-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JKNXSlWbiF6Fm7AxS0AO1BDtGGvQSpgOX3NUZrmEqWb+eXyR2t/zLbhJc85t/bhN 6ZIGKYtpE8VlXgEXe3OhJA== 0000950123-95-002903.txt : 19951016 0000950123-95-002903.hdr.sgml : 19951016 ACCESSION NUMBER: 0000950123-95-002903 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19951013 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACO ELECTRONICS INC CENTRAL INDEX KEY: 0000052971 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 111978958 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-62559 FILM NUMBER: 95580425 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 S-2/A 1 AMENDMENT NO. 1 TO FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1995 REGISTRATION NO. 33-62559 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ 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, Including Zip Code) ------------------------ JOEL H. GIRSKY, PRESIDENT JACO ELECTRONICS, INC. 145 OSER AVENUE HAUPPAUGE, NEW YORK 11788 (Name and Address of Agent for Service) ------------------------ (516) 273-5500 (Telephone Number, Including Area Code, of Agent for Service) ------------------------ COPIES OF ALL COMMUNICATIONS REGARDING THIS REGISTRATION STATEMENT SHOULD BE SENT TO: STEPHEN I. BUDOW, ESQ. MARK A. KLEIN, ESQ. MORRISON COHEN SINGER & WEINSTEIN, LLP FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN 750 LEXINGTON AVENUE 9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST NEW YORK, NEW YORK 10022 BEVERLY HILLS, CA 90212-3480 (212) 735-8600 (TELEPHONE) (310) 273-1870 (TELEPHONE) (212) 735-8708 (FACSIMILE) (310) 274-8293 (FACSIMILE)
------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
=================================================================================================================== PROPOSED PROPOSED MAXIMUM TITLE OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- Common Stock, par value $0.10...... 1,840,000 shares(3) $12.47 $22,944,800 $7,912.00 Representatives' Warrants.......... 70,000 warrants(4) $ .001 $ 70 $ .02 Common Stock....................... 70,000 shares(5) $14.96 $ 1,047,200 $ 361.10 - ------------------------------------------------------------------------------------------------------------------- Total............................................................................................ $8,273.12 - -------------------------------------------------------------------------------------------------------------------
(1) As adjusted for a 4-for-3 stock split which was effective on September 22, 1995. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) based on the average of the high and low prices of the Registrant's Common Stock on The Nasdaq National Market on September 5, 1995 (as adjusted for a 4-for-3 stock split which was effective on September 22, 1995). (3) Includes 240,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (4) To be issued to the Representatives. (5) Issuable upon exercise of the Representatives' Warrants. This Registration Statement also relates to such indeterminate number of shares of Common Stock issuable pursuant to the anti-dilution provisions of the Representatives' Warrants. APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 JACO ELECTRONICS, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-K
ITEM NO. AND CAPTION LOCATION IN PROSPECTUS - -------------------- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................ Cover of Registration Statement; Cross Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus................... Available Information; Incorporation of Certain Documents by Reference; Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.... Prospectus Summary; Incorporation of Certain Documents by Reference; Risk Factors 4. Use of Proceeds......................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price......... Outside Front Cover Page; Underwriting 6. Selling Shareholders.................... Prospectus Summary; Principal and Selling Shareholders 7. Plan of Distribution.................... Underwriting; Inside Front Cover Page 8. Description of Securities to be Registered......................... Description of Capital Stock 9. Interests of Named Experts and Counsel............................... Legal Matters 10. Information with Respect to the Registrant............................ Prospectus Summary; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management 11. Incorporation of Certain Information by Reference............................. Incorporation of Certain Documents by Reference 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................... Inapplicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 13, 1995 PROSPECTUS 1,600,000 SHARES [LOGO] COMMON STOCK JACO ELECTRONICS, INC. Of the 1,600,000 shares of Common Stock offered hereby, 1,325,000 shares are being sold by Jaco Electronics, Inc. (together with its subsidiaries, "Jaco" or the "Company") and 275,000 shares are being sold by certain shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. The Company's Common Stock is traded on The Nasdaq National Market under the symbol "JACO." The last sale price for the Common Stock on October 12, 1995, was $13.50 per share (which gives effect to a 4-for-3 stock split which was effective on September 22, 1995). See "Price Range of Common Stock." ------------------------ PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE DISCUSSION UNDER "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===================================================================================================== UNDERWRITING PROCEEDS TO THE PRICE TO DISCOUNTS AND PROCEEDS TO THE SELLING THE PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2) - ----------------------------------------------------------------------------------------------------- Per Share.................... $ $ $ $ - ----------------------------------------------------------------------------------------------------- Total(3)..................... $ $ $ $ - -----------------------------------------------------------------------------------------------------
(1) Excludes the value of warrants (the "Representatives' Warrants") to purchase up to 70,000 shares of Common Stock. The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"). See "Underwriting." (2) Before deducting expenses estimated at $ payable by the Company and $ payable by the Selling Shareholders. See "Underwriting." (3) The Company has granted an option to the Underwriters, exercisable within forty-five (45) days from the date of this Prospectus, to purchase up to 240,000 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If the Underwriters' over-allotment option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ , and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters, subject to the right to reject any order in whole or in part and certain other conditions. It is expected that delivery of such shares will be made through the offices of Cruttenden Roth Incorporated, Irvine, California or the facilities of the Depository Trust Company on or about October , 1995. ------------------------ CRUTTENDEN ROTH CLEARY GULL REILAND & MCDEVITT INC. Incorporated The date of this Prospectus is October , 1995 4 (Logo with four pictures of Electronic Components) AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, statements and other information can be inspected and copies obtained at the public reference facilities maintained by the Commission at its offices at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, New York, New York 10048. Also, copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option, Representatives' Warrants or options granted or reserved under the Company's stock option plans and gives effect to a 10% stock dividend paid on March 10, 1995 and a 4-for-3 stock split which was effective on September 22, 1995. Investors should carefully consider the information set forth under the heading, "Risk Factors." THE COMPANY 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 several Fortune 500 manufacturers. In fiscal 1995, the Company distributed electronic components to thousands of customers, none of which individually represented more than 3% of net sales. 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, exclusive of interconnects, accounted for approximately 52% of the Company's net distribution sales in the year ended June 30, 1995. Through acquisitions and internal growth, the Company's sales and earnings increased from approximately $77.4 million and $312,000, respectively, in the year ended June 30, 1992 to $138.7 million and $1.9 million, respectively, in the year ended June 30, 1995. According to the April 17, 1995 edition of Electronic Buyers' News, an industry publication, the Company ranked 8th among distributors of passive electronic components in the United States and 19th overall among electronic component distributors in the United States. 3 6 Jaco is a service-oriented company built on strong customer and supplier relationships. Management believes that the Company's logo, "Today Isn't Soon Enough," is widely recognized in the electronics distribution industry and articulates the Company's approach and commitment to its customers. The Company's objective is to improve its position as a national distributor of electronic components through increased sales and improved operating efficiencies achieved by: (i) pursuing strategic acquisitions; (ii) capitalizing on the trend towards outsourcing by increasing sales of value-added services, particularly contract manufacturing; (iii) expanding geographic coverage in targeted areas of the United States and Canada where the Company does not yet have a significant presence; (iv) expanding and diversifying its product lines by obtaining new distributorships with additional suppliers; and (v) expanding its customer base to include more large, high-volume customers while maintaining its traditional focus on its small and medium-sized customers. Fundamental to the success of the Company's strategy is its continuing emphasis on quality, controlling costs and improving customer service. The Company was organized in the State of New York in 1961. Its principal executive offices are located at 145 Oser Avenue, Hauppauge, New York 11788, and its telephone number is (516) 273-5500. Recent Developments. The Company recently announced that its net sales, net earnings and earnings per share were $40.1 million, $808,000 and $.32 per share, respectively, for the three months ended September 30, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." THE OFFERING Common Stock offered: By the Company.................... 1,325,000 shares By the Selling Shareholders....... 275,000 shares Common Stock to be outstanding after the offering...................... 3,789,384 shares* Use of proceeds..................... Net proceeds will be used to reduce the Company's outstanding bank indebtedness. See "Use of Proceeds." Investment considerations........... Prospective investors should consider carefully the factors set forth under "Risk Factors." Nasdaq National Market Symbol....... JACO
- --------------- * Subject to adjustment to avoid fractional shares as a result of the Company's 4-for-3 stock split. 4 7 SUMMARY FINANCIAL DATA The following table sets forth summary financial data for the Company for the fiscal years ended June 30, 1993 through 1995. Such information and data should be read in conjunction with the "Selected Consolidated Financial Data" and the Consolidated Financial Statements and related Notes thereto included elsewhere in this Prospectus.
YEAR ENDED JUNE 30, ------------------------------------- 1993 1994 1995 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) STATEMENT OF INCOME DATA: Net sales................................................. $ 96,675 $ 105,213 $ 138,683 Gross profit.............................................. 21,045 22,175 28,781 Selling, general and administrative expenses.............. 17,786 19,155 23,551 Net earnings.............................................. 1,384 1,430 1,916 Net earnings per common share............................. $ 0.55 $ 0.56 $ 0.78 Supplemental net earnings per common share(1)............. -- -- $ .72 Weighted average number of common and common equivalent shares outstanding...................................... 2,522,980 2,551,173 2,461,091 OTHER DATA: Inventory turnover ratio.................................. 4.4x 4.6x 4.6x Average number of days in accounts receivable............. 51 52 50
AT JUNE 30, 1995 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital..................................................... $30,741 $ 30,741 Total assets........................................................ 56,323 56,323 Short-term debt..................................................... 453 453 Long-term debt and capitalized lease obligations.................... 23,666 8,351 Shareholders' equity................................................ 13,227 28,542
- ------------------------------- (1) Supplemental net earnings per common share is computed based on the weighted average number of common and common equivalent shares outstanding during the period, as if the shares issuable pursuant to this offering were outstanding at the beginning of the period after giving retroactive effect to the reduction of interest expense, net of income tax effect, applicable to the reduction of the Company's bank indebtedness. (2) Adjusted to reflect the sale of 1,325,000 shares of Common Stock by the Company and the receipt and application of the net proceeds from this offering estimated at $15,315,000 to the reduction of the Company's bank indebtedness. See "Use of Proceeds." 5 8 RISK FACTORS Prospective investors should carefully consider the following factors, as well as all other matters set forth elsewhere in this Prospectus, before making an investment in the Common Stock offered hereby. DEPENDENCE ON SUPPLIERS. The Company relies on a limited number of suppliers for products which generate a significant portion of its sales. Substantially all of the Company's inventory has and will be purchased from suppliers with which the Company has entered into non-exclusive distributor agreements. Such agreements are typically cancelable on short notice. These agreements are generally designed to protect the Company against product obsolescence and price reductions. However, there can be no assurance that these agreements will not be canceled. In the year ended June 30, 1995, the Company's three largest suppliers accounted for approximately 37% of the Company's sales. No other supplier accounted for more than 5% of the Company's sales. While the Company does not believe that the loss of any one supplier would have a material adverse impact upon the Company since most products sold by the Company are available from multiple sources, the Company's future success will depend in large part on maintaining relationships with existing suppliers and developing relationships with new ones. The loss of, or significant disruptions in, relationships with major suppliers could have a material adverse effect on the Company's business, since there can be no assurance that the Company will be able to replace lost suppliers. 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/Kyocera ("AVX"), canceled its distributor agreement with the Company. Based upon sales for the year ended June 30, 1995, AVX accounted for approximately 15% of the Company's total sales. 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 for similar products with two new suppliers, Sprague, Inc. and Johanson Dielectric Inc. However, there can be no assurance that the Company will, in fact, be able to replace the AVX sales. Moreover, the Company's financial results in future periods could be adversely affected to the extent it is unable to replace sales of the AVX product line with sales of products from other suppliers and, even if it succeeds in replacing the AVX product line, to the extent the Company's customers are unwilling to purchase such other products. At various times there have been shortages of components in the electronics industry and certain components, including certain semiconductor devices and capacitors, have been subject to limited allocation by some of the Company's suppliers. Although such shortages and allocations have not had a material adverse effect on the Company's results of operations or finances, there can be no assurance that any future shortages or allocations would not have such an effect on the Company. COMPETITION. The electronic components and related services, distribution and contract manufacturing industries are highly competitive. In the distribution of electronic components and related services, the Company generally competes with local, regional and national distributors and electronic component manufacturers, including some of its own suppliers. In the area of contract manufacturing, the Company competes against numerous domestic and offshore manufacturers, as well as the in-house manufacturing capabilities of its existing and potential customers. Many of such competitors have greater name recognition and financial and other resources than the Company. Moreover, the electronics distribution industry is going through a period of rapid consolidation that is intensifying competition. There can be no assurance that the Company will continue to compete successfully with existing or new competitors and failure to do so would have a material adverse effect on the Company's operating results. See "Business -- Competition." DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon the services of its executive officers, including Joel H. Girsky, its Chairman, President and Treasurer, and Charles B. Girsky, its Executive Vice President and Director. Although the Company continued to operate smoothly during the temporary absence due to illness of Joel H. Girsky for two months during 6 9 1995, the permanent loss for any reason of either Joel or Charles Girsky, or one or more of the Company's other key executives, could have a material adverse effect upon the business of the Company. While the Company believes that it would be able to locate suitable replacements for its executives if their services were lost, there can be no assurance that it would, in fact, be able to do so. The Company's future success will also depend, in part, upon its continuing ability to attract and retain highly qualified personnel. UNCERTAINTY OF FUTURE ACQUISITIONS. The Company's growth strategy depends, in part, on its ability to identify and acquire compatible electronics distributors and/or contract manufacturers and to integrate the acquired operations. A portion of the Company's sales growth during fiscal 1995 resulted from the Nexus acquisition. See Note I of Notes to Consolidated Financial Statements. There can be no assurance that the Company will be able to locate additional appropriate acquisition candidates, that, if identified, any of such candidates will be acquired or that the operations of acquired candidates will be effectively integrated or prove profitable. The completion of future acquisitions requires the expenditure of sizable amounts of capital and management effort. Moreover, unexpected problems encountered in connection with the Company's acquisitions could have a material adverse effect on the Company. The Company could be forced to alter its strategy in the future if suitable acquisition candidates are not available or are too costly. See "Business -- Business Strategy." FOREIGN MANUFACTURING AND TRADE REGULATION. A significant number of the components sold by the Company are manufactured by foreign manufacturers. As a result, the Company, and its ability to sell certain products at competitive prices, could be adversely affected by increases in tariffs or duties, changes in trade treaties, strikes or delays in air or sea transportation and possible future United States legislation with respect to pricing and/or import quotas on products imported from foreign countries. The Company's ability to be competitive with respect to sales of imported components could also be affected by other governmental actions and policy changes relating to, among other things, anti-dumping and other international antitrust legislation and adverse currency fluctuations which could have the effect of making components manufactured abroad more expensive. Because the Company purchases products from United States subsidiaries or affiliates of foreign manufacturers, the Company's purchases are paid for in U.S. dollars, which usually reduces or eliminates the potential adverse effects of currency fluctuations. While the Company believes that the factors involving foreign components supply have not adversely impacted its business in the past, there can be no assurance that such factors will not materially adversely affect its business in the future. INDUSTRY CYCLICALITY AND POTENTIAL QUARTERLY FLUCTUATIONS. The electronics distribution industry has historically been affected by general economic downturns, which have often had an adverse economic effect upon manufacturers, end-users of electronic components and electronic component distributors such as the Company. In addition, the life-cycle of existing electronic products and timing of new product development and introduction can affect demand for electronic components. The Company's results of operations for any particular period may be adversely affected by numerous factors, such as the loss of key suppliers or customers, price competition, problems incurred in managing inventories or receivables, the timing or cancellation of orders from major customers, the timing or cancellation of purchase orders with suppliers and the timing of expenditures in anticipation of increased sales and customer product delivery requirements. Price competition in the industries in which the Company competes is intense and could result in gross margin declines, which could have an adverse impact on the Company's profitability. In various periods in the past, the Company's operating results have been affected by all of these factors. CONTINUED CONTROL BY PRESENT SHAREHOLDERS AND MANAGEMENT. Upon completion of the offering, Messrs. Joel H. Girsky and Charles B. Girsky will own an aggregate of 699,914 shares of Common Stock, representing approximately 18.5% of the outstanding shares. In the event of the exercise of all of their outstanding stock options, after completion of the offering the Girskys would own approximately 20.2% of the outstanding capital stock of the Company. As a result of such stock ownership and their positions as executive officers and as two of the four directors of the Company, they may be in a 7 10 position to elect a majority of the Board of Directors and to control the day-to-day affairs of the Company. NEED FOR ADDITIONAL AUTHORIZED AND UNISSUED SHARES; ISSUANCE OF PREFERRED STOCK AND NEWLY AUTHORIZED SHARES. The Company's Certificate of Incorporation (the "Certificate") authorizes the issuance of 5,000,000 shares of Common Stock and 100,000 shares of Preferred Stock. After giving effect to the issuance of the 1,325,000 shares of Common Stock offered by the Company hereunder, 240,000 shares underlying the over-allotment option, 70,000 shares underlying the Representatives' Warrants and of all shares covered by options granted under the Company's stock option plans, only approximately 450,000 authorized shares of Common Stock would remain unissued. As a result of the limited number of authorized and unissued shares of Common Stock available for future issuance, the Company intends at its 1995 annual meeting of shareholders, currently anticipated to be held in December 1995 (the "1995 Annual Meeting"), to seek approval from its shareholders to increase the number of shares of capital stock authorized to be issued to 10,000,000. If the Company's shareholders approve the increase in the number of authorized shares, shares may be issued to raise equity capital, in connection with acquisitions, or for anti-takeover or other purposes without further shareholder approval unless required by applicable law, which could result in dilution to current shareholders. The Company's management has no present intention of issuing additional shares other than as a result of the exercise of stock options or the Representatives' Warrants. If the Company's shareholders do not approve an increase in the number of authorized shares, the continued growth of the Company could be materially limited by its inability to raise additional equity capital when needed or to issue shares of capital stock in connection with future acquisitions or for other corporate purposes. The Company's Board of Directors has the power, in its discretion and without shareholder approval, to issue any or all authorized and unissued shares of capital stock authorized by the Certificate which are not reserved for issuance, as well as certain other securities exchangeable for, or rights to purchase, such shares, including the 100,000 shares of Preferred Stock currently authorized by the Certificate and any new shares of Common Stock authorized by shareholders at the 1995 Annual Meeting. Any Preferred Stock can be issued with such rights, preferences and limitations as may be determined by the Board. Any such issuances of Common or Preferred Stock may result in a reduction in the book value and/or market price of the outstanding shares and may reduce the proportionate ownership and voting power of each then existing shareholder. Further, any new issuances of securities could be used for anti-takeover purposes or to effect or avoid a change of control of the Company. POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be subject to significant fluctuations in response to such factors as, among others, variations in the anticipated or actual results of operations of the Company or of other distributors in the electronics industry and changes in conditions affecting the economy generally, the financial markets or the electronics distribution industry. Furthermore, relatively light trading volume of the Common Stock which occurred during periods in the recent past may exacerbate such volatility. 8 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,325,000 shares of Common Stock offered by it hereby are estimated to be approximately $15,315,000 (approximately $18,160,550, if the Underwriters' over-allotment option is exercised in full), based upon an assumed public offering price of $12.75 per share of Common Stock. The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. The Company intends to use such net proceeds to reduce the outstanding balance of its bank indebtedness (approximately $25,300,000 as of August 31, 1995) under its credit facility (the "Credit Facility") with The Bank of New York Commercial Corporation and NatWest Bank, N.A. The maximum amount available under the Credit Facility is $30,000,000. Borrowings under the Credit Facility have been used by the Company for working capital and to acquire the outstanding capital stock of Nexus. As of August 31, 1995, approximately $4,700,000 remained available to the Company under the Credit Facility. Of the amount borrowed under the Credit Facility, $8,000,000 is structured as a term loan; $1,500,000 (the outstanding balance of which was $1,196,000 at August 31, 1995) is structured as a term loan repayable in equal monthly installments of $17,857; and the balance is structured as a revolving line of credit. All amounts under the Credit Facility are due in September 1998 unless the Credit Facility is extended. Repayments of the term loans correspondingly increase amounts available under the revolving line of credit. The Credit Facility bears interest at the higher of the prime rate or the federal funds rate plus 1/2% or, at the Company's option, at a rate equal to LIBOR plus 2.5%. The rate charged at August 31, 1995 was 8.75%. As a result of the application of the net proceeds of this offering to reduce the Company's indebtedness under the Credit Facility, the amount available to be borrowed thereunder will be increased and may be drawn down in the future to provide the Company with funds for working capital or potential acquisitions of other component distributors which might be acquired for geographic, consolidation or franchise expansion reasons, or of other contract manufacturers of PCBs. The Company has no current plans, arrangements, or understandings, written or oral, with respect to any such acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". DIVIDEND POLICY 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 contains provisions that prohibit the Company from paying cash dividends on its Common Stock. 9 12 PRICE RANGE OF COMMON STOCK The Company's 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 through October 3, 1995 have been adjusted to give effect to a 4-for-3 stock split which was 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 FISCAL YEAR 1996: First quarter ended September 30, 1995........................... $13.88 $ 6.28 Second quarter ending December 31, 1995 (through October 12, 1995).................................... $13.50 $10.50
On October 12, 1995, the last reported sale price of the Company's Common Stock on The Nasdaq National Market was $13.50 per share (which gives effect to the 4-for-3 stock split which was effective on September 22, 1995). As of October 9, 1995, there were approximately 150 holders of record of the Company's Common Stock, who management believes held for more than 950 beneficial owners. 10 13 CAPITALIZATION The following table sets forth the short term debt and capitalization of the Company as of June 30, 1995 and as adjusted to reflect receipt of estimated net proceeds from the sale of 1,325,000 shares of Common Stock of approximately $15,315,000 and the application thereof to reduce bank indebtedness.
AT JUNE 30, 1995 -------------------------- ACTUAL AS ADJUSTED(1) ------- -------------- (IN THOUSANDS EXCEPT SHARE INFORMATION) Short-term debt: Current maturities of long-term debt payable and capitalized lease obligations(2)................................................. $ 453 $ 453 ======= ======= Long-term debt and capitalized lease obligations(2)................. $23,666 $ 8,351 ------- ------- Shareholders' equity: Preferred Stock: $10 par value, 100,000 shares authorized, none issued and outstanding or to be issued and outstanding, as adjusted....... -- -- Common Stock: $.10 par value, authorized shares; 2,464,384 shares issued and outstanding; 3,789,384 shares issued and outstanding, as adjusted........... 246 379 Additional paid-in capital.......................................... 5,014 20,196 Retained earnings................................................... 7,967 7,967 ------- ------- Total shareholders' equity..................................... 13,227 28,542 ------- ------- Total capitalization...................................... $36,893 $36,893 ======= =======
- ------------------------------- (1) As adjusted to reflect receipt of estimated net proceeds from the sale of 1,325,000 shares of Common Stock of approximately $15,315,000 and the application thereof to reduce bank indebtedness. See "Use of Proceeds." (2) See Note E of Notes to Consolidated Financial Statements. 11 14 SELECTED CONSOLIDATED FINANCIAL DATA The data set forth below is qualified by reference to and should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The following selected consolidated financial data have been derived from the audited Consolidated Financial Statements of the Company. The Consolidated Financial Statements as of June 30, 1994 and 1995 and for each of the three years in the period ended June 30, 1995 have been audited by Grant Thornton LLP, independent certified public accountants, and are included elsewhere in this Prospectus.
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
12 15 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. 13 16 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% ===== ===== =====
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. Interest expense is expected to decrease in fiscal 1996 as a result of the reduction of indebtedness under the Company's Credit Facility by application of the net proceeds of this offering. 14 17 Nexus recently moved operations from two formerly leased facilities in Vermont and one in 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. 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. 15 18 SELECTED QUARTERLY FINANCIAL DATA The following table sets forth certain statements of earnings information for the periods indicated. This information has been derived from unaudited financial statements which in the opinion of management, includes all adjustments (consisting only of normal recurring accrual adjustments) necessary for a fair presentation of such information. These operating results are not necessarily indicative of results for any future period and may fluctuate significantly from quarter to quarter in the future.
QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- ----------- ----------- FISCAL 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........... .11 .18 .23 .26 FISCAL 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 Net earnings........................ 654,033* 242,982 382,528 150,124 Earnings per common share........... .25* .10 .15 .06 FISCAL 1993 Net sales........................... $ 23,260,952 $23,452,161 $24,419,669 $25,542,623 Gross profit........................ 5,229,523 5,135,003 5,183,823 5,496,480 Net earnings........................ 287,094 296,693 338,595 462,013 Earnings per common share........... .11 .12 .13 .18
- ------------------------------- * Includes $241,000 or a $.09 per share benefit derived from cumulative effect of a change in accounting for income taxes. RECENT DEVELOPMENTS For the three months ended September 30, 1995, net sales were $40.1 million, an increase of $9.0 million or 29% as compared to $31.1 million for the first quarter of fiscal 1995. The increase in sales is the result of continued strength in the electronic components markets and the expansion of sales forces in existing and more recently established offices. Net earnings for the three months ended September 30, 1995 were $808,000, or $.32 per share, a 208% increase over the net earnings of $262,000, or $.11 per share, reported in the first quarter of fiscal 1995. The incremental growth in sales was primarily responsible for the increase in earnings. 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 16 19 September 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 increased to $4.0 million, from $127,000 in fiscal 1994 as a result of increases in accounts receivable and inventory, which were partially offset by increases in accounts payable, all of which is a reflection of higher sales. In fiscal 1995 the Company increased its borrowings under its Credit Facility by $4.6 million principally to provide cash for operating activities. 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's lenders under its Credit Facility have advised the Company of their willingness to increase the maximum amount thereof to $33 million. The Company expects that cash flow from operations and funds available under its Credit Facility, as same may be so amended, 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. 17 20 BUSINESS GENERAL Jaco markets and distributes passive and active electronic components to 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, a Vermont-based turnkey contract manufacturer of 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 fiscal 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 material 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 distribution industry and articulates the Company's approach and commitment to servicing its customers. 18 21 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 assocation, 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. A number of trends are affecting the electronic components distribution industry today. One of the most significant trends is that of consolidation. A series of mergers and acquisitions over the last ten years has created a number of very large distribution companies that have increasingly focused on larger customers and expansion of international operations. As a result, regional and smaller national distributors have gained market share among small and medium-sized OEMs. In addition, manufacturers of electronic components have contributed to this trend by limiting the number of distributors through which they market their products in an effort to improve operating efficiencies. Distributors which can demonstrate strong local market positions and client relationships are better positioned to obtain or retain distributorship arrangements with top manufacturers. As a result, many distributors in the industry have made substantial efforts to expand their market shares by emphasizing customer services, such as value-added, just-in-time inventory management, automatic replenishment and on-site inventory services. Another key trend affecting the industry is the outsourcing of component assembly by OEMs. Outsourcing allows OEMs to enhance profitability by concentrating resources on product design, marketing and other core aspects of their businesses. By serving many manufacturers of similar products, distributors can often produce subassemblies more efficiently than many small and medium-sized OEMs. BUSINESS STRATEGY The Company's objective is to improve its position as a rapidly growing distributor of passive and active electronic components in the United States. The Company's strategy for achieving this objective is to enhance operating results by increasing sales and improving operating efficiencies. The Company's strategy includes the following key elements: - Pursue Strategic Acquisitions. Among the factors driving consolidation of distributors are the desire of manufacturers to sell through fewer distributors, the need for distributors to improve operating results and the desire of OEMs to satisfy component requirements with fewer suppliers. The Company plans to actively seek complementary acquisitions which are expected 19 22 to increase sales, profits and earnings and strengthen the Company's presence in targeted markets. Management believes that there will be future opportunities for attractive and synergistic acquisitions. - Capitalize on the Trend Toward Outsourcing By Increasing Sales of Value-Added Services. As the trend toward outsourcing by OEMs of all sizes continues, the Company anticipates that it will have opportunities to provide additional value-added services to its customer base. The Company's large purchasing volumes and inventories and efficient operations enable it to offer small and medium-sized OEMs the opportunity to purchase electronic components and custom assemblies on a just-in-time basis at lower costs than they would otherwise incur. This enables the Company's customers to reduce end-product costs and required investments in working capital, as well as improve product quality. Additionally, value-added services enhance the Company's relationships with its customers, who come to rely upon the Company's expertise and efficiency in assembling key parts of their end-products. The Company first offered contract manufacturing services in March 1994, when it acquired Nexus. Contract manufacturing revenues amounted to 9% of net sales in the fiscal year ended June 30, 1995. - Expand United States Geographic Coverage. The Company has expanded its United States geographic coverage by opening new sales offices in various major metropolitan markets. For example, the Company established three new sales offices located in Minnesota, Oregon and Colorado in November 1993, January 1994 and September 1995, respectively, and currently has plans to open a total of three additional sales offices in the Rocky Mountain States, the Midwest and the Southeast. By expanding in such regions, the Company hopes to gain additional market share in targeted areas in the United States and Canada where the Company does not yet have a significant presence. - Expand and Diversify Product Lines by Obtaining New Distributorships With Additional Suppliers. The Company continuously seeks to obtain new distributorships to expand its product lines. In fiscal 1995, the Company became a distributor for Dale, a subsidiary of Vishay Intertechnology, Inc. Dale produces a premier line of resistors. In August 1995, the Company became a distributor for the entire capacitor line of Sprague, Inc., another Vishay subsidiary, and for Johanson Dielectric, Inc. Management regularly contacts other manufacturers of electronic components with a view to expanding the Company's product lines. - Maintain Focus on Small and Medium-sized Customers While Expanding the Customer Base to Include Larger Companies. Cost structures and pressure from manufacturers have pushed many large national distributors to emphasize obtaining large orders of products from larger customers. By contrast, since small OEMs generally do not have the purchasing power to buy directly from manufacturers and frequently cannot be served on a cost-effective basis by large national distributors due to the detailed technical and product assistance they require for relatively small orders, management believes that they are more likely to rely on smaller distributors such as the Company. While historically the Company has primarily catered to the special needs of smaller OEMs, management believes that significant growth can also be achieved through expanding the Company's customer base by selectively targeting larger national and multinational companies. Management believes the successful implementation of this strategy will diversify the Company's range of potential customers and increase sales by generating larger-volume orders. Over the past three years, the Company has added several Fortune 500 manufacturers in the telecommunications, aerospace, medical, computer and computer-related industries to its roster of customers. Fundamental to the success of the Company's strategy is its constant focus on improving quality, lowering costs and improving customer service. The Company pursues opportunities to reduce operating expenses in every aspect of its business. The Company emphasizes working capital management and links product manager compensation to improved inventory efficiency. Management 20 23 regularly reviews the performance of the Company's information systems and employs cost-saving technological advances wherever feasible. Both quality and efficiency are recognized by the Company to be important to its continued success. Jaco's dedication to achieving quality and efficiency in its distribution and contract manufacturing operations is evidenced by the certification of the Company's principal distribution facility in Hauppauge, New York and its contract manufacturing facility in Brandon, Vermont to be in compliance with the ISO 9002 Quality System Standard by the International Organization for Standardization. ISO 9000 is a program developed initially by the International Organization for Standardization in Geneva, Switzerland, to provide quality control registration standards that can be relied upon to provide assurance to third parties. 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 fiscal 1993, fiscal 1994 and fiscal 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 fiscal 1993, fiscal 1994 and fiscal 1995, respectively. VALUE-ADDED SERVICES The Company provides a number of value-added services which are intended to attract new customers, to maintain and increase sales to existing customers and, where feasible, to generate additional revenues and improve margins from sales of components. Value-added services include: - Configuring Computer Systems. Subsystem integration is a service offered by the Company where it offers turnkey solutions to customers' computer requirements by integrating such components as disks, tapes and floppy disk drives with other components, including power suppliers, enclosures, interface electronics cables and converters and active components to configure complete computer systems to customer specifications, both in tower and desktop configurations. - Kitting. Kitting of customer component product requirements is provided to fill a segment or a complete order of products to a select customer base. Kitting consists of assembling to a customer's specifications two or more of the Company's 60,000 stock items into pre-packaged kits ready for use in the customer's assembly line. 21 24 - 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. The Company conducts its contract manufacturing operations through Nexus, a Brandon, Vermont-based contract manufacturer which the Company acquired in March 1994. 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 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 New York and California and from 12 additional sales offices located in Colorado, Florida, Maryland, Massachusetts, Minnesota, North Carolina, Oregon, Texas and Washington. 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 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 fiscal 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. 22 25 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 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 fiscal 1995, the Company borrowed $500,000 to purchase machinery and equipment in order to expand Nexus' SMT assembly capability and plans in fiscal 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 23 26 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. See "Business -- Business Strategy". In fiscal 1995, of the Company's top ten suppliers, three, AVX, Kemet and Samsung, accounted for 15%, 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. See "Investment Considerations -- Relationships with Suppliers." 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 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 24 27 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 129 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. 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 25 28 $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. See "Management -- Certain Transactions." The lease provides for a current monthly base rent of approximately $56,250 and has a term which expires in December 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. LEGAL PROCEEDINGS There are no material legal proceedings pending, or, to the knowledge of management, threatened against the Company. 26 29 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The directors and executive officers of the Company, their ages, and their positions and terms of office with the Company are set forth below.
NAME AGE TITLE ---- --- ----- Joel H. Girsky................ 56 Chairman of the Board, President, Treasurer, and Director. Charles B. Girsky............. 61 Executive Vice President and Director. Jeffrey D. Gash............... 42 Vice President of Finance and Principal Financial Officer. Stephen A. Cohen(1)........... 58 Director. Edward M. Frankel(1).......... 57 Director.
- ------------------------------- (1) Messrs. Cohen and Frankel serve as the members of the Audit Committee, Option Committee and Compensation Committee. Joel H. Girsky has been a Director and executive officer of the Company since it was founded in 1961. Since January 1983, he has been the President and Chairman of the Board of Directors of the Company. He also is a Director of Nastech Pharmaceutical Company, Inc. of Hauppauge, New York, and Frequency Electronics, Inc. of Uniondale, New York. Charles B. Girsky became an executive officer of the Company on August 2, 1985 and has been its Executive Vice President since January 1983. Since April, 1984, he has been President of Distel, Inc., a wholly-owned subsidiary of the Company. He was a founder, Director, and the President of the Company from 1961 through January 1983, and was elected a Director of the Company again in 1986. Jeffrey D. Gash has been employed by the Company for over 14 years. He became Vice President of Finance in January 1989, and was Controller of the Company for more than five years prior thereto. He has also served in similar capacities with the Company's subsidiaries. Stephen A. Cohen has been a Director of the Company since 1970. Since August 1989, he has practiced law as a member of the law firm of Morrison Cohen Singer & Weinstein, LLP, general counsel to the Company. For more than five years prior thereto, he was engaged in the practice of law as a member of the firm of Friedlander, Gaines, Cohen & Rosenberg, former general counsel to the Company. Edward M. Frankel became a Director of the Company in May 1984. For more than five years, he has been President of both Garden State Nutritionals, Inc. and Windmill Marketing Services, Inc., each a regional distributor of vitamins and health and beauty products. Directors are elected at each annual meeting of shareholders. Officers serve at the discretion of the Board, subject to existing employment agreements. Except for Joel and Charles Girsky who are brothers, no family relationship exists between any directors or executive officers of the Company. The Board of Directors has standing Audit, Option, and Compensation Committees. The Audit Committee reviews the work and reports of the Company's independent accountants. The Option Committee, administers the Company's 1993 NonQualified Stock Option Plan. The Compensation Committee makes recommendations to the Board of Directors concerning compensation arrangements for directors, executive officers, and senior management of the Company. OTHER KEY EMPLOYEES The Company also considers the following individuals to be key to its operations: Denis Haggerty, Vice President of Marketing -- Passives. Mr. Haggerty, who is 62 years old, oversees marketing of passive components and has been employed by the Company for approximately 30 years. 27 30 Morton J. Denson, Vice President of Marketing -- Actives. Mr. Denson, who is 61 years old, oversees marketing of active components and has been employed by the Company for over 8 years. Herbert Entenberg, Vice President of Management and Information Systems and Secretary. Mr. Entenberg has been employed by the Company for over 15 years. Mr. Entenberg, who is 61 years old, oversees management information systems and operations and is responsible for developing and implementing the Company's inventory control system. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table sets forth, for each of the Company's last three fiscal years, the compensation paid or accrued to the President of the Company and paid to the executive officers and key employees of the Company other than the President whose aggregate annual salary and bonus for the Company's last fiscal year exceeded $100,000 (the "Named Executives"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ----------------------------------- ANNUAL COMPENSATION AWARDS --------------------------------------- --------------------- PAYOUTS ALL YEAR OTHER RESTRICTED ----------- OTHER NAME AND ENDED ANNUAL STOCK OPTIONS/ LTIP COMPENSATION PRINCIPAL POSITION JUNE 30 SALARY($) BONUS($) COMPENSATION ($) AWARDS ($) SARS (#) PAYOUTS ($) ($)(2) - ----------------------- ------- --------- -------- ---------------- ---------- -------- ----------- ------------ Joel H. Girsky......... 1993 $225,000 $87,000 -- -- -- -- $ 55,087 Chairman of the Board, 1994 $250,000 $76,000 -- -- 81,400 -- $ 62,519 President, and 1995 $300,000 $193,000 -- -- -- -- $ 72,100 Treasurer(1) Charles B. Girsky...... 1993 $168,269 $40,037 -- -- -- -- $ 3,762 Executive Vice President 1994 $181,000 $17,997 -- -- -- -- $ 3,783 1995 $206,720 $42,073 -- -- -- -- $ 3,947 Jeffrey D. Gash........ 1993 $ 86,160 $ 9,000 -- -- -- -- $ 1,513 Vice President, Finance 1994 $ 96,000 $10,000 -- -- 4,033 -- $ 1,663 1995 $ 96,347 $10,000 -- -- -- -- $ 1,806 Denis Haggerty......... 1993 $ 76,096 $33,368 -- -- -- -- $ 10,814 Vice President, 1994 $ 90,000 $31,377 -- -- 3,667 -- $ 11,165 Marketing 1995 $ 90,348 $36,964 -- -- -- -- $ 11,029 Morton J. Denson....... 1993 $114,306 $16,173 -- -- -- -- $ 8,762 Vice President, 1994 $114,998 $19,887 -- -- -- -- $ 8,891 Marketing 1995 $115,440 $37,955 -- -- -- -- $ 8,957 Herbert Entenberg...... 1993 $102,560 $ -- -- -- -- -- $ 3,369 Vice President, 1994 $102,560 $ 4,363 -- -- 3,667 -- $ 3,436 Management and 1995 $102,816 $16,155 -- -- -- -- $ 3,538 Information Systems
- ------------------------------- (1) Mr. Joel Girsky entered into a four-year employment agreement with the Company, effective as of July 1, 1993, to serve as the Company's Chairman, President and Treasurer. Pursuant to the agreement, Mr. Girsky received a base salary of $250,000 for the fiscal year ended June 30, 1994 and $300,000 for the fiscal year ended June 30, 1995 and is to receive $325,000 for each of the fiscal years ended June 30, 1996 and June 30, 1997. In addition, he is entitled to receive a cash bonus equal to four percent (4%) of the Company's earnings before income taxes for each year in which such earnings are in excess of $1,000,000, and six percent (6%) of the Company's earnings before income taxes for each year in which such earnings are in excess of $2,500,000. Mr. Girsky or his estate, as the case may be, is entitled to receive a payment of $500,000 if he dies or becomes permanently disabled during the term of the employment agreement. This death and disability benefit is funded by a "key-man" life insurance policy maintained by the Company. In the event of Mr. Girsky's cessation of employment with the Company, upon his request, the Company is obligated to transfer such policy to Mr. Girsky. Thereafter, the Company would have no further liability for the payment of such benefit or the premiums on such policy. In addition, pursuant to the terms of the employment agreement, Mr. Girsky is to receive deferred compensation which accrues at the rate of $50,000 per year and becomes payable in a lump sum at the later of (i) Mr. Girsky's attainment of age 60, or (ii) his cessation of employment, with or without cause, by the Company at any time after July 1, 1993. In the event of a change in control resulting in termination of Mr. Girsky's employment, Mr. Girsky will receive between $450,000 and $600,000 depending on the date of termination. (2) Includes auto expenses, 401(k) matching contributions by the Company, premiums paid on group term life insurance, taxable portion of split dollar life insurance policies and amounts accrued in connection with the retirement or termination of Mr. Joel Girsky's employment with the Company. Auto expenses for fiscal 1995 for the Named Executives were as follows: Mr. Joel Girsky -- $12,031, Mr. Charles Girsky -- $2,110, Mr. Gash -- $724 and Mr. Entenberg -- $2,354. 401(K) matching contributions for fiscal 1995 for the Named Executives were as follows: Mr. Joel Girsky -- $1,009, Mr. Charles Girsky -- $1,162, Mr. Gash -- $1,000, Mr. Haggerty -- $1,078, Mr. Denson -- $1,055 and Mr. Entenberg -- $1,031. Premiums paid on group term life insurance for fiscal 1995 for the Named Executives were as follows: Mr. Joel Girsky -- $1,008, Mr. Charles Girsky -- $675, Mr. Gash -- $82, Mr. Haggerty -- $351, Mr. Denson -- $702 and Mr. Entenberg -- $153. The taxable portion of split dollar life insurance policies for Mr. Joel Girsky was $8,052 for fiscal 1995. In addition, $50,000 was accrued in fiscal 1995 in connection with the retirement or termination of Mr. Joel Girsky's employment with the Company. 28 31 STOCK OPTIONS There were no grants of stock options made to any of the Named Executives in fiscal 1995. The following table sets forth information concerning the exercise of stock options during fiscal 1995 by each of the Named Executives and the number and value of unexercised options held by them at the fiscal year-end. AGGREGATE OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES FY-END (#) FY-END ($)(1) ACQUIRED ON VALUE --------------------------- --------------------------- EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE --------------- ------------ ----------- ------------- ----------- ------------- Joel H. Girsky........ 0 0 81,400 0 123,728 0 Charles B. Girsky..... 36,667 92,188 0 0 0 0 Jeffrey D. Gash....... 0 0 4,033 0 6,130 0 Denis Haggerty........ 0 0 3,667 0 5,877 0 Morton J. Denson...... 4,400 10,875 0 0 0 0 Herbert Entenberg..... 0 0 3,667 0 5,877 0
- ------------------------------- (1) Based on the fair market value per share of the Common Stock at year end, minus the exercise or base price on "in-the-money" options. The closing sale price for the Company's Common Stock as of June 30, 1995 on The Nasdaq National Market was $6.38. COMPENSATION OF DIRECTORS Pursuant to the Company's 1993 Stock Option Plan for Outside Directors (the "Outside Directors' Plan"), the Company's outside directors (directors who are not employees of the Company) were each granted options on December 31, 1993 to purchase 14,667 shares of Common Stock. In addition, the Outside Directors Plan provides that each outside director shall also be granted on each December 31 subsequent to December 31, 1993 stock options to purchase 2,933 shares of Common Stock. All options granted under the Outside Directors' Plan are immediately exercisable, and the exercise price per share of each option is equal to the fair market value of the shares of Common Stock on the date of grant. CERTAIN TRANSACTIONS During the year ended 1995, the Company incurred approximately $654,000 of rental expenses in connection with its main headquarters and centralized inventory distribution facility, located in Hauppauge, New York, which was paid to Bemar Realty Company ("Bemar"), the owner of such premises. Bemar is a partnership consisting of Messrs. Joel Girsky and Charles Girsky, both of whom are officers, directors and principal shareholders of the Company. The lease on the property, which is net of all expenses, including taxes, utilities, insurance, maintenance and repairs, expires on December 31, 1995. The Company is in the process of negotiating a renewal of such lease at a rental rate comparable to the rates currently being charged to rent similar properties in the area. It is anticipated that the new rental rate will be slightly lower than the current rate. For information concerning the Company's contingent guarantee of a mortgage on this property, see Note F of Notes to Consolidated Financial Statements. During fiscal 1995, Joel H. Girsky, the Chairman, President and Treasurer of the Company, was indebted to the Company under demand loans bearing interest at a rate of 9 3/4% per annum, the 29 32 greatest amount of which indebtedness was $641,425 during such fiscal year. At June 30, 1995, the amount of such indebtedness was $309,808. Such indebtedness will be repaid in full on or before the closing of this offering. In September 1995, the Company's Board of Directors adopted a policy resolution prohibiting the Company from making any loan or advance of money or property to, or guaranteeing the obligation of, any non-employee director of the Company and limiting the Company's ability to make such loans, advances or guarantees to employee directors and executive officers of the Company or its subsidiaries unless a majority of independent disinterested outside directors determine that such loan, advance or guarantee may reasonably be expected to benefit the Company. Stephen A. Cohen, a Director of the Company, is a member of Morrison Cohen Singer & Weinstein, LLP, general counsel to the Company. Mr. Cohen currently owns 4,789 shares of Common Stock and options to purchase an additional 17,600 shares of Common Stock. See "Legal Matters". 30 33 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth the number and percentage of shares of Common Stock beneficially owned as of October 9, 1995, and as adjusted to give effect to the sale of 1,325,000 shares by the Company and 275,000 shares by the Selling Shareholders in the offering, by (i) each director of the Company, (ii) all persons who, to the knowledge of the Company, are the beneficial owners of more than 5% of the outstanding shares of Common Stock, (iii) each of the executive officers named in the Summary Compensation Table; (iv) all of the Company's executive officers and directors as a group; and (v) each Selling Shareholder. Each person named in the table has sole investment power and sole voting power with respect to the shares of Common Stock set forth opposite such person's name, except as otherwise indicated.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO SHARES BEING OWNED AFTER OFFERING(1) OFFERED OFFERING --------------------- ------------ ------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT ------------------------ --------- ------- ------------ ------- ------- Joel H. Girsky.............................. 666,540(2) 26.2% 137,500 529,040 13.7% Chairman of the Board, President, Treasurer and Director Charles B. Girsky........................... 389,774 15.8% 137,500 252,274 6.7% Executive Vice President and Director of the Company Stephen A. Cohen............................ 22,389(3) * 0 22,389(3) * Director Edward M. Frankel........................... 17,600(3) * 0 17,600(3) * Director Jeffrey D. Gash............................. 4,565(4) * 0 4,565(4) * Vice President, Finance of the Company Dennis Haggerty............................. 3,667(5) * 0 3,667(5) * Vice President, Marketing of the Company Morton J. Denson............................ 4,400 * 0 4,400 * Vice President, Marketing of the Company Herbert Entenberg........................... 3,667(5) * 0 3,667(5) * All Directors and Executive Officers as a Group (8 persons)......................... 1,112,602(6) 42.9% 275,000 837,602(6) 21.4%
- ------------------------------- * Less than 1%. (1) Based upon (i) 2,464,384 shares of Common Stock issued and outstanding, plus, if appropriate, (ii) the number of shares of Common Stock which may be acquired by the named person or by all persons included in the group pursuant to the exercise of options. (2) Includes 81,400 shares of Common Stock acquirable pursuant to the exercise of options granted under the Company's 1993 Non-Qualified Stock Option Plan. (3) Includes 17,600 shares of Common Stock acquirable pursuant to the exercise of options granted under the Company's 1993 Stock Option Plan for Outside Directors. (4) Includes 4,033 shares acquirable pursuant to the exercise of options granted under the Company's 1993 Non-Qualified Stock Option Plan. (5) Includes 3,667 shares of Common Stock acquirable pursuant to the exercise of options granted under the Company's 1993 Non-Qualified Stock Option Plan. (6) Includes 127,967 shares of Common Stock acquirable pursuant to the exercise of options. 31 34 DESCRIPTION OF CAPITAL STOCK COMMON STOCK The Company has 5,000,000 authorized shares of Common Stock, $0.10 par value, of which 2,464,384 shares were issued and outstanding as of August 31, 1995. Holders of the Common Stock are entitled to one vote per share on all matters requiring shareholder action. The Company's Restated Certificate of Incorporation does not permit cumulative voting for the election of directors. Holders of Common Stock have no preemptive or other subscription rights and there are no redemption, sinking fund or conversion privileges applicable thereto. The holders of the Common Stock are entitled to receive dividends as and when declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy". Upon liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities. All outstanding shares of the Common Stock are, and all shares to be issued and sold by the Company in this offering will be, fully paid and non-assessable. PREFERRED STOCK The Company has 100,000 authorized shares of Preferred Stock, $10.00 par value ("Preferred Stock"), none of which was issued and outstanding as of August 31, 1995. The Company's Restated Certificate of Incorporation permits the terms, rights and preferences of any Preferred Stock issued in the future, including dividend rates, voting rights, redemption prices, maturity dates, liquidation preference and similar matters, to be determined by the Company's Board of Directors at the time such issuance is approved. The Preferred Stock may be issued with voting, dividend or liquidation rights superior to the Common Stock, and could be used to frustrate a takeover attempt by a third party or to entrench management. Management does not presently know whether any shares of Preferred Stock will actually be issued or, if issued, what the terms, rights and preferences thereof will be. Under the New York Business Corporation Law (the "BCL"); however, the holders of such Preferred Stock will not have any preemptive rights with respect to any future issuance of shares of the Common Stock or Preferred Stock, unless the Company's Restated Certificate of Incorporation is amended to provide for such rights. See "Investment Considerations -- Need for Additional Authorized and Unissued Shares, Issuance of Preferred Stock and Newly Authorized Shares." CERTAIN CERTIFICATE OF INCORPORATION AND STATUTORY PROVISIONS REGARDING LIMITATIONS OF LIABILITY OF DIRECTORS. The Company's Restated Certificate of Incorporation includes a provision eliminating director liability to the fullest extent permissible under New York law, as such law currently exists or as it may be amended in the future. New York corporations are permitted to adopt provisions in their certificates of incorporation eliminating the monetary liability of directors for certain breaches of duty. Such provisions are subject to exceptions, as described below. Under New York law, a New York corporation may include a provision in its certificate of incorporation which eliminates or limits the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. However, such a provision may not eliminate or limit director's liability for (i) breaches of the duty of loyalty to the corporation or its stockholders, (ii) acts or omissions in bad faith or involving intentional misconduct or knowing violations of law, (iii) a violation of Section 719 of the BCL (including the payment of unlawful dividends or unlawful stock purchases or redemptions), or (iv) transactions in which a director receives an improper personal benefit. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's securities is American Stock Transfer & Trust Company. 32 35 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, there will be 3,789,384 shares of Common Stock outstanding. Of these shares, 667,107 shares, together with any shares acquired by affiliates in this offering, will be subject to Rule 144 under the Securities Act. As a result, 3,122,277 shares, less any shares acquired by affiliates in this offering, will be freely transferable without restriction. In general, under Rule 144 a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years, including persons who may be deemed to be affiliates of the Company, would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of then-outstanding shares of Common Stock or the average weekly trading volume in the Common Stock as reported by NASDAQ during the four calendar weeks preceding such sale. Sales pursuant to Rule 144 also are subject to certain other requirements relating to the manner of sale, notice and availability of current public information about the Company. Affiliates may publicly sell shares not constituting restricted securities under Rule 144 in accordance with the foregoing volume limitations and other restrictions but without regard to the two-year holding period. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding a sale by such person, and who has beneficially owned restricted shares for at least three years, would be entitled to sell such shares under Rule 144 without regard to any of the limitations described above. The Company, its directors, executive officers and certain shareholders have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, for a period of 180 days after the date of the Prospectus, without the prior written consent of Cruttenden Roth Incorporated. After this period, 667,107 shares of Common Stock held by this group will be eligible for sale subject to resale limitations of Rule 144 promulgated under the Securities Act and 36,667 shares will be eligible for sale under a Registration Statement filed under the Securities Act. No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for future sale will have on the prevailing market price of the Common Stock. Sales of substantial amounts of Common Stock of the Company in the public market or the perception that such sales might occur, could adversely affect the prevailing market price of the Common Stock. 33 36 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company and the Selling Shareholders have agreed to sell to the Underwriters named below, for whom Cruttenden Roth Incorporated and Cleary Gull Reiland & McDevitt Inc. are acting as representatives (the "Representatives"), and the Underwriters have severally agreed to purchase, the numbers of shares of Common Stock set forth opposite their respective names in the table below at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions and that the Underwriters are committed to purchase all of such shares if any are purchased:
NUMBER OF UNDERWRITER SHARES ----------- ---------- Cruttenden Roth Incorporated.............................................. Cleary Gull Reiland & McDevitt Inc. ...................................... ----------- Total........................................................... 1,600,000 ===========
The Company has been advised by the Representatives that the Underwriters propose to offer the shares to the public at the public offering price set forth on the cover page of this Prospectus, and to certain securities dealers at such price less a concession of not more than $ per share, and that the Underwriters and such dealers may reallow to other dealers, including the Underwriters, a discount not in excess of $ per share. After the public offering, the public offering price and concessions and discounts may be changed by the Representatives. The Company has granted an option to the Underwriters, exercisable for a period of 45 days after the date of this Prospectus, to purchase up to an additional 240,000 shares of Common Stock at the public offering price set forth on the cover page of this Prospectus less the underwriting discounts and commissions. The Underwriters may exercise this option only to cover over-allotments, if any. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase a percentage of such additional shares approximately equal to the percentage of shares it was obligated to purchase from the Company pursuant to the Underwriting Agreement. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters against certain liabilities under the Securities Act. The Company has also agreed to issue to the Representatives for $70.00 warrants (the "Representatives' Warrants") to purchase up to 70,000 shares of Common Stock at an exercise price per share equal to 120% of the public offering price per share. The Representatives' Warrants are exercisable for a period of three years beginning one year from the date of this Prospectus, and are not transferable for a period of one year except to officers of the Representatives or any successors to the Representatives. In addition, the Company has granted certain rights to the holders of the Representatives' Warrants to register the Common Stock underlying the Representatives' Warrants under the Securities Act. The rules of the Commission generally prohibit the Underwriters and other members of the selling group from making a market in the Company's Common Stock during the "cooling off" period immediately preceding the commencement of sales in the offering. The Commission has, however, adopted an exemption from these rules that permits passive market making under certain conditions. These rules permit an Underwriter or other member of the selling group to continue to make a market in the Company's Common Stock subject to the conditions, among others, that its bid not exceed the 34 37 highest bid by a market maker not connected with the offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group intend to engage in passive market making in the Company's Common Stock during the cooling off period. LEGAL MATTERS The law firm of Morrison Cohen Singer & Weinstein, LLP, New York, New York has acted as counsel to the Company in connection with this offering and will render an opinion as to the legality of the securities being offered hereby. Stephen A. Cohen, a member of the firm and a Director of the Company, currently owns 4,789 shares of Common Stock and holds options to purchase an additional 17,600 shares of Common Stock. Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, has acted as counsel to the Underwriter in connection with certain legal matters relating to this offering. EXPERTS The consolidated balance sheets as of June 30, 1994 and 1995, and the consolidated statements of income, changes in shareholders' equity and cash flows for the three years ended June 30, 1993, 1994 and 1995 have been included in this Prospectus in reliance upon the report of Grant Thornton LLP, independent certified public accountants, given on the authority of such firm as experts in accounting and auditing. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Annual Report on Form 10-K for the fiscal year ended June 30, 1995 filed with the Commission by the Company is incorporated by reference in this Prospectus. Any statement contained herein or in any document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company hereby undertakes to furnish without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, copies of any or all of the documents which are incorporated by reference herein (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents). Written or telephone requests for such documents should be directed to Mr. Jeffrey D. Gash, Vice President and Principal Financial Officer, Jaco Electronics, Inc., 145 Oser Avenue, Hauppauge, New York 11788. The Company's telephone number is (516) 273-5500. 35 38 ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-2 under the Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and a schedule thereto pursuant to the Act and the rules and regulations of the Commission thereunder. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and to the exhibits and a schedule filed as a part thereof. Copies of all or any part of the Registration Statement, including exhibits thereto, may be obtained upon payment of the prescribed fees, or inspected without charge at the offices of the Commission in Washington, D.C. See "Available Information." 36 39 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- 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
F-1 40 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 41 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 42 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 43 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 these statements. F-5 44 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 45 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 46 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 15%, 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 47 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 48 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 49 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 50 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 51 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 52 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 53 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 54 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 (a)..................... $.11 $.18 $.23 $.26 ====== ====== ====== ======
F-16 55 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 56 ================================================================================ (Logo w/4 pictures of taped and reeled components, assembly of fractional horse power motors, assembly of electronic components on printed circuit boards and printed circuit board) NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................ 2 Prospectus Summary................... 3 Risk Factors......................... 6 Use of Proceeds...................... 9 Dividend Policy...................... 9 Price Range of Common Stock.......... 10 Capitalization....................... 11 Selected Consolidated Financial Data............................... 12 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13 Business............................. 18 Management........................... 27 Principal and Selling Shareholders... 31 Description of Capital Stock......... 32 Shares Eligible for Future Sale...... 33 Underwriting......................... 34 Legal Matters........................ 35 Experts.............................. 35 Incorporation of Certain Documents By Reference.......................... 35 Additional Information............... 36 Index to Consolidated Financial Statements......................... F-1
================================================================================ ================================================================================ 1,600,000 SHARES LOGO COMMON STOCK JACO ELECTRONICS, INC. ------------------------ P R O S P E C T U S ------------------------ CRUTTENDEN ROTH I N C O R P O R A T E D CLEARY GULL REILAND & MCDEVITT INC. OCTOBER , 1995 ================================================================================ 57 PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
TO BE PAID TO BE PAID BY THE BY THE COMPANY SELLING STOCKHOLDERS -------------- -------------------- Accounting Fees**.................................. $ 50,000 $ -- Printing Expenses**................................ 100,000 -- Blue Sky Fees and Expenses**....................... 20,000 -- Registration Fee*.................................. 6,851 1,422 NASD Fee*.......................................... 2,402 498 Legal Fees**....................................... 160,000 -- Additional Listing Fees**.......................... 17,500 -- Miscellaneous**.................................... 39,435 -- -------- ------ Total......................................... $396,188 $1,920 ======== ======
- --------------- * Actual. ** Estimated. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 402 of the Business Corporation Law of the State of New York (the "BCL") provides that a corporation may indemnify its officers and directors (or persons who have served, at the corporation's request, as officers or directors of another corporation) against the reasonable expenses, including attorneys' fees, actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that if such action shall be in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been judged to have been liable to the corporation unless and to the extent that the Supreme Court of the State of New York, or any other court in which the suit may be brought, shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnification. The Restated Certificate of Incorporation (the "Charter"), and the Restated By-Laws (the "By-Laws") of the registrant provide for the elimination of the personal liability of a director to the registrant and its stockholders for monetary damages for breach of a fiduciary duty as a director. However, the Charter and By-Laws have not (and are not permitted by statute to have) eliminated the liability of a director for (i) any breach of a director's duty of loyalty to the registrant and its stockholders; (ii) any acts or omissions not undertaken in good faith or which involve intentional misconduct or a knowing violation of law; (iii) any action under Section 719 of the BCL, including paying a dividend or approving an illegal dividend; or (iv) any transaction from which the director derived an improper personal benefit. The Charter and By-Laws also provide that expenses incurred by an officer or director may be paid in advance of the final disposition of such action, suit or proceeding by the registrant upon the receipt of an undertaking by or on behalf of the director or officer to repay the said amount advanced if a specific determination is made that the officer or director is not entitled to the indemnification. In addition, the By-Laws provide that the registrant may maintain insurance to protect itself and its officers and directors against any liability, cost, payment or expense associated with such indemnification. II-1 58 ITEM 16. EXHIBITS
EXHIBIT NO. -------- 1.1 Final form of Underwriting Agreement 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 4.2 Final form of Representatives' Warrant Agreement (with form of Representatives' Warrant Certificate attached thereto as Exhibit A). 5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP, as to the legality of the shares of Common Stock (to be filed by Amendment). 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 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. 10.4 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.5 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K, filed October 7, 1994, Exhibit 10.8. 10.6 Employment Agreement between Joel H. 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. 10.7 Employment Agreement between Joel H. Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K, filed October 7, 1994, Exhibit 10.9. 10.8 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company (to be filed by Amendment). 10.9 Electronic Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company (to be filed by Amendment). 23.1 Consent of Morrison Cohen Singer & Weinstein, LLP (included in the Opinion of Morrison Cohen Singer & Weinstein, LLP to be filed by Amendment as Exhibit 5.1). 23.2 Consent of Grant Thornton LLP (included in Part II of this Registration Statement). 24.1 Power of Attorney (included in the signature page filed as a part of this Registration Statement). 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).
II-2 59
EXHIBIT NO. --------
99.3 Letter of Credit and Security Agreement, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(3). 99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company in favor of BNYCC dated January 13, 1992, together with Letters from R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and Distel, Inc., each a subsidiary of the Company and a guarantor of the obligations evidenced by the Term Notes, to BNYCC acknowledging the amendment to the Term Notes for the extension of the maturity date of each such note, incorporated by reference to the Company's 1992 10-K, Exhibit 28.4. 99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the Company and BNYCC, incorporated by reference to the Company's Annual Report on Form 10-K, filed October 7, 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, filed October 7, 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. (Previously filed) 99.8 Second Restated and Amended Loan and Security Agreement dated September 13, 1995 among Jaco Electronics, Inc., Nexus Custom Electronics, Inc., The Bank of New York Commercial Corporation and NatWest Bank, N.A.
PAGE ---- Financial Statement Schedules filed as part of this Registration Statement: Report of Independent Certified Public Accountants on Schedule. .... S-1 Schedule II -- Valuation and Qualifying Accounts. .................. S-2
ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement with respect to the following: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 60 (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. For purposes of determining any liability under the Securities Act, (i) the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (ii) each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 61 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 and incorporated by reference in this Registration Statement on Form S-2 of Jaco Electronics, Inc. and the related Prospectus. We consent to the use and incorporation by reference of the aforementioned reports in the Registration Statement and Prospectus and to the use of our name as it appears under the captions "Selected Consolidated Financial Data" and "Experts". GRANT THORNTON LLP Melville, New York October 12, 1995 II-5 62 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Hauppauge, New York on October 13, 1995. JACO ELECTRONICS, INC. By: JOEL H. GIRSKY ------------------------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer By: JEFFREY D. GASH ------------------------------------- Jeffrey D. Gash, Principal Financial and Accounting Officer POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- JOEL H. GIRSKY - --------------------------------------------- Chairman of the Board, October 13, 1995 Joel H. Girsky President and Treasurer /s/ CHARLES S. GIRSKY - --------------------------------------------- Executive Vice President October 13, 1995 Charles S. Girsky and Director /s/ STEPHEN A. COHEN* - --------------------------------------------- Director October 13, 1995 Stephen A. Cohen /s/ EDWARD M. FRANKEL* - --------------------------------------------- Director October 13, 1995 Edward M. Frankel By: JOEL H. GIRSKY - --------------------------------------------- (Joel H. Girsky, at attorney-in-fact)
II-6 63 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, which is included in the annual report to security holders and incorporated by reference in Part II of this form, we have also audited Schedule II as of June 30, 1995 and for each of the three years in the period then ended. 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 S-1 64 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 ----------------------- (2) (1) 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. S-2 65 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION -------- ----------- 1.1 Final form of Underwriting Agreement 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 4.2 Final form of Representatives' Warrant Agreement (with form of Representatives' Warrant Certificate attached thereto as Exhibit A). 5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP, as to the legality of the shares of Common Stock (to be filed by Amendment). 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 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. 10.4 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.5 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K, filed October 7, 1994, Exhibit 10.8. 10.6 Employment Agreement between Joel H. 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. 10.7 Employment Agreement between Joel H. Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K, filed October 7, 1994, Exhibit 10.9. 10.8 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company (to be filed by Amendment). 10.9 Electronic Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company (to be filed by Amendment). 23.1 Consent of Morrison Cohen Singer & Weinstein, LLP (included in the Opinion of Morrison Cohen Singer & Weinstein, LLP to be filed by Amendment as Exhibit 5.1). 23.2 Consent of Grant Thornton LLP (included in Part II of this Registration Statement). 24.1 Power of Attorney (included in the signature page filed as a part of this Registration Statement).
66
EXHIBIT NO. DESCRIPTION -------- ----------- 99.1 General Loan and Security Agreement dated January 20, 1989, between the Company as borrower and The Bank of New York Commercial Corporation ("BNYCC") as secured party, incorporated by reference to the Company's Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1). 99.2 Loan and Security Agreement -- Accounts Receivable and Inventory, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(2). 99.3 Letter of Credit and Security Agreement, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(3). 99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company in favor of BNYCC dated January 13, 1992, together with Letters from R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and Distel, Inc., each a subsidiary of the Company and a guarantor of the obligations evidenced by the Term Notes, to BNYCC acknowledging the amendment to the Term Notes for the extension of the maturity date of each such note, incorporated by reference to the Company's 1992 10-K, Exhibit 28.4. 99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the Company and BNYCC, incorporated by reference to the Company's Annual Report on Form 10-K, filed October 7, 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, filed October 7, 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. (Previously filed) 99.8 Second Restated and Amended Loan and Security Agreement dated September 13, 1995 among Jaco Electronics, Inc., Nexus Custom Electronics, Inc., The Bank of New York Commercial Corporation and NatWest Bank, N.A.
EX-1.1 2 FINAL FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1.1 1,600,000 SHARES(1) JACO ELECTRONICS, INC. COMMON STOCK UNDERWRITING AGREEMENT ____________, 1995 DRAFT OF SEPTEMBER 1, 1995 CRUTTENDEN ROTH INCORPORATED CLEARY GULL REILAND & MCDEVITT INC. As Representatives of the several Underwriters c/o Cruttenden Roth Incorporated 18301 Von Karman, Suite 100 ---------------------- Irvine, California 92715 MARKED TO SHOW CHANGES ---------------------- Gentlemen: JACO ELECTRONICS, INC. a New York corporation (the "Company"), and certain stockholders of the Company named in Schedule B hereto (hereafter called the "Selling Stockholders") address you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirm their respective agreements with the several Underwriters as follows: 1. Description of Shares. The Company proposes to issue and sell 1,325,000 shares of its authorized and unissued Common Stock, $0.10 par value per share, to the several Underwriters. The Selling Stockholders, acting severally and not jointly, propose to sell an aggregate of 275,000 shares of the Company's authorized and outstanding Common Stock, $0.10 par value per share, to the several Underwriters. The 1,325,000 shares of Common Stock, $0.10 par value per share, of the Company to be sold by the Company are hereinafter called the "Company Shares" and the 275,000 shares of Common Stock, $0.10 par value per share, to be sold by the Selling Stockholders are hereinafter called the "Selling Stockholder Shares." The Company Shares and the Selling Stockholder Shares are hereinafter collectively referred to as the "Firm Shares." The Company also proposes to grant to the Underwriters an option to purchase up to 240,000 additional shares of the Company's Common Stock, $0.10 par value per share (the "Option Shares"), as provided in Section 7 hereof. In addition, the Company proposes to sell to you, individually and not in your capacity as Representatives, four-year warrants (the "Representatives' Warrants") to purchase up to 70,000 shares of Common Stock, $0.10 par value per share, of the Company (the "Representatives' Warrant Stock"), which sale will be consummated in accordance with the terms and conditions of the Representatives' Warrant Agreement (the "Representatives' Warrant Agreement"), the form of which is filed as an exhibit to the Registration Statement described below. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock, $0.10 par value per share, of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." 2. Representations, Warranties and Agreements of the Company and the Selling Stockholders. I. The Company and the Selling Stockholders each represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-2 (File No. 33-62559) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements - ------------------------ (1) Plus an option to purchase up to 240,000 additional shares from the Company to cover over-allotments. 2 of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement and such amended prospectuses subject to completion as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement and such amended prospectuses subject to completion as may hereafter be required. Copies of such registration statement and amendments and of each related prospectus subject to completion (the "Preliminary Prospectuses"), including all documents incorporated by reference therein, have been delivered to you. The Company and the transactions contemplated by this Agreement meet the requirements for using Form S-2 under the Act. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations) and, in the event of any amendment thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations), except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. Any reference to the Registration Statement or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-2 under the Act, as of the date of the Registration Statement or the Prospectus, as the case may be. As used in this Agreement, the term "Incorporated Documents" means the documents which at the time are incorporated by reference in the Registration Statement, the Prospectus or any amendment or supplement thereto. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were -2- 3 made, not misleading; provided, however, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. The Incorporated Documents heretofore filed, when they were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed), conformed in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder; no such document when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company owns all of the outstanding capital stock of its subsidiaries free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; each of the Company and its subsidiaries is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; neither the Company nor any of its subsidiaries is in violation of its respective charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties may be bound; and neither the Company nor any of its subsidiaries is in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties of which it has knowledge. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than those subsidiaries listed in Exhibit 21.1 to the Company's Annual Report on Form 10-K filed with the Commission and incorporated by reference into the Registration Statement. (d) The Company has full legal right, power and authority to enter into this Agreement and the Representatives' Warrant Agreement and to perform the transactions contemplated hereby and thereby. Each of this Agreement and the Representatives' Warrant Agreement each has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification under this Agreement or the Representatives' Warrant Agreement may be limited by applicable law and except as the enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the Representatives' Warrant Agreement and the consummation of the transactions herein or therein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties may be bound, (ii) the charter or bylaws of the Company or any of its subsidiaries, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic -3- 4 or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties is required for the execution and delivery of this Agreement or the Representatives' Warrant Agreement and the consummation by the Company or any of its subsidiaries of the transactions herein and therein contemplated, except such as may be required under the Act or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company, any of its subsidiaries or any of their respective officers or any of their respective properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective officers or properties or otherwise which (i) might result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise or might materially and adversely affect their properties, assets or rights, (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company or any of its subsidiaries of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations or by the Exchange Act or the rules and regulations of the Commission thereunder which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Company Shares and the Option Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Company Shares or Option Shares or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act or under state or other securities or Blue Sky laws. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right, or other rights to subscribe for or purchase shares and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth or incorporated by reference in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. -4- 5 (g) Grant Thornton LLP which has audited the consolidated financial statements of the Company, together with the related schedule and notes, as of June 30, 1994 and 1995 and for each of the years in the three (3) years ended June 30, 1995 filed with the Commission as a part of or incorporated by reference into the Registration Statement are independent accountants within the meaning of the Act and the Rules and Regulations; the audited consolidated financial statements of the Company, together with the related schedule and notes, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company and its subsidiaries at the respective dates and for the respective periods to which they apply; and all audited consolidated financial statements of the Company, together with the related schedule and notes, filed with the Commission as part of or incorporated by reference into the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included or incorporated by reference in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (ii) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (vi) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (i) Except as set forth in the Registration Statement and Prospectus, (i) each of the Company and its subsidiaries has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (ii) the agreements to which the Company or any of its subsidiaries is a party described in the Registration Statement and are valid agreements, enforceable by the Company and its subsidiaries (as applicable), except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) each of the Company and its subsidiaries has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted. (j) The Company and its subsidiaries have timely filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or any of its subsidiaries that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business -5- 6 prospects of the Company and its subsidiaries considered as one enterprise; and all tax liabilities are adequately provided for on the books of the Company and its subsidiaries. (k) The Company and its subsidiaries maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company or its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (l) To the best of the Company's knowledge, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, that might be expected to result in a material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. No collective bargaining agreement exists with any of the Company's employees and, to the best of the Company's knowledge, no such agreement is imminent. (m) Each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus, the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would, in the reasonable judgment of the Company, have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (n) The Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is listed on The Nasdaq National Market, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from The Nasdaq National Market, nor has the Company received any notification that the Commission or the National Association of Securities Dealers, Inc. ("NASD") is contemplating terminating such registration or listing. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution -6- 7 of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) Neither the Company nor any of its subsidiaries has at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) Each officer and director of the Company, each Selling Stockholder and each key employee of the Company set forth in the Prospectus agreed in writing that such person will not, for a period of 180 days from the date that the Registration Statement is declared effective by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to limited partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will also agree and consent to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and key persons have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other key persons from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Cruttenden Roth Incorporated. (t) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) except for its property in Brandon, Vermont, no property which is owned, leased or occupied by the Company or its subsidiaries has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law, and such designation of such Brandon, Vermont property will not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries aconsidered as one enterprise. (u) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general -7- 8 or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus or except such loans, advances or guarantees of indebtedness which are not material, individually or in the aggregate, to the Company and its subsidiaries considered as one enterprise. (w) The Representative's Warrants have been duly and validly authorized by the Company and upon delivery to you in accordance with the Representatives' Warrant Agreement will be duly issued and legal, valid and binding obligations of the Company. (x) The Representative's Warrant Stock have been duly authorized and reserved for issuance upon the exercise of the Representative's Warrants and when issued upon payment of the exercise price therefor will be validly issued, fully paid and nonassessable shares of Common Stock of the Company. II. Each Selling Stockholder, severally and not jointly, represents and warrants to and agrees with each Underwriter and the Company that: (a) Such Selling Stockholder now has and on the Closing Date will have valid marketable title to the Shares to be sold by such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each of the Underwriters will obtain valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest pertaining to such Selling Stockholder or such Selling Stockholder's property, encumbrance, claim or equitable interest, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Stockholder. (b) Such Selling Stockholder has duly executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Power of Attorney (the "Power of Attorney") appointing Joel H. Girsky and Jeffrey D. Gash, and each of them, as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody Agreement") with American Stock Transfer & Trust Company, as custodian (the "Custodian"); each of the Power of Attorney and the Custody Agreement constitutes a valid and binding agreement on the part of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of such Selling Stockholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 6(h) hereof on behalf of such Selling Stockholder, to determine the purchase price to be paid by the several Underwriters to such Selling Stockholder as provided in Section 3 hereof, to authorize the delivery of the Selling Stockholder Shares under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Stockholder of the Power of Attorney and the Custody Agreement, the execution and delivery by or on behalf of such Selling Stockholder of this Agreement and the sale and delivery of the Selling Stockholder Shares under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission declaring the Registration Statement effective -8- 9 and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws) have been obtained and are in full force and effect; and such Selling Stockholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Power of Attorney and Custody Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder under this Agreement. (d) Such Selling Stockholder will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such Selling Stockholder or with respect to which such Selling Stockholder has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to limited partners or stockholders of such Selling Stockholder, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the Selling Stockholder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Such Selling Stockholder also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the securities held by such Selling Stockholder except in compliance with this restriction. (e) Certificates in negotiable form for all Shares to be sold by such Selling Stockholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Stockholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder. (f) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (g) Such Selling Stockholder has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (h) All information furnished by or on behalf of such Selling Stockholder relating to such Selling Stockholder and the Selling Stockholder Shares that is contained in the representations and warranties of such Selling Stockholder in such Selling Stockholder's Power of Attorney or set forth in the Registration Statement and the Prospectus is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date was or will be, true, correct and complete, and does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information not misleading. (i) Such Selling Stockholder will review the Prospectus and will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or prior to the Closing Date and will advise one of its Attorneys and Cruttenden Roth Incorporated prior to the Closing Date if any statement to be made on behalf of such Selling Stockholder in the certificate contemplated by Section 6(h) would be inaccurate if made as of the Closing Date. (j) Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement; such -9- 10 Selling Stockholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. 3. Purchase, Sale and Delivery of Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholders agree, severally and not jointly, to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders, respectively, at a purchase price of $_____ per share, the respective number of Company Shares and Selling Stockholder Shares set forth opposite the names of the Company and the Selling Stockholders in Schedule B hereto. The obligation of each Underwriter to the Company and to each Selling Stockholder shall be to purchase from the Company or such Selling Stockholder that number of Company Shares or Selling Stockholder Shares, as the case may be, which (as nearly as practicable, as determined by you) is in the same proportion to the number of Company Shares or Selling Stockholder Shares, as the case may be, set forth opposite the name of the Company or such Selling Stockholder in Schedule B hereto as the number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10) is to the total number of Firm Shares to be purchased by all the Underwriters under this Agreement. The certificates in negotiable form for the Selling Stockholder Shares have been placed in custody (for delivery under this Agreement) under the Custody Agreement. Each Selling Stockholder agrees that the certificates for the Selling Stockholder Shares of such Selling Stockholder so held in custody are subject to the interests of the Underwriters hereunder, that the arrangements made by such Selling Stockholder for such custody, including the Power of Attorney is to that extent irrevocable and that the obligations of such Selling Stockholder hereunder shall not be terminated by the act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event, except as specifically provided herein or in the Custody Agreement. If any Selling Stockholder should die or be incapacitated, or if any other such event should occur, before the delivery of the certificates for the Selling Stockholder Shares hereunder, the Selling Stockholder Shares to be sold by such Selling Stockholder shall, except as specifically provided herein or in the Custody Agreement, be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether the Custodian shall have received notice of such death or other event. Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company with regard to the Shares being purchased from the Company, and to the order of each such Selling Stockholder (or the Custodian for the respective accounts of the Selling Stockholders) with regard to the Shares being purchased from such Selling Stockholders (and the Company and such Selling Stockholders agree not to deposit and to cause the Custodian not to deposit any such check in the bank on which it is drawn until the day following the date of its delivery to the Company or the Custodian, as the case may be), at the offices of Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Boulevard, Eighth Floor, East Tower, Beverly Hills, California, or such other place as may be agreed upon among the Representatives and the Company and the Selling Stockholders), at 7:00 A.M., California time, on the third (3rd) full business day following the first day that Shares are traded or at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company and the Selling Stockholders may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date." The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the -10- 11 Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of $_____ per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), under the last two paragraphs on page 2, concerning stabilization and over-allotment and passive market marking by the Underwriters, and under the first, second and last paragraphs under the caption "Underwriting" in any Preliminary Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b) constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company and the Selling Stockholders that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. Further Agreements of the Company. The Company agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; it will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement or any subsequent amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as -11- 12 may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the rules and regulations of the Commission thereunder and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, and the Incorporated Documents (three of which will include all exhibits,) all in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of five (5) years after the date hereof, the Company will furnish to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's stockholders, (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared by the Company or any of its subsidiaries, and (vi) any additional information of a public nature concerning the Company or its subsidiaries, or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. -12- 13 (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company or any Selling Stockholder to perform any agreement on its or their respective parts to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will reimburse the several Underwriters for all reasonable and documented out-of- pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (j) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (k) During the Lock-up Period, the Company will not, without the prior written consent of Cruttenden Roth Incorporated effect the Disposition of, directly or indirectly, any Securities other than the sale of the Firm Company Shares and the Option Shares hereunder and the Company's issuance of options or Common Stock under the Company's presently authorized stock option plans (the "Option Plans"). (l) During a period of ninety (90) days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under the Option Plans or other employee benefit plan. 5. Expenses. (a) The Company and the Selling Stockholders agree with each Underwriter that: (i) The Company and the Selling Stockholders will pay and bear all costs and expenses incurred by the Company and the Selling Stockholders in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits) and the Preliminary Prospectuses and the Prospectus and the Incorporated Documents and any amendments or supplements thereto; in connection with the printing of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; in connection with the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any; in connection with the cost of all certificates representing the Shares and transfer agents' and registrars' fees; in connection with the fees and disbursements of counsel for the Company; in connection with all fees and other charges of the Company's independent certified public accountants; in connection with the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus and the Incorporated Documents, and any amendments or supplements to any of the foregoing; in connection with NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and up to $20,000 of fees and disbursements of Underwriters' Counsel in connection Blue Sky qualifications); and directly by the Company and the Selling Stockholders in connection with the performance of their obligations hereunder. Any additional expenses incurred as a result of the sale of the Shares by the Selling Stockholders will be borne collectively by the Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are intended -13- 14 to relieve the Underwriters from the payment of the expenses and costs which the Selling Stockholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Stockholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Stockholders hereunder to the several Underwriters. (ii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (iii) In addition to their other obligations under Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof relating to such Selling Stockholder, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of such Selling Stockholder's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Selling Stockholders, together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(c) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(c) hereof, they will reimburse the Company and each Selling Stockholder on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and each such Selling Stockholder for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company and each such Selling Stockholder shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company and each such Selling Stockholder within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD in Orange County, California (or as close geographically to Orange County, California as is reasonably practical). Any such arbitration must be commenced by service of a written demand for arbitration or a -14- 15 written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(e) hereof. 6. Conditions of Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy in all material respects, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the Selling Stockholders herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 2:00 P.M., California time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, any Selling Stockholder or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date there shall not have been any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your reasonable judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) You shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, the following opinion of Morrison Cohen Signer & Weinstein, LLP, counsel for the Company, dated the Closing Date or such later date on which Option Shares are purchased, addressed to the Underwriters (and stating that it may be relied upon by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Underwriters' Counsel, in rendering its opinion pursuant to Section 6(e) of this Agreement) and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company and each significant subsidiary within the meaning of Item 3-01 of Regulation S-X under the Rules and Regulations (a "Significant Subsidiary") has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company and each Significant Subsidiary has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company and each Significant Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or -15- 16 leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and its subsidiaries considered as one enterprise. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than Distel, Inc., R. C. Components, Inc., Micatron Inc., Quality Components, Inc., Jaco Overseas, Inc. and Nexus Custom Electronics, Inc. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (v) All issued and outstanding shares of capital stock of each Significant Subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; (vi) The Firm Shares and the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement each have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders; (vii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (viii) The Company has the corporate power and authority to enter into the Representatives' Warrant Agreement and to issue, sell and deliver to the Representatives the Representatives' Warrants to be issued and sold by it thereunder; (ix) This Agreement and the Representatives' Warrant Agreement each has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (x) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (xi) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedule) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; -16- 17 (xii) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with New York law; (xiii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; (xiv) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or any Incorporated Document or to be filed as an exhibit to the Registration Statement or any Incorporated Document which are not described or referred to therein or filed as required; (xv) The performance of this Agreement and the Representatives' Warrant Agreement and the consummation of the transactions herein and therein contemplated (other than performance of the Company's indemnification obligations hereunder or under the Representatives' Warrant Agreement, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; (xvi) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; (xvii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations or by the Exchange Act or the applicable rules and regulations of the Commission thereunder, other than those described therein; (xviii) To such counsel's knowledge, neither the Company nor any of its Significant Subsidiaries is presently (a) in material violation of its respective charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its Significant Subsidiaries, or over any of their properties or operations; (xix) The Representative's Warrants have been duly and validly authorized by the Company and upon delivery to you in accordance with the Representatives' Warrant Agreement will be duly issued and legal, valid and binding obligations of the Company; -17- 18 (xx) The Representatives' Warrant Stock to be issued by the Company pursuant to the terms of the Representatives' Warrants has been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms of the Representatives' Warrant Agreement and assuming no change in applicable law or facts from those existing on the date hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders; (xxi) To such counsel's knowledge no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company. (xxii) Each of the Selling Stockholders has full right, power and authority to enter into and to perform its obligations under this Agreement and to sell, transfer, assign and deliver the Shares to be sold by such Selling Stockholder hereunder; and (xxiii) Upon the delivery of and payment for the Shares as contemplated in this Agreement, each of the Underwriters will receive valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. In rendering such opinion, such counsel may assume that the Underwriters are without notice of any defect in the title of the Shares being purchased from the Selling Stockholders. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement, when such documents became effective (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel shall also state that the conditions for the use of Form S-2 set forth in the General Instructions thereto have been satisfied. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of New York upon opinions of local counsel, and as to questions of fact upon representations (including, without limitation, those set forth in this Agreement) or certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person), and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. -18- 19 (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Grant Thornton LLP, addressed to the Company and the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Grant Thornton LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their audit of the consolidated balance sheet of the Company as of June 30, 1994 and 1995 and related consolidated statements of operations, shareholders' equity, and cash flows for the each of the years in the three year period ended June 30, 1995, (iii) state that Grant Thornton LLP has performed the procedure set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information for each of the quarters ended September 30, December 31, March 31 and June 30, 1993, September 30, December 31, March 31 and June 30, 1994, and September 30, December 31, March 31 and June 30, 1995 and (iv) address other matters agreed upon by Grant Thornton LLP and you. In addition, you shall have received from Grant Thornton LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of June 30, 1995 did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the President and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct in all material respects, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied in all material respects with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; -19- 20 (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and Regulations or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, and in all material respects conformed to the requirements of the Act and the Rules and Regulations or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (b) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (h) You shall be satisfied that, and you shall have received a certificate, dated the Closing Date from the Attorneys for each Selling Stockholder to the effect that, as of the Closing Date, they have not been informed that: (i) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on the Closing Date; or (ii) Such Selling Stockholder has not complied with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Stockholder at or prior to the Closing Date. (i) The Company shall have obtained and delivered to you an agreement from each officer and director of the Company, each Selling Stockholder and each key employee of the Company set forth in the Prospectus in writing prior to the date hereof that such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to limited partners or stockholders of such -20- 21 person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the such holder. Such prohibited hedging or other transactions would including, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. (j) The Company and the Selling Stockholders shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers of the Company) as to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein, as to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. (k) The Representative's Warrant Agreement shall have been entered into by the Company and you, and the Representative's Warrants shall have been issued and sold to you pursuant thereto. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company and the Selling Stockholders will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 7. Option Shares. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 240,000 Option Shares at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of forty-five (45) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as is necessary to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company (and the Company agrees not to deposit any such check in the bank on which it is drawn until the day following the date of its delivery to the Company). Such delivery and payment shall take place at the offices of Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Boulevard, Eighth Floor, East Tower, Beverly Hills, California, or at such other place as may be agreed upon among the Representatives and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least three (3) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the fifth (5th) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company less than three (3) full business days prior to the Closing Date. -21- 22 The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location as you may reasonably request for checking at least two (2) full business days prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least three (3) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company and the Selling Stockholders herein, to the accuracy of the statements of the Company, the Selling Stockholders and officers of the Company made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of its their respective obligations hereunder, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company and the Selling Stockholders or the compliance with any of the conditions herein contained. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such -22- 23 person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E or the Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of such Selling Stockholder herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Selling Stockholder, directly or through such Selling Stockholder's representatives, specifically for use in the preparation thereof, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement provided in this Section 8(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which such Selling Stockholder may otherwise have. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company or such Selling Stockholder may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the extent, that such -23- 24 untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company and each such Selling Stockholder for any legal or other expenses reasonably incurred by the Company and each such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(c) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, each Selling Stockholder and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that, except as set forth in Section 8(f) hereof, the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company and the Selling -24- 25 Stockholders are responsible for the remaining portion, provided, however, that (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter in excess of the amount of damages which such Underwriter was otherwise required to pay and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(e) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls the Underwriters or the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company and each officer of the Selling Stockholders who signed the Registration Statement. (f) The liability of each Selling Stockholder under the representations, warranties and agreements contained herein and under the indemnity agreements contained in the provisions of this Section 8 shall be limited to an amount equal to the initial public offering price of the Selling Stockholder Shares sold by such Selling Stockholder to the Underwriters minus the amount of the underwriting discount paid thereon to the Underwriters by such Selling Stockholder. The Company and such Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. (g) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. The parties are advised that federal or state public policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain of the provisions of this Section 8, and the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under this Section 8 and further agree not to attempt to assert any such defense. 9. Representations, Warranties, Covenants and Agreements to Survive Delivery. All representations, warranties, covenants and agreements of the Company, the Selling Stockholders and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or any of its their officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. Substitution of Underwriters. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours -25- 26 (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, neither the Company nor any Selling Stockholder shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company, the Selling Stockholders and the other Underwriters for damages, if any, resulting from such default) be liable to the Company or any Selling Stockholder (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. Effective Date of this Agreement and Termination. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., California time, on the second full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(i), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company or any Selling Stockholder shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your reasonable judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended -26- 27 on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 4(i), 5 and 8 hereof. In the event of termination pursuant to subparagraph (i) above, the Company shall also remain obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 12. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715, telecopier number (714) 852-9603, Attention: Mr. Byron Roth; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to 145 Oser Avenue, Hauppauge, Long Island, New York 11788, telecopier number (516) 434-3963, Attention: Joel H. Girsky, Chairman of the Board and President; if sent to one or more of the Selling Stockholders, such notice shall be sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to Joel H. Girsky, as Attorney-in-Fact for the Selling Stockholders, at 145 Oser Avenue, Hauppauge, Long Island, New York 11788, telecopier number (516) 434-3963. 13. Parties. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and the Selling Stockholders and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or corporation. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company and the Selling Stockholders under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company and the Selling Stockholders shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by Cruttenden Roth Incorporated on behalf of you. 14. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 15. Counterparts. This Agreement may be signed in several counterparts, each of which will constitute an original. -27- 28 If the foregoing correctly sets forth the understanding among the Company, the Selling Stockholders and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, JACO ELECTRONICS, INC. By ___________________________________________ Joel H. Girsky, Chairman of the Board and President SELLING STOCKHOLDERS By ___________________________________________ Attorney-in-Fact for the Selling Stockholders named in Schedule B hereto Accepted as of the date first above written: CRUTTENDEN ROTH INCORPORATED CLEARY GULL REILAND & MCDEVITT INC. On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By: CRUTTENDEN ROTH INCORPORATED By: ___________________________________ Authorized Signatory -28- 29 SCHEDULE A
Number of Firm Shares To Be Underwriters Purchased ------------ --------- Cruttenden Roth Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cleary Gull Reiland & McDevitt Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600,000 =========
30 SCHEDULE B
Number of Company Shares To Company Be Sold ------- --------- Jaco Electronics, Inc. 1,325,000 --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,325,000 =========
Number of Selling Stockholder Shares Name of Selling Stockholder To Be Sold --------------------------- ----------- Joel H. Girsky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,500 Charles B. Girsky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,500 ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,000 =======
EX-4.2 3 FINAL FORM OF REPRESENTATIVE'S WARRANT AGREEMENT 1 Exhibit 4.2 DRAFT OF SEPTEMBER 1, 1995 ------------------------------------------------------------ JACO ELECTRONICS, INC. and CRUTTENDEN ROTH INCORPORATED CLEARY GULL REILAND & MCDEVITT INC. ----------------------- REPRESENTATIVES' WARRANT AGREEMENT Dated as of __________, 1995 ---------------------- MARKED TO SHOW CHANGES ---------------------- ------------------------------------------------------------ 2 REPRESENTATIVES' WARRANT AGREEMENT THIS REPRESENTATIVES' WARRANT AGREEMENT (the "Agreement"), dated as of ________ 1995 is made and entered into by and between JACO ELECTRONICS, INC., a New York corporation (the "Company") and CRUTTENDEN ROTH INCORPORATED and CLEARY GULL REILAND & MCDEVITT INC. (individually the "Warrantholder" and collectively the "Warrantholders"). The Company agrees to issue and sell, and the Warrantholders agree to purchase, for the price of $70, warrants, as hereinafter described (the "Warrants"), to purchase up to an aggregate of 70,000 shares (the "Shares") of the Company's Common Stock, $0.10 value (the "Common Stock"), in connection with a public offering (the "Public Offering") by the Company and certain stockholders of 1,600,000 shares of Common Stock pursuant to an underwriting agreement (the "Underwriting Agreement"), dated as of _____________, 1995 between the Company and the Warrantholders, as Representatives of the several Underwriters named in the Underwriting Agreement. The purchase and sale of the Warrants shall occur on the Closing Date, as defined in the Underwriting Agreement, and be subject to the conditions to the Underwriters' obligations to purchase Common Stock thereunder and the performance of such obligations by the Underwriters. In consideration of the foregoing and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder, the Company and the Warrantholders, for value received, hereby agree as follows: Section 1. Transferability and Form of Warrants. 1.1 Registration. The Warrants shall be numbered and shall be registered on the books of the Company when issued. 1.2 Transfer. The Warrants shall be transferable only on the books of the Company maintained at its principal office in Hauppauge, Long Island, New York, or wherever its principal office may then be located, upon delivery thereof duly endorsed by the Warrantholder or by its duly authorized attorney or representative, accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration of transfer, the Company shall execute and deliver new Warrants to the person entitled thereto. 1.3 Limitations on Transfer of the Warrants. Subject to the provisions of Section 11, the Warrants shall not be sold, transferred, assigned or hypothecated by the Warrantholders until ___________, 1996, except to (i) one or more persons, each of whom on the date of transfer is an officer or partner of the transferring Warrantholder; (ii) a successor to the transferring Warrantholder in merger or consolidation; (iii) a purchaser of all or substantially all of the transferring Warrantholder's assets; or (iv) any person receiving the Warrants from one or more of the persons listed in this subsection 1.3 at such person's or persons' death pursuant to will, trust or the laws of intestate succession. The Warrants may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates representing the right to purchase the same aggregate number of Shares. Unless the context indicates otherwise, the terms "Warrantholder" or "Warrantholders" shall include any transferee or transferees of the Warrants pursuant to this subsection 1.3, and the term "Warrants" shall include any and all warrants outstanding pursuant to this Agreement, including those evidenced by a certificate or certificates issued upon division, exchange, substitution or transfer pursuant to this Agreement. 1.4 Form of Warrants. The text of the Warrants and of the form of election to purchase Shares shall be substantially as set forth in Exhibit A attached hereto. The number of Shares issuable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by its President or by a Vice President, attested to by its Secretary or an Assistant Secretary. A Warrant bearing the signature of an individual who was at any time the proper officer of the Company shall bind the 3 Company, notwithstanding that such individual shall have ceased to hold such office prior to the delivery of such Warrant or did not hold such office on the date of this Agreement. The Warrants shall be dated as of the date of signature thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. 1.5 Legend on Shares. Each certificate for Shares initially issued upon exercise of the Warrants shall bear the following legend, unless, at the time of exercise, such Shares are subject to a currently effective Registration Statement under the Securities Act of 1933, as amended (the "Act"): "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED." Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Act, of the securities represented thereby) shall also bear the above legend unless, in the opinion of the Company's counsel, the securities represented thereby need no longer be subject to such restrictions. Section 2. Exchange of Warrant Certificate. Any Warrant certificate may be exchanged for another certificate or certificates entitling the Warrantholder to purchase a like aggregate number of Shares as the certificate or certificates surrendered then entitled such Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant certificate shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, with signatures guaranteed, the certificate evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant certificate as so requested. Section 3. Term of Warrants; Exercise of Warrants. (a) Subject to the terms of this Agreement, the Warrantholders shall have the right, at any time during the period commencing at 9:00 a.m., New York Time, on ___________, 1996 and ending at 5:00 p.m., New York Time, on ___________, 1999 (the "Termination Date"), to purchase from the Company up to the number of fully paid and nonassessable Shares to which the Warrantholder may at the time be entitled to purchase pursuant to this Agreement, upon surrender to the Company, at its principal office, of the certificate evidencing the Warrants to be exercised, together with the purchase form on the reverse thereof duly filled in and signed, with signatures guaranteed, and upon payment to the Company of the Warrant Price (as defined in and determined in accordance with the provisions of this section 3 and sections 7 and 8 hereof), for the number of Shares in respect of which such Warrants are then exercised, but in no event for less than 100 Shares (unless less than an aggregate of 100 Shares are then purchasable under all outstanding Warrants held by a Warrantholder). (b) Payment of the aggregate Warrant Price shall be made in cash, by wire transfer, by certified or official bank check or through the use of Appreciation Currency (as defined below), or any combination thereof. Upon such surrender of the Warrants and payment of such Warrant Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Warrantholder and in the name or names of the Warrantholder or, subject to compliance with the provisions of Section 11(s), in such name or names as the Warrantholder may designate a certificate or certificates for the number of full Shares so purchased upon the exercise of the Warrant, together with cash, as provided in Section 9 hereof, in respect of any fractional Shares otherwise issuable upon such surrender. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such securities as of the date of surrender of the Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that the certificate or certificates representing such securities shall not actually have been delivered or that the stock transfer books of the Company shall then be closed. The Warrants shall be exercisable, at the election of the 2 4 Warrantholder, either in full or from time to time in part and, in the event that a certificate evidencing the Warrants is exercised in respect of less than all of the Shares specified therein at any time prior to the Termination Date, a new certificate evidencing the remaining portion of the Warrants will be issued by the Company. (c) As used herein, "Appreciation Currency" shall mean the consideration given by the surrender of Warrants in exchange for Shares. The number of Shares to which the holder shall be entitled upon such surrender of Warrants ("X") shall be determined by applying the following formula: X = N x (($S-$W) divided by $S), where "N" is the number of Shares that would be received if the Warrants surrendered were instead exercised for cash. "$S" is the Current Market Price (as defined in section 9) per share of Common Stock and "$W" is the Warrant Price defined in section 7 as adjusted and readjusted as set forth in Section 8. Section 4. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of the Warrants or the securities comprising the Shares; provided, however, the Company shall not be required to pay any tax which may be payable in respect of any secondary transfer of the Warrants or the securities comprising the Shares. Section 5. Mutilated or Missing Warrants. In case the certificate or certificates evidencing the Warrants shall be mutilated, lost, stolen or destroyed, the Company shall, at the request of the Warrantholder, issue and deliver in exchange and substitution for and upon cancellation of the mutilated certificate or certificates, or in lieu of and substitution for the certificate or certificates lost, stolen or destroyed, a new Warrant certificate or certificates of like tenor and representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant and a bond of indemnity, if requested, also satisfactory in form and amount at the applicant's cost. Applicants for such substitute Warrants certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. Section 6. Reservation of Shares. There has been reserved, and the Company shall at all times keep reserved so long as the Warrants remain outstanding, out of its authorized Common Stock, such number of shares of Common Stock as shall be subject to purchase under the Warrants. The company will supply every transfer agent for the Common Stock and other securities of the Company issuable upon the exercise of the Warrants with duly executed stock and other certificates, as appropriate, for such purpose and will provide or otherwise make available any cash which may be payable as provided in Section 9 hereof. Section 7. Warrant Price. The price per Share at which Shares shall be purchasable upon the exercise of the Warrants (the "Warrant Price") shall be $_____ subject to further adjustment pursuant to Section 8 hereof. Section 8. Adjustment of Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: 8.1 Adjustments. The number of Shares purchasable upon the exercise of the Warrants shall be subject to adjustment as follows: In case the Company shall (i) pay a dividend in Common Stock or make a distribution in Common Stock, (ii) subdivide its outstanding Common Stock, (iii) combine its outstanding Common Stock into a smaller number of shares of Common Stock, (iv) effect any increase or decrease in the number of outstanding shares of Common Stock without receipt of consideration by the Company, or (v) issue by reclassification of its Common Stock other securities of the Company, the Warrant Price and the number of Shares purchasable upon exercise of the Warrants immediately prior thereto shall be proportionately adjusted so that the Warrantholder shall be entitled to receive the kind and number of Shares or other securities of the Company which it would have owned or would have been entitled to receive immediately after the happening of any of the events described above, had the Warrants been exercised at the Warrant Price immediately prior to the 3 5 happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection 8.1 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. For the purpose of this subsection 8.1, the term "Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Agreement, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 8.2 No Adjustment for Dividends. Except as provided in subsection 8.1, no adjustment in respect of any dividends or distributions out of earnings shall be made during the term of the Warrants or upon the exercise of the Warrants. 8.3 Certificate of Adjustment. Whenever the number of Shares purchasable upon the exercise of the Warrants is adjusted as herein provided, the Company shall cause to be promptly mailed to the Warrantholder by first class mail, postage prepaid, notice of such adjustment and a certificate of the chief financial officer of the Company setting forth the number of Shares purchasable upon the exercise of the Warrants after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 8.4 Preservation of Purchase Rights upon Reclassification, Consolidation, etc. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute with the Warrantholder an agreement that the Warrantholder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase, upon exercise of the Warrants, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had the Warrants been exercised immediately prior to such action. In the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, in which the Company is the surviving corporation, the right to purchase Shares under the Warrants shall terminate on the date of such merger and thereupon the Warrants shall become null and void, but only if the controlling corporation shall agree to substitute for the Warrants its warrant which entitles the holder thereof to purchase upon its exercise the kind and amount of shares and other securities and property which it would have owned or been entitled to receive had the Warrants been exercised immediately prior to such merger. Any such agreements referred to in this subsection 8.4 shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 8 hereof. The provisions of this subsection 8.4 shall similarly apply to successive consolidations, mergers, sales or conveyances. 8.5 Par Value of Shares of Common Stock. Before taking any action which would cause an adjustment effectively reducing the portion of the Warrant Price allocable to each Share below the then par value per share of the Common Stock issuable upon exercise of the Warrants, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Stock upon exercise of the Warrants. 8.6 Independent Public Accountants. The Company may retain a firm of independent public accountants of recognized national standing (which may be any such firm regularly employed by the Company) to make any computation required under this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 8. 8.7 Statement on Warrant Certificates. Irrespective of any adjustments in the number of securities issuable upon exercise of Warrants, Warrant certificates theretofore or thereafter issued may continue to express the same number of securities as are stated in the similar Warrant certificates initially issuable pursuant to this Agreement. However, the Company may, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant certificate that it may deem appropriate and that does not affect the substance thereof; and any Warrant certificate thereafter 4 6 issued, whether upon registration of transfer of, or in exchange or substitution for, an outstanding Warrant certificate, may be in the form so changed. Section 9. Fractional Interests; Current Market Price. The Company shall not be required to issue fractional Shares on the exercise of the Warrants. If any fraction of a Share would, except for the provisions of this Section 9, be issuable on the exercise of the Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the then Current Market Price per share of Common Stock multiplied by such fraction. For purposes of this Agreement, the term "Current Market Price" shall mean (i) if the Common Stock is traded in the over-the-counter market and not in The Nasdaq National Market nor on any national securities exchange, the average of the per share closing bid price on the 30 consecutive trading days immediately preceding the date in question, as reported by The Nasdaq Small Cap Market (or an equivalent generally accepted reporting service if quotations are not reported on The Nasdaq Small Cap Market), or (ii) if the Common Stock is traded in The Nasdaq National Market or on a national securities exchange, the average for the 30 consecutive trading days immediately preceding the date in question of the daily per share closing prices of the Common Stock in The Nasdaq National Market or on the principal stock exchange on which it is listed, as the case may be. For purposes of clause (i) above, if trading in the Common Stock is not reported by The Nasdaq Small Cap Market, the applicable bid price referred to in said clause shall be the lowest bid price as reported in The Nasdaq Electronic Bulletin Board or, if not reported thereon, as reported in the "pink sheets" published by National Quotation Bureau, Incorporated, and, if such securities are not so reported, shall be the price of a share of Common Stock determined by the Company's Board of Directors in good faith. The closing price referred to in clause (ii) above shall be the last reported sale price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case in The Nasdaq National Market or on the national securities exchange on which the Common Stock is then listed. Section 10. No Rights as Shareholder; Notices to Warrantholder. Nothing contained in this Agreement or in the Warrants shall be construed as conferring upon the Warrantholder or its transferees any rights as a shareholder of the Company, including the right to vote, receive dividends, consent or receive notices as a shareholder in respect of any meeting of shareholders for the election of directors of the Company or any other matter. If, however, at any time prior to the expiration of the Warrants and prior to their exercise, any one or more of the following events shall occur: (a) any action which would require an adjustment pursuant to Section 8.1; or (b) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger or sale of its property, assets and business as an entirety or substantially as an entirety) shall be proposed; then the Company shall give notice in writing of such event to the Warrantholder, as provided in Section 14 hereof, at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to any relevant dividend, distribution, subscription rights or other rights or for the determination of shareholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to mail or receive such notice or any defect therein shall not affect the validity of any action taken with respect thereto. Section 11. Restrictions on Transfer; Registration Rights. (a) The Warrantholder agrees that prior to making any disposition of the Warrants or the Shares, including without limitation, to persons or entities identified in clauses (i) through (vi), inclusive, of Section 1.3 other than pursuant to a registration statement or other notification or post-effective amendment thereto (hereinafter collectively a "Registration Statement") filed by the Company with, and declared effective, by, the Securities and Exchange Commission (the "Commission") the Warrantholder shall give written notice to the Company describing briefly the manner in which any such proposed disposition is to be made and shall provide such other information as may reasonably be required by the Company and counsel familiar with securities matter to conclude that no Registration Statement under the Act is required with respect to such disposition, and no such disposition shall be made if the Company has notified the Warrantholder that in the opinion of counsel reasonably satisfactory to the Warrantholder a Registration Statement under the Act is required with respect to such disposition and no such Registration Statement has been filed by the Company with, and declared effective, if necessary, by, the Commission. (b) Whenever during the three-year period beginning on ______________, 1996 and ending on ___________, 1999, 5 7 the Company proposes to file with the Commission a Registration Statement (other than as to securities issued pursuant to an employee benefit plan or as to a transaction subject to Rule 145 promulgated under the Act or which a Form S-4 Registration Statement could be used), it shall, at least 30 days prior to each such filing, give written notice of such proposed filing to the Warrantholder and each holder of Shares at their respective addresses as they appear on the records of the Company, and shall offer to include and shall include in such filing any proposed disposition of the Shares upon receipt by the Company, not less than 15 days prior to the proposed filing date, of a request therefor setting forth the facts with respect to such proposed disposition and all other information with respect to such person reasonably necessary to be included in such Registration Statement. In the event that the managing underwriter for said offering advises the Company in writing that the inclusion of such securities in the offering would be detrimental to the offering, such securities shall nevertheless be included in the Registration Statement, provided that the Warrantholder and each holder of Warrants and Shares desiring to have their Shares included in the Registration Statement agree in writing, for a period of 90 days following such offering, not to sell or otherwise dispose of such Shares pursuant to such Registration Statement, which Registration Statement the Company shall keep effective for a period of at least nine months following the expiration of such 90-day period. (c) All fees, disbursements and out-of-pocket expenses (other than Warrantholders' and holders' of Shares brokerage fees and commissions and legal fees of counsel to the Warrantholder and holders of Shares, if any) in connection with the filing of any Registration Statement under Section 11(b) (or obtaining the opinion of counsel and any no-action position of the Commission with respect to sales under Rule 144) and in complying with applicable securities and Blue Sky laws shall be borne by the Company. The Company at its expense will supply any Warrantholder and any holder of Shares with copies of such Registration Statement and the prospectus included therein and other related documents any opinions and no-action letters in such quantities as may be reasonably requested by the Warrantholder or holder of Shares. (d) The Company shall not be required by this Section 11 to file such Registration Statement if, in the opinion of counsel for the Warrantholders and holders of Shares and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for such holders and the Company), the proposed public offering or other transfer as to which such Registration Statement is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not "restricted securities," as defined in Rule 144 under the Act. (e) The provisions of this Section 11 and Section 12 hereof shall apply to the extent as provided herein if the Company chooses to file an Offering Statement under Regulation A promulgated under the Act. (f) The Company agrees that until all Shares have been sold under a Registration Statement or pursuant to Rule 144 under the Act, it will use its best efforts to keep current in filing all materials required to be filed with the Commission in order to permit the holders of such securities to sell the same under Rule 144. Section 12. Indemnification. (a) In the event of the filing of any Registration Statement with respect to the Shares pursuant to Section 11 hereof, the Company agrees to indemnify and hold harmless the Warrantholder or any holder of such Shares and each person, if any, who controls the Warrantholder or any holder of such Shares within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all reasonable attorneys' fees), to which the Warrantholder or any holder of such Shares or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such Registration Statement, or any related preliminary prospectus, final prospectus, or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus or amendment or supplement thereto in reliance upon, and in conformity 6 8 with, written information furnished to the Company by such Warrantholder or the holder of such Shares or any person who controls the Warrantholder or any holder of such Shares within the meaning of the Act specifically for use in the preparation thereof. This indemnity will be in addition to any liability which the Company may otherwise have. (b) The Warrantholders and the holders of the Shares agree that they will indemnify and hold harmless the Company, each other person referred to in subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement, or any related preliminary prospectus, final prospectus or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Warrantholder or such holder of Shares specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Warrantholder or such holder of Shares may otherwise have. (c) Promptly after receipt by an indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 12, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 12. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 12 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 12(a) or 12(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 7 9 Section 13. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) a Warrantholder or any holder of the Shares or controlling person makes a claim for indemnification pursuant to Section 12 hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 12 hereof provide for indemnification in such case or (ii) contribution under the Act may be required on the part of any Warrantholder or any holder of the Shares or controlling person, then the Company and any Warrantholder or any such holder of the Shares or controlling person shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or a Warrantholder or holder of Shares or controlling person on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and such holders of such securities and such controlling persons agree that it would not be just and equitable if contribution pursuant to this Section 13 were determined by pro rata allocation or by any other method which does not take account of the equitable considerations referred to in this Section 13. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 13 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 14. Notices. Any notice pursuant to this Agreement by the Company or by a Warrantholder or a holder of Shares shall be in writing and shall be deemed to have been duly given if delivered or mailed by certified mail, return receipt requested: (a) If to a Warrantholder or a holder of Shares addressed to Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California, Attention: Corporate Finance Department, and to Cleary Gull Reiland & McDevitt Inc., 100 East Wisconsin Avenue, Suite 2850, Milwaukee, Wisconsin 53202, Attention: Corporate Finance Department,. (b) If to the Company addressed to it at 145 Oser Avenue, Hauppauge, Long Island, New York 11788, Attention: Mr. Joel H. Girsky, Chairman of the Board and President. Each party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance herewith to the other party. Section 15. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company, the Warrantholders, or the holders of Shares shall bind and inure to the benefit of their respective successors and permitted assigns hereunder. Section 16. Merger or Consolidation of the Company. The Company will not merge or consolidate with or into any other corporation or sell all or substantially all of its property to another corporation, unless the provisions of Section 8.4 are complied with. Section 17. Survival of Representations and Warranties. All statements contained in any schedule, exhibit, certificate or other instrument delivered by or on behalf of the parties hereto, or in connection with the transactions contemplated by this Agreement, shall be deemed to be representations and warranties hereunder. Notwithstanding any investigations made by or on behalf of the parties to this Agreement, all representations, warranties and agreements made by the parties to this Agreement or pursuant hereto shall survive. 8 10 Section 18. Applicable Law. This Agreement shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State. Section 19. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrantholders and the holders of Shares any legal or equitable right, remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive benefit of the Company, the Warrantholders and the holders of Shares. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, all as of the day and year first above written. JACO ELECTRONICS, INC. By_____________________________ CRUTTENDEN ROTH INCORPORATED By____________________________ CLEARY GULL REILAND & MCDEVITT INC. By____________________________ 9 11 EXHIBIT A THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED. Warrant Certificate No. ___ REPRESENTATIVES' WARRANTS TO PURCHASE __________ SHARES OF COMMON STOCK, $0.10 PAR VALUE PER SHARE VOID AFTER 5:00 P.M., NEW YORK TIME, ON ________________, 1999 JACO ELECTRONICS, INC. ORGANIZED UNDER THE LAWS OF THE STATE OF NEW YORK This certifies that, for value received, __________________, the registered holder hereof or assigns (the "Warrantholder"), is entitled to purchase from JACO ELECTRONICS INC. (the "Company"), at any time during the period commencing at 9:00 a.m., New York Time, on ______________, 1995, and before 5:00 p.m., New York Time, on ______________, 1999, at the purchase price per share of $_______ (the "Warrant Price"), the number of shares of Common Stock of the Company set forth above (the "Shares"). The number of shares of Common Stock of the Company purchasable upon exercise of these Warrants shall be subject to adjustment from time to time as set forth in the Representatives' Warrant Agreement referred to below. The Warrants evidenced hereby may be exercised in whole or in part by presentation of this Warrant Certificate with the Purchase Form attached hereto duly executed (with a signature guarantee as provided thereon) and simultaneous payment of the Warrant Price at the principal office of the Company. Payment of such price shall be made at the option of the Warrantholder cash, by wire transfer, by certified or official bank check or through the use of "Appreciation Currency" as defined in the Representatives' Warrant Agreement, or any combination thereof. The Warrants evidenced hereby represent the right to purchase an aggregate of up to 70,000 Shares and are issued under and in accordance with a Representatives' Warrant Agreement, dated as of ___________1995 (the "Representatives' Warrant Agreement"), between the Company and Cruttenden Roth Incorporated and Cleary Gull Reiland & McDevitt Inc. and are subject to the terms and provisions contained in the Representatives' Warrant Agreement, to all of which the Warrantholder by acceptance hereof consents. Upon any partial exercise of the Warrants evidenced hereby, there shall be signed and issued to the Warrantholder a new Warrant Certificate in respect of the Shares as to which the Warrants evidenced hereby shall not have been exercised. These Warrants may be exchanged at the office of the Company by surrender of this Warrant Certificate properly endorsed for one or more new Warrants of the same aggregate number of Shares as here evidenced by the Warrant or Warrants exchanged. No fractional securities will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. These Warrants are transferable at the office of the Company in the manner and subject to the limitations set forth in the Representatives' Warrant Agreement. This Warrant Certificate does not entitle any Warrantholder to any of the rights of a shareholder of the Company. JACO ELECTRONICS INC. By_________________________________________ Joel H. Girsky President and Chairman of the Board Dated: __________, 1995 ATTEST: [Seal] ________________________ Secretary 12 JACO ELECTRONICS INC. PURCHASE FORM JACO ELECTRONICS INC. 145 Oser Avenue Hauppauge, Long Island, New York 11788 The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, ____________ shares of Common Stock (the "Shares") provided for therein, and requests that certificates for the Shares be issued in the name of: _________________________________________________________________ (Please Print or Type Name, Address and Social Security Number) _________________________________________________________________ _________________________________________________________________ and, if said number of Shares shall not be all the Shares purchasable hereunder, that a new Warrant Certificate for the balance of the Shares purchasable under the within Warrant Certificate be registered in the name of the undersigned Warrantholder or his Assignee as below indicated and delivered to the address stated below. Dated: ______________ Name of Warrantholder or Assignee: __________________________________________ (Please Print) Address: ______________________________________ ______________________________________ Signature: ______________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever, unless these Warrants have been assigned. Signature Guaranteed: ___________________________ (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) ASSIGNMENT (To be signed only upon assignment of Warrants) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto (Name and Address of Assignee Must Be Printed or Typewritten ________________________________________ ________________________________________ ________________________________________ the within Warrants, hereby irrevocably constituting and appointing __________________________ Attorney to transfer said Warrants on the books of the Company, with full power of substitution in the premises. Dated:_____________ ________________________________________________ Signature of Registered Holder Note:The signature on this assignment must correspond with the name as it appears upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed:_____________________________ (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) EX-99.8 4 SECOND RESTATED AND AMENDED LOAN & SEC. AGREEMENT 1 Exhibit 99.8 SECOND 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"), each with a principal place of business at the addresses listed on the signature pages hereof, The Bank of New York Commercial Corporation in its capacity as a Lender, with its principal place of business also as listed on the signature pages hereof ("BNYCC"), each other financial institution from time to time a party to this Agreement (hereafter BNYCC and such other financial institutions may be referred to individually as a "Lender" or alternatively as a "Secured Party" and collectively, as the "Lenders" or alternatively, the "Secured Parties"), and BNYCC as agent for the Lenders (in such capacity and any successor appointed in accordance with the terms hereof, the "Agent"), each hereby agree as follows: Upon this Second Restated and Amended Loan and Security Agreement ("Agreement") becoming effective, in accordance with the terms and provisions set forth below, this Agreement shall restate and amend in its entirety, without any interruption or break in continuity, the Restated and Amended Loan and Security Agreement between BNYCC and Debtor dated April 25, 1995 (which in turn restated and amended in its entirety, also without any interruption or break in continuity, the Loan and Security Agreement - Accounts Receivable and Inventory between BNYCC and Jaco dated January 20, 1989) and the Security Agreement between BNYCC 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. "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 Agent may deem reasonably necessary and proper. The Accounts Receivable Borrowing Base may be changed by Agent from time to time in its reasonable discretion subject to Paragraph 22 hereof as among Lenders and Agent,, 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. "Agent" shall have the meaning set forth in the introductory paragraph of this Agreement. "Agent ABR Loan" shall have the meaning set forth in Paragraph 4(c) of this Agreement. "Aggregate Maximum Loan Amount" shall mean the total principal Maximum Loan Amounts applicable to all of the Lenders hereunder on a cumulative basis as the same may be reduced pursuant to paragraph 5(b)(v) hereof. "Agreement" shall have the meaning set forth in the second paragraph hereof. "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%. "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. "Closing Date" means the date on which all of the following shall have occurred: (a) all of the parties hereto have executed this Agreement and have delivered the same to the Agent and all other Conditions Precedent in relation to the initial Loans have been completed to the Lenders' satisfaction; and (b) NatWest Bank N.A. ("NatWest") BNYCC, the Agent and the Debtor have each executed and delivered an Assignment and Acceptance Agreement substantially in the form of Exhibit C hereto and NatWest has also fully funded, in immediately available funds, its initial Pro Rata Share of the outstanding Obligations hereunder as of said Closing Date. "Collateral" shall have the meaning set forth in Paragraph 2 hereof. "Conditions Precedent" shall mean with respect to the making of Loans under this Agreement, those conditions precedent more fully described in Paragraph 13 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 and one-half percent (2.5%) or (B) in the case of all other Loans, the Alternate Base Rate. 2 1 "Credit Exposure" means an amount determined for each Lender, equal to the aggregate principal amount of the Loans owing to such Lender plus the aggregate unutilized amounts of such Lender's Maximum Loan Amount, provided, however, that if any Lender shall have failed to pay its Pro Rata Share of any Loans hereunder to the Agent when due and such Loans have been advanced by the Agent to the Debtor, such Lender's Credit Exposure attributable to the Pro Rata Share not so paid, shall be deemed to be held by the Agent for purposes of this definition. "Debtor's Loan Account" shall mean the account on the records of the Agent in which shall be recorded the Loans and any other advances or extension(s) of credit made by the Agent and/or any of the Lenders to or for the benefit of the Debtor pursuant to this Agreement, including without limitation in respect of any Letters of Credit and/or the Term Loans, any 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 or concerning any of the Secured Parties, on the one hand and Debtor, on the other hand. "Deficiency Loan" shall have the meaning set forth in Paragraph 4(d) of this Agreement. "Dollars" and the symbol "$" means dollars constituting legal tender for the payment of public and private debts in the United States of America. "Eligible Equipment" shall mean Equipment purchased by Debtor which Agent has determined at the time of such purchase in its sole and reasonable discretion to be eligible. 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 Agent, on behalf of the Secured Parties and with respect to which Debtor has requested that Agent deem it eligible. "Eligible Assignee" means a commercial bank organized under the laws of the United States, or any state thereof, having a combined capital and surplus of at least One Hundred Million Dollars ($100,000,000), an entity that is primarily engaged in the business of commercial lending, having a combined capital surplus of at least One Hundred Million Dollars ($100,000,000), or an entity acceptable to the Agent, whose acceptance shall not be unreasonably withheld. "Eligible Inventory" shall mean Inventory; valued at the lower of cost or market, consisting of current saleable finished goods, which conforms to the representations and warranties contained herein and which at all times continues to be acceptable to the Agent in its sole and reasonable discretion, less work-in-process if any, supplies (other than raw materials), goods not located in the United States of America, returned or rejected goods of customers unless the same are undamaged and resalable in the normal course of business, goods returned to the Debtor's suppliers, goods in transit to third parties, and less any reserves required by the Agent, in its sole and reasonable discretion, for special order goods, market value declines and bill and hold (deferred shipment) or consignment sales goods to the extent that such consignment sales goods (A) do not comply with the provisions of Paragraph 3(c)(ii) hereof or (B) do comply but exceed $1,500,000 in the aggregate valued at the lower of cost or market. "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. The Equipment Borrowing Base may be changed by Agent from time to time in its reasonable discretion, subject to Paragraph 22 hereof as among Lenders and Agent, such change to be effective upon thirty (30) days written notice to Debtor. "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 Paragraph 4 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 Paragraph 4(c)(ii) hereof; 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 next 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 3 2 (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 Agent from time to time in its reasonable discretion subject to Paragraph 22 hereof as among Agent and Lenders, such change to be effective upon thirty (30) days written notice to Debtor. "Letter of Credit Agreement" shall mean that certain Letter of Credit and Security Agreement executed by Jaco in favor of BNYCC on January 20, 1989, as the same has been or may be amended, supplemented, extended, modified or restated from time to time. "Letters of Credit" shall mean all letters of credit issued pursuant to the Letter of Credit Agreement. "Letter of Credit Fee" shall mean the fee due the Agent on behalf of the Lenders with respect to Letters of Credit issued pursuant to the Letter of Credit Agreement. "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%) per annum rate, determined by the LIBOR Office (each such determination to be conclusive and binding absent manifest error), at which Dollar deposits in immediately available funds are being, have been, or would be offered to or quoted by the Agent to major banks, through its LIBOR Office, in the London interbank market for eurodollar deposits, as at or about 11:00 a.m. two Business Days immediately preceding the first day 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 Agent at 48 Wall Street, New York, New York or such other office of the Agent as designated from time to time by the Agent, whether or not outside the United States. "LIBOR Reserve Percentage" means, for any day, that percentage (expressed as a decimal) which is in effect from time to time, equal to the maximum aggregate reserve requirements (including without limitation all basic, emergency, supplemental, special, 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 or any successor regulation (or against any other category of liabilities that includes deposits by reference to which the interest rate of LIBO Rate Loans is determined), having a term approximately equal or comparable to such Interest Period and applicable to the Bank, whether or not any Lender has any Eurocurrency Liabilities subject to such requirements, without benefit of credits or pro-rations, exceptions or offsets that may be available from time to time to the Agent. "Loan" or "Loans" means any extensions of credit hereunder; without limiting the foregoing, "Loans" shall additionally include the Term Loans and the Letters of Credit unless the context herein otherwise requires. "Maximum Loan Amount" shall mean for each Lender, the principal amount set forth beneath the signature of each Lender hereunder set forth on the signature page hereof, as the same may be reduced pursuant to paragraph 5(b)(v) hereof. "Mortgage" shall mean the Commercial Mortgage executed on March 11, 1994 and delivered by Nexus to BNYCC with respect to the Real Property, as the same has been or may be amended, supplemented, extended, modified or restated from time to time including, without limitation the Mortgage Modification and Assignment Agreement among Debtor and Lenders, executed contemporaneously herewith. "Obligations" shall mean any and all debts, liabilities and obligations of Debtor to the Agent, whether in its capacity as Agent or on behalf of any of the Lenders hereunder and/or to any of the Secured Parties hereunder, including without limitation any and all Loans, (including, without limitation, Letters of Credit and/or Term Loans), as well as any and all other debts, liabilities and obligations of Debtor to the Agent, in its capacity as Agent, or on behalf of any of the Lenders and/or to any of the Secured Parties of every kind and description, however arising, 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, under the Letter of Credit Agreement, under any guaranty(ies) or indemnity(ies) given or to be given in favor of Agent and/or any Lender and further including, without limitation, all interest, fees, reasonable charges and reasonable expenses (including reasonable attorneys' fees and expenses). 4 3 "Overadvances" shall have the meaning set forth in paragraph 4(d) hereof. "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 the Agent and/or the Secured Parties; (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 acquired after April 25, 1995 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 Agent and/or the Secured Parties 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. "Pro Rata Share" means with respect to each Lender at any time, such Lender's share of the total amount of all outstanding Loans, Letters of Credit and Term Loans, and is expressed as a percentage equivalent to a fraction where the numerator thereof is the Maximum Loan Amount of such Lender and the denominator thereof is the Aggregate Maximum Loan Amount of all Lenders, as the same may be adjusted pursuant to Paragraphs 4(c) and/or 4(d) of this Agreement. "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 Agent in accordance with Paragraph 6. "Required Lenders" shall mean at any time Lenders then holding, in the aggregate, Pro Rata Shares totalling at least sixty-six and two thirds percent (66 2/3%) of the aggregate Credit Exposure of all Lenders on such date. "Secured Party(ies)" shall have the meaning set forth in the introductory paragraph of this Agreement. "Settle" shall mean the provisions hereof in respect of the Agent and the Lenders settling matters between or among each of them on a particular Settlement Date. "Settlement Date" shall mean the date, weekly and more frequently, at the discretion of the Agent, that the Agent and the Lenders shall settle the outstanding balance of all Loans (inclusive of all ABR Loans, LIBO Rate Loans, Letters of Credit, and Term Loans) between or among themselves in order that Agent shall not have any funds at risk (beyond BNYCC's Pro Rata Share thereof in its capacity as a Lender hereunder, as contrasted with its capacity as Agent hereunder) and so that on such Settlement Date the Lenders will each have their respective Pro Rata Share of all Loans (including, without limitation, ABR Loans, LIBO Rate Loans, Letters of Credit and Term Loans); provided, however, in accordance with Paragraph 4(c)(ii), the "Settlement Date" applicable to any LIBO Rate Loan requested by the Debtor (and which is not a request for continuation of or conversion into a LIBO Rate Loan) shall be the third Business Day following the date on which the Debtor requests the Agent to incur such a Loan under this Agreement; and further provided however, that each Settlement Date for a Lender shall be a Business Day on which such Lender is open for business. "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 Agent'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 Agent made in accordance with this definition shall control. "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. 5 4 "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 six separate promissory notes issued by Debtor to the order of the Agent on behalf of each Lender, substantially in the forms attached hereto as Exhibits B-1 through and including B-6 respectively, which evidence and which without any interruption or break in continuity, amend and restate in their entirety, upon the terms and conditions therein more fully described, those three certain promissory notes initially issued by Debtor to the order of BNYCC (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 full and timely payment and performance of Debtor's Obligations, Debtor hereby grants to the Agent, for itself and for the ratable benefit of the Secured Parties (and wherever in this Agreement, the terms "ratable", "ratably", "pro rata" or the like may be used, such terms shall mean such portion as may be determined by reference to that particular Lender's Pro Rata Share), a first priority 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 any 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 any Lender 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 any Lender or in transit by mail or carrier to or from any Lender in the possession of any third party acting in any Lender's behalf, without regard to whether any Lender received the same in pledge, for safekeeping, as agent for collection or transmission, or otherwise or whether any Lender 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. The Agent for itself and on behalf of the Lenders 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 which is evidenced by those notes attached hereto as Exhibits B-5 and B-6, which notes in turn amend and restate in their entirety, upon the terms and conditions therein more fully described, that certain Term Loan Note to the order of BNYCC dated as of March 11, 1994 in the original principal amount of $1,500,000 (such amended and restated notes herein collectively, the "$1,500,000 Term Loan"), provided that any application of the proceeds of Accounts which (i) is made prior to the occurrence of an Event of Default and (ii) is not made at the direction of Borrower, and which application results in the payment of a LIBO Rate Loan prior to the last day of an Interest Period with respect thereto shall not result in the required payment by Debtor to Lender of any penalty or premium or loss or expense pursuant to Paragraph 5(g). hereof, 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 the Agent and/or any of the Lenders is considered by any of them to be adequate. The Agent may, subject to Paragraph 22(b) hereof as among Lenders and Agent, in its sole discretion, on behalf of itself and/or the other Lenders, exchange, waive, or release any of the Collateral, without affecting the Obligations or the Lenders' right to take any other action with respect to any other Collateral. Debtor agrees to safeguard, protect and hold all Inventory and Equipment for the Secured Parties' account and to make no disposition thereof except in the regular course of business as herein provided. Until the occurrence of an Event of Default any Inventory may be sold and shipped by the Debtor to its customers in the ordinary course of business, on open account and on terms currently being extended by the Debtor to their customers, provided that the proceeds of all sales (including cash, Accounts, checks, notes, instruments for the payment of money and similar proceeds) are forthwith transferred, endorsed and turned over and delivered to the Agent. Upon the occurrence of an Event of Default and until such time as such Event of Default is waived or cured to the Required Lenders' reasonable satisfaction no further disposition shall be made of the Inventory and/or Equipment without the Agent's prior written approval. Upon and following the occurrence of an Event of Default (i) cash sales or sales of Inventory in which a lien upon, or security interest in, Inventory or Equipment is retained by the Debtor, shall be made by the Debtor only with the approval of the Agent and the proceeds of such sales shall not be commingled with the Debtor's other property, but shall be segregated, held by the Debtor in trust for the Agent on behalf of the Lenders, as the Agent's exclusive property, and shall be delivered immediately by the Debtor to the Agent in the identical form received; (ii) upon the sale, exchange, or other disposition of Inventory, as herein provided, the security interest in the Debtor's Inventory provided for herein shall, without any break in continuity or interruption and without further formality or act, continue in and attach to all proceeds, of every type or nature and (iii) as to any such sale, exchange or other disposition, the Agent, on behalf of the Lenders, shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. 6 5 The rights and security interests granted herein to the Agent, on behalf of the Lenders, shall continue in full force and effect, notwithstanding the termination of this Agreement or the fact that the account of the Debtor may from time to time be temporarily in a credit position, until the final payment in full to the Agent and the Lenders of all Obligations and the termination of this Agreement. To the extent that the Obligations are now or hereafter secured by any assets or property other than the Collateral, or by the guarantee, endorsement, assets or property of any other person, then the Agent shall have the right in its sole discretion, to determine which rights, security interests, liens, or remedies the Agent shall at any time pursue, foreclose upon, relinquish, subordinate, modify or take any other action with respect to, without in any way modifying or affecting any of them, or any of the rights of the Agent or any Lender hereunder. Any balances to the credit of Debtor and any other property or assets of Debtor in the possession of the Agent and/or the Lenders may be held by the Agent or the Lenders, as the case may be, as security for any Obligations and upon the occurrence and during the continuance of an Event of Default, applied in whole or partial satisfaction of such Obligations subject to Paragraph 23(b) hereof. The liens and security interests granted herein and any other lien or security interest the Agent or the Lenders may have in any other assets of the Debtor shall secure payment and performance of all now existing and future Obligations. The Agent may in its sole discretion charge any or all of the Obligations to the account of the Debtor when due. In addition to the foregoing, the Debtor authorizes the Lenders and each of the Lenders shall have the right, without notice, upon the occurrence and during the continuance of an Event of Default to set-off and apply against any and all property held by, or in the possession of the Lenders, the Obligations due the Lenders, subject to Paragraph 23(b) hereof. 3. For the purpose of inducing each of the Lenders to make Loans to Debtor, Debtor hereby warrants, represents, covenants and guarantees to Agent and each Lender, 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 of the Loans made by, and with respect to each of the Letters of Credit issued, extended or confirmed with the assistance of Agent or any of the Lenders 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 Agent 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 claimed has been or will be made with the Account Debtor on any Account except as shown on the statement or invoice furnished to Agent 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 Agent, on behalf of the Secured Parties, has been given notice of such fact, has been given UCC-1 Financing Statements executed by Debtor as, consignor and Account Debtor as consignee with assignments of the UCC-1 financing statements to Agent for filing in such locations, and the location thereof will not be changed without prior written notice given by the Debtor to Agent, on behalf of the Secured Parties in each and every instance provided, however, that the failure to comply with this subsection 3(c)(ii) shall result in an Event of Default only to the extent that it affects Inventory with an aggregate value, at lower of cost or market, of $1,500,000; (d) upon the occurrence and during the continuance of an Event of Default, the Agent on behalf of the Secured Parties 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 the Agent on behalf of the Secured Parties 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 the Agent on behalf of the Secured Parties 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 Agent and/or any of the Lenders with reference to the description, content or valuation of 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 an all other instruments, memoranda and documents presented or delivered to the Agent, on behalf of the Secured Parties shall be valid and genuine; and (h) Debtor will promptly notify Agent on behalf of the Secured Parties 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 and/or Equipment, or in the collectability 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, 7 6 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 the Agent made on behalf of the Secured Parties, Debtor shall hold the same segregated in trust for the Agent for the benefit of the Secured Parties, subject to its exclusive disposition, and shall, at Debtor's expense, deliver the same to the Agent on behalf of the Secured Parties, or to such place or places as the Agent on behalf of the Secured Parties may designate. 4. (a) Subject to the terms of this Agreement and provided that there does not exist, at the time of any request of Debtor to Agent, an Event of Default or an event which with the giving of notice or the passage of time or both would become an Event of Default, each Lender severally agrees, upon any such request, to make Loans to Debtor hereunder, on a revolving basis from time to time and which the Debtor may borrow, repay and reborrow during the Term hereof, provided that the sum of all such Loans inclusive of all Obligations under or in connection with Letters of Credit and the Term Loans, shall not be in excess of such Lender's Pro Rata Share of the lesser of (i) the Aggregate Maximum Loan Amount or (ii) the sum of (A) the Accounts Receivable Borrowing Base plus (B) the lesser of (x) the Inventory Borrowing Base or (y) $15,000,000; plus (C), the lesser of (x) the Equipment Borrowing Base or (y) $500,000; plus (D) the amount outstanding under the $1,500,000 Term Loan but only for so long as the Term Loan is secured by the Mortgage. 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 less, the unpaid principal amount at such time, of the $1,500,000 Term Loan, provided that for the purpose of such calculation the unpaid principal amount advanced hereunder (less the then outstanding balance of $1,500,000 Term Loan) advanced hereunder shall be deemed to have been advanced first against the maximum amount available at such time under the Accounts Receivable Borrowing Base. Notwithstanding anything to the contrary contained herein the indebtedness evidenced by the Term Loan Notes constitutes term loans. (b) The total amount of Loans outstanding shall include, without limitation, 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. In no event, however, 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 unpaid drafts pursuant to the Letters of Credit exceed $2,000,000. The Agent shall have the right, without notice to the Debtor, to charge the Debtor's accounts on the Agent's books with the amount of any and all Obligations of any kind incurred by the Agent and/or Lenders under or in connection with any Letters of Credit at the earlier of payment by the Agent and/or Lenders therefor, or the occurrence of an Event of Default. Any amount charged to the Debtor's loan account shall be included in the Loans and shall incur interest at the rates provided for herein. In any event no Letter of Credit shall have an expiration date that extends beyond the end of the Term. (c) (i) The Debtor may by telephonic notice received by an officer of the Agent, request a borrowing prior to 1:00 P.M. New York time in the form of an ABR Loan on the date on which it requests to incur such a Loan, such request to specify the amount of the Loan requested. In any such instance, the Agent may: (a) notify each of the Lenders, not later than 2:00 P.M. New York time, of the ABR Loan to be funded on such date, as well as the amount of such Lender's Pro Rata Share of the requested ABR Loan, and each such Lender shall make such amount available to the Agent on such date in same day funds, to such account of the Agent as the Agent may designate, by not later than 5:00 P.M. New York time; or (b) if the Agent shall elect to do so in its sole and absolute discretion, subject to the terms and conditions hereof and in its capacity as a Lender, make such ABR Loan available to the Debtor (each an "Agent ABR Loan") on the date so requested, by transferring same day funds to the operating account(s) of the Debtor maintained with the Agent. Each such Agent ABR Loan shall constitute a Loan hereunder and shall be subject to all of the terms and conditions applicable to other Loans, except that all payments thereon shall be payable to the Agent in its capacity as Lender, solely for its own account, until such time as each of the Lenders shall Settle with the Agent as to such Agent ABR Loan on the Settlement Date next occurring. Until such Settlement shall occur, the Agent shall correspondingly increase its Pro Rata Share of the Aggregate Maximum Loan Amount and the Pro Rata Share of each such other Lender shall be correspondingly decreased and upon such Settlement occurring, appropriate adjustments shall be made to such Pro Rata Shares in order to restore such Pro Rata Shares to their respective levels prior to the relevant Agent ABR Loan. (ii) Alternatively, the Debtor may by written notice received by an officer of the Agent (and the Agent shall promptly notify the Lenders) request a borrowing prior to 11:00 A.M. New York time in the form of a LIBO Rate Loan on the day on which it requests Lenders to incur such Loans and which date is three (3) Business Days prior to the Settlement Date in relation thereto, such request to specify the amount of such Loans so requested, as well as the requested Interest Period applicable thereto, shall be in a minimum amount of $1,000,000 and an integral multiple of $100,000. On each such Settlement Date in relation to any LIBO Rate Loan so requested by the Debtor, each Lender shall make the amount of its Pro Rata Share of such LIBO Rate Loan available to the Agent and to such account of the Agent as the Agent may designate, in same day funds on such Settlement Date, by no later than 1:00 P.M New York time. Such amounts made available to the Agent shall be applied against the amounts of the applicable LIBO Rate Loan so requested, and together with the portion of such LIBO Rate Loan representing the other Pro Rata Share(s) thereof made available by all other Lenders, shall constitute a LIBO Rate Loan of the Lenders to the Debtor pursuant to this Agreement. In any event, no LIBO Rate Loan shall be made which has an Interest Period that, shall expire on a date that, extends beyond the end of the Term, and each LIBO Rate Loan may, subject to the provisions of Paragraph 5(g) hereof, be repaid only on the last day of the Interest Period with respect thereto. (iii) Each such request for a borrowing hereunder by the Borrower shall be deemed to include and restate to the Agent and to each Lender each representation and warranty contained in this Agreement and to constitute a certification by the Debtor to the Agent and to each Lender that no event has occurred and is continuing on the date of such request, or would result from any such Loan, which constitutes an Event of Default. Any such request shall be irrevocable and the Debtor shall be bound to borrow the funds requested therein in accordance therewith. The Agent shall not incur any liability to the Debtor or Lenders as a result of acting upon any request or notice which the Agent believes in good faith to have been given by an officer duly authorized by the Debtor in relation to the Loans or for otherwise acting in good faith in relation thereto and the crediting of Loans to the Debtor's account, or transmittal to such person as the Debtor shall 8 7 direct, or other action called for hereunder shall conclusively establish the obligation of the Debtor to repay such Loans as provided herein. (iv) On each Settlement Date under this Agreement the Agent shall be entitled to assume that each Lender has made its Pro Rata Share of such Loan available to the Agent, unless a Lender shall have notified the Agent to the contrary. The Agent, in its sole discretion, based upon such assumption and in reliance thereon, may make available to the Debtor a corresponding amount on such Settlement Date. If such corresponding amount not in fact been made available to the Agent by any Lender, such Lender and the Debtor severally agree to repay to the Agent forthwith, on demand, such corresponding amount, together with interest thereon for each day during the period commencing on the date such amount is made available to the Debtor and ending on the date such amount is repaid to the Agent, at (A) in the case of the Debtor, the interest rate applicable from time to time to such borrowing, and (B) in the case of a Lender, the Federal Funds Rate for the first three days following the date such amount was made available by the Agent and thereafter, at the interest rate applicable to the Debtor from time to time with respect to such Loans. If the Lender repays to the Agent such corresponding amount, such amount so repaid shall constitute a Loan, and if both such Lender and the Debtor shall have repaid such corresponding amount, the Agent shall promptly return to the Debtor such corresponding amount in same day funds. Nothing in this paragraph, however, shall or shall be deemed to: (a) obligate Agent to make available to the Debtor any Loans or to issue or cause to be opened any Letters of Credit, when the Agent has any notice that any Lender will not advance its Pro Rata Share thereof; or (b) relieve any Lender of its obligation, if any, to make a Loan on any Settlement Date. (v) By delivering a Continuation Notice to the Agent 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, immediately following last day of the Interest Period Applicable thereto, as, or that an ABR Loan be converted into, a LIBO Rate Loan (and in the absence of timely 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, on 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, immediately following the last day of the Interest Period Applicable thereto, as, or converted into, a LIBO Rate Loan, and no LIBO Rate Loans may be requested by the Debtor, in any instance when any Event of Default has occurred and is continuing. The Agent shall give written notice to each Lender of any such Continuation Notice or conversion prior to 3:00 P.M. on the day such notice is received. All such continuation or conversions of Loans shall be effected based on the respective Pro Rata Share of each Lender. (vi) On the Settlement Date relevant to each Loan, the Agent and the Lenders shall each remit to the other, in immediately available funds, all amounts necessary so as to ensure that, as of the Settlement Date, the Lenders shall have their Pro Rata Share of all outstanding Obligations. All Loans made by the Agent hereunder shall be disbursed from whichever office or other place Agent may designate from time to time and, together with any and all other Obligations of Debtor to the Agent and/or to the Lenders arising under or in connection with this Agreement, shall be charged to the Debtor's account on Agent's books. The proceeds of each Loan made by the Agent shall be made available to the Debtor by way of credit to the Debtor's operating account(s) maintained with the Agent. Any and all Obligations due and owing hereunder may be charged to Debtor's account and shall constitute Loans hereunder. (vii) INTENTIONALLY DELETED (viii) The Agent shall forward to each Lender, at the end of each month, a copy of the account statement rendered by the Agent to the Debtor. (ix) All Loans shall be made by the Lenders in accordance with their Pro Rata Shares thereof. The Debtor hereby agrees that each Lender is solely responsible for its Pro Rata Share of the Obligations, including all Loans to be made and all Letters of Credit to be issued for the Debtor's account, as well as such Lender's Pro Rata Share of the Term Loans, and that neither the Agent nor any Lender shall be responsible for, nor assume any obligations for the failure of any Lender to make any Loans hereunder or otherwise to make available such Pro Rata Share. Furthermore, no such failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder, whether to make Loans or otherwise. However, should any Lender refuse to make available its Pro Rata Share as described above, then the Agent may proceed in accordance with subparagraph (d) immediately below, or the other Lenders or any other Lender (including without limitation, the Agent in its capacity as Lender) may, but without the obligation to do so, increase, unilaterally, their or its Maximum Loan Amount, in which event the Debtor shall be correspondingly obligated to such other Lenders or Lender. Any such defaulting Lender, however, shall not thereafter be entitled to receive from the Agent any payments of principal, interest, fees or other amounts paid hereunder (whether by collection of the Collateral or otherwise), and the Agent shall be entitled to retain such amounts, until all amounts owing by such defaulting Lender to the Agent (together with any interest therein as provided in this Agreement) shall have been paid in full. (x) In the event that the Agent, the Lenders, or any of them, is sued or threatened with suit by the Debtor or by a receiver, trustee, creditor or any committee of creditors on account of any preference, voidable transfer or lender liability issue, alleged to have occurred or been received as a result of, or during the transactions contemplated in this Agreement, then in such event any money paid in satisfaction or compromise of such suit, action, claim or demand and any expenses, costs and attorneys' fees paid or incurred in connection therewith, whether by the Agent, the Lenders, or any of them, shall be the responsibility of the Lenders on a Pro Rata Share basis. In addition, any costs, expenses, fees or disbursements reasonably incurred by outside agencies or attorneys retained by the Agent to effect collection or enforcement of any rights in the Collateral, including enforcing, preserving or maintaining rights under this Agreement shall be also the responsibility of the Lenders on a Pro Rata Share basis to the extent not reimbursed by the Debtor or from the proceeds of Collateral. (xi) INTENTIONALLY DELETED (xii) The Agent may, in its sole discretion and at any time for the Debtor's account and expense, pay any amount or do any act required of the Debtor hereunder or reasonably requested by the Agent, to preserve, protect, maintain or enforce the Obligations, the Collateral or the security interests or liens 9 8 now or hereafter held by the Agent and/or any of the Lenders, and which the Debtor fails to pay or do, including without limitation, payment of any judgment against the Debtor, any insurance premium, any warehouse charge, any finishing or processing charge, any landlord's claim, and any other security interest, lien, charge and/or encumbrance upon or with respect to the Collateral and which such failure to pay or do would impair the Agent's rights hereunder or constitute an Event of Default. All payments that the Agent makes or any action taken by the Agent under this paragraph shall be without prejudice to any right to assert an Event of Default hereunder and to proceed thereafter as herein provided. (d) Notwithstanding the foregoing, the Agent shall have the right, in Agent's sole and absolute discretion, to make Loans hereunder: (i) on behalf of the Lenders, on a Pro Rata Share basis, which are in excess of the maximum amount of Loans which would otherwise be permitted hereunder pursuant to Paragraph 4(a) above ("Overadvances") to the maximum amount of $1,000,000 for no more than five (5) consecutive Business Days applicable to all of such (voluntary) Overadvances, whether or not any such Overadvances are in excess of the Accounts Receivable Borrowing Base, the Equipment Borrowing Base and/or the Inventory Borrowing Base, or are in excess of any the above percentages and/or dollar limitations or any other pertinent limitations herein set forth. Notwithstanding the foregoing, however, such Overadvance limitation shall not include, or be deemed to include, or be considered to have been exceeded by reason of, any Loans which at any time or from time to time arise in an involuntary manner, whether by reason of items charged to the Debtor's account in accordance with this Agreement or otherwise, and such Overadvance limitation shall only apply to any Overadvances which may be voluntarily extended under this Agreement to the Debtor and which are made by Agent, in Agent's sole and absolute discretion, on behalf of the Lenders, subject to any additional terms the Agent may deem necessary; and (ii) in the event any Lender shall fail to fund Loans to the Debtor as herein provided, by making such Loans itself, in its capacity as a Lender, in whole or in part (each a "Deficiency Loan"), but there shall be no obligation on its part to make any such Deficiency Loan. Upon making any such Deficiency Loan, the Agent in its capacity as Lender shall thereafter be entitled to payments of principal of and interest thereon in the same manner and at the same interest rate or rates to which such other Lender would have been entitled had it made such Loan; in such an instance, the Agent in its capacity as Lender shall correspondingly increase its Pro Rata Share of the Aggregate Maximum Loan Amount (and decrease the Pro Rata Share thereof held by the defaulting Lender) until such time, if any, as full repayment of the Deficiency Loan may be made by such defaulting Lender, as more fully described below. Should the defaulting Lender later pay to the Agent, in its capacity as Lender, the entire outstanding amount of such Deficiency Loan, together with accrued and unpaid interest thereon, from the most recent date or dates interest was paid to the Agent by the Debtor on each Loan comprising a Deficiency Loan, at the interest rate per annum for overnight borrowing by the Bank from the Federal Reserve Bank, then such payment shall be credited against the Deficiency Loan and in full payment thereof and the Debtor shall be deemed to have borrowed the amount of such Deficiency Loan from such other Lender as of the most recent date or dates, as the case may be, upon which any payments of interest were made by the Debtor thereon. Under no circumstances, however, shall the Agent or any Lender be responsible for any default of any other Lender in respect to such Lender's obligation to make any Loan hereunder, nor shall the Pro Rata Share of any Lender hereunder in any Loans be increased as a result of such default of any other Lender. (e) Except as otherwise specifically provided in this Agreement all payments under this Agreement and the Term Loan Notes shall be made to the Agent for the ratable account of each Lender in immediately available funds not later than 1:30 p.m. (New York time) on the date when due and shall be made in immediately available funds and in lawful money of the United States of America. Any payments under this Agreement or under the Term Loan Notes which are made later than 1:30 p.m. (New York time) shall be deemed to have been made on the next succeeding Business Day. If any payment of principal, interest, premium, or any other sum to be made hereunder becomes due and payable on a day other than a Business Day, the due date of such payment shall be extended to the next succeeding Business Day (except as set forth in subsection (b) of the definition of "Interest Period" appearing herein) and interest thereon shall be payable at the applicable rate during such extension. (f) As between the Debtor and the Agent, the Agent shall determine in its sole discretion the order and manner in which the proceeds of Collateral and other payments that the Agent receives are applied to the Loans, interest thereon and the other Obligations, and the Debtor hereby irrevocably waives the right to direct the application of any payment or proceeds. As between Debtor and Agent, the Agent shall have the continuing and exclusive right to apply and reverse and reapply any and all such proceeds and payments to any portion of the Obligations. As between the Agent and the Lenders, all payments against and all proceeds of Accounts or other Collateral received by the Agent, shall be applied, ratably, subject to the provisions of this Agreement, first, to pay any attorney costs, fees or other expense reimbursements then due to the Agent from the Debtor; second, to pay any Loans of the Agent made in its capacity as Lender, not as yet Settled as of the applicable Settlement Date, together with all interest thereon; third, to pay any fee or expense reimbursements then due to the Lenders from the Debtor; fourth, to pay interest due in respect of all Loans; fifth, to pay principal of the Loans (other than any Loans of the Agent made in its capacity as Lender, covered by clause "second" above) and unpaid reimbursement Obligations in respect of Letters of Credit; and sixth, to payment of any other Obligation due to the Agent or any Lender by the Debtor. (g) The Debtor shall indemnify, defend and hold harmless upon demand, the Agent and the Lenders from and against any and all liabilities, obligations, losses, claims, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind whatsoever, which are at any time (including without limitation at any time following the repayment of the Loans) imposed or asserted against the Agent or any Lender arising out of: (i) the ownership, use, operation, maintenance, repair, leasing or subleasing of the Collateral; (ii) the design, maintenance and construction of the Collateral; (iii) the sale or other disposition of the Collateral or proceeds; (iv) the issuance, sale or delivery of any notes hereunder, including without limitation the Term Loan Notes; (v) breach of representations or warranties made by the Debtor; or (vi) any agreement entered into by the Debtor in connection with the Collateral; unless it is determined that such liabilities, claims, obligations, damages, penalties, or judgments were the result of acts or omissions on the part of the Agent or the Lenders constituting gross negligence or willful misconduct, and then only to the extent of such gross negligence or willful misconduct. (h) Without limiting the foregoing, if after receipt of any payment, or any proceeds of Collateral applied to the payment of, all or any part of the Obligations, Agent or any Lender is for any reason compelled to surrender such payment or proceeds to or for the benefit of the Debtor, because such payment or proceeds is invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, 10 9 impermissible setoff, or a diversion of trust funds, (each a "Surrender Event") then the Obligations or part thereof intended to be satisfied shall be revived and continue, the Debtor hereby agrees to unconditionally and irrevocably indemnify each Lender and the Agent with respect thereto and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by the Lender or the Agent, as the case may be; and the Debtor shall be liable to pay to the Lender or the Agent, the amount of such payment or proceeds surrendered. Notwithstanding the foregoing and not in limitation, in any respect, of the indemnity by Debtor contained herein, in the event of the occurrence of a Surrender Event the Lenders which have not so surrendered shall pay to the Lender required to so surrender such sums as will cause each Lender to have paid its Pro Rata Share of the amount so surrendered. The provisions of this subparagraph (g) shall be and remain effective notwithstanding any contrary action which may have been taken by any Lender or the Agent in reliance upon such payment or proceeds, and any such contrary action so taken shall be without prejudice to the rights of the Lenders and the Agent under this Agreement and shall be deemed to have been conditioned upon such payment or proceeds having become final and irrevocable. The provisions of this subparagraph (g) shall survive the payment of all Obligations hereunder, the termination of all outstanding Letters of Credit, the termination of this Agreement and/or the resignation of the Agent. 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 Agent's option be charged by Agent to Debtor's account. Interest charges shall be computed on the unpaid balance of the Loans (other than the Term Loans which shall bear interest at the rates set forth in the respective Term Loan Notes) 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 Agent's option, to the outstanding Loans in such order as Agent shall determine or refunded by Agent or by the Lender, as the case may be, 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) In the event the average closing daily unpaid balances of all Loans hereunder during any calendar month is less than the Aggregate Maximum Loan Amount, Debtor shall pay to Agent for the ratable benefit of the Lenders, a non-refundable fee at a rate per annum equal to 2/10 of one percent (.2%) on the amount by which the Aggregate 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. (ii) The Debtor shall also pay to the Agent for the ratable benefit of the Lenders, the Letter of Credit Fee, which shall be payable on a monthly basis in accordance with the Letter of Credit Agreement. (iii) Upon Agent'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 Agent and which due diligence is undertaken by Agent or for the benefit of Agent and the Lenders, an amount equal to Agent'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 provided, however, that only the Agent can conduct field examinations but any Lender may, without charge to Debtor, participate in any such field examination. (iv) With respect to any and all other fees and charges at any time and from time to time paid or payable by the Debtor to the Agent under or in connection with this Agreement, which fees and charges may be set forth herein or in separate agreements between Agent and the Debtor, the Agent alone shall be entitled to retain the same for its exclusive account. Without limiting the foregoing, Debtor shall pay to Agent for the Agent's account only (or Agent may charge Debtor's account(s) with), an annual Collateral Monitoring Fee, in an amount equal to $20,000, which fee shall be paid in equal monthly installments during each year that this Agreement is in effect. (v) Notwithstanding anything to the contrary contained in this Agreement, in the event of a public offering by Jaco ("Public Offering") and provided that no Event of Default has occurred, Debtor may reduce the Aggregate Maximum Loan Amount, in not more than two reductions, to an amount of not less than $10,000,000, subject to the following conditions: (A) notice of such reduction must be given to Agent no less than five Business Days prior to the effective date of such reduction ("Effective Reduction Date") and Debtor shall no later than the Effective Reduction Date, pay to Agent the amount which will reduce the outstanding balance of the Loans (including interest, costs, fees, amounts payable pursuant to Paragraph 5(g) and other charges as specified in the Agreement) to an amount not greater than the Aggregate Maximum Loan Amount as so reduced; (B) the aggregate of such reductions shall not exceed the net proceeds received by Debtor from the Public Offering (C) any such reduction must be for an amount no less than $1,000,000 and in integral multiples of $500,000; and (D) any such reduction shall be irrevocable and shall permanently reduce the Aggregate Maximum Loan Amount and Debtor shall thereafter have no right to increase the same. Any such reduction shall equally decrease each Lender's Pro Rata Shares. (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 any Lender (for purposes of this Paragraph 5(c), the term "Lender" shall include Lender and any corporation or bank controlling Lender) 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 any Lender to any tax of any kind whatsoever with respect to this Agreement or change the basis of taxation of payments to any Lender 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 any Lender); 11 10 (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 any Lender, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (iii) impose on any Lender any other condition with respect to this Agreement; and the result of any of the foregoing is to increase the cost to any Lender of making, renewing or maintaining its Loans commitments or other extensions of credit hereunder or under the Term Notes by an amount that any Lender 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 any Lender deems to be material, then, in any case Debtor shall promptly pay any Lender, upon its demand, such additional amount as will compensate such Lender for such additional cost or such reduction, as the case may be. Any such Lender shall certify the amount of such additional cost or reduced amount to Debtor, including all 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 any Lender (for purposes of this Paragraph 5(d), the term "Lender" shall include any Lender and any corporation or bank controlling such Lender) 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 such Lender's capital as a consequence of its obligations hereunder to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then, from time to time, Debtor shall pay upon demand to such Lender such additional amount or amounts as will compensate such Lender for such reduction. In determining such amount or amounts, any such Lender may use any reasonable averaging or attribution methods. The protection of this Paragraph shall be available to any Lender regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition. (ii) A certificate of any Lender setting forth such amount or amounts as shall be necessary to compensate such Lender with respect to Paragraph 5(d) hereof including all pertinent information regarding the calculation thereof, when delivered to Debtor shall be conclusive absent manifest error. (e) If any Lender (for purposes of this Paragraph 5(e) the term "Lender" shall include any Lender and any corporation or bank controlling such Lender) 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 such Lender to make, continue or maintain the Loans or any portion thereof as a LIBO Rate Loan, the obligations of such Lender 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 such Lender 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 any Lender (for the purposes of this Paragraph 5(f) the term "Lender" shall include any Lender and any corporation or bank controlling such Lender) 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 or the LIBO Rate does not reflect such Lender's cost of funds, then, upon notice from such Lender to Debtor, the obligations of such Lender under this Agreement to make, continue, maintain or convert the Loans or any portion thereof as LIBO Rate Loans shall forthwith be suspended until such Lender shall notify Debtor that the circumstances causing such suspension no longer exist. (g) Absent any gross negligence on the part of any Lender, in the event any Lender (for purposes of this Paragraph 5(g) the term "Lender" shall include any Lender and any corporation or bank controlling such Lender) shall incur any loss or expense (including any loss of margin or any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender 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 (i) 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; (ii) 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 such Lender's obligation to make such LIBO Rate Loan in accordance with the terms hereof); or (iii) the Loans or any portion thereof not being continued as or converted to, LIBO Rate Loans in accordance with the Continuation Notice therefor, then, upon the written notice of such Lender to Debtor the Debtor shall, within five days of receipt thereof, pay to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender 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. 5(A). Until Debtor's authority to do so is terminated by the Agent on behalf of the Secured Parties, either as a result of notice by Agent which it may give at any time, or automatically upon the occurrence of an Event of Default, Debtor will for the benefit of and for the account of the Agent on behalf of the Secured Parties, but at the Debtor's expense, enforce, collect and receive as the property of the Secured Parties and hold in trust for the Secured Parties, separate from the Debtor's own property and funds, all amounts received on Accounts from Account Debtors and will turn over and/or mail and deliver to the office of Agent on behalf of the Secured Parties, 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 Agent on behalf of the Secured Parties to 12 11 endorse and deposit such original Account Debtor's checks and remittances to its own account, whether said remittances are made payable to Agent, any of the Secured Parties or Debtor, the proceeds thereof to be credited to Debtor's loan account as provided in Paragraph 8 hereof. Debtor shall submit to Agent on behalf of the Secured Parties, with all remittances, a report in such form as Agent may require; and further, shall submit original remittance advice in the form received by Debtor from Account Debtors. This privilege shall terminate automatically upon the occurrence of an Event of Default pursuant to Paragraph 19 (f) of this Agreement, or at the election of the Agent or the Required Lenders, upon the occurrence of any other Event of Default and until such Event of Default is cured or waived to the satisfaction of the Agent. 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 each of the Agent on behalf of the Secured Parties. Upon the occurrence and continuance of an Event of Default, Debtor shall deliver to and sign for Agent on behalf of Secured Parties as Agent shall require, any bills, statements and letters to be directed to Account Debtors and shall execute and deliver to Agent on behalf of the Secured Parties any and all instruments (including, without limitation, ageing of Accounts), reasonably determined by Agent 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 the Agent on behalf of the Secured Parties 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. 6(A). Debtor shall deliver to Agent on behalf of the Secured Parties daily, or at such other periods as Agent shall determine, a report in form reasonably satisfactory to Agent on behalf of the Secured Parties enumerating the Accounts arising out of the sale of merchandise or rendition of service. Debtor shall deliver to Agent on behalf of the Secured Parties, 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 Agent may, from time to time, reasonably require. Upon request, Debtor shall deliver to Agent on behalf of the Secured Parties a report in form satisfactory to Agent 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 Agent, in writing, of the issuance of such credit or the return of such merchandise. The Debtor agrees to maintain such books and records regarding Accounts as the Agent may reasonably require and agrees that the books and records of the Debtor will reflect the Agent's interest in the Accounts for the benefit of the Lenders. All of the books and records of the Debtor will be available to the Agent at normal business hours, including any records handled or maintained for Debtor by any other company or entity. 7. Agent on behalf of the Secured Parties 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 Agent on behalf of the Secured Parties and shall be paid directly to Agent on behalf of the Secured Parties. Upon the occurrence and during the continuance of an Event of Default, upon the request of the Agent on behalf of the Secured Parties, Debtor shall so notify Account Debtors and shall indicate on all billings to Account Debtors that all moneys due thereon are payable to Agent. Agent shall further have the right upon the occurrence and during the continuance of an Event of Default, directly or through its agents, on behalf of the Secured Parties, to collect any or all of the Accounts, and in Agent's 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 Agent 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 of any subsequent breach or delay or of the rights of Agent and/or any of the Secured Parties 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 Agent on behalf of the Secured Parties, release, compromise or adjust any Account, or any guarantee, security or lien therefor, accept any returns, or grant any discounts, allowances or credits thereon, or bring any suit to enforce payment thereof; in any event, after the occurrence of an Event of Default under Paragraph 19(f) hereof, or after the Agent has notified the Debtor of the occurrence of any other Event of Default which has occurred and is continuing, none of the foregoing shall be deemed any longer to be in the ordinary course of business and thereafter, all of the foregoing are only to occur after the Agent, in its sole discretion, may have given its prior written approval. Upon the occurrence of an Event of Default and until such time as such Event of Default is waived or cured to the Agent's satisfaction and on notice from the Agent, the Debtor agrees that all returned, reclaimed or repossessed merchandise or goods shall be set aside by the Debtor and held by the Debtor for the Agent's account as owner and assignee. Agent and/or the Secured Parties 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. Agent shall credit to Debtor's Loan Account proceeds of Accounts received by Agent on behalf of the Secured Parties, such credits to be entered one Business Day after receipt of the proceeds; such credits, however are conditional upon final payment to Agent on behalf of the Secured Parties, at Agent's 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. At the end of each month, the Agent shall send the Debtor a statement showing the accounting for the charges, Loans, payments and other transactions occurring between the Agent and the Lenders and the Debtors during that month, with a copy thereof to each Lender. The monthly statements shall constitute an account stated between the Debtor and the Lenders and shall fully bind the Debtor unless the Agent receives a written statement of the exceptions within thirty (30) days of the date on which the monthly statement is mailed or within thirty (30) days of the mailing by Agent of any adjustment thereof. 9. All sales of Inventory by Debtor shall be reported to Agent on behalf of the Secured Parties promptly on a Sales Summary Report. Agent on behalf of the Secured Parties shall have the right upon the occurrence of 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 Agent on behalf of the Secured Parties for inspection at any time requested by Agent. Debtor shall, upon 13 12 request of Agent, promptly furnish Agent on behalf of the Secured Parties with a report, in form and substance satisfactory to the Agent, 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. Agent on behalf of the Secured Parties 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. Agent on behalf of the Secured Parties 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 Agent shall be charged to Debtor's Loan Account and be part of the Obligations. Neither Agent nor any of the Secured Parties shall 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 by Agent or by or through any other agent for any of them, or otherwise, or for the collection of any proceeds thereof, but the same shall at all times be solely 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 Agent on behalf of the Secured Parties may reasonably designate or approve, and the policies evidencing such insurance shall be issued with such loss payable rider as Agent may reasonably designate and said policies shall be delivered to Agent on behalf of the Secured Parties at Agent's request. Until such time as the Agent requires otherwise, such loss payable rider shall provide that payment with respect to any claim exceeding $150,000 shall be made directly to Agent on behalf of the Secured Parties. Should Debtor fail for any reason to furnish Agent with such insurance, Agent shall have the right to effect the same and charge any costs in connection therewith to Debtor's Loan Account. Neither Agent nor any of the Secured Parties shall have any risk, liability or responsibility in connection with payment or non- payment of any loss, the sole obligation of Agent on behalf of the Secured Parties 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 Agent on behalf of the Secured Parties, 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 Agent may reasonably request in order to perfect and enforce the rights of the Agent and/or the Secured Parties herein. Debtor hereby authorizes Agent to complete any blank space therein according to the terms upon which the Obligations hereunder are granted. At the request of Agent, Debtor will execute and deliver to Agent on behalf of the Secured Parties such financing statements or amendments thereof or supplements thereto, and such other instruments, all in a form satisfactory to Agent, as Agent 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 Agent, 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 Agent on demand, for itself and on behalf of the Lenders any and all reasonable costs and 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 Agent or by any Secured Party to obtain or enforce payment of any Account, either as against the Account Debtor, and 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 the rights or interests therein or thereto of the Agent and/or any Lender, including, without limitation, any reasonable counsel fees or expenses incurred in any bankruptcy or insolvency proceeding or otherwise with respect hereto. 13 (a). The obligation of the Lenders to make any initial Loan to be made hereunder on or after the Closing Date and the obligation of the Agent to cause any initial Letter(s) of Credit to be issued hereunder on or after the Closing Date, is subject to the conditions precedent that the Agent shall have received on or before the Closing Date all of the following (except as waived by the Agent), in form and substance satisfactory to the Agent and in sufficient copies for each Lender: (i) the Agreement and all related agreements, instruments and documentation, executed by the Debtor, the Agent and where called for, each of the Lenders including Uniform Commercial Code - 1 financing statements (each a "UCC-1") and Uniform Commercial Code - 3 financing statements (each a "UCC-3") and a guaranty by Jaco of the Obligations of Nexus to Agent and Lenders; (ii) copies of the resolutions of the board of directors of the Debtor approving and authorizing the execution, delivery and performance by the Debtor of this Agreement, certified as of the Closing Date; (iii) good standing certificates for the Debtor of their state of incorporation and from each other jurisdiction in which it is doing business, verifying the good standing of the Debtor; (iv) an officer's certificate dated as of the Closing Date, stating that the representations and warranties herein are true and correct on and as of such date, as though made on and as of such date and that no Event of Default exists or would result immediately after the Closing Date; (v) the Debtor shall have executed and delivered to the Agent the (revised) Term Loan Notes, substantially in the forms attached hereto as Exhibits B-1 through and including B-6 respectively; (vi) a modification to Commercial Mortgage shall have been executed and delivered to the Agent, in relation to that certain Commercial Mortgage Deed from Nexus to BNYCC dated March 11, 1994, recorded in Book 117 at Page 389 of the Town of Brandon (Vermont) Land Records on March 17, 1994; (vii) in relation to the modification referenced in immediately preceding subparagraph, an amendment to Lawyer's Title Insurance Policy #112-02-090492 shall have been executed and delivered to the Agent; (viii) the Debtor shall have executed and delivered an amendment to that certain Trademark Collateral Security Agreement and to that certain Patent Collateral Security Agreement heretofore executed in favor of BNYCC, as Secured Party, together with an amendment to any related agreements and/or powers of attorney; (ix) the Debtor shall have provided to the Agent certificates executed by its insurance carriers with respect to each of Debtors relevant insurance policies which shall be in form and substance acceptable to the Agent, (provided that Debtor shall, upon request of the Agent, provide to the Agent copies of its up to date insurance policies), as well as having executed and delivered to Agent an amended loss payable endorsement accepted by its insurance carriers, with respect to relevant insurance coverages, in form and substance acceptable to the Agent; (xi) each guarantor of the Obligations of Debtor to Agent and/or Lenders shall execute and deliver (A) such reaffirmations of existing guarantees as may be required by Agent; (B) such reaffirmations of existing security agreements as may be required by Agent; and (C) such UCC-1 and UCC-3 financing statements as may be required by Agent; (xii) NatWest, BNYCC, the Agent and the Debtor shall have 14 13 each executed and delivered an Assignment and Acceptance Agreement substantially in the form of Exhibit C hereto; (xiii) NatWest shall have funded its initial Pro Rata Share of the Obligations hereunder; and (xiv) Jaco shall have executed and delivered to Agent its guaranty of the Obligations of Nexus to Agent and/or Lenders. (b) The obligation of the Lenders to make each Loan, after the Closing Date and the obligation of the Agent to cause initial Letter(s) of Credit to be issued hereunder after the Closing Date, is subject to the further conditions precedent that on the date of any such extension of credit: (i) the following statements shall be true and correct: (A) all representations and warranties in this Agreement and all related agreements, instruments and documentation are correct in all material respects on and as of the date of such extension of credit as though made on and as of such date, except to the extent the Agent and the Lenders have been notified by the Debtor in writing that any representation or warranty is not correct and the Required Lenders have explicitly waived in writing compliance with such representation or warranty; and (B) no event or circumstance exists and is continuing, or would result from any such extension of credit, which constitutes an Event of Default hereunder, or which with the giving of notice, or the passage of time, or both, would constitute an Event of Default hereunder; and (ii) the Agent shall have received an appropriate notice of borrowing or a notice of conversion/continuation, as applicable, and Agent shall have received all reports, information and documents to be provided to it as of the date of such relevant notice, in a timely manner; provided however, that the foregoing conditions precedent are not conditions to each Lender Settling with the Agent on the relevant Settlement Date, or for reimbursing its Pro Rata Share of any Loans as provided in this Agreement. 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, Agent on behalf Secured Parties 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 Agent for the ratable benefit of the Secured Parties with interest thereon upon demand, notwithstanding that the payments made may also discharge a liability of the Agent and/or any of the Secured Parties. 15. Debtor does hereby make, constitute and appoint any officer of Agent as Debtor's true and lawful attorney-in-fact, with power at all times to receive and take and 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 the Agent and/or any of the Secured Parties, if any, in full or part payment or any amount owing to any Lender; 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; to sign the Debtor's name on any financing statements contemplated by this Agreement; to request from customers indebted on Accounts at any time, in the name of the Agent or the Agent's designees, or the Debtor, or any one of them, information concerning the amounts owing on the Accounts; upon an Event of Default and during the continuance thereof: (i) 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 Agent on behalf of the Secured Parties and to receive, open and dispose of all mail of the Debtor; (ii) to transmit to customers indebted on Accounts notice of the Agent's interest therein and to notify customers indebted on Accounts to make payment directly to the Agent for the benefit of the Lenders, on any of the Debtor's Accounts; and (iii) to take or bring, in the name of the Agent or the Debtor, or any one of them, all steps, actions, suits or proceedings deemed by the Agent necessary or desirable to enforce or effect collection of the Accounts. Debtor does hereby grant 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. Neither the Agent nor any Lender shall be liable for any acts or omissions or for any error in judgment or mistake of fact or law except to the extent that such act or omission constituted the gross negligence or willful misconduct of the Agent or any Lender, as the case may be. This power of attorney shall be exercisable at the Debtor's sole expense and being coupled with an interest, shall be irrevocable for the Term of this Agreement and for all transactions hereunder and thereafter as long as Debtor may be indebted to Agent and/or any of the Secured Parties. 16. Debtor hereby certifies to Agent on behalf of the Secured Parties 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 Agent at least thirty days prior written notice thereof. 17. Until the Agreement has been terminated and all Obligations satisfied in full Debtor shall: (a) Furnish to each of the Lenders, 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 Agent: (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 Agent 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. Agent hereby acknowledges that Grant Thorton, L.L.P. is a certified public accounting firm presently satisfactory to Agent. (b) Furnish to Agent concurrently with each delivery of financial statements set forth in Paragraph 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 15 14 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 Agent, accompanied by officers of the Secured Parties, 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 Agent and/or the Secured Parties such other information as any of them 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 $9,000,000. (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 this 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, in any fiscal year of Debtor and corresponding fiscal year of every Subsidiary which, for all such entities combined, exceeds $3,000,000 in the aggregate without the consent of Agent, 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 Agent's prior written consent which shall not be unreasonably withheld. (d) Create, incur, assume or suffer to exist any Indebtedness of Debtor and every Subsidiary which, for all such entities combined, exceeds $2,500,000 in the aggregate at any one time, other than (i) indebtedness to the Lenders under the 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 or indebtedness incurred by Debtor in a public offering of debt securities by the Debtor, (iv) liability or indebtedness incurred by the Debtor in a private offering of debt securities by the Debtor, (v) indebtedness evidenced by liens described in clause (v) of the definition of Permitted Liens or (vi) indebtedness owing by any Debtor or Subsidiary to any other Debtor or Subsidiary. For purposes of this Paragraph 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 sale 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 Paragraph 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 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 of the Obligations, 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 16 15 (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 Agent or any of the Secured Parties, as the case may be, and such failure or neglect continues for twenty (20) days after Agent and/or any of such Secured Parties 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 of the Obligations makes any false, untrue, incomplete or misleading representation, warranty, schedule, report or other communication to Agent and/or any of the Secured Parties in connection with this Agreement or any transaction relating thereto which, in any such case, is material in the reasonable judgment of Agent; or (e) Debtor or any guarantor, surety or other party liable upon any of the Obligations 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 of the Obligations 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 of the Obligations, 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 of the Obligations any such proceeding which proceeding is not dismissed within 45 days; or Debtor or any guarantor, surety or party liable on any of the Obligations 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 of the Obligations or any substantial part of its property; or Debtor or any guarantor, surety or party liable on any of the Obligations suffers any such custodianship, receivership or trusteeship; or (g) any guarantor, surety or other party liable upon any of the Obligations shall die or become incompetent; or (h) Debtor, any guarantor, surety or other party liable upon any of the Obligations shall deny or contest its liability with respect to any of the Obligations or any liability of any guarantor, surety or other party liable upon any of the Obligations with respect to any of Obligations shall be declared to be null and void; or (i) Debtor shall be dissolved or liquidated or be a party to any merger or consolidation without the prior written consent of Agent. (j) any guarantor, surety or party liable upon any of the Obligations shall be dissolved or liquidated or be a party to any merger or consolidation excepting only for a merger with or consolidation into Debtor or any guarantor of all of the Obligations, without the prior written consent of Agent; or (k) 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 (l) any guarantor, surety or other party liable on any of the Obligations shall fail or neglect to perform, keep or observe any material term, provision, condition, covenant, warranty or representation contained in any agreement, instrument or document under which it is obligated to Agent and/or any of the Secured Parties or which it delivered to the Agent and/or any of the Secured Parties in connection herewith; or (m) any judgment against the Debtor in an amount exceeding $250,000 or any and all attachments, executions, levies or restraining notices against its property having an aggregate value in excess of $250,000 remain unpaid or unstayed on appeal or undischarged, unbonded or undismissed for a period of thirty days; or (n) 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 non payment 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; or (o) Debtor or any guarantor, surety or party liable upon any of the Obligations contests the validity, perfection or priority of Lender's first lien on the Collateral. 20. Upon the occurrence of any of the Events of Default specified in paragraph 19 hereof, Agent on behalf of the Secured Parties 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 Agent on behalf of the Secured Parties has a security interest, such rights and remedies being in addition to all of the other rights and remedies of Agent and/or the Secured Parties provided for herein. Upon the occurrence of an Event of Default specified in paragraph 19 (f) hereof, this Agreement shall automatically be terminated, there shall no longer be any outstanding commitments of the Agent and/or of any of the Lenders to make Loans hereunder, the outstanding principal amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, without notice, demand or presentment and the Debtor shall also provide the Agent with one or more supporting letters of credit or pay to the Agent in immediately available funds an amount equal to the then aggregate undrawn face amount of all outstanding Letters of Credit. Upon the occurrence of any other Event of Default (other than an Event of Default described in paragraph 19 (f) hereof) so long as the same shall be continuing , the Agent: (a) shall upon the direction of the Required Lenders: (i) by written notice to the Debtor, terminate this Agreement and/or declare all commitments of the Agent and the Lenders terminated, whereupon such commitments will terminate immediately and all unpaid fees hereunder will become due and payable without notice of any kind; (ii) by written notice to the Debtor, declare all or any portion 17 16 of the then outstanding principal amount of the Loans and other Obligations to be due and payable, whereupon the full unpaid amount of such Loans and other Obligations which shall so be declared due and payable, shall be and become immediately due and payable, without further notice, demand or presentment and the Debtor shall also provide the Agent with one or more supporting letters of credit or pay to the Agent in immediately available funds an amount equal to the then aggregate undrawn face amount of all outstanding Letters of Credit; and/or (iii) terminate any Letter of Credit which may be terminated in accordance with its terms; and (b) shall, upon the direction of the Required Lenders and may, in its sole and absolute discretion: (i) restrict the amount of or refuse to make Loans; (ii) reduce the advance rates applicable against Collateral (used in calculating the borrowing base(s) thereof) or otherwise reduce Loans to be made in accordance with Paragraph 4 hereof; or (iii) decline to permit the issuance or renewal of Letters of Credit or the extension of the stated expiry date of any outstanding Letter of Credit. All Loans and Letters of Credit provided for herein, notwithstanding anything to the contrary contained in this Agreement, shall thereafter otherwise be in the Agent's sole discretion and the obligation of the Agent to make any Loans on behalf of the Lenders and/or to assist in establishing such Letters of Credit on behalf of the Lenders shall cease, unless such Event of Default is waived or cured to the Agent's satisfaction. Nothing contained herein, however, shall or shall be deemed to change, limit or otherwise adversely affect the right of the Agent after the occurrence of an Event of Default to pay any amount or do any act required of the Debtor hereunder or reasonably requested by the Agent to preserve, protect, maintain or enforce the Obligations, the Collateral or the security interests or liens now or hereafter held by the Agent and/or any of the Lenders, and which the Debtor fails to pay or do, all as more fully described in subparagraph 4 (c) (xii) hereof. Agent may also require the Debtor to assemble the Collateral at Debtor's expense at such place or places as the Agent designates, and Agent on behalf of and for the ratable benefit of the Secured Parties, shall have the right: (I) to remove from any premises where the same may be located any and all documents, instruments, files and records, and any receptacles or cabinets containing the same, relating to Accounts, or the Agent may use, at the Debtor's expense, such of the Debtor's personnel, supplies or space as the Debtor's places of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (II) bring suit, in the name of the Debtor or the Agent, and generally shall have all other rights respecting said Accounts, including without limitation the right to accelerate or extend the time of payment, settle, compromise, release in whole or in part any amounts owing on any Accounts and issue credits in the name of the Debtor or the Agent; (III) sell, assign and deliver the Collateral and any returned, reclaimed or repossessed merchandise, with or without advertisement, at public or private sale, for cash, on credit or otherwise, at the Agent's sole option and discretion, and the Agent may bid or become a purchaser at any such sale, free from any right of redemption, which right is expressly waived by Debtor; (IV) foreclose the security interests created herein by any available a judicial process, and to enter any premises where any inventory may be located for the purpose of taking possession of any of all of Collateral without judicial process; (V) 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 or removing the same; and (VI) exercise any other rights and remedies provided in law, in equity, by contract or otherwise. Agent shall have the right, (x) without notice or advertisement, if the collateral to be sold is perishable or subject to rapid diminution in value or (y) upon five (5) day notice otherwise and may sell or lease or cause to be sold, leased or otherwise disposed of, any or all of such Collateral, whether in its then condition or after further preparation or processing, in the name of the Debtor or the Agent, or in the name of such other party as the Agent may designate, in one or more sales or parcels, at such price and upon such terms as Agent on behalf of the Secured Parties may deem best, and for cash or on credit, or for future delivery, without Agent and/or any of the Secured Parties assuming any credit risk and at a public or private sale as Agent may deem appropriate. Upon the occurrence of an Event of Default the Debtor agrees at the request of the Agent, to assemble the Collateral and to make it available to the Agent at the premises and facilities of the Debtor for the purpose of the Agent's taking possession of, removing or putting the Collateral in saleable form. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Agent 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. Agent may invoice any such sale in its name or in Debtor's name, as Agent may elect, as the seller, and in such latter event such invoice may be marked payable to Agent and/or the Secured Parties. Agent and/or any of the Secured Parties 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 reasonable attorneys' fees, and then to the payment of all Obligations in accordance with paragraph 4(f) of this Agreement. The Debtor agrees that the Agent has no obligation to preserve rights to the Collateral or to marshal any Collateral for the benefit of any person. Agent will return any excess proceeds to Debtor and Debtor shall remain liable for any deficiency. In no event shall prior recourse to any Accounts or other Collateral granted to or by Debtor be a prerequisite to the Agent and/or the Lenders right to payment of any Obligations due in accordance with this Agreement, including without limitation any such deficiency. All rights and remedies of the Agent and of each of the Lenders under this Agreement are cumulative and non- exclusive and shall be in addition to every other right, power and remedy provided herein or in any related agreement, instrument or document, or provided under applicable law. The Debtor shall immediately notify the Agent in writing of any Event of Default, with a copy thereof to each Lender. 21. This (Second Restated and Amended Loan and Security) Agreement shall (subject to compliance with the Conditions Precedent) become effective on the Closing Date hereof, without any interruption or break in continuity (as more fully described in the second paragraph hereof) and shall continue until the third anniversary of the Closing Date. Notwithstanding the foregoing: (a) 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 (b) upon the occurrence of any other Event of Default, Agent may, at its option, or shall at the written request of the Required Lenders, terminate this Agreement with notice. All Obligations shall, unless and to the extent that Agent (with the consent of the Required Lenders) otherwise elects, become immediately due and payable upon any termination of this Agreement; the Debtor shall thereupon pay all Obligations to the Agent for the ratable benefit of the Lenders and the Agent may withhold any balances in the Debtor's account(s) (unless supplied with an indemnity satisfactory to the Agent) to cover all of the Debtor's Obligations, whether absolute or contingent. Until this Agreement has been terminated and all Obligations shall have been fully paid and satisfied, and notwithstanding any termination of this Agreement, Debtor shall continue to assign Accounts to Agent on behalf of the Secured Parties and turn over collections to Agent on behalf of the Secured Parties as herein provided and this Agreement shall remain in full force and effect as to, and be binding upon, Debtor, Agent and the Lenders and the Secured Parties shall retain all of their respective rights, as well as their security interests in all Collateral. Debtor may repay the facility at any time in whole or in part without premium or penalty by giving Agent on behalf of the Secured Parties sixty (60) days' 18 17 written notice of such repayment provided that any such payment which results in a payment of a LIBO Rate Loan before the last date of the Interest Period with respect thereto shall be subject to the provisions of Paragraph 5(g) hereof. The period commencing with the effective date of this Agreement, through and including the effective termination date of this Agreement, determined in accordance with the preceding provisions, shall be the "Term" of this Agreement. The $1,500,000 Term Loan (the balance of which is, as of the Closing Date, $1,196,428.45), shall be payable, with respect to principal, as follows, subject to acceleration upon the occurrence of an Event of Default and subject to payment in full upon termination of this Agreement consecutive monthly installments of $17,857.14 commencing on September 1, 1995 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 Notes so long as no Event of Default has occurred and is continuing, provided that there is paid to Agent for the ratable benefit of the Secured Parties the net proceeds thereof, but not less than $1,012,500 and not more than the then remaining principal amount of, plus all accrued interest on, such $1,500,000 Term Loan provided that a release of the Mortgage for a payment of less than the then outstanding balance of the $1,500,000 Term Loan shall be subject to the condition that after giving effect to such payment and the release of the Mortgage the Debtor is in compliance with the borrowing limitations set forth in Paragraph 4(a) hereof, with such amount to be applied in reduction or discharge of such $1,500,000 Term Loan. Upon such sale of the Real Property or refinancing of such $1,500,000 Term Loan, Agent on behalf of the Secured Parties shall release the Mortgage; provided, however, Agent for the benefit of the Secured Parties shall receive with respect to the Collateral, an executed mortgagee waiver on terms and conditions satisfactory to Agent from the refinancing party, if any. Such $1,500,000 Term Loan 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 $1,500,000 Term Loan, then the monthly installments remaining on the $1,500,000 Term Loan shall be reduced, pro rata, based on the amount so paid. 22. (a) 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 Agent on behalf of the Secured Parties 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, THE AGENT AND THE LENDERS EACH HEREBY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR IN ANY MATTER RELATING TO THIS AGREEMENT OR THE SUBJECT MATTER HEREOF AND ANY OBJECTION OF FORUM NON CONVENIENCE OR VENUE IN ANY SUCH ACTION OR PROCEEDING. No failure or delay by Agent of any of the Secured Parties 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. All of the rights, remedies and benefits of the Agent and/or of the Lenders hereunder are cumulative and not exclusive of any other rights, remedies or benefits which they 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 shall inure to the benefit of and shall bind the respective successors and assigns of Agent, the Secured Parties and of Debtor. Any Lender including, without limitation, BNYCC in its capacity as a Lender may at any time sell, assign or transfer its Pro Rata Share of the Obligations (including without limitation Obligations arising under or with respect to all or any portion of Loans, Letters of Credit and/or the Term Loans) and its rights and duties with respect thereto, in accordance with subparagraph (c) below. (b) No waiver by Agent on behalf of the Secured Parties will be effective unless in writing and shall be sent to the Debtor at the address specified herein. Except as expressly otherwise provided herein, the provisions of this Agreement may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Agent, the Required Lenders, and the Debtor, unless such amendment, modification or waiver does not adversely affect Debtor's rights hereunder, provided that, and notwithstanding anything to the contrary contained in this Agreement, without the prior written consent of all Lenders, (A) the Agreement will not be amended to: (1) increase the Aggregate Maximum Loan Amount; (2) reduce the interest rate; (3) reduce or waive any fees (other than fees to which the Agent alone may be entitled) or the repayment of any Obligations due the Lenders; (4) extend the maturity of any Obligations; (5) alter or amend this paragraph or the definitions of Required Lenders, Slow Accounts, Eligible Accounts, Eligible Inventory or the Agent's criteria for determining compliance therewith; (6) release any Collateral in excess of $1,000,000 (valued at lower of cost or market) during any fiscal year of Debtor provided, that in no event shall any Collateral be released without the prior written consent of all Lenders if the effect thereof is to cause Loans to exceed the borrowing limitations set forth in this Agreement; (7) release any Guarantor; (8) release the Mortgage (except as provided in section 21 hereof) or (9) increase the advance percentages set forth in the definitions of each of the following terms: Accounts Receivable Borrowing Base, Inventory Borrowing Base and Equipment Borrowing Base; (B) the Agent shall not make intentional Overadvances beyond the limitations set forth in Paragraph 4(d) of this Agreement and (C) upon and following an Event of Default, Agent shall endeavor to consult with Lenders with respect to any material decisions regarding the Loans, Obligations or Collateral including the enforcement of Agents rights (on behalf of such Lenders) with respect thereto. (c) Any Lender may at any time assign and delegate to one or more Eligible Assignees (provided that in no event shall there be more than four entities comprising Lender at any one time) all, or any ratable part of all, of the Loans, and the other rights and obligations of such Lender hereunder, in a minimum amount of Five Million Dollars ($5,000,000); provided however, that the Debtor and the Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Eligible Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Eligible Assignee, shall have been given to the Borrower, the Agent and the other Lenders by such Lender and the Eligible Assignee; and (ii) such Lender and such Eligible Assignee shall have delivered to the Borrower and the Agent an Assignment and Acceptance Agreement in the form of Exhibit C hereto, together with any note(s) subject to such assignment and the Agent shall have accepted the same in its sole discretion, which shall not be unreasonably withheld; (iii) the assignor Lender has paid to the Agent a processing fee in the amount of $2,000; and (iv) the Eligible Assignee, in any instance in which it is a foreign person (i.e., a person 19 18 other than a United States person for United States Federal income tax purposes) shall have provided to the Agent and the Borrower the forms required to demonstrate that the Lender is entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States federal income tax. From and after the date that the Agent notifies the assignor Lender that it has received and provided its consent with respect to an executed Assignment and Acceptance Agreement and payment of the above-referenced processing fee, the Eligible Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance Agreement, shall have the rights and obligations of a Lender under the Agreement; the assignor Lender shall, to the extent that rights and obligations hereunder have been assigned pursuant to such Assignment and Acceptance Agreement, relinquish its rights and be released from its obligations hereunder. Within three (3) Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance Agreement and payment of the processing fee, the Debtor shall execute and deliver to the Agent, a new note or notes, if any, necessary to evidence such Eligible Assignee's assigned Loans and/or its commitment hereunder and, if the assignor Lender has retained a portion of its Loans, a replacement note or notes in the amount of its retained Loans and/or commitment hereunder (with such notes to be in exchange for, but not in payment of, the notes held by such assigning Lender). Immediately upon each Eligible Assignee's paying its processing fee under the completed and accepted Assignment and Acceptance Agreement, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Eligible Assignee and the resulting adjustment of the commitments arising therefrom. The commitment allocated to each Eligible Assignee shall reduce such commitment of the assigning Lender pro tanto. Debtor shall not be responsible for payment or reimbursement for any fees or charges incurred by Agent or Lender solely as a result of an assignment pursuant to this Paragraph 22 unless such assignment is made at the request of Debtor. If at any time, a Lender ("Proposed Transferor") proposes to enter into any agreement with a party ("Purchaser") pursuant to which the Proposed Transferor would sell, assign or transfer any of its Pro Rata Share of Obligations under this Agreement (other than to one or more concerns affiliated with such Proposed Transferor which such Proposed Transferor may complete without regard to this paragraph), with the result that following the completion of the transaction(s) with Purchaser, the Proposed Transferor would retain a Pro Rata Share of the Obligations under this Agreement which in the aggregate would be less than the aggregate Pro Rata Share of any other Lender following such completion, then at least ten (10) days prior to closing thereof by such Proposed Transferor it, shall notify each other Lender in writing of such proposed sale, assignment or transfer, the terms and conditions thereof including the amount thereof (the "Assignment Amount") and the proposed closing date thereof. Each of the Lenders shall have the right, and such Proposed Transferor hereby grants such right to each of the Lenders, to participate in such sale, transfer or assignment, by assigning to the Purchaser (or selling a participation to Purchaser in) each of the other Lender's Pro Rata Share of the Obligations and rights under this Agreement, in an amount equal to the electing Lender's Pro Rata Share of the Assignment Amount. Each Lender shall have five (5) days after receipt of any such notice of sale, transfer or assignment within which to notify such Proposed Transferor in writing of its decision to participate in any such transaction in the manner indicated above. If any other Lender notifies Proposed Transferor that it will not participate in such transaction, or if any Lender fails to respond within the time frame specified in the preceding sentence, such Proposed Transferor shall be entitled to consummate the sale, transfer or assignment with the Purchaser as contemplated in its earlier notice. Notwithstanding anything to the contrary contained herein, in the event that Agent sells and assigns to an Eligible Assignee any or all of its Loans, Agent shall use its best efforts to find an Eligible Lender to purchase and assume a pro rata share of the Loans from the other Lenders. (d) 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 the Lenders. 23. (a) To the extent Debtor makes a payment, or Agent or any of the Secured Parties 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 so received. (b) If any Lender shall obtain any payment, whether voluntarily or involuntarily, by setoff or otherwise, on account of the Loans made by it, or receive any collateral therefor, in an amount that exceeds that portion of all payments or Collateral obtained by any other Lender on account of the Loans, to which such other Lender would be entitled if all such payments and Collateral were allocated among the Lenders in accordance with the provisions of this Agreement, then such benefitted Lender shall purchase for cash a participation from such other Lender(s) such portion of the Loans made by them , or shall provide such other Lender(s) with the benefits of any such Collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such Collateral or proceeds ratably with each such other Lender in accordance with their Pro Rata Shares; provided, that if all or any portion of such excess payment or benefits thereafter is recovered from such benefitted Lender, such purchase shall be rescinded and the purchase price and benefit returned by such other Lender(s) to the extent of such recovery, but without interest. Each Lender so purchasing a portion of another Lender's Loans may exercise all rights of payment (including without limitation, rights of setoff) with respect to such portion as fully as if such Lender were the direct holder of such portion. 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. 25. In all respects, except as expressly limited in this Agreement, the Agent is authorized to take such actions or to fail to take such actions that the Agent, in its reasonable discretion, deems to be advisable and in the best interests of the Lenders, including making Overadvances within the limitations set forth in Paragraph 4 (d) of this Agreement and upon the occurrence of an Event of Default hereunder, the termination of this Agreement and/or the exercise of any other rights or remedies hereunder, unless and until the Agent may be specifically instructed to the contrary by the Required Lenders. 26. (a) Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder with such powers as are specifically delegated to the Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for 20 19 any Lender. The Agent shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other document referred to or provided for herein or for any failure by the Borrower to perform any of its obligations hereunder. The Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither the Agent nor any of its directors, officers, employees, or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct. (b) The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper person or persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Lenders, and such instructions of the Required Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. (c) The Agent shall not be deemed to have knowledge of the occurrence of any Event of Default (other than the non-payment of principal of or interest on Loans, Letters of Credit and/or Term Loans in accordance with this Agreement), or the occurrence of any event or circumstance with which the giving of notice, the passage of time or both would constitute and Event of Default, unless the Agent has received notice from a Lender or the Debtor specifying such Event of Default, event or circumstance and stating that such notice is a "Notice of Default". In the event of any non-payment of principal of or interest on Loans, Letters of Credit and/or Term Loans in accordance with this Agreement, or in the event that the Agent receives any such Notice of Default, the Agent shall give notice thereof to the Lenders . The Agent shall (subject to subparagraph (g) below) take such action with respect to such non-payment or other Event of Default as shall be directed by the Required Lenders, provided that, unless and until the Agent shall have received such directions, the Agent may take such action, or refrain from taking such action, with respect thereto as Agent shall deem advisable in the best interests of the Lenders. (d) With respect to its Maximum Loan Amount, its Pro Rata Share of the Obligations, including without limitation the Loans made by it, BNYCC in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include BNYCC in its individual capacity. The Agent and its affiliates may (without having to account therefor to any Lender) also accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Debtor (and any Subsidiaries of Debtor) as if it were not acting as the Agent, and the Agent may accept fees and other consideration from the Debtor for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. (e) The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Debtor hereunder, but without limiting the obligations of the Debtor hereunder), ratably, based upon their respective Pro Rata Share hereunder, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses which the Debtor is obligated to pay hereunder) or the enforcement of any of the terms hereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. Without limiting the foregoing, each Lender shall reimburse the Agent upon demand for such Lender's Pro Rata Share of any costs or out-of-pocket expenses(including reasonable attorneys fees) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights, or responsibilities under, this Agreement or any of the transactions contemplated hereby or referred to herein, to the extent that the Agent is not reimbursed for such costs or expenses by or on behalf of the Debtor and such expenses are properly chargeable to Debtor. The Obligations of the Lenders under this subparagraph shall survive the payment of all Obligations hereunder, the termination of all outstanding Letters of Credit, the termination of this Agreement and/or the resignation of the Agent. (f) Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Debtor and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Debtor of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Debtor. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Debtor (or any of Debtor's Subsidiaries) which may come into the possession of the Agent or any of its affiliates. (g) Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall have received the written consent of the Required Lenders and unless it shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. (h) Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Agent provided, that if such successor Agent will not be a Lender holding a share of the Loans at least equal to the share held by any other Lender, the consent of the Debtor to such appointment shall be required but shall not be unreasonably withheld. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a Lender having combined capital and surplus of not less 21 20 than $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent (immediate written notice of which acceptance shall be given to the Debtor), such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation as Agent, the provisions of this paragraph 26 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. (i) Each and all of the provisions hereunder contained pertaining to this Paragraph 26 and any other provisions hereof pertaining to the Agent acting or refraining from acting based upon the acquiescence of the Required Lenders are matters strictly between and among the Agent, on the one hand, and the Lenders on the other hand and neither the Debtor or any other person or entity shall have or assert any rights or benefits, as a third party beneficiary or otherwise, by reason of any of such provisions. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto on this 13th day of September, 1995. THE BANK OF NEW YORK JACO ELECTRONICS, INC. COMMERCIAL CORPORATION as Agent and a Lender By: /s/ Alice Adelberg By: Jeffrey D. Gash ------------------------- ------------------------- Title: Vice President Title: Vice President Address: 530 Fifth Avenue Address: 145 Oser Avenue New York, New York 10036 Hauppague, NY 11778 Maximum Loan Amount: $15,000,000 ----------- NATWEST BANK N.A. NEXUS CUSTOM ELECTRONICS, INC. as a Lender By: /s/ Daniel J. Murray By: Jeffrey D. Gash ------------------------- ------------------------- Title: Vice President Title: Vice President Address: 100 Jericho Quadrangle Address: Prospect Street Jericho, NY 11753 Brandon, VT 05733 Maximum Loan Amount: $15,000,000 ----------- 22 SCHEDULE I PERMITTED LIENS 23 SCHEDULE 3(c) INVENTORY LOCATIONS Jaco Electronics, Inc. 9900 West Sample Road 145 Oser Avenue Suite 404 Hauppauge, NY 11788 Coral Springs, Fl. 33065 5206 Greens Diary Road 10340 Viking Drive - Suite 115 Raleigh, NC 27604 Eden Prairie, MN 55344 10270 Old Columbia Columbia, MD 21046 _________________________________________________________________ Jaco Overseas, Inc. R.C. Components, Inc. 145 Oser Avenue 1053 East Street Hauppauge, NY 11788 Tewksbury, MA 01876 _________________________________________________________________ Micatron, Inc. 145 Oser Avenue Hauppauge, NY 11788 _________________________________________________________________ Distel, Inc. 17220 127th Place, N.E. 2282 Townsgate Road Suite 300 Westlake, CA 91361 Woodinville, WA 98072 1610-A Berryessa Road 1541 Parkway Loop #A San Jose, CA 95134 Tustin, CA 92680 4900 SW Griffith Drive Suite 129 Beaverton, OR 97005 _________________________________________________________________ Nexus Custom Electronics, Inc. Prospect Street Brandon, VT 05733 _________________________________________________________________ Quality Components, Inc. 1209 North Glenville Dr. Richardson, TX 75081 2120-A Braker Lane Austin, Tx 78758 24 EXHIBIT C ASSIGNMENT AND ACCEPTANCE AGREEMENT 25 EXHIBIT A CONTINUANCE NOTICE 26 EXHIBIT B-1 $2,500,000 TERM LOAN NOTE 27 EXHIBIT B-2 $2,500,000 TERM LOAN NOTE 28 EXHIBIT B-3 $1,500,000 TERM LOAN NOTE 29 EXHIBIT B-4 $1,500,000 TERM LOAN NOTE 30 EXHIBIT B-5 $598,214.23 TERM LOAN NOTE 31 EXHIBIT B-6 $598,214.23 TERM LOAN NOTE -----END PRIVACY-ENHANCED MESSAGE-----