the year ended June 30, 1994, assuming consummation of the purchase and term loan borrowing as of July 1, 1993, are as follows: Net sales................................................................ $108,793,684 =========== Net earnings............................................................. $ 799,967 =========== Net earnings per share................................................... $.31 =====
F-15 32 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE I -- ACQUISITION (CONTINUED) As a result of this acquisition, the Company now 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 for fiscal 1995 and 1994. Fiscal year ended 1994 information for the contract manufacturing segment is from March 11, 1994 (the date of acquisition) to June 30, 1994.
YEAR ENDED JUNE 30, --------------------------- 1994 1995 ----------- ----------- Sales Electronics components distribution..................... $102,493,000 $126,545,000 Contract manufacturing.................................. 2,720,000 12,138,000 ------------ ------------ $105,213,000 $138,683,000 ============ ============ Operating profit Electronics components distribution..................... $ 2,991,000 $ 4,666,000 Contract manufacturing.................................. 29,000 563,000 ------------ ------------ $ 3,020,000 $ 5,229,000 ============ ============ Identifiable assets Electronics components distribution..................... $ 39,545,000 $ 47,909,000 Contract manufacturing.................................. 6,140,000 8,414,000 ------------ ------------ $ 45,685,000 $ 56,323,000 ============ ============ Capital expenditures Electronics components distribution..................... $ 828,000 $ 342,000 Contract manufacturing.................................. 48,000 566,000 ------------ ------------ $ 876,000 $ 908,000 ============ ============ Depreciation and amortization Electronics components distribution..................... $ 329,000 $ 397,000 Contract manufacturing.................................. 84,000 296,000 ------------ ------------ $ 413,000 $ 693,000 ============ ============
NOTE J -- SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED --------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1994 1994 1995 1995 ------------- ------------ ---------- ---------- Net sales.......................... $31,087,594 $33,747,154 $35,825,167 $38,023,416 Gross profit....................... 6,394,122 6,919,043 7,496,699 7,970,828 Net earnings....................... 262,494 447,765 554,284 651,399 Earnings per common share Net earnings per common share share (a)...................... $.11 $.18 $.23 $.26 ====== ====== ===== =====
F-16 33 JACO ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1993, 1994 AND 1995 NOTE J -- SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
QUARTER ENDED --------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1993 1993 1994 1994 ------------- ------------ ---------- ---------- Net sales.......................... $25,027,679 $24,035,522 $27,528,315 $28,621,561 Gross profit....................... 5,424,908 5,178,809 5,634,382 5,936,724 Earnings before cumulative effect of a change in accounting for income taxes..................... 413,033 242,982 382,528 150,124 Net earnings....................... 654,033 242,982 382,528 150,124 Earnings per common share Earnings per share before cumulative effect of a change in accounting for income taxes......................... $.16 $.10 $.15 $.06 Cumulative effect of a change in accounting for income taxes per share..................... .09 -- -- -- ------ ------ ----- ----- Net earnings per common share (a)..................... $.25 $.10 $.15 $.06 ====== ====== ===== =====
------------------------------- (a) As adjusted to reflect the 10% stock dividend paid on March 10, 1995 and a 4-for-3 stock split authorized on August 30, 1995. F-17 34 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 15, 1995 (except for Note H as to which the date is August 30, 1995), 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, 1995. 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 15, 1995 F-18 35 JACO ELECTRONICS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1993, 1994 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ------------ ---------- ----------------------- ------------ -------- ADDITIONS ----------------------- (1) (2) CHARGED TO BALANCE BALANCE AT CHARGED TO OTHER AT BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD --------------------------------- ---------- ---------- ---------- ------------ -------- Allowance for doubtful accounts Year ended June 30, 1993....... $1,007,000 $549,000 $110,000(b) $803,000(a) $863,000 ========= ======== ======== ========== ======== Year ended June 30, 1994....... $ 863,000 $160,000 $187,000(b)(c) $600,000(a) $610,000 ========= ======== ======== ========== ======== Year ended June 30, 1995....... $ 610,000 $458,000 $104,000(b) $562,000(a) $610,000 ========= ======== ======== ========== ========
------------------------------- (a) Represents write-offs of uncollectible accounts. (b) Recoveries of accounts. (c) Includes balance attributable to acquired subsidiary. F-19 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JACO ELECTRONICS, INC. Date: Sept. 11, 1995 By: /s/ JOEL H. GIRSKY ------------------------------------ Joel H. Girsky, Chairman of the Board, President and Treasurer (Principal Executive Officer) Date: Sept. 11, 1995 By: /s/ JEFFREY D. GASH ------------------------------------ Jeffrey D. Gash, Vice President- Finance (Principal Financial and Accounting 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 Company and in the capacities and on the dates indicated. Date: Sept. 11, 1995 /s/ STEPHEN A. COHEN --------------------------------------------- Stephen A. Cohen, Director Date: Sept. 11, 1995 /s/ EDWARD M. FRANKEL --------------------------------------------- Edward M. Frankel, Director Date: Sept. 11, 1995 /s/ CHARLES B. GIRSKY --------------------------------------------- Charles B. Girsky, Executive Vice President and Director
37
EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION ---------- ----------- 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. 3.2 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. 10.3 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, 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 Annual Report on Form 10-K for the year ended June 30, 1993, 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.
38
EXHIBIT NO. ---------- 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. 10.9 Employment Agreement between Joel Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.9. 10.10 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company. 10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company. 21.1 Subsidiaries of the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 21. 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 Annual Report on Form 10-K for the year ended June 30, 1992, 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 99.6. 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.
EX-10.10 2 AUTHORIZED DISTRIBUTOR AGREEMENT, AVX & COMPANY 1 AEROVOX AUTHORIZED ELECTRONIC INDUSTRIAL DISTRIBUTOR AGREEMENT -------------- THIS AGREEMENT, made as of the 24 day of August 1970, between Aerovox Corporation 740 Belleville Avenue New Bedford, Mass. (hereinafter referred to as MANUFACTURER,) and Name Jaco Electronics, Inc. Address Engineers Road City and State Hauppauge, New York 11787 (hereinafter referred to as DISTRIBUTOR). In consideration of the mutual covenants and agreements hereinafter, the parties hereto agree as follows: 1. APPOINTMENT MANUFACTURER hereby appoints DISTRIBUTOR its non-exclusive distributor, and DISTRIBUTOR hereby accepts such appointment for the sale of certain items, hereinafter referred to as the "Products", more fully described in the "Supplemental Terms and Conditions" attached hereto as Exhibit "A", in the territories specified in Exhibit A. DISTRIBUTOR agrees to inventory, invoice, and ship products only from such franchised territories. 2. TERM OF AGREEMENT The term of this Agreement shall commence on August 24, 1970, and continue for a period of one (1) year thereafter, unless sooner terminated as provided in Paragraph 10(a) hereof. In the event that the parties do not enter into a written extension of this Agreement prior to the end of the one (1) year specified, this Agreement shall be deemed to continue thereafter until terminated as provided in Paragraph 10(a) hereof. 3. RESPONSIBILITIES (a) MANUFACTURER MANUFACTURER shall make reasonable efforts to manufacture quantities of the Products sufficient to meet the resale requirements of DISTRIBUTOR. MANUFACTURER'S field representative shall work closely with DISTRIBUTOR to assist in the readjusting of inventories, advising of customer usage as to quantity and type, and in the promotion and increase of the sale of the Products. (b) DISTRIBUTOR agrees: (i) to use its reasonable efforts to promote the sale of the Products and to serve the interests of MANUFACTURER in any and all matters in accordance with this Agreement. (ii) To maintain an inventory of the Products in a supply sufficient to meet the needs of its customers in accordance with reasonable recommendations which may be made by MANUFACTURER or its representative, as to specific items and quantities. These requirements are specified in Paragraph 4 of exhibit A. 2 (III) To provide reports as set forth in Paragraph 14 of this agreement. (IV) To hold in confidence during the term of this Agreement, and at all times thereafter, any and all information of a confidential nature regarding MANUFACTURER'S business or affairs, including without limitation, customer lists and data regarding the design and/or methods of manufacture of the Products, and not to disclose the same to any person, firm or corporation. (V) To assist MANUFACTURER'S field representatives in every reasonable manner, including obtaining information useful in expanding product usage and data concerning customer requirements, and to participate, after reasonable notice, in training activities sponsored by MANUFACTURER. 4. PRICE AND PRICE PROTECTION (a) PRICE. DISTRIBUTOR agrees to pay MANUFACTURER for the Products purchased hereunder in accordance with price purchase schedules or bulletins supplied by MANUFACTURER from time to time. The presently applicable schedule is attached hereto as Exhibit "B". MANUFACTURER reserves the right to change the price of any of the Products without liability to DISTRIBUTOR for any loss which may be sustained by DISTRIBUTOR, except as provided in Paragraph 4(c) hereof. The price to DISTRIBUTOR shall be the price in effect at the time of receipt and acceptance by MANUFACTURER of DISTRIBUTOR'S purchase order. All specials will be manufactured to meet the DISTRIBUTOR or DISTRIBUTOR'S customer requirements. No price protection can be offered, but Aerovox will supply such products to the DISTRIBUTOR at the same price as to the user for like quantities. (b) TERMS AND PAYMENT. The terms of payment and applicable discounts, if any, shall be as provided in Exhibit A attached hereto. (b) TERMS AND PAYMENT. The terms of payment and applicable discounts, if any, shall be as provided in Exhibit A attached hereto. PRICE PROTECTION (c) If prices are decreased, DISTRIBUTOR shall receive a credit against future shipments for the difference between the net price paid and the reduced price on applicable Products remaining in DISTRIBUTOR'S inventory which were purchased within the six months prior to the effective date of such price reduction. DISTRIBUTOR shall furnish MANUFACTURER with an itemized inventory of applicable Products within thirty (30) days after the effective date of such price reduction and MANUFACTURER shall have the right to inspect said inventory. (d) Minimum Order. Catalog Items................$100.00 per order 25.00 per line item Specials...................... 50.00 minimum line item 5. DELIVERY (a) General. MANUFACTURER shall use reasonable efforts to fill all orders promptly upon receipt and acceptance thereof. However, if because of Acts of God, casualty, labor difficulties or conditions beyond the control of MANUFACTURER arise which prevent compliance with normal delivery schedules, MANUFACTURER shall not be liable for damages, general, special or otherwise. Deliveries shall be made F.O.B. point of manufacture. DISTRIBUTOR shall have the right to select the carrier of its choice. Drop or direct shipments to DISTRIBUTOR'S customers ordinarily will not be made by MANUFACTURER, unless individually approved by MANUFACTURER'S authorized representative. No single shipment shall exceed the value of Twenty-Five Thousand Dollars ($25,000.00). (b) Cancellation of Orders. In the event DISTRIBUTOR cancels an order for non-stock items which has been accepted by MANUFACTURER, DISTRIBUTOR shall reimburse MANUFACTURER for all direct costs incurred as a result of such order. (c) Risk of Loss. MANUFACTURER shall retain title and bear the risk of loss until such time as a shipment has been placed on board the carrier, at which time title shall pass to, and the risk of loss shall be borne by, DISTRIBUTOR. (d) Taxes. DISTRIBUTOR shall pay any Federal, State or local taxes which may be imposed upon the Products sold to it hereunder or directly to DISTRIBUTOR'S customer, by reason of receipt, sale or delivery thereof, or shall reimburse MANUFACTURER in the event MANUFACTURER becomes obligated to pay and pays the same. 3 6. REFERRALS DISTRIBUTOR quantity orders for standard catalog Products emanating from the territory assigned to DISTRIBUTOR hereunder shall be referred to DISTRIBUTOR; except that MANUFACTURER reserves the right to bid on, negotiate and make sales of Products directly to any department, agency or instrumentality of the Federal, State or local governments and not otherwise, except as may be specified in Exhibit A attached hereto, with no liability to DISTRIBUTOR for commissions thereon. Receipt of any order of stock products in DISTRIBUTOR protected quantities will be referred to the franchise DISTRIBUTOR in the area, provided that they are known to stock the item. If not, orders will be filled by the factory and the DISTRIBUTOR will be notified that such an order has been accepted and the DISTRIBUTOR will be asked to stock such items for future referrals. Orders received from non-franchised DISTRIBUTORS will be referred to the nearest authorized Industrial DISTRIBUTOR. 7. STOCK ADJUSTMENT (a) Obsolescence. MANUFACTURER shall give DISTRIBUTOR written notice of the discontinuance of any Product. Within thirty (30) days of receipt of such notice, DISTRIBUTOR shall notify MANUFACTURER in writing of its intention to return for credit the discontinued Products in its inventory purchased by DISTRIBUTOR from MANUFACTURER within one (1) year prior to receipt of such notice and shall submit an itemized inventory of all such Products returned. On receipt thereof in satisfactory condition, freight prepaid by DISTRIBUTOR, MANUFACTURER shall issue a credit for the net price paid by DISTRIBUTOR for these products. The return provision of this subparagraph shall not apply to items specially prepared by MANUFACTURER to DISTRIBUTOR'S specifications. (b) Slow Moving Items. Where DISTRIBUTOR has maintained in its inventory Products for more than six (6) months but not longer than one (1) year, MANUFACTURER shall exchange such Products purchased by DISTRIBUTOR from MANUFACTURER for other Products having in the aggregate the same net dollar cost to DISTRIBUTOR, provided prior written authorization (not to be unreasonably withheld) is obtained from MANUFACTURER and the Products are returned, freight prepaid by DISTRIBUTOR, subject to reasonable tests and inspection by MANUFACTURER. The exchange privilege granted DISTRIBUTOR hereunder shall be limited to five (5) per cent of the net dollar amount of purchases made by DISTRIBUTOR during the preceding twelve (12) months, and shall not apply to items specially prepared by MANUFACTURER to DISTRIBUTOR'S specifications. (c) Damaged Inventory. DISTRIBUTOR agrees to notify MANUFACTURER immediately of any accident, fire, flood, storm, explosion, sprinkler leakage or other occurrence or act of God which causes damage to the DISTRIBUTOR'S inventory or any part thereof. DISTRIBUTOR further agrees to return such damaged inventory to MANUFACTURER for inspection, test and evaluation. MANUFACTURER shall have the exclusive right to determine what disposition shall be made of any damaged or defective inventory, and DISTRIBUTOR agrees to be bound by such determination. DISTRIBUTOR will not relinquish its inventory or any part thereof in settlement of any claim, nor attempt to sell or salvage any damaged inventory in its possession, without MANUFACTURER'S written consent. If MANUFACTURER fails to consent to any settlement, sale or salvage, then MANUFACTURER shall repurchase such damaged or defective inventory from DISTRIBUTOR for the amount DISTRIBUTOR would otherwise have received by such settlement, sale or salvage. (d) Product and Policy Changes. MANUFACTURER reserves the right from time to time, in its absolute discretion, without thereby incurring any liability to DISTRIBUTOR with respect to any purchase order theretofore placed by DISTRIBUTOR, or otherwise, to discontinue or to limit its production of any Product, in time of shortage to allocate or to terminate or limit deliveries of any Product the production of which is discontinued or limited, to alter the design or construction of any Product, to add new and additional Products to its lines, and upon reasonable notice to DISTRIBUTOR to change its sales and distribution policies, not inconsistent with the terms of this agreement. 8. ADVERTISING MANUFACTURER shall supply reasonable quantities of materials such as catalogs, brochures of new Products, and reprints of its advertising at no charge to DISTRIBUTOR. DISTRIBUTOR shall have the right to conduct advertising campaigns with respect to the Products but shall be required to obtain the approval of MANUFACTURER prior to releasing the same. DISTRIBUTOR agrees to refrain from making any claims or representations concerning the Products in excess of those made by MANUFACTURER. 4 9. WARRANTIES Materials and Workmanship. MANUFACTURER warrants its Products for a period of one (1) year from the date of shipment to DISTRIBUTOR to be free from defects caused by faulty materials or poor workmanship and to conform to specifications furnished or approved by MANUFACTURER. The liability of MANUFACTURER under this warranty is limited to replacing or repairing or issuing credit at its option for any product which is returned by DISTRIBUTOR, provided: (I) MANUFACTURER is promptly notified in writing within ten (10) days after discovery of such defect by DISTRIBUTOR, and (II) The defective unit is returned to MANUFACTURER, freight prepaid, by DISTRIBUTOR, and (III) MANUFACTURER'S examination of such units shall disclose to its reasonable satisfaction that such defects exist and have not been caused by misuse, neglect, improper installation, repair, alteration or accident occasioned by parties other than MANUFACTURER. In no event shall MANUFACTURER be liable to DISTRIBUTOR for collateral or consequential damages of any nature. This warranty is in lieu of all other warranties, express or implied, except as to title. 10. TERMINATION (a) General. The Distributorship hereby created may be terminated: (I) By an agreement in writing duly signed by the parties hereto, or (II) By either party at will, with or without cause, upon not less than ninety (90) days notice in writing, given by registered or certified mail to the other party, or (III) By either party hereto upon ten (10) days like notice in the event the other party hereto attempts to assign this Agreement or any rights hereunder without the other party's written consent, except as specifically provided in Paragraph 13 (c) hereof, or either party ceases to function as a going concern or to conduct its operations in the normal course of business, or a receiver is appointed and not removed within ten (10) days thereafter, or a petition under the Federal Bankruptcy Act is filed by or against either party and not dismissed within ten (10) days, or either party makes an assignment for the benefit of creditors. (b) Stock Repurchase. Within thirty (30) days after the termination of the Distributorship hereby created, regardless of which party instituted said termination, MANUFACTURER shall be obligated to repurchase from DISTRIBUTOR standard stock items which have been purchased from MANUFACTURER within the preceding twelve (12) months, subject to inspection at MANUFACTURER'S plant, at the net price paid by DISTRIBUTOR to MANUFACTURER, less a charge for inspecting, handling and restocking. This charge will be based on cost for this work but in no case will it be less than five (5) per cent nor greater than fifteen (15) per cent of the total repurchase price. Any Products to be returned to MANUFACTURER under this provision shall be shipped freight prepaid to MANUFACTURER. The repurchase provision of this subparagraph shall not apply to items specially prepared by MANUFACTURER to DISTRIBUTOR'S specifications: however, MANUFACTURER shall have the option to purchase the same for thirty (30) days after the effective date of termination at the net price paid by DISTRIBUTOR. The repurchase provision of this subparagraph shall not apply to inventory purchased prior to the date of this contract. (c) Deliveries after Termination. After a date for termination of the Distributorship hereby created shall have been established otherwise than pursuant to subparagraph (a)(III) above, MANUFACTURER shall be obligated to deliver and DISTRIBUTOR shall be obligated to accept hereunder only orders for Products accepted by MANUFACTURER prior to establishment of such date of termination. (d) Sales after Termination. The acceptance of any order from or the sale of any Product to DISTRIBUTOR after the termination or expiration of the Distributorship hereby created, shall not be construed as a renewal or extension thereof nor as a waiver of termination. (e) No Liability for Termination. Neither MANUFACTURER nor DISTRIBUTOR shall, by reason of the termination or nonrenewal of the Distributorship hereby created, be liable to the other for compen- 5 sation, reimbursement or damages on account of the loss of prospective profits on anticipated sales, or on account of expenditures, investments, leases or commitments in connection with the business or good will of MANUFACTURER or DISTRIBUTOR, or otherwise. (f) Trade Names. If during the term of this agreement, DISTRIBUTOR uses signs containing the name of MANUFACTURER or uses any trade name, trade-mark, or the listing of MANUFACTURER'S name in any telephone book, directory, public record or elsewhere, DISTRIBUTOR, regardless of the cause of termination of this Agreement, will take all reasonable and necessary steps to discontinue any usage of the aforementioned in any manner whatsoever and cause the removal of MANUFACTURER'S name from any such listing. 11. CONFIRMING ORDERS It shall be DISTRIBUTOR'S responsibility to mark confirming orders as "confirming". Duplication of shipments resulting from such unmarked orders may be returned only upon written authorization of MANUFACTURER and will be subject to a service and restocking charge of twenty per cent (20%). 12. AUDITING OF DISTRIBUTOR RECORDS The continued authorization of DISTRIBUTOR is dependent upon adherence to the procedures and policies described herein and therefore, it may be necessary for authorized auditors or personnel of MANUFACTURER to examine, without prior notice, all or part of DISTRIBUTOR'S books and records pertaining to Products. DISTRIBUTOR agrees to allow such examination when deemed necessary by MANUFACTURER from time to time. 13. MISCELLANEOUS (a) Construction. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements between them, whether written or oral, relating to the Products covered by this Agreement. This Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts. (b) Failure to Enforce. The failure of either party to enforce at any time or for any period of time the provisions hereof shall not be construed to be a waiver of such provisions or of the right of such party thereafter to enforce each and every such provision. An inadvertent and immaterial failure to comply with any term of this Agreement by either party shall not give rise to a cause of action on the part of the other party. (c) Assignment. This Agreement is not assignable or transferable by DISTRIBUTOR in whole or in part, except with the written consent of MANUFACTURER. However, this Agreement shall not prohibit the assignment or transfer of this Agreement to wholly owned subsidiaries or divisions of Aerovox Corporation. (d) Notices. Any notice given or required pursuant to the terms of this Agreement shall be in writing and forwarded by registered or certified mail to MANUFACTURER or DISTRIBUTOR, as the case may be, to its address indicated on the first page of this Agreement or to such other address as the party to be notified shall have last designated in writing to the other party. (e) Relationship of Parties. The parties hereto agree that DISTRIBUTOR shall operate as an independent contractor and not as an agent or employee of MANUFACTURER. DISTRIBUTOR has no express of implied authorization to incur any obligation or in any manner otherwise make any commitments on behalf of MANUFACTURER. DISTRIBUTOR shall employ its own personnel and shall be responsible for them and their acts and in no way shall MANUFACTURER be liable to 6 DISTRIBUTOR, its employees or third parties for any losses, injuries, damages or the like occasioned by DISTRIBUTOR'S activities in connection with this Agreement, except as expressly provided herein. In addition, DISTRIBUTOR shall carry adequate liability and property insurance at its own expense to cover such risks, and, if requested by MANUFACTURER, shall supply evidence of such insurance satisfactory to MANUFACTURER. 14. SALES AND INVENTORY REPORTS To insure maximum cooperation between the MANUFACTURER'S representative and the DISTRIBUTOR, the commission to the MANUFACTURER'S representative will be paid on DISTRIBUTORS selling price and determined by point of sale. Therefore, it is necessary that the DISTRIBUTOR provide to the MANUFACTURER on a monthly basis a sales report showing customer, quantity, product and selling price. This report must be made monthly by the fifth working day of the succeeding month. To insure proper stock movement it will be necessary for the DISTRIBUTOR to provide the MANUFACTURER with a complete inventory no less than twice per calendar year. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above set forth. /s/ Joel Girsky AEROVOX CORPORATION ------------------------------------- ------------------------------------- By /s/ Jaco Elect. By /s/ Matthew A. Simon 8/24/70 ----------------------------------- ---------------------------------- Distributor EX-10.11 3 DISTRIBUTOR AGREEMENT, KEMET & THE COMPANY 1 KEMET ELECTRONICS CORPORATION and JACO ELECTRONICS DISTRIBUTOR AGREEMENT 2 Effective: 3/01/88 Supersedes: 1/03/83 KEMET ELECTRONICS CORPORATION DISTRIBUTOR AGREEMENT THIS AGREEMENT made and entered into as of the 15th day of November, 1974, by and between KEMET ELECTRONICS CORPORATION, a Delaware Corporation, having its headquarters on I-385 South, Greenville, South Carolina 29606 (hereinafter called "KEMET"), and JACO ELECTRONICS, a New York Corporation, having offices at 145 Oser Avenue, Hauppauge, New York 11788, (hereinafter called the "Distributor"): W I T N E S S E T H: ARTICLE 1 - DISTRIBUTORSHIP 1.1 KEMET hereby appoints Distributor as a non-exclusive distributor of KEMET's KEMET Brand Capacitors and other products listed in Exhibit A and Exhibits C attached hereto (hereinafter called the "Products"). KEMET will have the right at any time to make additions, deletions, or modifications in the list of Products set forth in Exhibit A and Exhibits C upon prior written notice to Distributor. ARTICLE 2 - QUANTITY 2.1 KEMET will sell and deliver to Distributor and Distributor will purchase and receive from KEMET for resale, upon the terms and conditions herein set forth, such quantities of Products as Distributor shall need in its business. ARTICLE 3 - PRICE 3.1 The purchase price for the Products will be KEMET's standard distributor prices in effect on the date of shipment of the Products to Distributor, except as otherwise provided in Articles 3.2 and 3.3. KEMET will have the right at any time to increase or decrease the purchase price for the Products, but not more often than every thirty days. 3 -2- 3.2 In the event that KEMET increases the purchase price for any of the Products, KEMET will give Distributor thirty (30) days' prior written notice of such increase. For the Products ordered by Distributor prior to the effective date of such price increase for delivery within sixty (60) days of the effective date of such price increase (regardless of when such delivery is actually made), the purchase price will be KEMET's standard distributor prices in effect on the date the Distributor's purchase order is accepted by KEMET. 3.3 In sales pursuant to KEMET's "EPIC" computer sales and delivery program, KEMET may increase the purchase price for the Products effective immediately by giving written notice thereof to Distributor pursuant to Article 16, and such increase shall apply to the Products purchased after such notice, irrespective of actual notice to Distributor. 3.4 In the event that KEMET decreases the purchase price for any of the Products listed in Exhibits C-1, C-2 and C-3 after shipment to Distributor, Distributor may apply for a credit on the inventory of such Products which Distributor has on hand on the effective date of such decrease and which are purchased from KEMET within the twelve (12) month period prior to the effective date of such decrease. To be entitled to such credit, Distributor must submit in writing a detailed inventory report of all Products affected by such price decrease to KEMET's Distributor Sales Manager within twenty-one (21) days after the effective date of such price decrease. Such credit will be given to Distributor only after such inventory report has been reviewed and approved by KEMET. 3.5 In addition to the purchase price, Distributor will pay KEMET the amount of all taxes, excises, or other governmental charges that KEMET may be required to pay with respect to the production, sale or transportation of any Products delivered hereunder, except taxes on or measured by net income, and except where the law otherwise provides. 4 -3- 3.6 Exhibit E outlines KEMET's pricing and Ship from Stock and Debit Policy and Procedures. KEMET shall have the right at any time to make additions, deletions or modifications to such policy and procedures upon prior written notice to the Distributor. ARTICLE 4 -- DELIVERY AND PAYMENT 4.1 KEMET will deliver the Products to Distributor FOB point of shipment. Title to the Products will pass to Distributor at time of delivery. 4.2 KEMET will ship the Products only to those Authorized Distributor Stocking Locations listed in Exhibit D attached hereto. 4.3 Distributor will furnish to KEMET, at a reasonable time prior to delivery, purchase orders specifying quantity, type of Product, requested date of delivery and shipping instructions. 4.4 Distributor will pay KEMET the purchase price for all Products sold and delivered hereunder within thirty (30) days after the end of the calendar month containing the date of the invoice rendered therefor; provided, however, that all invoices dated within the same calendar month during the term of this Agreement and paid prior to the sixteenth (16th) of the following month will be subject to a one percent (1%) discount. ARTICLE 5 -- ACCEPTANCE OF ORDERS 5.1 Distributor will submit all purchase orders hereunder to: KEMET Electronics Corporation P. O. Box 5928 Greenville, SC 29606 5.2 All purchase orders submitted by Distributor hereunder are subject to acceptance by KEMET. KEMET reserves the right to reject any purchase order submitted by Distributor hereunder even if a previous quotation has been made. An order is accepted by KEMET when it is shipped or acknowledged. ARTICLE 6 -- INVENTORY ADJUSTMENT AND RETURNS 6.1 Distributor will maintain an adequate and comprehensive stock of Products and will permit periodic examination and physical inventory by KEMET repre- 5 -4- sentatives. Distributor may return slow-moving or obsolete Products only after proper written authorization has been obtained from KEMET's Distributor Sales Manager or his representatives. Credit will be allowed only after KEMET tests and inspects the returned Products, and no credit will be allowed for Products KEMET determines to be damaged. The credit, if any, for each Product so returned will be the actual price paid by Distributor for each Product or published distributor cost in effect at the time of the return, whichever is lower. A restocking charge in the form of a fifteen percent (15%) reduction of the amount of credit that would otherwise be given as aforesaid will apply with respect to all returns of Products not contained in the unbroken packages in which they were originally shipped by KEMET. Product returns must be shipped FOB KEMET's plant at Greenville, South Carolina, or such other place as KEMET may designate in writing. 6.2 The value of the credit to be allowed by KEMET to Distributor under Article 6.1 shall not exceed an amount equal to five percent (5%) of the total net sales previously billed to Distributor during the previous four (4) calendar quarters less the amount of any previous credit allowed against sales billed during the same period. Individual items authorized for return shall have a cost extension of twenty ($20) minimum. Exhibit F outlines KEMET's 5% Stock Return Procedure. KEMET shall have the right at any time to make additions, deletions or modifications to such Procedure upon prior written notice to Distributor. 6.3 When a new standard product is introduced, or a product is reclassified as standard, KEMET may request Distributor to purchase a recommended listing of items. Twelve months after the receipt of this recommended inventory, Distributor may request an inventory return of the initial recommended items -- separate and distinct from the return described in Paragraph 6.2 above. At the time of this one-year inventory review, KEMET will grant any reasonable request for return of non-selling items from the recommended inventory list, provided the items involved were purchased by Distributor at the time of the initial product 6 -5- offering or reclassification and no additional orders were placed for this product. 6.4 Returns authorized by the Paragraph 6.3 are subject to the provisions of Paragraph 6.1. ARTICLE 7 -- REPORTS 7.1 Within fifteen (15) days after the end of each calendar month during the term of this Agreement, Distributor will deliver two copies of a monthly sales report with respect to the previous month (containing total sales by Distributor of each type of Product to each customer for the Products) to the KEMET plant at Greenville, South Carolina. (This report shall identify each customer by name, city, state and zip code and shall identify for each customer each item shipped by quantity, part number, unit price and extension.) In addition, within fifteen (15) days after the end of each six (6) month period during the term of this Agreement, Distributor will deliver two (2) copies of an inventory report with respect to the six (6) month period just ended to the KEMET plant, address below: KEMET Electronics Corporation P. O. Box 5928 Greenville, SC 29606 Attention: National Distributor Sales Manager ARTICLE 8 -- TRADEMARKS 8.1 Distributor will not incorporate under or otherwise make use of the name of KEMET or of any of its departments or divisions or subsidiaries, or make use of any trademark or trade name of KEMET, or of any trademark or trade name which in the judgment of KEMET is confusingly similar thereto, or make use of any sales promotion or publicity literature, displays or stationery of KEMET, without the prior written consent of KEMET. Distributor will not alter or remove any trademark or trade name applied by KEMET to the Products except upon prior written authorization of KEMET. Distributor's covenant under this Article 8 will 7 -6- survive termination of this Agreement. ARTICLE 9 -- ADVERTISING, SALES PROMOTION AND LITERATURE 9.1 KEMET, at its own expense, will supply Distributor with general price lists and specification and application information for use by the Distributor's sales personnel in such quantities and to such of Distributor's locations as KEMET shall deem reasonable. KEMET will supply Distributor with additional quantities of such literature upon terms mutually agreeable to both parties. 9.2 KEMET will share in Distributor's advertising and sales promotion activities by contributing up to fifty (50) percent of the cost of any approved expenditure. 9.3 All of Distributor's advertising and sales promotion plans for KEMET Products must be submitted in advance for written approval by KEMET. At such time, an authorized KEMET Co-Op Number will be issued. 9.4 To receive funds to cover KEMET's share of Distributor's advertising and sales promotion activity, Distributor must invoice KEMET. The invoice must be submitted with a copy(ies) of the applicable invoice(s) and other required support documentation showing proof of actual cost incurred by Distributor. 9.5 All Distributor invoices for Co-Op expenses must reference an approved KEMET Co-Op Number. ARTICLE 10 -- WARRANTIES 10.1 KEMET warrants that the Products delivered under this Agreement will, at the time of delivery, conform to KEMET's applicable standard specifications for such Product in effect at the time of shipment or such other specifications as are expressly agreed upon by KEMET and Distributor in writing, and will be adequately contained, packaged and labeled and conform to any promises and affirmations of fact made on the container and label. THERE ARE NO EXPRESS WARRANTIES BY KEMET OTHER THAN THOSE SPECIFIED IN THIS ARTICLE 10.1. NO WARRANTIES BY KEMET (OTHER THAN A WARRANTY OF TITLE AS PROVIDED BY THE UNIFORM COMMERCIAL CODE) SHALL BE IMPLIED OR OTHERWISE CREATED UNDER THE UNIFORM COMMERCIAL CODE, INCLUDING BUT 8 -7- NOT LIMITED TO A WARRANTY OF MERCHANTABILITY AND A WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. 10.2 Distributor's receipt of any Product delivered hereunder will be an unqualified acceptance of, and a waiver by Distributor of any and all claims with respect to, such Product unless Distributor gives KEMET written notice of claim within thirty (30) days after such receipt. NO CLAIM AGAINST KEMET OF ANY KIND, WHETHER AS TO PRODUCT DELIVERED OR FOR DELAYED DELIVERY OR FOR NONDELIVERY OF PRODUCT, AND WHETHER OR NOT BASED ON NEGLIGENCE OR WARRANTY SHALL BE GREATER IN AMOUNT THAT THE PURCHASE PRICE OF THE PRODUCT IN RESPECT OF WHICH SUCH CLAIM IS MADE. Without limiting the generality of the foregoing, KEMET will not be liable for any special, indirect or consequential damages whether or not caused by or resulting from its negligence or breach of the warranties hereunder. 10.3 Distributor will not return Products for warranty adjustment without prior written authorization from KEMET's Distributor Sales Manager. Products, when so returned, will be shipped FOB KEMET's plant at Greenville, South Carolina or such other place as KEMET may designate in writing. KEMET will pay return freight where warranty adjustment is made. KEMET will notify Distributor if any Products returned under this Article 10 are not subject to warranty adjustment, and will reship them to Distributor, freight collect, unless instructions are received from Distributor within thirty (30) days after such notification calling for other disposition at Distributor's expense. ARTICLE 11 - PARTY RELATIONSHIP 11.1 This Agreement does not create any employer-employee, agency, joint venture or partnership relationship between KEMET and Distributor. Distributor is not authorized or empowered to act as agent for KEMET for any purpose and will not on behalf of KEMET either enter into any contract, undertaking or agreement of any kind whatever or make any promise, warranty or representation with respect to the Products other than such as may be published by KEMET in its advertising and sales promotional material. The status of the Distributor will be that of an 9 -8- independent contractor only. ARTICLE 12 -- FORCE MAJEURE 12.1 Neither party will be liable for its failure to perform hereunder due to contingencies beyond its reasonable control, including but not limited to, acts of God, fires, floods, wars, sabotage, accidents, labor disputes or shortages, governmental laws, ordinances, rules and regulations, whether valid or invalid (including, but not limited to, priorities, requisitions, allocations and price adjustment restrictions), inability to obtain material, electrical power, equipment or transportation, and any other similar or different contingency. The party whose performance is prevented by any such contingency will have the right to omit during the period of such contingency all or any portion of the quantity of the Products deliverable during such period, whereupon the total quantity of the Products deliverable hereunder shall be reduced by the quantity so omitted. If due to any such contingency KEMET is unable to supply the total demands for any Products to be delivered hereunder, KEMET will have the right to allocate its available supply among its customers and its departments, divisions and subsidiaries in such manner as KEMET shall deem to be fair and equitable. In no event will KEMET be obligated to purchase material from other than its regular sources of supply in order to enable it to supply Products to Distributor hereunder. ARTICLE 13 -- DURATION AND TERMINATION 13.1 The term of this Agreement will commence on the date hereof and will continue in full force and effect until terminated, with or without cause, by either party giving to the other written notice of termination at least thirty (30) days prior to the effective date of such termination, unless earlier terminated as herein provided. The rights and obligations of the parties under this Agreement will survive for ninety (90) days after termination of this Agreement with respect to all orders accepted and Products delivered hereunder prior to the effective date of such termination. 10 -9- 13.2 KEMET may terminate this Agreement at any time upon written notice to Distributor if (a) Distributor files a petition in bankruptcy, (b) Distributor makes a general assignment for the benefit of creditors, (c) a receiver for Distributor is appointed, (d) Distributor becomes insolvent, (e) any person who at the time of execution of this Agreement was participating substantially in the operation or ownership of Distributor dies, is incapacitated, removed, eliminated, resigns or withdraws for any reason from Distributor or (f) Distributor shall be guilty of a breach of any of the provisions of this Agreement and such breach has continued for ten (10) days after written notice of said breach from KEMET. Any termination of this Agreement pursuant to this Article 13.2 will be in addition to and will not be exclusive of or prejudicial to any other rights or remedies at law or in equity which KEMET may have against Distributor. 13.3 In the event of termination of this Agreement by Distributor under Article 13.1, KEMET will repurchase Distributor's inventory of the Products at a price as determined below, less fifteen percent (15%) handling charge. In the event of termination of this Agreement by KEMET under Article 13.2, KEMET will repurchase Distributor's inventory of Products at a price as determined below, without application of any handling charge. Such purchase arrangements will apply only to Products which KEMET determines to be undamaged and in good condition after testing and inspection. All Products to be repurchased by KEMET under this Article 13.3 will be shipped by Distributor to KEMET, freight prepaid, FOB KEMET's plant at Greenville, South Carolina, or such other place as KEMET may designate in writing. The price to be paid for the Products returned hereunder will be the actual price paid by Distributor for such Product or published distributor cost in effect at any time of the return, whichever is lower. KEMET will not be obligated under this Article 13.3 to repurchase any Products delivered by KEMET to Distributor more than twelve (12) months prior to the date of termination nor to repurchase any inventory in the event of termination of this 11 -10- Agreement by KEMET under Article 13.2. ARTICLE 14 - ASSIGNMENT 14.1 Any assignment of this Agreement by either party without the prior written consent of the other party will be void. ARTICLE 15 - APPLICABLE LAW 15.1 The validity, interpretation and performance of this Agreement will be governed by the laws of the State of South Carolina. ARTICLE 16 - NOTICE 16.1 It will be a sufficient giving of any notice or other communication hereunder if the party giving the same shall deposit a copy thereof in the Post Office in a registered or certified envelope, postage prepaid, properly addressed to the other party at the address hereinabove set forth or at such other address as the other party shall have heretofore in writing designated. The date of giving any such notice or other communication will be the date on which such envelope was deposited as above provided. The Post Office receipt showing the date of such deposit will be prima facie evidence of these facts. ARTICLE 17 - QUALITY 17.1 The quality requirements of KEMET Specification 110304 for Category A distributors and KEMET Specification 11133 for Category B distributors, are hereby agreed to and made part of this distributor's agreement. 17.2 If a distributor is both a Category A and a Category B distributor, the requirements of both KEMET Specifications 110304 and 11133 shall apply. 17.3 The above mentioned KEMET Specification will be submitted, reviewed, inspected, monitored, and accepted by KEMET (KEMET) Quality Assurance in conjunction with the Distributor. ARTICLE 18 - PROCUREMENT SOURCE 18.1 It is hereby incorporated into the Distributor Agreement that the Distributor shall buy KEMET Brand Capacitors from KEMET and no other source. 12 -11- ARTICLE 19 - HEADINGS 19.1 Article headings set forth in this Agreement are inserted only for convenience and in no way define, limit, or describe the scope or intent of the terms and conditions set forth herein. ARTICLE 20 - ENTIRE AGREEMENT 20.1 This Agreement contains all of the representations and agreements between the parties hereto. No modification of this Agreement or waiver of the terms and conditions thereof will be binding upon either party unless approved in writing by an authorized representative of such party, nor will be affected by the acknowledgement or acceptance of purchase order forms or releases containing other or different terms or conditions whether or not signed by an authorized representative of such party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ------------------------------------ ------------------------------------ DISTRIBUTOR SELLER /s/ R. A. TAYLOR, JR. ------------------------------------ ------------------------------------ JOEL GIRSKY R. A. TAYLOR, JR., NAT'L SALES MGR. /s/ D. E. MANLY ------------------------------------ ------------------------------------ CHAIRMAN OF THE BOARD D. E. MANLY, NAT'L. DIST. SALES MGR. 3/01/88 ------------------------------------ ------------------------------------ DATE DATE 13 EFFECTIVE: 3/01/88 SUPERSEDES: 1/03/83 JACO ELECTRONICS EXHIBIT A PRODUCTS Tantalum T110, T111, T120, T140 T210, T212, T213, T216, T220, T222, T240, T242, T252, T256, T262 T322, T323, T330, T340, T35X, T362, T363, T368, T369, T37X T411, T421, T491 Ceramics C052, C056, C062, C065 C114, C124, C192, C202, C222 C315, C317, C318, C320, C321, C322, C323, C324, C325, C326, C327, C328 C330, C331, C333, C335, C336, C340, C346, C350, C356 C410, C412, C420, C430, C440 C512, C522 4th character may be as follows: C = Commercial KEMET K = Mil-C-11015D E,T = Mil-C-39014 G = Mil-C-20 Ceramic Chips C0805C, C1005C, C1206C, C1210C, C1805C, C1808C, C1812C, C1825C, C2225C C0805P, C1805P, C1808P, C1812P, C1825P, C2225P Film F310, F311, F320, F321, F330, F331 F141, F241, F242, F245, F246, F247, F248, F251, F252 F110, F120, F130 JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ------------------------------------ ------------------------------------ DISTRIBUTOR SELLER /s/ R. A. TAYLOR, JR. ------------------------------------ ------------------------------------ JOEL GIRSKY R. A. TAYLOR, JR., NAT'L SALES MGR. /s/ D. E. MANLY ------------------------------------ ------------------------------------ CHAIRMAN OF THE BOARD D. E. MANLY, NAT'L. DIST. SALES MGR. 3/01/88 ------------------------------------ ------------------------------------ DATE DATE 14 EFFECTIVE: 3/01/88 SUPERSEDES: 9/18/87 JACO ELECTRONICS EXHIBIT C-1 PRIMARY DISTRIBUTOR ITEMS RECOMMENDED FOR DISTRIBUTOR STOCK. PRICE PROTECTED AND RETURNABLE UNDER THE 5% STOCK RETURN POLICY. MINIMUM BILLING PER ORDER AND PER LINE: $100.00
Tantalum -------- SERIES FAILURE RATE ------ ------------ T110 A T140 A T212 L, M, P, R, S T212 (REV. F) B, C, D T242 L, M, P, R, S T242 (REV. F) B, C, D T252 M, P, R, S T252 (REV. F) B, C, D T262 M, P, R, S T262 (REV. F) B, C, D T322 A T35X A T361 A T362 A T368 A T370* A T491* A
1. TO INCLUDE ONLY SERIES AND FAILURE RATES LISTED ABOVE. 2. * ONLY THOSE T370 AND T491 ITEMS DESIGNATED "A" AND "C" ON CURRENT PRICE SHEETS. JACO ELECTRONICS KEMET ELECTRONICS CORPORATION --------------------------------- ------------------------------------ DISTRIBUTOR SELLER /s/ R. A. TAYLOR, JR. --------------------------------- ------------------------------------ JOEL GIRSKY R. A. TAYLOR, JR., NAT'L SALES MGR. /s/ D.E. MANLY --------------------------------- ------------------------------------ CHAIRMAN OF THE BOARD D. E. MANLY, NAT'L. DIS. SALES MGR. 3/01/88 --------------------------------- ------------------------------------ DATE DATE 15 EFFECTIVE: 3/01/88 SUPERSEDES: 9/18/87 JACO ELECTORNICS EXBIBIT C-1A SECONDARY DISTRIBUTOR ITEMS NOT RECOMMENDED FOR DISTRIBUTOR STOCK. THESE ITEMS ARE NOT PRICE PROTECTED, ARE NON-RETURNABLE AND NON-CANCELLABLE. MINIMUM BILLING PER ORDER AND PER LINE: $50.00 Tantalum -------- SERIES FAILURE RATE ------ ------------ T111 A T120 A T210 M, P, R, S T211 M, P, R, S T213 L, M, P, R, S T213 (REV. F) B, C, D T216 (REV. F) B, C T220 M, P, R, S T222 M, P, R, S T222 (REV. F) B, C, D T240 M, P, R T256 (REV. F) B, C T323 A T330 A T340 A T363 A T369 A T37X - (ALL T37X EXCEPT T370) A ----------- T370 * A T396 A T398 A T411 A T421 A T491 * A 1. TO INCLUDE ONLY SERIES AND FAILURE RATES LISTED ABOVE. ---- 2. * EXCEPT THOSE T370 AND T491 ITEMS DESIGNATED "A" AND "C" ON ------ CURRENT PRICE SHEETS. JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ------------------------------- ------------------------------------ DISTRIBUTOR SELLER /s/ R. A. TAYLOR, JR. ------------------------------- ------------------------------------ JOEL GIRSKY R. A. TAYLOR, JR., NAT'L SALES MGR. /s/ D. E. MANLY ------------------------------- ------------------------------------ CHAIRMAN OF THE BOARD D. E. MANLY, NAT'L DIST. SALES MGR. 3/01/88 ------------------------------- ------------------------------------ DATE DATE 16 EFFECTIVE: 3/01/88 SUPERSEDES: 9/18/87 JACO ELECTRONICS ---------------- EXHIBIT C-2 ----------- Distributor Price Protection and Stock Rotation Items MINIMUM BILLING PER ORDER AND PER LINE "A" AND "C" ITEMS: $100.00 MINIMUM BILLING PER ORDER AND PER LINE "Z" ITEMS: $50.00 Ceramic ------- SERIES CASE SIZE VOLTAGE TOLERANCE FAILURE RATE ------ --------- ------- --------- ------------- C052 C, K, T 50-200 M, K A, M, P, R, S C062 C, K, T 50-200 M, K A, M, P, R, S C114 C, K, T 50-200 M, K A, M, P, R, S C124 C, K, T 50-200 M, K A, M, P, R, S C192 C, K, T 50-200 M, K A, M, P, R, S C202 C, K, T 50-200 M, K A, M, P, R, S C3XX C 50-200 Z, M, K A C4XX C 50-200 Z, M, K A Commercial Chips C 50-100 D, J, K, M A CDR Chips P 50-100 J, K R 1. The above to include ONLY A and C line identified product as described by the current KEMET Distributor Price Sheets. JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ------------------------------- ------------------------------------- DISTRIBUTOR SELLER /s/ R. A. TAYLOR, JR. ------------------------------- ------------------------------------- JOEL GIRSKY R. A. TAYLOR, JR., NAT'L. SALES MGR. /s/ D. E. MANLY ------------------------------- ------------------------------------- CHAIRMAN OF THE BOARD D. E. MANLY, NAT'L. DIST. SALES MGR. 3/01/88 ------------------------------- ------------------------------------- DATE DATE 17 EFFECTIVE: 3/01/88 SUPERSEDES: 1/03/83 JACO ELECTRONICS EXHIBIT C-3 PRIMARY DISTRIBUTOR ITEMS Distributor Price Protection and Stock Rotation Items MINIMUM BILLING PER ORDER AND PER LINE: $100.00 Film ----
SERIES VOLTAGE TOLERANCE FAILURE RATE ------ ------- --------- ------------ F241 30-200 K, J, G, F M, P, R
1. To include only series, case size and CV ratings as described by the latest product specification. 2. All other Film Series are SECONDARY DISTRIBUTOR ITEMS. These items are not price protected, are non-cancellable, non-returnable and are subject to a $50 per order and per line minimum. JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ---------------------------------- ------------------------------------ DISTRIBUTOR SELLER /s/ R. A. Taylor, Jr. ---------------------------------- ------------------------------------ JOEL GIRSKY R.A. TAYLOR, JR., NAT'L SALES MGR. /s/ Dan E. Manly ---------------------------------- ------------------------------------ CHAIRMAN OF THE BOARD D.E. MANLY, NAT'L. DIST. SALES MGR. 3/01/88 ---------------------------------- ------------------------------------ DATE DATE
18 EFFECTIVE: 3/01/88 SUPERSEDES: 8/01/85 JACO ELECTRONICS EXHIBIT D AUTHORIZED STOCKING LOCATIONS
STREET ADDRESS CITY AND STATE -------------- -------------- 1. 145 Oser Avenue Hauppauge, L.I., NY 11788 2. 1209 Glenville Drive Richardson, TX 75080 3. 222 Ancover Street Wilmington, MA 01887 4. 10270 Old Columbia Road Columbia, MO 21046
DISTEL, INC. ------------ 1. 2260 Townsgate Road Westlake Village, CA 91361
JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ---------------------------------- ------------------------------------ DISTRIBUTOR SELLER /s/ R. A. Taylor, Jr. ---------------------------------- ------------------------------------- JOEL GIRSKY R.A. TAYLOR, JR., NAT'L SALES MGR. CHAIRMAN OF THE BOARD /s/ D E. Manly ---------------------------------- ------------------------------------- TITLE D.E. MANLY, NAT'L. DIST. SALES MGR. 3/01/88 ---------------------------------- ------------------------------------- DATE DATE
19 EFFECTIVE: 3/01/88 SUPERSEDES: 6/08/87 Page 1 of 4 JACO ELECTRONICS EXHIBIT E POLICY & PROCEDURE DISTRIBUTOR/COMPETITIVE PRICE AUTHORIZATION I. POLICY: It is KEMET ELECTRONICS CORPORATION's policy to allow authorized distributors to order product and deviate from standard distributor cost due to a competitive situation. II. PROCEDURE 1. A Distributor/Competitive Price Authorization (D/CPA) number is issued by the local KEMET Sales Representative after the Distributor has booked the order, the customer has given the Distributor a purchase order and the Distributor has no more than one ship schedule from his customer. 2. The D/CPA number is valid for three months and must be referenced on the Distributor's request for purchase. 3. The following information is required before a D/CPA number is issued. a) Customer name and location b) KEMET Part Number(s) c) Quantity and shipment schedule d) All available competitive information e) Approved cost f) Resale g) Customer P. O. number 4. A D/CPA applies to a specific customer, the total quantity upon which the special price was based and for a specific period of time during which the total quantity must be shipped in no more than one shipment to the Distributor's customer. 5. Distributor's failure to ship the total quantity to the specified end customer in the specified time frame will subject the Distributor to a billback liability (the difference between the standard distributor cost and the special price multiplied by the quantity not shipped to the customer). 6. If the Distributor's end customer returns products for which a special price was granted, the Distributor must notify the local KEMET Sales Office in writing and promptly issue a credit for the difference between the standard distributor cost and the special price multiplied by the number of items returned. 20 EFFECTIVE: 3/01/88 SUPERSEDES: NIL Page 2 or 4 JACO ELECTRONICS EXHIBIT E POLICY & PROCEDURE SHIP FROM STOCK AND DEBIT I. POLICY: It is KEMET ELECTRONICS CORPORATION's policy to allow authorized distributors to deviate from standard distributor cost due to a competitive situation and debit KEMET for this price differential upon the Distributor's shipment to his end customer. II. PROCEDURE 1. When an authorized KEMET Distributor requires a price lower than his standard/inventory cost in order to meet a competitive situation and ship the parts from distributor stock, the Distributor must request such pricing from the local KEMET Sales Representative. 2. If not in inventory but order has more than one scheduled shipment, Distributor will order product at standard cost and Ship-from-Stock- and-Debit will be authorized at time of shipment to the end customer. However, the Distributor must get approval from the local KEMET Sales Office. 3. Volume Quantity Pricing: a) All special pricing quotes are good for thirty (30) days; i.e., Distributor must receive the order within thirty (30) days after the quote was issued or SSD may not be issued to the Distributor for that specific order. b) The pricing quote applies to a specific customer, the total quantity upon which the special price was based and for a specific period of time (NOT TO EXCEED ONE (1) YEAR) during which the total quantity must be shipped to the Distributor's customer. c) Distributor's failure to ship the total quantity to the specified end customer in the specified time frame will subject the Distributor to a billback liability (the difference between the standard distributor cost and the special price multiplied by the quantity not shipped to the customer). d) If the Distributor's end customer returns products for which a special price was granted, the Distributor must so notify the local KEMET Sales Office in writing and promptly issue a credit for the difference between the standard distributor cost and the special price multiplied by the number of items returned. 4. The following information is required prior to issuing an approved Ship-from-Stock-and-Debit Number: 21 EFFECTIVE: 3/01/88 SUPERSEDES: NIL Page 3 of 4 a) Customer name and location b) KEMET or Military Part Number(s) c) Quantity and shipment schedule d) All available competitive information e) Standard cost f) Approved cost g) Resale h) Customer P. O. number i) P. O. number against which parts were shipped. (Not required if product is to be ordered. Product will be ordered at book price.) 5. Ship and debit memoranda for specially priced shipments should be submitted once a month to: KEMET ELECTRONICS CORPORATION P.O. BOX 5928 GREENVILLE, SC 29606 ATTENTION: ADMINISTRATIVE MARKETING MANAGER 6. Each debit memo issued by the Distributor must include the following: a) KEMET Ship-from-Stock-and-Debit Number b) Customer name and address c) Customer Purchase Order Number d) Invoice Number e) Date of shipment f) KEMET or military part number g) Quantity ordered h) Quantity shipped i) Resale j) Standard cost (purchased cost) k) Approved special cost l) Difference in dollars between standard (purchased cost) and approved special cost. 7. Upon receipt of Distributor debit memo, KEMET Customer Service will match the KEMET special price authorization form with the Distributor debit memo and if all is in order; will issue credit in accordance with KEMET ELECTRONICS' accounting procedures. If the Distributor debit memo and KEMET special price authorization form do not agree, KEMET will bill back the Distributor for any price differences in accordance with KEMET ELECTRONICS' accounting procedures. 8. Under this policy, KEMET considers every special price request on an individual basis with no consideration for previous special price quotes. 22 EFFECTIVE: 3/01/88 SUPERSEDES: NIL Page 4 of 4 9. The minimum debit for an SSD Number is $25. 10. KEMET reserves the right to audit the Distributor's records pertaining to all such aforementioned debits. JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ---------------------------------- ------------------------------------- DISTRIBUTOR SELLER /s/ R. A. Taylor Jr. ---------------------------------- ------------------------------------- JOEL GIRSKY R. A. TAYLOR, JR., NAT'L SALES MGR. /s/ D. E. Manly ---------------------------------- ------------------------------------- CHAIRMAN OF THE BOARD D. E. MANLY, NAT'L DIST. SALES MGR. 3/01/88 ---------------------------------- ------------------------------------- DATE DATE 23 EFFECTIVE: 3/01/88 SUPERSEDES: NIL Page 1 of 2 JACO ELECTRONICS EXHIBIT F POLICY & PROCEDURE INVENTORY ADJUSTMENT AND RETURNS I. POLICY: It is KEMET ELECTRONICS CORPORATION's policy to allow authorized distributors to return slow-moving or obsolete products so that the Distributor can maintain an adequate and comprehensive stock of primary products. The Products that are returnable are listed on Exhibits C-1, C-2 and C-3. II. PROCEDURE: 1. An authorized KEMET Distributor may return slow-moving or obsolete products ONLY after proper written authorization has been obtained from KEMET's Distributor Sales Manager or his representatives. 2. Credit will be allowed ONLY after KEMET inspects and tests the returned products. No credit will be allowed for products KEMET determines to be damaged. Distributor debit is not to be taken prior to credit being approved. 3. The credit, if any, for each product returned will be the actual price paid by Distributor for such product or the distributor cost in effect at the time of the return, whichever is lower. 4. A restocking charge at the rate of fifteen (15) percent will be imposed with respect to all returns not contained in the packages in which the product was originally shipped by KEMET. 5. The value of the credit to be allowed by KEMET shall not exceed an amount equal to five (5) percent of the total net sales previously billed to the Distributor during the previous four (4) calendar quarters, less the amount of any credits allowed against sales billed during this same period. 6. Product returns must be shipped FOB KEMET's plant in Greenville, South Carolina, or such other place as KEMET may designate in writing. 7. Minimum value of individual items authorized for return shall have a cost extension of twenty dollars ($20). 24 EFFECTIVE: 3/01/88 SUPERSEDES: NIL Page 2 of 2 8. Under this policy, returns may be made as shown below ONLY: 1st Quarter - April, May, June Golden Max Ceramics - C3XX Molded Axial and Radial Tantalums - T322, T370 Tantalum Chips - T491 2nd Quarter - July, August, September Hermetically Sealed Tantalums - T1XX, M39003 (T2XX) Molded Axial and Radial Ceramics - C1XX, M39014 (C052, C062) Ceramic Chips - C0805, C1206, C1210 3rd Quarter - October, November, December Dipped Radial Tantalums - T35X, T36X Conformal Axial Ceramics - C4XX Films - M83421 (F241) 4th Quarter - January, February, March NO RETURNS JACO ELECTRONICS KEMET ELECTRONICS CORPORATION ---------------------------------- ------------------------------------- DISTRIBUTOR SELLER /s/ R. A. TAYLOR, JR. ---------------------------------- ------------------------------------- JOEL GIRSKY R. A. TAYLOR, JR., NAT'L SALES MGR. /s/ D. E. MANLY ---------------------------------- ------------------------------------- CHAIRMAN OF THE BOARD D. E. MANLY, NAT'L DIST. SALES MGR. 3/01/88 ---------------------------------- ------------------------------------- DATE DATE EX-23.1 4 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated August 15, 1995 (except for Note H to the consolidated financial statements as to which the date is August 30, 1995) accompanying the consolidated financial statements and schedule of Jaco Electronics, Inc. as of June 30, 1994 and 1995 and for each of the three years in the period ended June 30, 1995 contained in this annual report of Jaco Electronics, Inc. on Form 10-K for the year ended June 30, 1995. 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 11, 1995 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the audited Consolidated Balance Sheet as of June 30, 1995 and the audited Consolidated Statement of Earnings for the year ended June 30, 1995 and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1995 JUN-30-1995 393,671 0 21,047,339 609,675 26,653,881 49,622,343 6,911,927 2,805,706 56,323,238 18,881,082 0 246,438 0 0 12,980,094 56,323,238 138,683,331 138,683,331 109,902,639 133,453,835 0 458,226 2,010,554 3,218,942 1,303,000 0 0 0 0 1,915,942 0.78 0.78
EX-99.7 6 RESTATED AND AMENDED LOAN & SECURITY AGREEMENT 1 Exhibit 99.7 RESTATED AND AMENDED LOAN AND SECURITY AGREEMENT JACO ELECTRONICS, INC. ("Jaco"), a New York corporation and NEXUS CUSTOM ELECTRONICS, INC. ("Nexus"), a New Jersey corporation (collectively referred to as "Debtor"), and The Bank of New York Commercial Corporation ("Secured Party") hereby agree as follows: This Agreement restates and amends in its entirety without a break in continuity the Loan and Security Agreement -- Accounts Receivable and Inventory between Secured Party and Jaco dated January 20, 1989 and the Security Agreement between Secured Party and Nexus dated March 11, 1994. 1. As used herein, the following terms shall have the following meanings: "ABR Loan" means the Loan or any portion thereof bearing interest at a rate determined by reference to the Alternate Base Rate. "Alternate Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate in effect on such day or (ii) the Federal Funds Rate in effect on such day plus 1/2 of 1%. "Account" or "accounts" shall mean and include all accounts, accounts receivable, contract rights, chattel paper, instruments, notes, drafts, acceptances, and all other debts, obligations and liabilities in whatever form owing to Debtor from any person, firm, corporation or other legal entity whether now existing or hereafter arising or acquired. "Account Debtor" shall mean any person, firm, corporation or other legal entity who is obligated on any Account. "Accounts Receivable Borrowing Base" shall mean 85% of the net outstanding amount of Reported Accounts, exclusive of Slow Accounts, after deducting therefrom all payments, adjustments and credits applicable thereto less such reasonable reserves as Secured Party may deem reasonably necessary and proper. The Accounts Receivable Borrowing Base may be changed by Secured Party from time to time in its reasonable discretion, such change to be effective, upon thirty (30) days written notice to Debtor. Whenever the Accounts Receivable Borrowing Base is used as a measure of loans, it shall be computed as of, and the loans referred to shall be those reflected in the Debtor's Loan Account at, the time in question. "Bank" means The Bank of New York. "Business Day" means (a) any day other than a day on which commercial banks in New York are authorized or required by law to close and (b) relative to the making, continuing, prepaying or repaying of any LIBO Rate Loans, any day on which dealings in dollars are carried on in the London interbank eurodollar market. "Collateral" shall have the meaning set forth in Paragraph 2 hereof. "Continuation Notice" means a notice of continuation duly executed by an authorized officer of the Debtor substantially in the form of Exhibit A hereto. "Contract Rate" means an interest rate per annum equal to (A) in the case of LIBO Rate Loans, (i) the applicable LIBO Rate plus (ii) two percent (2.5%) or (B) in the case of all other Loans, the Alternate Base Rate. "Debtor's Loan Account" shall mean the account on the records of the Secured Party in which shall be recorded the loans and advances made by the Secured Party to the Debtor, payments made on such loans, and other appropriate debits and credits all made pursuant to, or as provided by, this Agreement or any other agreement made between Secured Party and Debtor. "Eligible Equipment" shall mean Equipment purchased by Debtor which Secured Party has determined at the time of such purchase in its sole and reasonable discretion to be eligible. In general, Equipment shall not be deemed eligible unless such Equipment was purchased after January 1, 1995, is subject to a first perfected security interest in favor of Secured Party and with respect to which Debtor has requested that Secured Party deem it eligible. "Eligible Inventory" shall mean inventory consisting of current saleable finished goods. "Equipment" shall mean equipment, machinery, furniture, fixtures, dies, tools and other tangible personal property of Debtor, wherever located and whether now owned or hereafter acquired by the Debtor and all accessions and attachments to and replacements of or relating to the foregoing. "Equipment Borrowing Base" shall mean 80% of the invoice cost of Eligible Equipment, provided that for purposes of calculating the Equipment Borrowing Base, the invoice cost of each piece of Eligible Equipment shall be deemed to be reduced by 2% for each month following its date of purchase. 2 "Event of Default" shall have the meaning set forth in Paragraph 19 hereof. "Federal Funds Rate" means, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or if such rate is not so published for any day which is a Business Day, the average of quotations for such day on such transactions received by the Bank from three Federal funds brokers of recognized standing selected by the Bank. "General Intangibles" shall mean all general tangibles as defined in Article 9 of the Uniform Commercial Code of the State of New York now owned or hereafter acquired, whether now existing of hereafter arising, including without limitation, all trademarks, patents, copyrights, service marks, brand names, trade names, trade styles, together with the goodwill of the business represented thereby, all claims for moneys due (including tax refunds) from any federal, state or municipal government, agency or subdivision thereof or taxing authority and all excess pension funds. "Interest Period" means, relative to any Loan constituting a LIBO Rate Loan, the period beginning on (and including) the date on which such LIBO Rate Loan is made or continued as, or converted into, a LIBO Rate Loan pursuant to Section (4)a or 4(b) and shall end on (but exclude) the day which numerically corresponds to such date one, two, or three months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), in either case as the Debtor may select in its relevant notice pursuant to Section 4(a) or 4(b); provided, however, that (a) the Debtor shall not be permitted to select Interest Periods to be in effect at any one time which have expiration dates occurring on more than five different dates; (b) if such Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the following Business Day (unless such next following Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day); and (c) no Interest Period may end later than the last day of the Term. "Inventory" shall mean all now owned hereafter acquired and wherever located goods, merchandise and other personal property which are held for sale or lease or to be furnished under contracts of service or held as raw materials, work in process or finished goods and supplies or materials used or consumed in Debtor's business or used in connection with the manufacture, packing, shipping, advertising or furnishing of such goods. "Inventory Borrowing Base" shall mean 60% of Debtor's Eligible Inventory. The Inventory Borrowing Base may be changed by Secured Party from time to time in its reasonable discretion, such change to be effective upon thirty (30) days written notice to Debtor. "Letters of Credit" shall mean all letters of credit issued by banks for the account of Debtor with respect to which Secured Party has joined in and/or guaranteed payment of all obligations and liabilities of Debtor under such letters of credit. "LIBO Rate" means, relative to the Interest Period for a LIBO Rate Loan, the rate of interest equal to the average (rounded upwards, if necessary, to the nearest 1/100th of 1%) of the rates per annum at which dollar deposits in immediately available funds are offered to the Bank's LIBOR Office in the London interbank eurodollar market as at or about 11:00 a.m. two Business Days prior to the beginning of such Interest Period for delivery on the first day of such Interest Period, and in an amount approximately equal to the amount of the LIBO Rate Loan and for a period approximately equal to such Interest Period. "LIBO Rate Loan" means the Loan or any portion thereof bearing interest, at all times during the Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the LIBO Rate (Reserve Adjusted). The "LIBO Rate (Reserve Adjusted)" means, relative to the Loan or any portion thereof to be made, continued or maintained as, or converted into, a LIBO Rate Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) determined pursuant to the following formula: LIBO Rate = LIBO Rate (Reserve Adjusted) ---------------------------- 1.00-LIBOR Reserve Percentage The LIBO Rate (Reserve Adjusted) for the Interest Period for a LIBO Rate Loan will be determined by the Secured Party on the basis of the LIBOR Reserve Percentage in effect two Business Days before the first day of such Interest Period. "LIBOR Office" means the office of the Bank at 48 Wall Street, New York, New York or such other office of the Bank as designated from time to time by the Bank, whether or not outside the United States. -2- 3 "LIBOR Reserve Percentage" means, relative to the Interest Period for a LIBO Rate Loan, the reserve percentage (expressed as a decimal) equal to the maximum aggregate reserve requirements (including all basic, emergency, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements) specified under regulations issued from time to time by the Federal Reserve Board and then applicable to assets or liabilities consisting of and including "Eurocurrency Liabilities," as currently defined in Regulation D of the Federal Reserve Board, having a term approximately equal or comparable to such Interest Period and applicable to the Bank. "Loan" or "Loans" means any extensions of credit hereunder. "Maximum Loan Amount" shall mean $30,000,000. "Mortgage" shall mean the Commercial Mortgage executed on March 11, 1994 and delivered by Nexus to Secured Party with respect to the Real Property. "Obligations" shall mean any and all debts, liabilities and obligations of Debtor to Secured Party hereunder and also any and all other debts, liabilities and obligations of Debtor to Secured party of every kind and description, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including without limitation, the obligations and liabilities of Debtor under the Term Loan Notes and under that certain Letter of Credit and Security Agreement executed by Debtor in favor of the Secured Party on January 20, 1989, and further including, without limitation, all interest, fees, reasonable charges and reasonable expenses (including reasonable attorneys' fees and expenses). "Overadvances" shall have the meaning set forth in paragraph 4(a). "Permitted Liens" means (i) liens of carriers, warehousemen, mechanics and materialmen incurred in the ordinary course of business securing sums not overdue; (ii) liens incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance or other forms of governmental insurance or benefits, relating to employees, securing sums (a) not overdue or (b) being diligently contested in good faith provided that adequate reserves with respect thereto are maintained on the books of Debtor in conformity with GAAP; (iii) liens in favor of Secured Party; (iv) liens for taxes (a) not yet due or (b) being diligently contested in good faith provided that adequate reserves with respect thereto are maintained on the books of the Debtor in conformity with GAAP; (v) liens placed upon Equipment hereafter acquired and the proceeds thereof to secure a portion of the purchase price thereof, provided that any such lien shall not encumber any other property of Debtor (it being understood that Secured Party will upon Debtor's request provide UCC-3 Financing Statements releasing its lien on such Equipment and the proceeds thereof); and (vi) liens specified on Schedule 1 hereto. "Prime Rate" means the prime commercial lending rate of the Bank as publicly announced in New York, New York to be in effect from time to time, such rate to be adjusted automatically, without notice, on the effective date of any change in such rate. This rate of interest is determined from time to time and is neither tied to any external rate of interest or index nor does it necessarily reflect the lowest rate of interest actually charged to any particular class or category of customers. "Real Property" shall mean the property located at Prospect Street, Brandon, VT 05733. "Reported Account" shall mean any Account arising out of the sale of merchandise or rendition of services which Debtor has reported to Secured Party in accordance with Paragraph 6. "Slow Account" shall mean any Reported Account with respect to which any of the following has occurred: (i) all or a substantial part of the property or services giving rise to the Reported Account is returned, rejected or repossessed, or lost or damaged; (ii) any merchandise or other dispute has arisen (it being understood that such Account shall be a Slow Account only to the extent of the amount of such dispute); (iii) the Account Debtor has become insolvent; (iv) payment on such Reported Account is unpaid more than 90 days from invoice date; (v) all Reported Accounts due from the same Account Debtor if 50% or more of all unpaid invoices due from such Account Debtor remain unpaid more than 90 days from invoice date; or (vi) in Secured Party's reasonable discretion the Account may not be used in computing the Accounts Receivable Borrowing Base. In the event of any dispute as to whether a Reported Account has become a Slow Account, the reasonable decision of Secured Party made in accordance with this definition shall control. -3- 4 "Subsidiary" shall mean any corporation of which more than 50% of the outstanding shares of stock of each class having ordinary voting power is at the time owned by Debtor and/or one or more of its subsidiaries. "Term" shall have the meaning set forth in Paragraph 21 hereof. "Term Loans" shall mean the loans made by Secured Party to Debtor as evidenced by the Term Loan Notes. "Term Loan Notes" shall mean the promissory notes issued by Debtor to Secured Party (i) dated as of June 1, 1989 in the original principal amount of $3,000,000; (ii) dated as of March 31, 1990 in the original principal amount $5,000,000; and (iii) dated as of March 11, 1994 in the original principal amount of $1,500,000. 2. To secure the payment and performance of Debtor's Obligations, Debtor hereby grants to Secured Party a security interest in all of the following personal property (all herein referred to as the "Collateral"): a) all Accounts of Debtor whether now existing or hereafter arising or acquired, including, without limitation, Reported Accounts, all guarantees, securities and liens for payment of any Account, all right, title and interest of Debtor in the merchandise which gave rise to any Account, including the rights of reclamation and stoppage in transit, all rights of an unpaid seller of merchandise or service, and all rights of Debtor earned or yet to be earned under contracts with Account Debtor; b) all inventory of Debtor now owned or hereafter acquired, including without limitation all of Debtor's contract rights with respect thereto and all documents representing the same; c) all General Intangibles of Debtor now existing or hereafter arising or acquired; d) all returned, rejected or repossessed goods whether now owned or hereafter acquired which were Inventory before sale; e) all sums at any time due from Secured Party to Debtor; f) all instruments, documents, policies and certificates of insurance, securities, goods, choses in action, cash or other property owned by Debtor or in which Debtor has an interest, which now or hereafter are at any time in possession or control of Secured Party or in transit by mail or carrier to or from Secured Party in the possession of any third party acting in Secured Party's behalf, without regard to whether Secured Party received the same in pledge, for safekeeping, as agent for collection or transmission, or otherwise or whether Secured Party has conditionally released the same; g) all Equipment, excluding Equipment subject to liens described in clause (v) of the definition of Permitted Liens and the proceeds thereof; h) all proceeds of the foregoing, including, without limitation, proceeds of policies of fire, credit or other insurance; and i) all books, records, ledger sheets, and other records relating to the foregoing. Secured Party shall have the right (y) at any time to apply any or all of the proceeds of the Accounts against any and all Obligations excluding the Term Loan evidenced by the Term Loan Note dated as of March 11, 1994 in the original principal amount of $1,500,000 ("$1,500,000 Term Loan") and (z) upon an Event of Default, to apply any or all of the proceeds of the Collateral against any and all Obligations including the $1,500,000 Term Loan, whether or not, in either case, other security held by Secured Party is considered by Secured Party to be adequate. 3. For the purpose of inducing Secured Party to make loans to Debtor, Debtor hereby warrants, represents, covenants and guarantees which warranties, representations, covenants and guarantees shall survive the execution and delivery of this Agreement and shall be deemed repeated and confirmed with respect to each loan or advance made by Secured party hereunder: a) Debtor is duly organized and existing under the laws of its state of incorporation and licensed or qualified to do business in all other states in which the laws thereof require Debtor to be so qualified and/or licensed, and the execution, delivery and performance of this agreement and any security agreement, notes, guarantees or other agreements or instruments delivered in connection herewith are within Debtor's corporate powers, have been authorized, and are not in contravention of law or the terms of Debtor's charter, bylaws, or other incorporation papers, or of any indenture, agreement or undertaking to which Debtor is a party or by which it or its assets are bound; b) to the extent that Debtor has knowledge or should have knowledge, any Account reported by Debtor to Secured Party as a Reported Account will be a good and valid Account representing an undisputed bona fide indebtedness of an Account Debtor to Debtor; and no agreement under which any deduction or discount may be -4- 5 claimed has been or will be made with the Account Debtor on any Account except as shown on the statement or invoice furnished to Secured Party with reference thereto: c) the Inventory is either (i) in the possession of Debtor at the locations listed on Schedule 3(c) hereto or (ii) on the premises of Account Debtors with respect to which Secured Party has been given notice of such fact and has been given UCC-1 Financing Statements executed by Debtor for filing in such locations, and the location thereof will not be changed without prior written notice to Secured Party in each and every instance; d) upon the occurrence and during the continuance of an Event of Default, Secured Party shall, at all times, have the right to (i) take possession of any of the Collateral and to maintain such possession on Debtor's premises, at the expense of the Debtor, by use of a custodian or custodians in such a manner as Secured Party may elect and (ii) at the expense of the Debtor, to remove the Collateral or any part thereof to such other place or places as Secured Party may from time to time select; e) Debtor is and will be the lawful owner of all Collateral and has now and will in the future have the right to pledge, sell, assign and transfer the same and grant a security interest in any of the Collateral except for Permitted Liens; f) the Collateral is and will continue to be free and clear of all liens, claims, security interests and encumbrances except for Permitted Liens, and Debtor will warrant and defend all Collateral against the claims and demands of all persons; g) all representations made by Debtor to Secured Party with reference to the description, content or valuation or any and all of the Collateral are and will continue to be true and correct in all material respects; the sale of all Inventory which gives rise to an Account shall, subject to the terms of Paragraph 3(c)(ii), be an absolute sale and not on consignment or approval, and all such inventory shall have been the absolute property of Debtor, free of liens and other encumbrances, and Debtor shall not have received the same on consignment or approval; all service which gave rise to an account shall have actually been performed; all invoices, records, notes, documents of title, shipping and delivery receipts and any and all other instruments, memoranda and documents presented or delivered to Secured Party shall be valid and genuine; and h) Debtor will promptly notify Secured Party of any material change from the date hereof in Debtor's own financial status or a material adverse change which is known or should be known to Debtor in the status of any Account Debtor, or in the condition of the Inventory, or in the collectibility of any Account, including all material claims, rejections, reductions, returns and adjustments by Account Debtors. Debtor will comply with the terms and conditions of any leases covering the premises where Inventory or Equipment is located and any other order, ordinances, laws or statutes of any city, state or governmental department having jurisdiction with respect to such premises or the conduct of business thereon. If Inventory shipped on any Account is returned, Debtor may sell said Inventory in the ordinary course of business; however, upon an Event of Default and during the continuance thereof, at the request of Secured Party, Debtor shall hold the same segregated in trust for Secured Party subject to its exclusive disposition, and shall, at Debtor's expense, deliver the same to Secured Party, or to such place or places as Secured Party may designate. 4. a. Subject to the terms of this Agreement and provided that there does not exist, at the time of any request, an Event of Default, Secured Party will lend to Debtor hereunder, from time to time, sums of money (inclusive of the Term Loans) up to the lesser of (A) the Maximum Loan Amount or (b) the sum of (i) the Accounts Receivable Borrowing Base plus (ii) the lesser of (x) the Inventory Borrowing Base or (y) $15,000,000; plus (iii), the lesser of (x) the Equipment Borrowing Base or (y) $500,000; plus (iv) the amount outstanding under the Term Loan Note dated March 11, 1994 in the principal amount of $1,500,000. The total amount of loans outstanding shall include the sum of the aggregate face amount of all drafts which may then or thereafter be presented by beneficiaries under all Letters of Credit then outstanding and also including the sum of the aggregate face amount of all drafts theretofore presented under the Letters of Credit but not paid and the aggregate amount of outstanding banker's acceptances created under the Letters of Credit. Secured Party's assistance in joining in or guaranteeing Letters of Credit shall be in Secured Party's sole discretion and in no event shall the aggregate face amount of all drafts which may then or thereafter be presented by beneficiaries under all Letters of Credit together with the aggregate amount of outstanding banker's acceptances created under the Letters of Credit exceed $2,000,000. Notwithstanding the foregoing, the Secured Party shall have the right to make advances hereunder in excess of the advances ("Overadvances") which would otherwise be permitted hereunder pursuant to the percentages in the definitions of Accounts Receivable Borrowing Base, Equipment Borrowing Base and Inventory Borrowing Base in Secured Party's sole and absolute discretion. The aggregate unpaid principal amount advanced under the Inventory Borrowing Base shall not at any time exceed 60% of the aggregate unpaid principal amount advanced hereunder, as reduced by the outstanding principal amount at such time of the $1,500,000 Term Loan Note dated March 11, 1994, provided that for the purpose of such calculation such remaining amount advanced hereunder shall be deemed to have been advanced first against the maximum amount available at such time under the Accounts Receivable Borrowing Base. b. (i) The Debtor may by written notice request a borrowing prior to 1:00 P.M. New York time in the form of a LIBO Rate Loan three (3) Business Days prior to the date, and in the form of an ABR Loan on the date, on which it requests to incur an advance, such request to specify the amount of the advance requested (which in the case of a LIBO Rate Loan shall be in a minimum amount of $1,000,000 and an integral multiple of $100,000). All advances shall be disbursed from whichever office or other place Secured Party may designate from time to time and, together with any and all other Obligations of Debtor to Secured Party, shall be charged to -5- 6 the Debtor's account on Secured Party's books. The proceeds of each advance made by the Secured Party shall be made available to the Debtor on the day so requested by way of credit to the Debtor's operating account maintained with Secured Party. Any and all Obligations due and owing hereunder may be charged to Debtor's account and shall constitute an advance hereunder. (ii) By delivering a Continuation Notice to the Secured Party on or before 10:00 a.m., New York time, on a Business Day, the Debtor may from time to time irrevocably elect, on not less than three nor more than five Business Days' notice that all, or any portion in an aggregate minimum amount of $1,000,000 and an integral multiple of $100,000, of (A) a LIBO Rate Loan be continued as, or an ABR Loan be converted into, a LIBO Rate Loan (in the absence of delivery of a Continuation Notice with respect to any LIBO Rate Loan at least three Business Days before the last day of the then current interest Period with respect thereto, such LIBO Rate Loan shall, upon such last day, automatically convert to an ABR Loan) or (B) a LIBO Rate Loan may be converted into an ABR Loan; provided, however, that no portion of the outstanding principal amount of a Loan may be continued as, or converted into, a LIBO Rate Loan when any Event of Default has occurred and is continuing. 5. a. (i) Interest on Loans shall be payable in arrears on the last day of each month except that interest with respect to LIBO Rate Loans shall be payable on the last day of the Interest Period with respect thereto. Interest payments hereunder may, at Secured Party's option be charged by Secured Party to Debtor's account. Interest charges shall be computed on the unpaid balance of the loans for each day they are outstanding at a rate per annum equal to the Contract Rate. (ii) Interest shall be computed on the basis of actual days elapsed over a 360-day year. (iii) Notwithstanding the foregoing, in no event shall interest exceed the maximum rate permitted under any applicable law or regulation, and if any provision of this Agreement is in contravention of any such law or regulation, such provision shall be deemed amended to provide for interest at said maximum rate and any excess amount shall either be applied, at Secured Party's option, to the outstanding Loans in such order as Secured Party shall determine or refunded by Secured Party to Debtor. (iv) Debtor shall pay principal, interest and all other amounts payable hereunder, without any deduction whatsoever, including but not limited to, any deduction for any set-off or counterclaim. b. (i) Debtor shall pay to Secured Party an annual fee in an amount equal to $20,000.00 which fee shall be paid in equal monthly installments during each year that this Agreement is in effect. (ii) Upon Secured Party's performance of any due diligence - namely any field examination, collateral analysis or other business analysis, the need for which is to be determined in the reasonable discretion of Secured Party and which due diligence is undertaken by Secured Party or for Secured Party's benefit, an amount equal to Secured Party's reasonable out of pocket travel expenses to locations other than the 145 Oser Avenue office incurred in connection therewith shall be charged to Debtor's account. (iii) In the event the average closing daily unpaid balances of all advances hereunder during any calendar month is less than the Maximum Loan Amount, Debtor shall pay to Secured Party a fee at a rate per annum equal to 2/10 of one percent (.2%) on the amount by which the Maximum Loan Amount exceeds such average daily unpaid balance. Such fee shall be calculated on the basis of a year of 360 days and actual days elapsed, and shall be charged to Debtor's account on the first day of each month with respect to the prior month. c. In the event of any change in any applicable law, treaty or governmental regulation, or in the interpretation or application thereof, or compliance by Secured Party (for purposes of this Section 5(c), the term "Secured Party" shall include Secured Party and any corporation or bank controlling Secured Party) with any request or directive (whether or not having the force of law) from any central bank or other financial, monetary or other authority, shall: (i) subject Secured Party to any tax of any kind whatsoever with respect to this Agreement or change the basis of taxation of payments to Secured Party of principal, fees, interest or any other amount payable hereunder or (except for taxes on or changes in the rate of tax on the overall net income of Secured Party); (ii) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by, any office of Secured Party, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (iii) impose on Secured Party any other condition with respect to this Agreement; and the result of any of the foregoing is to increase the cost to Secured Party of making, renewing or maintaining its Loans hereunder by an amount that Secured Party deems to be material or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the Loans by an amount that Secured Party deems to be material, then, in any case Debtor shall promptly pay Secured Party, upon its demand, such additional amount as will compensate Secured Party for such additional cost or such reduction, as the case may be. Secured Party shall certify the amount of such additional cost or reduced amount to Debtor, including all -6- 7 pertinent information regarding the calculation thereof, and such certification shall be conclusive absent manifest error. d. (i) In the event of any change in any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Secured Party (for purposes of this Section 5(d), the term "Secured Party" shall include Secured Party and any corporation or bank controlling Secured Party) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Secured Party's capital as a consequence of its obligations hereunder to a level below that which Secured Party could have achieved but for such adoption, change or compliance (taking into consideration Secured Party's policies with respect to capital adequacy) by an amount deemed by Secured Party to be material, then, from time to time, Debtor shall pay upon demand to Secured Party such additional amount or amounts as will compensate Secured Party for such reduction. In determining such amount or amounts, Secured Party may use any reasonable averaging or attribution methods. The protection of this Section shall be available to Secured Party regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition. (ii) A certificate of Secured Party setting forth such amount or amounts as shall be necessary to compensate Secured Party with respect to Section 5(d) hereof including all pertinent information regarding the calculation thereof, when delivered to Debtor shall be conclusive absent manifest error. e. If the Secured Party (for purposes of this Section 5(e) the term "Secured Party" shall include Secured Party and any corporation or bank controlling Secured Party) shall determine (which determination shall, upon notice thereof to Debtor, be conclusive and binding on Debtor) that the introduction of or any change in or in the Interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for the Secured Party to make, continue or maintain the Loans or any portion thereof as a LIBO Rate Loan, the obligations of the Secured Party to make, continue, maintain or convert the Loans or any portion thereof as or into LIBO Rate Loans shall, upon such determination, forthwith be suspended until the Secured Party shall notify Debtor that the circumstances causing such suspension no longer exist, and all LIBO Rate Loans shall automatically convert into ABR Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion. f. If the Secured Party (for the purposes of this Section 5(f) the term "Secured Party" shall include Secured Party and any corporation or bank controlling Secured Party) shall have determined that by reason of circumstances affecting the London Interbank market, adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Loans, then, upon notice from the Secured Party to Debtor, the obligations of the Secured Party under this Agreement to make, continue, maintain or convert the Loans or any portion thereof as LIBO Rate Loans shall forthwith be suspended until the Secured Party shall notify Debtor that the circumstances causing such suspension no longer exist. g. Absent any gross negligence on the part of the Secured Party, in the event the Secured Party (for purposes of this Section 5(g) the term "Secured Party" shall include Secured Party and any corporation or bank controlling Secured Party) shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Secured Party to make, continue, maintain or convert any portion of the principal amount of the Loans or any portion thereof as a LIBO Rate Loan) as a result of 1. any conversion or repayment or prepayment of the principal amount of any LIBO Rate Loans on a date other than the scheduled last day of the Interest Period applicable thereto; 2. the Loans not being made as LIBO Rate Loans in accordance with the written request therefor (other than as a result of the breach of Secured Party's obligation to make such LIBO Rate Loan in accordance with the terms hereof); or 3. the Loans or any portion thereof not being continued as LIBO Rate Loans in accordance with the Continuation Notice therefor, then, upon the written notice of the Secured Party to Debtor the Debtor shall, within five days of receipt thereof, pay to the Secured Party such amount as will (in the reasonable determination of the Secured Party) reimburse the Secured Party for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on Debtor. 5A. Until Debtor's authority to do so is terminated by the Secured Party either as a result of notice by Secured Party which it may give at any time or automatically upon the occurrence of an Event of Default, Debtor will on the Secured Party's behalf and for the Secured Party's account, collect as the Secured Party's property and in trust for the Secured Party all amounts received on Accounts from Account Debtors and will turn over and/or mail and deliver to the office of Secured Party, on the day of receipt thereof, all cash, original checks, drafts, notes and other evidences of payment received in full or part payment of any Accounts, with full right in Secured Party to endorse and deposit such original Account Debtor's checks and remittances to its own account, whether said remittances are made payable to Secured Party or Debtor, the proceeds thereof to be credited to Debtor's loan account as provided in Paragraph 8 hereof. Debtor shall submit to Secured Party, with all remittances, a report in -7- 8 such form as Secured Party may require; and further, shall submit original remittance advice in the form received by Debtor from Account Debtors. 6. Debtor shall make clear and suitable entries and notations on Debtor's books and records, which shall reflect all facts giving rise to the Account (and in such a case where the Account arises by reason of a sale or delivery of merchandise, such notation shall clearly reflect the absolute sale of such merchandise), all payments, credits and adjustments applicable to the Account and the security interest of Secured Party. Upon the occurrence and continuance of an Event of Default, Debtor shall deliver to and sign for Secured Party as it shall require, any bills, statements and letters to be directed to Account Debtors and shall execute and deliver to Secured Party any and all instruments (including, without limitation, ageing of Accounts), reasonably determined by Secured Party to be necessary or convenient to carry into effect the terms, provisions and conditions of this Agreement, to perfect the security interest granted hereunder, and to facilitate collection of Accounts. Any employee or agent of Secured Party shall have the right to call at Debtor's place of business from time to time during normal business hours and, without hindrance or delay, inspect, examine, check and make abstracts from all the books, records, receipts, correspondence, memoranda and other papers or data of the Debtor. Debtor shall at all times maintain a complete set of books and records, containing up-to-date posting of all Debtor's cash and accrual transactions of any nature whatsoever. 6a. Debtor shall deliver to Secured Party daily, or at such other periods as Secured Party shall determine, a report in form reasonably satisfactory to Secured Party enumerating the Accounts arising out of the sale of merchandise or rendition of service. Debtor shall deliver to Secured Party, duplicate invoices, shipping receipts and such other evidence of shipment or delivery of the merchandise or performance of the services or the performance of such other act or acts giving rise to said Account as Secured Party may, from time to time, reasonably require. Upon request, Debtor shall deliver to Secured Party a report in form satisfactory to Secured Party enumerating all Accounts. If Debtor shall at any time grant to any Account Debtor a credit, or if Debtor shall, at any time, receive back any merchandise which it had delivered to an Account Debtor, Debtor shall forthwith give notice to Secured Party, in writing, of the issuance of such credit or the return of such merchandise. 7. Secured Party may, upon the occurrence and during the continuance of an Event of Default, without notice to Debtor, notify Account Debtors that Accounts have been assigned to Secured Party and shall be paid directly to Secured Party. Upon the occurrence and during the continuance of an Event of Default, upon the request of the Secured Party, Debtor shall so notify Account Debtors and shall indicate on all billings to Account Debtors that all moneys due thereon are payable to Secured Party. Secured Party shall further have the right upon the occurrence and during the continuance of an Event of Default, directly or through its agents, to collect any or all of the Accounts, and in its own name, or in Debtor's name, to sell, transfer, set over, compromise, discharge or extend the whole or any part of the Accounts, and for that purpose to do all acts and things necessary or incidental thereto, including the right of suit, Debtor hereby ratifying all that Secured Party shall do by virtue thereof. Granting extensions to Account Debtors or to Debtor, suffering any delay, or permitting any breach by Debtor or Account Debtors in connection with any transactions between the parties hereto, shall in no way be construed as a waiver or any subsequent breach or delay or of the rights of Secured Party against Debtor, and Debtor's liability shall in no way be restricted, limited, diminished or abated by virtue of any such extension or privilege granted. Debtor shall not, except in the ordinary course of its business, without the express written consent of Secured Party, release, compromise or adjust any Account, or any guarantee, security or lien therefor, or grant any discounts, allowances or credits thereon, or bring any suit to enforce payment thereof. Secured Party shall not, under any circumstances, or in any event whatsoever, have any liability for any error, omission or delay of any kind occurring in the settlement, collection or payment of any Account or of any instrument received in full or part payment thereof, or in dealing with any lien, security or guarantee of any Account. 8. Secured Party shall credit to Debtor's Loan Account proceeds of Accounts received by Secured Party, such credits to be entered one day after receipt of the proceeds; such credits, however are conditional upon final payment to Secured Party at its own office in cash or solvent credits of all items giving rise to the credits, and if any item is not so paid, any credit given to Debtor for it shall be reversed, whether or not the item is returned. 9. All sales of Inventory by Debtor shall be reported to Secured Party promptly on a Sales Summary Report. Secured Party shall have the right upon an Event of Default and during the continuance thereof to the immediate possession of all Inventory including without limitation, labels, stationery, documents and packing materials and products and proceeds of the foregoing, and Debtor shall make such Inventory and all its records pertaining thereto available to Secured Party for inspection at any time requested by Secured Party. Debtor shall, upon request of Secured Party, promptly furnish Secured Party with a report, in form and substance satisfactory to the Secured Party, describing and detailing the Inventory including, but not limited to, the location of such Inventory and the value thereof at cost or market value, whichever is lower. Secured Party shall have the right to take or cause to be taken a physical count of the Inventory upon the occurrence and during the continuance of an Event of Default. Secured Party shall have the right, in its discretion, to pay any liens or claims upon said inventory including, but not limited to, warehouse charges, dyeing, finishing and processing charges, landlord's claims or any other liens or encumbrances thereon, and the amount of any such payment by Secured Party shall be charged to Debtor's Loan Account and be part of the Obligations. Secured Party shall not be liable for the safekeeping of any of the Inventory or for any loss, damages or diminution in the value thereof, or for any act or default of any warehouse or other person dealing in and with said Inventory, whether as agent for Secured Party, or otherwise, or for the collection of any proceeds thereof, but the same shall at all times be at Debtor's risk. 10. Debtor agrees at its own expense, to keep all Inventory and Equipment insured to the full value thereof on a cost basis against such risks and by policies of insurance issued by such companies as Secured Party may -8- 9 reasonably designate or approve, and the policies evidencing such insurance shall be issued with such loss payable rider as Secured Party may reasonably designate and said policies shall be delivered to Secured Party at its request. Until such time as Secured Party requires otherwise, such loss payable rider shall provide that payment with respect to any claim exceeding $150,000 shall be made directly to Secured Party. Should Debtor fail for any reason to furnish Secured Party with such insurance, Secured Party shall have the right to effect the same and charge any costs in connection therewith to Debtor's Loan Account. Secured Party shall have no risk, liability or responsibility in connection with payment or non-payment of any loss, the sole obligation of Secured Party being to credit Debtor's Loan Account with the net proceeds of any insurance payments received on account of any loss. 11. Debtor hereby authorizes Secured Party at Debtor's expense to file one or more financing statements to perfect the security interests granted herein without Debtor's signature thereon, and Debtor agrees to do, file, record, make, execute and deliver all such acts, deeds, things, notices, instruments and financing statements as Secured Party may reasonably request in order to perfect and enforce the rights of Secured Party herein. Debtor hereby authorizes Secured Party to complete any blank space therein according to the terms upon which the Obligations hereunder are granted. At the request of Secured Party, Debtor will execute and deliver to Secured Party such financing statements or amendments thereof or supplements thereto, and such other instruments, all in a form satisfactory to Secured Party, as Secured Party may from time to time deem necessary or advisable, and will pay costs and expenses of filing or recording same, in order to preserve, protect and maintain the security interests hereby granted. Debtor further agrees that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. Except for Collateral subject to Permitted Liens, without the prior written consent of Secured Party, Debtor will not grant any security interest in any of the Collateral and will not permit or allow any adverse financing statement covering the Collateral to be on file in any public office. Except for Collateral subject to Permitted Liens, Debtor warrants and represents that as of the time of execution of this Agreement, no other financing agreements covering any of the Collateral are in force and that no claim of any security interest in any of the Collateral is on file in any public office. 12. Debtor shall pay to Secured Party on demand any and all reasonable expenses, including, but not limited to, a collection charge on all Accounts collected, all reasonable attorneys' fees and expenses, and all other reasonable expenses, of like or unlike nature, which may be expended or incurred by Secured Party to obtain or enforce payment of any Account either as against the Account Debtor, upon the occurrence and during the continuance of an Event of Default, Debtor or any guarantor or surety of Debtor or in the prosecution or defense of any action concerning any matter growing out of or connected with the subject matter of this Agreement, any amendment hereto or modification or waiver hereof, the Obligations or the Collateral or any of Secured Party's rights or interests therein or thereto, including, without limitation, any reasonable counsel fees or expenses incurred in any bankruptcy or insolvency proceeding or otherwise with respect hereto. 13. Debtor will pay to Secured Party forthwith upon the expiration or termination of this Agreement, the current amount of the debit balance of Debtor's Loan Account. 14. Upon an Event of Default and during the continuance thereof, in the event that Debtor shall become liable to, or any lien against Debtor shall arise in favor of, any taxing authority, whether or not the amount of such liability shall have been assessed against Debtor and whether or not notice of such lien shall have been filed or recorded as may be required by law, Secured Party shall have the right, but is not obligated, to pay the amount of such liability (including interest and/or penalties thereon) and also to pay any tax or liability by virtue of which such lien shall have arisen, and any amount or amounts paid for the discharge of such liability or lien shall be for Debtor's Loan Account, and any such amount shall be paid by Debtor to Secured Party with interest thereon upon demand, notwithstanding that the payments made may also discharge a liability of the Secured Party. 15. Debtor does hereby make, constitute and appoint any officer of Secured Party as Debtor's true and lawful attorney-in-fact, with power to endorse the name of Debtor upon any notes, checks, drafts, money orders or other instruments of payment or Collateral that may come into possession of Secured Party, if any, in full or part payment or any amount owing to Secured Party; to sign and endorse the name of Debtor upon any invoice, freight or express bill, bill of lading, storage or warehouse receipt, drafts against Account Debtors, assignments, verifications and notices in connection with Accounts, and any instruments or documents relating thereto, if any, or to Debtor's rights therein; upon an Event of Default and during the continuance thereof, to give written notice to such office and officials of the United States Post Office to effect such change or changes of address so that all mail addressed to Debtor may be delivered directly to Secured Party; granting unto Debtor's said attorney full power to do any and all things necessary to be done in and about the premises as fully and effectually as Debtor might or could do and hereby ratifying all that said attorney shall lawfully do or cause to be done by virtue herein. This power of attorney shall be irrevocable for the term of this Agreement and all transactions hereunder and thereafter as long as Debtor may be indebted to Secured Party. 16. Debtor hereby certifies to Secured Party that Debtor's address as set forth at the end of this Agreement is Debtor's mailing address, Debtor's principal place of business and the office at which Debtor's records relating to Accounts are kept. Debtor agrees not to effect any change in its mailing address, or in its principal place of business, or in the office in which its records relating to Accounts are kept without first giving Secured Party at least thirty days prior written notice thereof. 17. Until the Agreement has been terminated and all Obligations satisfied in full Debtor shall: -9- 10 a) Furnish to Secured Party as soon as possible but in no event more than 120 days after the close of each fiscal year of Debtor, and 60 days after the end of each fiscal quarter following each fiscal year of Debtor the following: consolidated financial statements of Debtor and its subsidiaries all in reasonable detail and form satisfactory to Secured Party: (i) a balance sheet as of the close of such period; and (ii) a statement of income and changes in cash flow for such period; together with copies of the management letters relating thereto furnished to Debtor by its independent certified public accountants in connection with such financial statements. The foregoing financial statements shall set forth in each case in comparative form the corresponding figures for the respective date or period for the preceding fiscal year. The foregoing financial statements with respect to fiscal years shall be audited by such firm of certified public accountants as shall be selected by Debtor and shall be reasonably satisfactory to Secured Party and shall be certified by such accountants without qualification or limitation because of the restricted or limited nature of the examination made by such accountants, and with respect to quarterly statements shall be prepared internally, shall be certified by an authorized financial officer of Debtor and shall be delivered subject to year end adjustments. All of the foregoing statements shall be prepared in accordance with generally accepted accounting principles consistently applied by Debtor. Secured Party hereby acknowledges that Grant Thorton, L.L.P. is a certified public accounting firm satisfactory to Secured Party. b) Furnish to Secured party concurrently with each delivery of financial statements set forth in Section 17(a) hereof: (i) with respect to annual financial statements, a certificate of Debtor's chief financial officer stating whether in the course of the examination necessary for certifying the financial statements Debtor obtained knowledge of any event which constitutes an Event of Default or an event which with notice or lapse of time, or both, would constitute such an Event of Default under the Agreement and if so, stating the facts with respect thereto and whether the same has been cured prior to the date of such certificate; and (ii) with respect to any other financial statements, a certificate of the chief financial officer of Debtor stating whether an Event of Default occurred or an event which with the giving of notice or lapse of time, or both, would constitute such an Event of Default under the Agreement and if so, stating the facts with respect thereto and whether the same has been cured prior to the date of such certificate. c) Permit officers of Secured party, at reasonable times, to visit and inspect any of the offices of Debtor and its Subsidiaries, to examine their books and records, to discuss the affairs and accounts of the Debtor and its Subsidiaries with their officers and furnish to Secured Party such other information as it may reasonably request. d) Maintain at all times a ratio of consolidated current assets of Debtor and its Subsidiaries to consolidated currents liabilities of Debtor and its Subsidiaries of not less than 1.2 to 1.0. "Current assets" shall mean all assets treated as current assets in accordance with generally accepted accounting principles consistently applied. "Current liabilities" shall mean all liabilities treated as current liabilities in accordance with generally accepted accounting principles consistently applied including without limitation all obligations payable on demand or within one year after the date on which the determination is made together with Obligations under this Agreement exclusive of any amounts outstanding under the Term Loan Notes. e) Maintain at all times consolidated tangible net worth (common stock plus preferred stock plus retained earnings plus additional paid in capital plus subordinated debt less intangible assets) in an amount not less than $9,000,00.00. f) Maintain at all times a ratio of the sum of (1) cash and cash equivalents plus (2) accounts receivable to current liabilities of not less than 0.3 to 1.0 all on a consolidated basis. g) Maintain at all times an excess of current assets over current liabilities each on a consolidated basis of not less than $13,500,000. h) Maintain at all times the insurance required by the Agreement and cause each Subsidiary to maintain insurance with responsible insurance companies on such of its properties in such amounts and against such risks as is customarily maintained by similar businesses. 18. Until the agreement has been terminated and all Obligations satisfied in full, Debtor shall not: a) Contract for, purchase or make any expenditure or commitments for, fixed or capital assets or securities or capital stock, or permit any Subsidiary so to do, in an aggregate amount in excess of $3,000,000 in any fiscal year without the consent of Secured Party, which consent will not be unreasonably withheld. b) With respect to Jaco declare or pay any cash dividends on any shares of any class of its capital stock, or apply any of its property or assets to the purchase, redemption or retirement of, or set apart any sum for the payment of dividends on, or for the purchase, redemption or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of any shares of any class of its capital stock. c) Enter into any merger or consolidation or acquire all or substantially all of the assets of any person, firm, joint venture or corporation, or permit any Subsidiary so to do without Secured Party's prior written consent which shall not be unreasonably withheld. d) Create, incur, assume or suffer to exist any Indebtedness in excess of $2,500,000.00 in the aggregate at any one time, or permit any Subsidiary so to do, other than (i) indebtedness to Secured Party under the -10- 11 Agreement, (ii) accounts payable and other liabilities created in the ordinary course of business but not including any liability or indebtedness incurred in connection with the borrowing of money, (iii) liability of indebtedness incurred by Debtor in a public offering of debt securities by the Debtor, (iv) liability of indebtedness incurred by the Debtor in a private offering of debt securities by the Debtor, or (v) indebtedness evidenced by liens described in clause (v) of the definition of Permitted Liens. For purposes of this Section 18(d), "Indebtedness" shall mean (i) all indebtedness for borrowed money or for the deferred purchase price of property, (ii) all obligations for the payment of rent or hire of property of any kind whatsoever under leases or lease arrangements which under generally accepted accounting principles are required to be capitalized, (iii) all obligations under conditional sales or other title retention agreement, and (iv) all indebtedness for borrowed money secured by any lien upon property owned by the Debtor (whether or not the holder of such indebtedness has recourse against the Debtor). e) Permit at any time the ratio of Indebtedness to Tangible Net Worth to be more than 5.0 to 1.0 for purposes of this Section 18(e), "Indebtedness" shall mean consolidated total liabilities of Debtor and its Subsidiaries determined in accordance with generally accepted accounting principles consistently applied. "Tangible Net Worth" shall mean the excess of consolidated total assets of Debtor and its Subsidiaries over consolidated total liabilities of Debtor and its Subsidiaries, each to be determined in accordance with generally accepted accounting principles consistently applied excluding however, from the determination of consolidated total assets, all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation, goodwill, patents, trademarks, trade names, copyrights and franchises. f) Permit the aggregate outstanding amount of Accounts due from Vargas, Inc. net of allowances or reserves to exceed $1,500,000.00 at any one time. 19. The occurrence of any of the following events shall constitute a default ("Event of Default") by Debtor under this Agreement: a) Debtor fails to pay any Obligation, excluding reasonable expenses, when due and payable or declared due and payable, and with respect to expenses, Debtor fails to pay any reasonable expense within five (5) days of when such expense is due and payable or declared due and payable; or b) Debtor fails or neglects to perform, keep or observe any term, provision, condition, warranty, representation or covenant, other than those contained in Paragraph 3, Paragraph 5, Paragraph 5A, Paragraph 17(c) through 17(g) or in Paragraph 18 hereof, contained in this Agreement or in any other instrument or document delivered pursuant hereto or in any other agreement, instrument or document under which Debtor is obligated to Secured Party and such failure or neglect continues for twenty (20) days after Secured Party gives Debtor notice thereof; or c) Debtor fails or neglects to perform, keep or observe any term, provision, condition, warranty, representation or covenant contained in Paragraph 3, Paragraph 5, Paragraph 5A, Paragraph 17(c) through 17(g) or in Paragraph 18 hereof. d) Debtor or any guarantor, surety or other party liable upon any Obligation makes any false, untrue, incomplete or misleading representation, warranty, schedule, report or other communication to Secured Party in connection with this Agreement or any transaction relating thereto which, in any such case, is material in the reasonable judgment of Secured Party; or e) Debtor or any guarantor, surety or other party liable upon any Obligation becomes insolvent or generally fails to pay, or admits in writing its inability to pay, its debts as they mature; or f) Debtor or any guarantor, surety or other party liable upon any Obligation makes an assignment for the benefit of creditors, commences a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect or any successor legislation) or files a petition thereunder; or petitions or applies to any tribunal for any receiver, custodian or trustee of Debtor or any such guarantor, surety or other party or any substantial part of its property; or commences any proceeding relating to Debtor or any guarantor, surety or other party liable upon any Obligation, under any reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction whether now or hereafter in effect, or there is commenced against Debtor or any guarantor, surety or party liable on any Obligation any such proceeding which proceeding is not dismissed within 45 days; or Debtor or any guarantor, surety or party liable on any Obligation by any act indicates its consent to, approval of or acquiescence in any such proceeding or of the appointment of any receiver, custodian or trustee for Debtor or any guarantor, surety or any party liable upon any Obligation or any substantial part of its property; or Debtor or any guarantor, surety or party liable on any Obligation suffers any such custodianship, receivership or trusteeship; or g) any guarantor, surety or other party liable upon any Obligation shall die or become incompetent; or h) any guarantor, surety or other party liable upon any Obligation shall deny or contest its liability with respect to any Obligation or any liability of any guarantor, surety or other party liable upon any Obligation with respect to such Obligation shall be declared to be null and void; or i) Debtor, or any guarantor, surety or party liable upon any Obligation shall be dissolved or liquidated or be a party to any merger or consolidation without the prior written consent of Secured Party; or -11- 12 j) the loss, theft, substantial damage or destruction of any material portion of the Inventory or Equipment shall occur, which is not insured as required by this Agreement; or k) any guarantor, surety or other party liable on any Obligation shall fail or neglect to perform, keep or observe any term, provision, condition, covenant, warranty or representation contained in any agreement, instrument or document under which it is obligated to Secured Party or which it delivered to the Secured Party in connection herewith; or l) any judgment against the Debtor in an amount exceeding $50,000 or any and all attachments, executions, levies or restraining notices against its property having an aggregate value in excess of $50,000 remain unpaid or unstayed on appeal or undischarged, unbonded or undismissed for a period of thirty days; or m) any obligation of the Debtor for the payment of borrowed money in excess of $350,000 in the aggregate is not paid when due or within any grace period for the payment thereof or there shall occur any default in the performance or observance of any term, condition or agreement contained in such obligation or in any agreement relating thereto if the effect of such nonpayment or other default is to cause the holder or holders of such obligation to cause such obligation to become due prior to its stated maturity. 20. Upon the occurrence of any of the Events of Default specified in paragraph 19 hereof, Secured Party shall have all the rights and remedies of a secured party under the Uniform Commercial Code and other applicable laws with respect to all Collateral in which Secured Party has a security interest, such rights and remedies being in addition to all of Secured Party's other rights and remedies provided for herein. Secured Party may require the Debtor to assemble the Collateral at Debtor's expense at such place or places as the Secured Party designates, and Secured Party shall have the right, with or without legal process and without prior notice or demand, to keep possession of the Collateral or any part thereof and to enter any premises for taking possession thereof. Secured Party may sell or cause to be sold any or all of such Collateral in one or more sales or parcels, at such price and upon such terms as Secured Party may deem best, and for cash or on credit, or for future delivery, without Secured Party assuming any credit risk and at a public or private sale as Secured Party may deem appropriate. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will give Debtor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. The requirements of reasonable notice shall be met if any such notice is mailed, postage prepaid, to Debtor's mailing address shown herein, at least ten (10) days before the time of the sale or other disposition thereof. Secured Party may invoice any such sale in its name or in Debtor's name, as Secured Party may elect, as the seller, and in such latter event such invoice may be marked payable to Secured Party. Secured Party may be the purchaser at any such public sale and thereafter hold the property so sold at public sale, absolutely free from any claim or right of whatsoever kind including any equity of redemption. The proceeds of sale shall be applied first to all costs and expenses of and incident to such sale, including attorneys' fees, and then to the payment (in such order as Secured Party may elect) of all Obligations. Secured Party will return any excess to Debtor and Debtor shall remain liable for any deficiency. All Secured Party's rights and remedies under this Agreement are cumulative and non-exclusive. 21. The term of this Agreement (the "Term") shall begin as of the date hereof and continue until the last day of the 36th month hereafter and thereafter shall be automatically renewed from year to year unless terminated on such date or any anniversary thereof by either party hereto giving at least sixty (60) days prior written notice of such termination to the other. Notwithstanding the foregoing, upon the occurrence of an Event of Default under paragraph 19(f), this Agreement shall automatically terminate without notice and all Obligations shall immediately become due and payable, and upon the occurrence of any other Event of Default, Secured Party may terminate this Agreement with notice and all Obligations shall, unless and to the extent that Secured Party otherwise elects, become immediately due and payable. Until all Obligations shall have been fully paid and satisfied, and notwithstanding any termination of this Agreement, Debtor shall continue to assign Accounts to Secured Party and turn over collections to Secured Party as herein provided and this Agreement shall remain in full force and effect as to, and be binding upon, Debtor, and Secured Party shall retain its security interest in all Collateral. Debtor may repay the facility at any time in whole or in part without premium or penalty by giving Secured Party sixty (60) days' written notice of such repayment. The Term Loan evidenced by the Term Loan Note dated March 11, 1994 shall be payable, with respect to principal, as follows, subject to acceleration upon the occurrence of an Event of Default under this Agreement or termination of this Agreement: consecutive monthly installments of $17,857.14 commencing on April 1, 1994 and on the first day of each month thereafter with a final payment in an amount equal to the unpaid principal amount plus all accrued interest thereon. Debtor may sell such Real Property or refinance such Term Loan Note so long as no Event of Default has occurred and is continuing, provided that there is paid to Secured Party the net proceeds thereof, but not less than $1,012,500.00 and not more than the then remaining principal amount of, plus all accrued interest on, such Term Loan with such amount to be applied in reduction or discharge of such Term Loan. Upon such sale of the Real Property or refinancing of such Term Loan, Secured Party shall release the Mortgage; provided, however, Secured Party shall receive an executed mortgagee waiver on terms and conditions satisfactory to Secured Party from the refinancing party, if any. Such Term Loan Note shall be subject to mandatory prepayments upon disposition of the Real Property in an amount equal to the net proceeds realized from such disposition. If the amount so paid is less than the then principal amount of the Term Loan Note, then the monthly installments remaining on the Term Loan Note shall be reduced, pro rata, based on the amount so paid. -12- 13 22. This Agreement is made and is to be performed under the laws of the State of New York and shall be governed by and construed in accordance with said laws. Debtor expressly submits and consents to the jurisdiction of any federal, state or local court, located in the State of New York, City of New York, with respect to any controversy arising out of or relating to this Agreement or any amendment or supplement thereto or to any transactions in connection therewith and Debtor hereby agrees that service of any summons or complaint or other process in any action or proceeding involving any such controversy may be made by registered or certified mail to it at the address appearing herein and service so made shall be deemed to be completed five business days after mailing; failure on the part of Debtor to appear or answer within thirty days after such mailing of such summons, complaint or process shall constitute a default entitling Secured Party to enter a judgment or order as demanded or prayed for therein to the extent that said court or duly authorized officer thereof may authorize or permit. DEBTOR HEREBY WAIVES ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY SUCH ACTION OR PROCEEDING AND ANY OBJECTION OF FORUM NON CONVENIENS OR VENUE IN ANY SUCH ACTION OR PROCEEDING. No failure or delay by Secured Party in exercising any of its powers or rights hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such power or right preclude other or future exercise thereof or the exercise of any other right or power. Secured Party's rights, remedies and benefits hereunder are cumulative and not exclusive of any other rights, remedies or benefits which Secured Party may have. Every provision of this Agreement is intended to be severable; if any term or provision of this Agreement shall be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. This Agreement may only be modified in writing and no waiver by Secured Party will be effective unless in writing and shall be sent to the other party at the address specified herein. This Agreement shall inure to the benefit of and shall bind the respective successors and assigns of Secured Party and of Debtor. Secured Party may sell, assign or transfer any of the Obligations and its rights and duties with respect thereto, and may deliver the Collateral, or any part thereof, to the assignee or transferee of the Obligations, who shall become vested with all the rights, remedies, powers, security interests and liens herein given to Secured Party in respect thereto; and Secured Party shall thereafter be relieved and fully discharged from any liability or responsibility in the premises. Debtor may not assign or transfer any of its rights or delegate any of its duties under this Agreement without the prior written consent of Secured Party. 23. Secured Party shall have the continuing and exclusive rights to apply or reverse and re-apply any and all payments to any portion of the Obligations. To the extent Debtor makes a payment or Secured Party receives any payment or proceeds of the Collateral for Debtor's benefit, which is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the Obligations, or part thereof intended to be satisfied, shall be revived and continue as if such payment or proceeds had not been received by Secured Party. 24. No termination of this Agreement or any guarantee of the Obligations shall affect or impair the powers, obligations, duties, rights, warranties, representations or liabilities of the parties hereto which arose or were made prior to such termination and are stated to survive such termination. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto on this 25th day of April, 1995. THE BANK OF NEW YORK JACO ELECTRONICS, INC. COMMERCIAL CORPORATION By: /s/ By: ----------------------- ----------------------- Title: Vice President -------------------- Title: Vice President -------------------- Address: 530 Fifth Avenue Address: 145 Oser Avenue New York, New York 10036 Hauppauge, NY 11788 NEXUS CUSTOM ELECTRONICS, INC. By: /s/ ------------------------ Title: Vice President --------------------- Address: Prospect Street Brandon, VT 05733 -13- 14 EXHIBIT A LETTERHEAD OF JACO Mr. Jeff Hegel Bank of New York 1 Penn Plaza, 9th Floor New York, NY 10119 Dear Mr. Hegel: This letter will serve as formal request to rollover our Eurodollar LIBOR accounts expiring as follows: Jaco Electronics, Inc. Revolver Amount: Term: Jaco Electronics, Inc., Term Amount: Term: Please confirm this letter by phone. Feel free to contact me if you have any questions. Very truly yours, 15 SCHEDULE 1 Permitted Liens - Clause (vi) UCC filings against Jaco Electronics Inc.
Secured Pty. File # Date Jurisdiction Collateral ------------ ------ ---- ------------ ---------- GECC 035487 2/24/94 NYS Specific Equip. " 02806 2/24/94 Suffolk " " " 079214 4/22/94 NYS " " " 180236 9/1/94 NYS " " " 14688 9/6/94 Suffolk " " " 06283 4/22/94 Suffolk " " Winbond 184633 4/30/93 NYS Computers Pacific 15851 9/28/94 Suffolk " Machinery Credit 01355 1/17/91 Suffolk Leased Equip. Pacific 194446 9/22/94 NYS Computers Machinery Credit 014352 1/23/91 NYS Leased Equip. Toshiba 173822 8/13/90 NYS Leased Equip. Lease America 107892 5/26/92 NYS Leased Equip. Atlantic 015675 1/23/90 NYS Leased Equip. Master Lease 155753 7/24/92 NYS Copier Leased Pitney Bowes 000522 1/3/95 NYS Leased Equip.
16 SCHEDULE I (continued) Permitted Liens -- Clause (vi) UCC filings against Nexus Custom Electronics, Inc. as follows: 1. Security interests existing when Nexus Custom Electronics Inc. was acquired by Jaco Electronics Inc. on March 11, 1994 in favor of the following Secured Parties: Eaton Financial Corporation Hewlett Packard Company Finance and Remarketing Division Reprographics of N.E. GenRad Inc. M&I First National Leasing Corp. 2. Security interests granted by Nexus Custom Electronics, Inc. subsequent to March 11, 1994 to Vermont National Bank and/or Vermont Economic Development Authority and/or Rutland Economic Development Corporation on the following equipment: Electrovert Wave Solder System Type EPK + 400F S/N 10540620061 Carrier Chiller Process Equipment Model 30HK060670 S/N 2594-107610 Digital Microvax 3100 Computer System and software S/N KA4288C2C1 FUJI CP-3 Chip Shooter In-Line Semi-Arqueout Cleaning System Cellular Manufacturing Equipment Mydata Tape Magazine TM88 Computer Workstations - FY 94/95 Acquisition DEK 260 Series High Precision Screen Printer with modular upgrade capability, align vision, programmable PCB/stencil separation and menu driven setup 17 SECRETARY'S CERTIFICATE OF DIRECTORS' RESOLUTIONS RESOLVED, that any officer, including without limitation, the President, Vice President, Secretary and Treasurer of this Corporation, and each of them, are hereby authorized and directed to execute and deliver on behalf of this Corporation to The Bank of New York Commercial Corporation ("Lender") a Restated and Amended Loan and Security Agreement -- Accounts Receivable and Inventory and related Uniform Commercial Code Financing Statements; and it is further RESOLVED, that any such officer may from time to time modify or supplement such Restated and Amended Loan and Security Agreement -- Accounts Receivable and Inventory and they or any persons hereafter and from time to time designated by any of them to act for this Corporation are hereby further authorized and empowered from time to time to sell, assign, transfer and deliver, endorse, negotiate or otherwise transfer to Lender and its assigns any and all accounts receivable now or hereafter belonging to or acquired by this Corporation, and for said purposes to execute and deliver any and all assignments, schedules, transfers, endorsements, contracts, agreements or other instruments in respect thereof and to make remittances and payments in respect thereof by checks, drafts or otherwise, and to do and perform all such other acts and things deemed by such officer necessary, convenient and proper to carry out, modify or supplement any such agreement and arrangements made with Lender. RESOLVED, that said documents shall be substantially in the forms presented to this meeting; and it is further RESOLVED, that said Officers and each of them are hereby authorized and directed to execute and deliver all further documentation and to do all other acts that they may deem convenient or proper to carry out the foregoing; and it is further RESOLVED, that all action heretofore taken and all documentation heretofore delivered by any of said officers in furtherance of the foregoing is hereby ratified and confirmed. I, HERBERT ENTENBERG, hereby certify that I am Secretary of Nexus Custom Electronics, Inc., a New Jersey corporation; that I am the custodian of the corporate records and the seal of said Corporation; that the foregoing is a true and correct copy of resolutions duly adopted and ratified at a special meeting of the Board of Directors of said Corporation, duly convened and held in accordance with its by-laws and the laws of said State, as taken and transcribed by me from the minutes of said meeting and compared by me with the original of said resolutions recorded in said minutes, and that these resolutions have not been modified, repealed or rescinded but are in full force and effect. I further certify that the following are all of the officers (empowered as set forth above) of said Corporation and that all of the directors of said Corporation are officers of said Corporation, namely: OFFICERS: President/Treasurer: /s/ -------------------------------- Vice President: /s/ -------------------------------- Secretary: /s/ Herbert Entenberg -------------------------------- Treasurer: -------------------------------- WITNESS my hand and the seal of said Corporation this 25th day of April, 1995. /s/ Herbert Entenberg -------------------------------- Secretary [CORPORATE SEAL] 18 SECRETARY'S CERTIFICATE OF DIRECTORS' RESOLUTIONS RESOLVED, that any officer, including without limitation, the President, Vice President, Secretary and Treasurer of this Corporation, and each of them, are hereby authorized and directed to execute and deliver on behalf of this Corporation to The Bank of New York Commercial Corporation ("Lender") a Restated and Amended Loan and Security Agreement -- Accounts Receivable and Inventory and related Uniform Commercial Code Financing Statements; and it is further RESOLVED, that any such officer may from time to time modify or supplement such Restated and Amended Loan and Security Agreement -- Accounts Receivable and Inventory and they or any persons hereafter and from time to time designated by any of them to act for this Corporation are hereby further authorized and empowered from time to time to sell, assign, transfer and deliver, endorse, negotiate or otherwise transfer to Lender and its assigns any and all accounts receivable now or hereafter belonging to or acquired by this corporation, and for said purposes to execute and deliver any and all assignments, schedules, transfers, endorsements, contracts, agreements or other instruments in respect thereof and to make remittances and payments in respect thereof by checks, drafts or otherwise, and to do and perform all such other acts and things deemed by such officer necessary, convenient and proper to carry out, modify or supplement any such agreement and arrangements made with Lender. RESOLVED, that said documents shall be substantially in the forms presented to this meeting; and it is further RESOLVED, that said Officers and each of them are hereby authorized and directed to execute and deliver all further documentation and to do all other acts that they may deem convenient or proper to carry out the foregoing; and it is further RESOLVED, that all action heretofore taken and all documentation heretofore delivered by any of said officers in furtherance of the foregoing is hereby ratified and confirmed. I, HERBERT ENTENBERG, hereby certify that I am Secretary of Jaco Electronics, Inc., a New York corporation; that I am the custodian of the corporate records and the seal of said Corporation; that the foregoing is a true and correct copy of resolutions duly adopted and ratified at a special meeting of the Board of Directors of said Corporation, duly convened and held in accordance with its by-laws and the laws of said State, as taken and transcribed by me from the minutes of said meeting and compared by me with the original of said resolutions recorded in said minutes, and that these resolutions have not been modified, repealed or rescinded but are in full force and effect. I further certify that the following are all of the officers (empowered as set forth above) of said Corporation and that all of the directors of said Corporation are officers of said Corporation, namely: OFFICERS: President/Treasurer: /s/ ------------------------------- Vice President: /s/ ------------------------------- Secretary: /s/ Herbert Entenberg ------------------------------- Treasurer: ------------------------------- WITNESS my hand and the seal of said Corporation this 25th day of April, 1995. /s/ Herbert Entenberg -------------------------------- Secretary [CORPORATE SEAL] 19 AMENDMENT TO TERM LOAN NOTES EXECUTED BY JACO ELECTRONICS, INC. IN FAVOR OF THE BANK OF NEW YORK COMMERCIAL CORPORATION Amendment dated as of April 25, 1995 to (i) the Term Loan Note executed by Jaco Electronics, Inc. (the "Debtor") in favor of The Bank of New York Commercial Corporation (the "Secured Party") in the principal amount of $3,000,000, dated June 1, 1989 as amended (the "$3,000,000 Note"); (ii) the Term Loan Note executed by the Debtor in favor of the Secured Party in the principal amount of $5,000,000, dated March 31, 1990 as amended (the "$5,000,000 Note"); and (iii) the Additional Term Loan Note executed by the Debtor in favor of the Secured Party in the principal amount of $1,500,000, dated March 11, 1994 (the "$1,500,000 Note"). The $3,000,000 Note, the $5,000,000 Note and the $1,500,000 Note may be collectively referred to as the "Notes". BACKGROUND Debtor executed the $3,000,000 Note and the $5,000,000 Note in favor of Secured Party, which Notes are payable upon the earlier of (i) July 31, 1995 (the "Maturity Date") or (ii) termination of the "Loan Agreement" (as defined in the Notes) or cessation of operation thereunder or (iii) the occurrence of an event of default under the Loan Agreement. Debtor and Secured Party have agreed to enter into a Restated and Amended Loan and Security Agreement (the "Restated Agreement") and in connection therewith Debtor has requested that Secured Party extend the Maturity Date of the $3,000,000 Note and the $5,000,000 Note to January 31, 1998 and Secured Party has agreed to do so subject to the terms hereof. NOW THEREFORE, it is hereby agreed as follows: 1. All references to the Loan Agreement in the Notes shall now and hereafter be deemed to refer to the Restated Agreement. 2. The second paragraph of the $3,000,000 Note is hereby amended to read in its entirety as follows: "(i) the principal sum of THREE MILLION DOLLARS ($3,000,000), payable upon the earlier of (i) January 31, 1998 or (ii) as otherwise provided 20 herein, at which time the remaining unpaid interest shall be due and payable; and" 3. The second paragraph of the $5,000,000 Note is hereby amended to read in its entirety as follows: "(i) the principal sum of FIVE MILLION DOLLARS ($5,000,000), payable upon the earlier of (i) January 31, 1998 or (ii) as otherwise provided herein, at which time the remaining unpaid interest shall be due and payable; and" 4. This Amendment shall become effective as of the date first written above upon the Secured Party's receiving: (i) counterparts hereof duly executed by each of the parties hereto and (ii) executed confirmations of this Amendment from the guarantors of the obligations of the Debtor. Upon receipt of such documents, any reference to the Notes on and after the date first above written shall be a reference to the Notes as amended by this Amendment. 5. The Debtor certifies to the Secured Party that no event of default under the Notes or Loan Agreement, or any event that with the passage of time or giving of notice, or both, would constitute such an event of default, has occurred and is continuing. 6. Except as expressly amended hereby, all other terms, conditions and provisions of the Notes are hereby ratified, confirmed and continued in effect. 7. This Amendment may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Amendment to the Notes as of the day and year first above written. THE BANK OF NEW YORK COMMERCIAL CORPORATION JACO ELECTRONICS CORP. [Secured Party] [Debtor] By: /s/ By: /s/ --------------------------- ------------------------------ Title: Title: Vice President -- Finance -2-