-----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, GeH5Q9zXSYqH1voloTmm6k14lleKkTFhBttqz0h4LMgJOQ+J+/eATprsxmi0c2WP 4BOQFXw5q82glXDmRJZstA== 0000950123-96-005282.txt : 19961001 0000950123-96-005282.hdr.sgml : 19961001 ACCESSION NUMBER: 0000950123-96-005282 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05896 FILM NUMBER: 96636785 BUSINESS ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162735500 MAIL ADDRESS: STREET 1: 145 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended ......................................June 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________________ to _____________________. Commission File Number 0-5896 JACO ELECTRONICS, INC. (Exact name of registrant as specified in its charter) New York 11-1978958 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 145 Oser Avenue, Hauppauge, New York 11788 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (516) 273-5500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.10 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock held by non-affiliates of the Company, computed by reference to the closing price on September 20, 1996 was $22,722,237. Number of shares outstanding of each class of Common Stock, as of September 20, 1996: 3,888,221 shares (excluding 87,500 shares of treasury stock). DOCUMENTS INCORPORATED BY REFERENCE: Part III: Definitive Proxy Statement to be filed on or before October 28, 1996, under Regulation 14A, in connection with the Company's 1996 Annual Meeting of Shareholders. 2 PART I ITEM 1. BUSINESS Jaco Electronics, Inc., a New York corporation organized in 1961 (collectively with all of its subsidiaries, unless otherwise noted, "Jaco" or the "Company"). GENERAL Jaco markets and distributes passive and active electronic components to original equipment manufacturers ("OEMs") throughout the United States and Canada from two distribution centers located on the East and West coasts and 14 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. Management believes the acquisition of Nexus has enabled, and will continue to enable, the Company to expand and broaden its range of value-added service capabilities. The Company's core customer base consists primarily of small and medium-sized OEMs that produce electronic equipment used in a wide variety of industries, including manufacturers of telecommunications, computer, computer-related, medical and aerospace equipment and several 2 3 Fortune 500 manufacturers. In the fiscal year ended June 30, 1996, the Company distributed electronic components to thousands of customers, none of which individually represented more than 2% of net sales. Jaco is a service-oriented company, built on strong customer and supplier relationships. The Company's inventory management and information systems assist its customers in controlling materials costs, in reducing cycle times and in keeping pace with rapidly occurring technological developments. The Company utilizes a computerized inventory control system to assist in the marketing of its products and coordinate purchases from suppliers with sales to customers. The Company's computer system provides detailed on-line information regarding the availability of the Company's entire stock of inventory located at its stocking facilities as well as on-line access to the inventories of some of the Company's major suppliers. Through the Company's integrated real-time information system, customers' orders can readily be tracked through the entire process of entering the order, reserving products to fill the order, ordering components from suppliers, if necessary, and shipping products to customers on scheduled dates. The Company is thus able to provide the type of distributor service required by its OEM customers that have adopted the "just-in-time" method of inventory procurement. The "just-in-time" method is utilized in an effort to operate more efficiently and profitably by relying on scheduled deliveries of such components at the time they are needed in the production process and thereby reducing inventories of components. The Company provides additional customer support through technically competent product managers and field engineers, value-added services and electronic data interchange. INDUSTRY OVERVIEW The electronics distribution industry has become an increasingly important sales channel for the electronics industry because distributors can market component manufacturers' products to a 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 3 4 relied upon distributors to serve small customers. Today, distributors have become more of an extension of component manufacturers' product delivery channels by providing value-added services and technical support to customers, by stocking sufficient inventory to ensure timely delivery of components and by managing customer credit. Distributors also work with OEMs to ensure that manufacturers' components are integrated into the design of new products. According to the National Electronics Distributors Association, an industry trade association, in 1995 the electronics distribution industry recorded approximately $22 billion in sales. Of these sales, approximately $14.4 billion consisted of sales of semiconductors and computer products, which accounted for approximately $81.8 million of the Company's net distribution sales for the year ended June 30, 1996. Approximately $6.6 billion of industry sales consisted of sales of interconnect (connectors, sockets), electromechanical (relays, switches) and passive (resistors, capacitors) components, which products accounted for approximately $74.5 million of the Company's net distribution sales in the year ended June 30, 1996. 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- horse-power motors and resistors. Passive products accounted for approximately 52%, 52% and 4 5 48% of the Company's net distributor sales in the fiscal years ended June 30, 1994, June 30, 1995 and June 30, 1996, respectively. Active components include semiconductors and computer subsystems. Semiconductors consist of such items as integrated circuits and discrete components, transistors, diodes, dynamic RAMs, static RAMs, video RAMs and MOSFETs. Computer subsystems are an integral part of personal computers and computer workstations and incorporate such items as disk drives, tape drives, floppy disks and controllers. These products represented approximately 48%, 48% and 52% of the Company's net distributor sales in the fiscal years ended June 30, 1994, June 30, 1995 and June 30, 1996, 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. 5 6 - 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 printed circuit boards ("PCBs") for OEMs using both conventional pin-through-hole and more advanced surface mount technologies. Contract manufacturing operations involve assembling PCBs to customer specifications utilizing components from suppliers with whom the Company has distribution agreements and other suppliers. As a turnkey contract manufacturer of PCBs, the Company procures the required raw materials and components, manages the assembly and test operations, and supplies the PCBs in accordance with the customer's delivery schedule and quality requirements for the finished product. SALES AND MARKETING Management believes the Company has developed valuable long-term customer relationships and an in-depth understanding of its customers' needs and purchasing patterns. Jaco serves a broad range of customers in the computer, computer-related, telecommunications, data transmission, defense, aerospace, medical equipment and other industries. None of the Company's customers individually represented more than 3% and 2%, respectively, of net sales in the fiscal years ended June 30, 1995 and June 30, 1996. The Company's sales personnel are trained to identify their customers' requirements and to actively market the Company's entire product line to satisfy those needs. For example, the Company's sales staff and field engineers regularly meet with customers' engineers and designers to discuss prospective needs and potential design or procurement problems and enable the sales personnel to understand which products will meet the customers' performance criteria, are cost-effective and target specifically identified problems. 6 7 Sales are made throughout the United States and Canada from the sales departments maintained at the Company's two distribution facilities located on the East and West Coasts of the United States in California and New York and from 14 additional sales offices located in California, Florida, Maryland, Massachusetts, Minnesota, North Carolina, Oregon, Texas, Washington, Colorado, Arizona (established in March 1996) and Illinois (established in August 1996). Sales are made primarily through personal visits by the Company's employees and by a staff of trained telephone sales personnel who answer inquiries and receive and process orders from customers. In addition, the Company utilizes the services of independent sales representatives whose territories include parts of the United States, Canada, and several foreign countries. These sales representatives operate under agreements which are terminable by either party upon 30 days' notice. Independent sales representatives are authorized to solicit sales of all of the Company's product lines and are prohibited from representing competing product lines. In the fiscal year ended June 30, 1996, 94% of the Company's sales were produced by Company sales personnel and 6% by independent sales representatives, one of whom produced approximately $5 million in revenue. The Company believes that the termination of any independent sales representative would not have a material adverse effect upon its business. BACKLOG The Company's backlog consists of purchase orders received from customers for products scheduled for delivery within the next twelve months. The Company's backlog was $44.9 million at June 30, 1995, compared to $40.6 million at June 30, 1996. 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. 7 8 OPERATIONS Component Distribution. Inventory management is critical to a distributor's business. The Company constantly focuses on a high number of resales or "turns" of existing inventory to reduce exposure to product obsolescence and changing customer demand. The Company's central computer system facilitates the control of purchasing and inventory, accounts payable, shipping and receiving, and invoicing and collection information of Jaco's distribution business. Each of the Company's sales departments and offices is electronically linked to the Company's central computer systems which provides fully integrated on-line real-time data with respect to the Company's inventory levels. The Company's inventory management system was developed internally by Jaco and is considered proprietary. Inventory turns are tracked by vendor, and the Company's inventory management system provides immediate information to assist in making purchasing decisions and decisions as to which inventory to exchange with suppliers under stock rotation programs. The Company's inventory management system also uses bar-code technology along with scanning devices, which are supplied by Jaco to certain customers, and is networked to the facilities of select customers. In some cases, customers use computers that interface directly with the Company's computers to identify available inventory and rapidly process orders. This system enables the Company to more effectively manage its inventory and to respond more quickly to customer requirements for timely and reliable delivery of components. The Company's inventory turnover was approximately 4.7x for the year ended June 30, 1996. Approximately 80% of the Company's component distribution inventory is maintained at its East Coast distribution center in Hauppauge, New York. Most of the remaining inventory is maintained at the Company's West Coast facility in Westlake Village, California. The Company also monitors supplier stock rotation programs, inventory price protection, rejected material and other factors related to inventory quality and quantity. Contract Manufacturing. The Company conducts its contract manufacturing operations through Nexus at an approximately 32,600 square foot facility located in Brandon, Vermont. Nexus 8 9 provides turnkey and consigned contract manufacturing of PCBs for OEMs. "Turnkey" is an industry term that describes a contract manufacturer that buys customer-specified components from suppliers, assembles the components onto finished PCBs and performs post-assembly testing, while "consigned" refers to a contract manufacturer that provides the assembly and testing elements only. OEMs then incorporate the PCBs into finished products. In assembling PCBs, Nexus is capable of employing both pin-through-hole ("PTH") and surface mount technologies ("SMT"). PTH is a method of assembling PCBs in which component leads are inserted and soldered into plated holes in the board. SMT is a method of assembling PCBs in which components are fixed directly to the surface of the board, rather than being inserted into holes. The SMT process allows for more miniaturization, cost savings and shorter lead paths between components (which results in greater signal speed). In the fiscal year ended June 30, 1996, the Company invested approximately $237,000 primarily in SMT machinery and equipment, as part of the Company's ongoing program to expand Nexus' operations. Nexus maintains strict quality control procedures for its products, including use of total quality management ("TQM") systems. Incoming raw material and components are checked by the Nexus quality control personnel. During the production stage, quality control personnel check all work in process at several points in the production process. Finally, after the assembly stage, Nexus conducts random testing of finished products. Nexus' manufacturing facility has earned ISO 9002 certification. The ISO is a Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. Nexus' receipt of ISO 9002 certification demonstrates that Nexus' manufacturing operations meet establish world standards. Management believes sophisticated customers increasingly are requiring their manufacturers to be ISO 9002-certified for purposes of quality assurance. Acquisition of Q.P.S. Electronics, Inc. On August 2, 1996, the Company acquired the operating assets of Q.P.S. Electronics, Inc. ("QPS"), a distributor of quality active and passive 9 10 electronic components based in Schaumburg, Illinois. Management expects that the acquisition of QPS will contribute to the expansion of the Company's national, dedicated distribution network by establishing the Company's presence in the Northern Mid-West of the United States. SUPPLIERS Manufacturers of passive and active electronic components are increasingly relying on the marketing, customer service and other resources of distributors who market their product lines to customers not normally served by the manufacturer, and to supplement the manufacturer's direct sales efforts in other accounts often by providing value-added services not offered by the manufacturer. Manufacturers seek distributors who have strong relationships with desirable customers, are financially strong, have the infrastructure to handle large volumes of products and can assist customers in the design and use of the manufacturers' products. Currently, the Company has non-exclusive distribution agreements with many manufacturers, including General Instrument Corporation, Globe Motors (a division of Labinal Components and Systems, Inc.), International Resistive Company, Inc., Kemet Electronics Corporation, Mitel Inc., Rohm Company, Limited, Samsung Semiconductor, Inc., TDK Corporation of America, Vishay Intertechnology, Inc., and Zetex, Inc. Management continuously seeks to identify potential new suppliers and obtain additional distributorships for new lines of products. Management believes that such expansion and diversification will increase the Company's sales and market share. In the fiscal year ended June 30, 1996, of the Company's top ten suppliers, two, Kemet, Samsung, accounted for 18.1% , and 10.7 %, respectively, of net sales and the remaining eight each accounted for between 6.7% and 1.5% of net sales. No other supplier accounted for more than 1% of net sales. As is common in the electronics distribution industry, from time to time the Company has experienced terminations of relationships with suppliers which affected its results of operations in post-termination fiscal periods. The Company generally purchases products from manufacturers pursuant to nonexclusive distributor agreements. Selection as an authorized distributor is a valuable marketing tool for the 10 11 Company because customers receive warranty protection and support from manufacturers when they purchase products from the Company. As an authorized distributor, the Company is able to offer customers marketing and engineering support from the product manufacturers, which enhances the Company's ability to attract new customers and close sales. Most of the Company's distributor agreements are cancelable by either party, typically upon 30 to 90 days' notice. These agreements typically provide for price protection, stock rotation privileges and the right to return inventory. Price protection is typically in the form of a credit to the distributor for any inventory in the distributor's possession for which the manufacturer reduces its prices. Stock rotation privileges typically allow the Company to exchange inventory in an amount up to 5% of a prior period's purchases. Upon termination of a distributor agreement, the right of return typically requires the manufacturer to repurchase the Company's inventory at the Company's adjusted purchase price. The Company believes that the above-described provisions of its distributorship agreements generally have served to reduce the Company's exposure to loss from unsold inventory. As such price protection and stock rotation privileges are limited in scope, there can be no assurance that the Company will not experience significant losses from unsold inventory in the future. COMPETITION The electronics distribution industry is highly competitive, primarily with respect to price and product availability. The Company believes that the breadth of customer base, services and product lines, its level of technical expertise and the quality of its services generally are also particularly important. The Company competes with large national distributors such as Arrow Electronics, Inc. and Avnet, Inc., as well as regional and specialty distributors, many of whom distribute the same or competitive products. Many of the Company's competitors have significantly greater name recognition and greater financial and other resources than those of the Company. The PCB contract manufacturing industry is highly fragmented and is characterized by relatively high levels of volatility, competition and pricing and margin pressure. Many large contract 11 12 manufacturers operate high-volume facilities and primarily focus on high-volume product runs. In contrast, certain contract manufacturers, such as Nexus, focus on low-to-medium volume and service-intensive products, where the finished product often requires a greater amount of overall labor. The Company believes that contract manufacturers which are affiliated or integrated with electronics distributors have competitive advantages over comparably-sized, stand-alone contract manufacturers. Distributors can reduce the risk of inventory obsolescence through stock rotation privileges and inventory price protection and can also take advantage of material acquisition skills, just-in-time delivery expertise and broad supplier relationships. EMPLOYEES At August 31, 1996, the Company had a total of 394 employees, of which 101 were employed by Nexus. Of total employees, 11 were engaged in administration, 55 were managerial and supervisory employees, 143 were in sales and 185 performed warehouse, manufacturing and clerical functions. Of these employees, Nexus employed one in administration, nine in management and supervisory positions, four in sales and 87 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. 12 13 ITEM 2. PROPERTIES All of the Company's facilities are leased except for the Brandon, VT property which is owned by Nexus. Jaco currently leases 16 facilities located in the States of Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Minnesota, New York, North Carolina, Oregon, Texas and Washington, 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 $5,700 per month. Depending on the terms of each particular lease, in addition to base rent, Jaco may also be responsible for portions of real estate taxes, utilities and operating costs, or increases in such costs over certain base levels. The lease terms range from month-to-month to as long as three years. All facilities are linked by computer terminals to Jaco's Hauppauge, New York headquarters. The following paragraphs set forth certain information regarding Jaco's two principal leased facilities: (i) Jaco leases from Bemar Realty Company, a partnership consisting of Messrs. Joel H. Girsky and Charles B. Girsky, approximately 72,000 square feet of office and warehouse space at 145 Oser Avenue, Hauppauge, New York. The lease provides for a current monthly base rent of approximately $42,000 net of all expenses, including taxes, utilities, insurance, maintenance and repairs, and has a term which expires on December 31, 2003. Jaco negotiated a renewal of the lease and the current rental rate is similar to that currently being charged for comparable properties in the area. Approximately 26,000 square feet of space is sublet by Jaco to an unaffiliated third party. In addition to its headquarters, Jaco maintains purchasing and sales offices and warehouse facilities at its Hauppauge location. (ii) Jaco leases from an unaffiliated party, on a month-to-month basis, approximately 10,000 square feet of office and warehouse space in Westlake Village, California for a base rent of approximately $8,400 per month. Jaco maintains both a purchasing and sales office at this location, as well as warehouse facilities. 13 14 Nexus currently owns and occupies a 32,000 square foot facility located in Brandon, Vermont, that is used for manufacturing, storage and office space. The building was acquired by the Company on March 11, 1994 as part of the acquisition of all of the outstanding shares of capital stock of Nexus. The Company believes that its present facilities will be adequate to meet its needs for the foreseeable future. ITEM 3. Legal Proceedings. The Company is not a party to any material pending legal proceedings. ITEM 4. Submission of Matters To A Vote of Security Holders. No response to this Item is required. 14 15 PART II ITEM 5. Market For the Company's Common Stock and Related Security Holder Matters. (a) The Company's common stock (the "Common Stock") is traded on The Nasdaq National Market under the symbol "JACO". The stock prices listed below represent the high and low closing sale prices of the Common Stock, as reported by The Nasdaq National Market, for each fiscal quarter beginning with the first fiscal quarter of 1995. 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 of all periods have been adjusted to give effect to the 4-for-3 stock split which was distributed to shareholders of record as of September 22, 1995.
FISCAL YEAR 1995: HIGH LOW 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: HIGH LOW First quarter ended September 30, 1995 $13.88 $ 6.28 Second quarter ended December 31, 1995 $16.00 $10.50 Third quarter ended March 31, 1996 $12.38 $ 9.75 Fourth quarter ended June 30, 1996 $12.63 $ 9.75
(b) As of August 31, 1996 there were approximately 194 holders of record of The Company's Common Stock who management believes held for more than 2,476 beneficial owners. (c) The Company has never declared or paid cash dividends on its Common Stock. The Company intends to retain its earnings, if any, for use in its business and to support growth and does not anticipate paying cash dividends in the foreseeable future. In addition, the agreement governing 15 16 the Company's credit facility (the "Credit Facility") contains provisions that prohibit the Company from paying cash dividends on its Common Stock. 16 17 Item 6. Selected Consolidated Financial Data
Year ended June 30, 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATING DATA (in thousands, except per share data) Net sales $ 77,358 $ 96,675 $ 105,213 $ 138,683 $ 167,149 Cost of goods sold 59,951 75,630 83,038 109,902 133,105 ---------- ---------- ---------- ---------- ---------- Gross profit 17,407 21,045 22,175 28,781 34,044 Selling, general and administrative expenses 15,753 17,786 19,155 23,552 26,247 ---------- ---------- ---------- ---------- ---------- Operating profit 1,654 3,259 3,020 5,229 7,797 Interest expense 1,172 1,078 1,117 2,010 1,347 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of a change in accounting for income taxes 482 2,181 1,903 3,219 6,450 Income tax expense 170 797 714 1,303 2,600 ---------- ---------- ---------- ---------- ---------- Earnings before cumulative effect of a change in accounting for income taxes 312 1,384 1,189 1,916 3,850 Cumulative effect of a change in accounting for income taxes 241 ---------- ---------- ---------- ---------- ---------- NET EARNINGS $ 312 $ 1,384 $ 1,430 $ 1,916 $ 3,850 ========== ========== ========== ========== ========== PER SHARE DATA * Earnings per common share before cumulative effect of a change in accounting $ 0.12 $ 0.55 $ 0.47 $ 0.78 $ 1.08 Cumulative effect of a change in accounting 0.09 ---------- ---------- ---------- ---------- ---------- Net earnings per common share $ 0.12 $ 0.55 $ 0.56 $ 0.78 $ 1.08 ========== ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding 2,506,001 2,522,980 2,551,173 2,461,091 3,554,018 ========== ========== ========== ========== ========== BALANCE SHEET DATA Working capital $ 13,614 $ 14,910 $ 15,160 $ 30,741 $ 36,964 Total assets 35,547 36,056 45,685 56,323 61,143 Long-term obligations 8,225 8,058 9,694 23,666 8,791 Shareholders' equity 8,520 9,905 11,202 13,227 34,304
* All per share information has been restated to give effect to a 10% stock dividend paid on March 10, 1995 and a 4-for-3 stock split distributed to shareholders of record as of September 22, 1995. 17 18 ITEM 7. Management's Discussion and Analysis of Financial Condition and Result of Operations Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements in this filing, and elsewhere, which look forward in time involve risks and uncertainties which may effect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: dependence on a limited number of suppliers for products which generate a significant portion of the Company sales, the effect upon the Company of increases in tariffs or duties, changes in trade treaties, strikes or delays in air or sea transportation and possible future United States legislation with respect to pricing and/or import quotas on products imported from foreign countries, and general economic downturns in the electronics distribution industry which may have an adverse economic effect upon manufacturers, end-users of electronic components and electronic component distributors. GENERAL Jaco is a distributor of electronic components and provider of contract manufacturing and value-added services. Products distributed by Jaco include semiconductors, capacitors, resistors and electromechanical devices and motors used in the assembly and manufacturing of electronic equipment. The Company's customers are primarily small and medium sized manufacturers. The trend for these customers has been to shift certain manufacturing functions to third parties (outsourcing). The Company intends to seek to capitalize on this trend toward outsourcing by increasing sales of products enhanced by value-added services. Value-added services currently provided by Jaco consist of configuring complete computer systems to customer specifications both in tower and desktop configurations, kitting (e.g. supplying sets of specified quantities of products to a customer that are prepackaged for ease of feeding the customer's production lines), 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 D and I of Notes to Consolidated Financial Statements. Since March 1994, the Company devoted significant efforts to improving the performance of Nexus including: capital expenditures of approximately $700,000 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. 18 19 The Company's sales from value-added services represented $18.0 million, or 11.0 % of net sales in the year ended June 30, 1996, $18.1 million, or 13% of net sales in the year ended June 30, 1995, and $8.9 million or 8% of net sales in the year ended June 30, 1994. Of these sales, sales from contract manufacturing through Nexus, which was acquired in March 1994, were $10.8 million or 6.5% of net sales in the year ended June 30, 1996, $12.1 million or 8.7% of net sales in the year ended June 30, 1995 and $2.7 million or 2.6% of net sales in the year ended June 30, 1994. 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, 1994 1995 1996 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold 78.9 79.2 79.6 ----- ----- ----- Gross profit 21.1 20.8 20.4 Selling, general and administrative expenses 18.2 17.0 15.7 ----- ----- ----- Operating profit 2.9 3.8 4.7 Interest expense 1.1 1.5 .8 ----- ----- ----- Earnings before income taxes and cumulative effect of a change in accounting 1.8 2.3 3.9 Income tax expense .7 .9 1.6 ----- ----- ----- Earnings before cumulative effect of a change in accounting 1.1 1.4 2.3 Cumulative effect of a change in accounting for income taxes .3 -- -- ----- ----- ----- Net earnings 1.4% 1.4% 2.3% ===== ===== =====
19 20 COMPARISON OF YEAR ENDED JUNE 30, 1996 ("FISCAL 1996") WITH YEAR ENDED JUNE 30, 1995 ("FISCAL 1995") Net sales for the fiscal year ended June 30, 1996 increased 20.5% to $167,149,000, as compared to $138,683,000 reported for the same fiscal 1995 period. The increase in sales is the result of strong overall demand for electronic components in the electronics industry, the Company's continued expansion as a national distributor into new territories, and the addition of sales personnel in existing locations. The Company has recently expanded its product offerings to include the flat panel display market. Though sales were minimal during fiscal 1996, the Company anticipates that flat panel display sales will contribute to the Company's sales growth in the future. Sales from contract manufacturing (Nexus) decreased by approximately $1.0 million during fiscal 1996, compared to fiscal 1995, due to the loss of two major customers. The Company believes that it has replaced the lost business and anticipates increases in contract manufacturing sales during future periods. Gross profit margins, as a percentage of net sales, decreased slightly from 20.8% in fiscal 1995 to 20.4% in fiscal 1996. This was primarily due to a softening in demand for components during the second half of fiscal 1996. The Company is hopeful that it will be able to raise margins realized from the contract manufacturing group during fiscal 1997. Selling, general and administrative (SG&A) expenses were $26.2 million in fiscal 1996, an increase of $2.7 million, or 11.4%, from $23.6 million in fiscal 1995. The continued geographic expansion of the Company by opening sales offices in Arizona and Colorado, the higher commissions paid based on sales growth, the addition of sales personnel in existing locations and the hiring of additional support personnel to handle increased sales all attributed to the increase in SG&A. As a percentage of fiscal 1996 net sales, SG&A declined to 15.7% from 17.0% in fiscal 1995. Close attention to cost containment resulted in the reduction. The Company believes that if net sales continue to increase, SG&A will decrease as a percentage of net sales. 20 21 Interest expense decreased to $1.3 million in fiscal 1996 from $2.0 million in fiscal 1995. The 33% decrease was primarily the result of a reduction in borrowings as a result of the reduction in indebtedness under the Company's Credit Facility by application of the net proceeds from the public offering completed during the second quarter of fiscal 1996. Net earnings for fiscal 1996 were $3.8 million, an increase of approximately $1.9 million, or approximately 100% as compared to the same period in fiscal 1995. The increase in the net earnings is principally the result of increases in sales, control of SG&A expenses and a reduction in interest expense. COMPARISON OF YEAR ENDED JUNE 30, 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 sale was 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. 21 22 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. 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. 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 realized modest profits after its first full year as a subsidiary. LIQUIDITY AND CAPITAL RESOURCES On October 20, 1995, the Company completed a public offering of 1,600,000 shares of its common stock at $12.75 per share. The offering consisted of 1,325,000 shares offered by the Company and an aggregate of 275,000 shares offered by certain officers and directors of the Company. On December 8, 1995, the underwriters of the public offering exercised a portion of their overallotment option for an additional 160,000 shares at a price per share equal to that of the public offering. The Company's net proceeds from the public offering of approximately $17,140,000, after deducting the underwriters' commission and costs of the public offering, were used to reduce its bank indebtedness. In connection with the public offering, the Company also issued stock warrants, 22 23 to the representative underwriters, to purchase up to 70,000 shares of common stock at an exercise price per share equal to 180% of the public offering price, which expire on October 20, 1999. The Company maintains a total Credit Facility of $30,000,000, $1,500,000 (the outstanding balance of which at August 31, 1996 was approximately $982,000) 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 (during fiscal 1996, the borrowing rate was further reduced to LIBOR plus 2.0%). The Company must comply with various financial covenants, with all of which the Company believes itself to be in compliance. As of August 31, 1996, the Company had outstanding borrowings of $10.3 million, with additional borrowing capacity of $19.7 million available under the revolving line of credit. Working capital increased to $37.0 million as of June 30, 1996, as compared to $30.7 million as of June 30, 1995, an increase of $6.3 million or approximately 21%. The increase was primarily attributable to increased accounts receivable and inventory related to increased level of sales. During fiscal 1996, the Company's net cash used in operating activities decreased to $1.6 million from $4.0 million in fiscal 1995 as a result of increases in earnings offset by increases in accounts receivable and inventory. In fiscal 1996, the Company decreased its borrowings under its Credit Facility by $14.6 million principally as a result of the application of the net proceeds from the public offering. 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 fiscal 1995 and 1996, inventory turnover was 4.6x and 4.7x, respectively. The average age of the Company's accounts receivable at June 30, 1996 was 48 days, as compared to 50 days at June 30, 1995. The Company did not experience any significant trade collection difficulties during fiscal 1996. 23 24 On April 15, 1996, the Company's Board of Directors authorized the purchase of up to 250,000 shares of its common stock or approximately 6.3% of the then outstanding shares, under a stock repurchase program. As of September 20, 1996, the Company has repurchased 87,500 shares at an average market price of $8.00 per share. INFLATION Inflation has not had a significant impact on the Company's operations during the last three fiscal years. ITEM 8. Financial Statements and Supplementary Data. For an index to the financial statements and supplementary data, see Item 14(a). ITEM 9. Disagreements on Accounting and Financial Disclosure. No response to this Item is required. 24 25 PART III ITEM 10. Directors and Executive Officers of the Company. Incorporated herein by reference is the information to appear under the caption "Election of Directors" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1996. ITEM 11. Executive Compensation. Incorporated herein by reference is the information to appear under the caption "Executive Compensation" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1996. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated herein by reference is the information to appear under the caption "Principal Shareholders; Shares Held by Management" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1996. ITEM 13. Certain Relationships and Related Transactions. Incorporated herein by reference is the information to appear under the caption "Certain Transactions" in the Company's definitive proxy statement for its Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission not later than October 28, 1996. 25 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page (a) (1) Financial Statements included in Part II, Item 8, of this Report: Index to Consolidated Financial Statements and Schedule F-1 Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Earnings F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-24 (a) (2) Financial Statement Schedule included in Part IV of this Report: Report of Independent Certified Public Accountant on Schedule II F-25 Schedule II - Valuation and Qualifying Accounts F-26
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. Exhibit No. - ------- 3.1 Restated Certificate of Incorporation adopted November, 1987, incorporated by reference to the Company's definitive proxy statement distributed in connection with the Company's annual meeting of shareholders held in November, 1987, filed with the SEC on November 3, 1986, as set forth in Appendix A to the aforesaid proxy statement. 3.1.1 Certificate of Amendment of the Certificate of Incorporation, adopted December, 1995. 26 27 3.2 Restated By-Laws adopted June 18, 1987, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1987 ("the Company's 1987 10-K"), Exhibit 3.2. 4.1 Form of Common Stock Certificate, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 4.1. 10.1 Sale and leaseback with Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1983, Exhibit 10(1), pages 48-312. 10.2 Amendment No. 1 to Lease between the Company and Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.2. 10.2.2 Lease Between the Company and Bemar Realty Company, dated January 1, 1996. 10.3 Employment Agreement between Joel Girsky and the Company, dated December 29, 1989, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1990 ("the Company's 1990 10-K"), Exhibit 10.3 pages 47-52. 10.4 1980 Stock Incentive Plan, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.4, pages 168-172. 10.5 Restated 1981 Incentive Stock Option Plan, incorporated by reference to the Company's 1987 10-K, Exhibit 10.1. 10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference to the Company's 1993 10-K, Exhibit 10.6. 10.7 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. 27 28 10.9 Employment Agreement between Joel Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.9. 10.10 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.10. 10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.11. 21.1 Subsidiaries of the Company. 23.1 Consent of Grant Thornton LLP. 27. Financial Data Schedule. 99.1 General Loan and Security Agreement dated January 20, 1989, between the Company as borrower and The Bank of New York Commercial Corporation ("BNYCC") as secured party, incorporated by reference to the Company's Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1). 99.2 Loan and Security Agreement - Accounts Receivable and Inventory, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(2). 99.3 Letter of Credit and Security Agreement, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(3). 99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company in favor of BNYCC dated January 13, 1992, together with Letters from R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and Distel, Inc., each a subsidiary of the Company and a guarantor of the obligations evidenced by the Term Notes, to BNYCC acknowledging the amendment to the Term Notes for the extension of the maturity date of each such note, incorporated by reference to the Company's 1992 10-K, Exhibit 28.4. 99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the Company and BNYCC, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5. 28 29 99.6 $1,500,000 Additional Term Loan Note, executed by the Company in favor of BNYCC, dated March 11, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.6. 99.7 Restated and Amended Loan and Security Agreement, dated April 25, 1995, among the Company, Nexus and BNYCC, together with an Amendment to Term Loan Note executed by the Company in favor of BNYCC and Letter executed by R.C. Components, Inc., Quality Components, Inc., Micatron, Inc., Distel, Inc. and Jaco Overseas, Inc., incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 99.7. 99.8 Second Restated and Amended Loan and Security Agreement dated September 13, 1995 among the Company, Nexus Custom Electronics, Inc., BNYCC and NatWest Bank, N.A. ("Second Restated and Amended Loan and Security Agreement"), incorporated by reference to the Company's Registration Statement on Form S-2, Commission File No. 33-62559, filed October 13, 1995, Exhibit 99.8. 99.8.1 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of April 10, 1996. (b) Reports on Form 8-K filed during last quarter of the period covered by this Report: None. 29 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page ---- Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Earnings F-5 Consolidated Statement of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-24 Report of Independent Certified Public Accountants on Schedule F-25 Schedule II - Valuation and Qualifying Accounts F-26 F-1 31 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, 1995 and 1996 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, 1996. 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, 1995 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1996 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 16, 1996 F-2 32 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30,
ASSETS 1995 1996 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 393,671 $ 164,161 Marketable securities 493,281 Accounts receivable, less allowance for doubtful accounts of $610,000 in 1995 and $758,000 in 1996 20,437,664 22,217,130 Inventories 26,653,881 30,089,508 Prepaid expenses and other 1,256,319 739,530 Due from officers 309,808 Deferred income taxes 571,000 708,000 ----------- ----------- Total current assets 49,622,343 54,411,610 PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 4,106,221 4,226,617 DEFERRED INCOME TAXES 174,000 189,000 EXCESS OF COST OVER NET ASSETS ACQUIRED, less accumulated amortization of $297,700 in 1995 and $369,200 in 1996 1,353,031 1,241,533 OTHER ASSETS 1,067,643 1,073,969 ----------- ----------- $56,323,238 $61,142,729 =========== ===========
The accompanying notes are an integral part of these statements. F-3 33 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (CONTINUED) June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1996 ----------- ----------- CURRENT LIABILITIES Accounts payable $16,651,774 $15,413,879 Current maturities of long-term debt and capitalized lease obligations 452,995 474,082 Accrued expenses 1,300,611 1,175,973 Income taxes payable 475,702 383,970 ----------- ----------- Total current liabilities 18,881,082 17,447,904 LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS 23,665,624 8,791,270 DEFERRED COMPENSATION 550,000 600,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock - authorized, 100,000 shares, $10 par value; none issued Common stock - authorized, 5,000,000 and 10,000,000 shares, respectively, $.10 par value; issued and outstanding, 2,464,384 and 3,955,721 shares, respectively 246,438 395,572 Additional paid-in capital 5,013,663 22,024,795 Unrealized gain on marketable securities 68,245 Retained earnings 7,966,431 11,814,943 ----------- ----------- 13,226,532 34,303,555 ----------- ----------- $56,323,238 $61,142,729 =========== ===========
The accompanying notes are an integral part of these statements. F-4 34 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30,
1994 1995 1996 ------------ ------------ ------------ Net sales $105,213,077 $138,683,331 $167,149,385 Cost of goods sold 83,038,254 109,902,639 133,105,227 ------------ ------------ ------------ Gross profit 22,174,823 28,780,692 34,044,158 Selling, general and administrative expenses 19,154,802 23,551,196 26,246,741 ------------ ------------ ------------ Operating profit 3,020,021 5,229,496 7,797,417 Interest expense 1,117,354 2,010,554 1,347,639 ------------ ------------ ------------ Earnings before income taxes and cumulative effect of a change in accounting for income taxes 1,902,667 3,218,942 6,449,778 Income tax provision 714,000 1,303,000 2,600,000 ------------ ------------ ------------ Earnings before cumulative effect of a change in accounting for income taxes 1,188,667 1,915,942 3,849,778 Cumulative effect of a change in accounting for income taxes 241,000 ------------ ------------ ------------ NET EARNINGS $ 1,429,667 $ 1,915,942 $ 3,849,778 ============ ============ ============ Earnings per common share Earnings per share before cumulative effect of a change in accounting for income taxes $ .47 $ .78 $ 1.08 Cumulative effect of a change in accounting for income taxes .09 ------------ ------------ ------------ Net earnings per common share $ .56 $ .78 $ 1.08 ============ ============ ============ Weighted average common shares and common equivalent shares outstanding 2,551,173 2,461,091 3,554,018 ============ ============ ============
The accompanying notes are an integral part of these statements. F-5 35 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 1994, 1995 and 1996
Unrealized Additional gain on Total paid-in marketable Retained shareholders' Shares Amount capital securities earnings equity --------- -------- ----------- ---------- ----------- ----------- Balance at July 1, 1993 1,708,637 $170,864 $3,936,613 $5,797,038 $9,904,515 Cancellation of shares in satisfac- tion of amounts due in connec- tion 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 Issuance of common stock for cash 1,485,000 148,500 16,991,466 17,139,966 Exercise of stock options 6,415 642 19,658 20,300 Payment for fractional shares resulting from 4-for-3 stock split (78) (8) 8 (1,266) (1,266) Unrealized gain on marketable securities $68,245 68,245 Net earnings 3,849,778 3,849,778 --------- -------- ----------- ------- ----------- ----------- BALANCE AT JUNE 30, 1996 3,955,721 $395,572 $22,024,795 $68,245 $11,814,943 $34,303,555 ========= ======== =========== ======= =========== ===========
The accompanying notes are an integral part of this statement. F-6 36 Jaco Electronics, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30,
1994 1995 1996 ------------- ------------- ------------- Cash flows from operating activities Net earnings $ 1,429,667 $ 1,915,942 $ 3,849,778 Adjustments to reconcile net earnings to net cash used in operating activities Depreciation and amortization 412,704 693,290 719,899 Deferred compensation 50,000 50,000 50,000 Deferred income tax benefit (111,000) (31,000) (158,000) Loss on sale of equipment 35,006 18,403 8,793 Provision for doubtful accounts 160,000 458,000 761,190 Changes in operating assets and liabilities, net of effects of acquisition Increase in accounts receivable (1,807,919) (3,759,741) (2,540,656) Increase in inventories (1,936,676) (6,572,285) (3,435,627) Decrease (increase) in prepaid expenses and other (224,965) (184,100) 516,789 (Decrease) increase in accounts payable 2,493,897 3,057,980 (1,237,895) (Decrease) increase in accrued expenses (234,864) 37,695 (124,638) (Decrease) increase in income taxes payable (392,514) 328,203 (91,732) ------------- ------------- ------------- Net cash used in operating activities (126,664) (3,987,613) (1,682,099) ------------- ------------- ------------- Cash flows from investing activities Increase in marketable securities (379,036) Capital expenditures (875,797) (908,153) (789,635) Proceeds from the sale of equipment 49,302 20,000 12,047 Purchase of subsidiary, net (1,796,355) Decrease (increase) in due from officers, net (101,878) (18,689) 309,808 (Increase) decrease in other assets 16,452 (106,956) (6,328) ------------- ------------- ------------- Net cash used in investing activities (2,708,276) (1,013,798) (853,144) ------------- ------------- ------------- Cash flows from financing activities Proceeds from public offering - net 17,139,966 Borrowings from line of credit 110,434,283 141,391,776 173,061,732 Payments of line of credit (109,501,754) (136,774,193) (179,449,087) Principal payments under equipment financing (269,613) (434,854) (251,626) Borrowings (payments) under term loans 1,982,071 669,417 (8,214,286) Proceeds from exercise of stock option 937 108,500 20,300 Payments for fractional shares (362) (1,266) ------------- ------------- ------------- Net cash provided by financing activities 2,645,924 4,960,284 2,305,733 ------------- ------------- ------------- NET DECREASE IN CASH (189,016) (41,127) (229,510) Cash and cash equivalents at beginning of year 623,814 434,798 393,671 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 434,798 $ 393,671 $ 164,161 ============= ============= ============= Supplemental cash flow disclosures: Interest paid $ 1,126,000 $ 1,970,000 $ 1,472,000 Income taxes paid 660,000 993,000 2,882,000 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-7 37 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1994, 1995 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily engaged in the distribution of semiconductors, capacitors, resistors, electromechanical devices, computers and computer subsystems, produced by others, for the manufacture and assembly of electronic products. 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, 1994, 1995 and 1996, export sales amounted to approximately $5,289,000, $5,032,000 and $4,963,000, respectively. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Jaco Electronics, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. 2. Revenue Recognition The Company recognizes revenue as products are shipped and title passes to customers. 3. Investments in Marketable Securities Investments in marketable securities consist of investments in mutual funds. Such investments have been classified as "available for sale securities" and are reported at fair market value which is inclusive of an unrealized gain of approximately $114,245. Changes in the fair value of "available for sale securities" are classified as a separate component of shareholders' equity, net of any related deferred tax effects. 4. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and average cost methods. F-8 38 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 5. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided for using 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. 6. Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired is amortized over periods of ten to forty years using the straight-line method. 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. 7. 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 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. F-9 39 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 8. Earnings Per Common Share Earnings per common share is based upon the weighted average number of shares of common stock outstanding during the year and reflects the dilutive effect of outstanding stock options. All per share information has been restated to reflect the Company's fiscal 1995 stock dividend and stock split. 9. Statement of Cash Flows The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 10. Financial Instruments and Business Concentrations 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 mitigated due to the large number of entities comprising the Company's customer base, their dispersion across geographic areas and the Company's policy of maintaining credit insurance. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Fair Value of Financial Instruments," requires disclosure of the estimated fair value of an entity's financial instrument assets and liabilities. The Company's principal financial instrument consists of a revolving credit facility, expiring on September 13, 1998, with a bank. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rate approximates the current prevailing interest rate. The Company generally purchases products from manufacturers pursuant to nonexclusive distributor agreements. During the year ended June 30, 1996, the Company's top three suppliers accounted for 18%, 11% and 7%, respectively, of net sales. In June 1995, the Company's then largest supplier canceled its distributor agreement with the Company. The Company has F-10 40 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) been able to replace a major portion of those sales with sales of other product lines from other suppliers. However, there can be no assurance that in the event a current supplier cancels its distributor agreement with the Company, that the Company will be able to replace the related sales with sales of other product lines. 11. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 12. Accounting Pronouncements Not Yet Adopted Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," is also required to be implemented in fiscal 1997 and introduces a choice in the method of accounting used for stock-based compensation. Entities may use the "intrinsic value" method currently based on APB No. 25 or the new "fair value" method contained in SFAS No. 123. The Company intends to implement SFAS No. 123 in 1997 by accounting for stock-based compensation, if applicable, under APB No. 25. As required by SFAS No. 123, the pro forma effects on net income and earnings per share will be determined as if the fair value-based method had been applied and disclosed in the notes to the financial statements. F-11 41 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE B - INVENTORY Inventories consist of the following:
June 30, ------------------------------------ 1995 1996 ----------- ----------- Finished goods and goods held for resale $23,374,881 $27,025,508 Work-in-process 718,000 477,000 Raw materials 2,561,000 2,587,000 ----------- ----------- $26,653,881 $30,089,508 =========== ===========
NOTE C - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
Useful June 30, life ------------------------------- in years 1995 1996 ---------- ------------ ----------- Land, building and improvements 10 to 30 $1,389,603 $1,419,126 Machinery and equipment 3 to 8 4,699,761 5,193,265 Transportation equipment 3 to 5 134,997 108,370 Leasehold improvements 5 to 10 687,566 661,479 ---------- ---------- 6,911,927 7,382,240 ---------- ---------- Less accumulated depreciation and amortization (including $607,851 in 1995 and $688,957 in 1996 of capitalized lease amortization) 2,805,706 3,155,623 ---------- ---------- $4,106,221 $4,226,617 ========== ==========
Included in machinery and equipment is computer equipment recorded under capitalized leases at June 30, 1995 and 1996 for $943,038. F-12 42 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE D - INCOME TAXES The components of the Company's provision for income taxes is as follows:
June 30, ------------------------------------------------ 1994 1995 1996 ----------- ----------- ----------- Federal Current $ 505,000 $ 1,063,000 $ 2,176,000 Deferred 111,000 (31,000) (158,000) ----------- ----------- ----------- 616,000 1,032,000 2,018,000 State 98,000 271,000 582,000 ----------- ----------- ----------- $ 714,000 $ 1,303,000 $ 2,600,000 =========== =========== ===========
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, ------------------------------------ 1994 1995 1996 ------ ------ ------ Statutory Federal tax rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 5.0 5.6 6.0 Prior period tax adjustments (3.7) Sales expense for which no tax benefit arises 2.4 1.7 .1 Other (.2) (.8) .2 ------ ------ ------ Effective tax rate 37.5% 40.5% 40.3% ====== ====== ======
F-13 43 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE D - INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities resulting from differences between accounting for financial statement purposes and tax purposes are summarized as follows:
1995 1996 ----------- ----------- Deferred tax assets Net operating loss carryforwards $ 409,000 $ 409,000 Allowance for bad debts 222,000 347,000 Inventory valuation 532,000 582,000 Deferred compensation 201,000 219,000 Other deferred assets 30,000 24,000 ----------- ----------- 1,394,000 1,581,000 Deferred tax liabilities Depreciation (56,000) (85,000) Other (47,000) (47,000) Unrealized gain on marketable securities available for sale (46,000) ----------- ----------- 1,291,000 1,403,000 Valuation allowance (546,000) (506,000) ----------- ----------- Net deferred tax asset $ 745,000 $ 897,000 =========== ===========
At June 30, 1996, the Company, through an acquisition (see Note I), has available a Federal net operating loss carryforward of approximately $1,121,000. Such net operating loss is subject to certain limitations and expires in varying amounts during the fiscal years 2007 through 2009. Further, the Company has established a valuation allowance with respect to the net deferred tax assets attributable to this acquired subsidiary. During fiscal 1996, $40,000 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. F-14 44 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS Debt and capitalized lease obligations are as follows:
June 30, ----------------------------- 1995 1996 ----------- ----------- Term loans and revolving line of credit (a) $22,787,811 $ 8,186,172 Other term loans (b) 485,646 424,721 Equipment notes (c) 487,189 373,608 Capitalized lease obligations (d) 413,722 314,945 ----------- ----------- 24,174,368 9,299,446 Less amounts representing interest on capitalized leases 55,749 34,094 ----------- ----------- 24,118,619 9,265,352 Less current maturities 452,995 474,082 ----------- ----------- $23,665,624 $ 8,791,270 =========== ===========
(a) Term Loans and Revolving Line of Credit Facility The Company's agreement with its banks, as amended, provides the Company with a $30,000,000 term loan and revolving line of credit facility based principally on eligible accounts receivable and inventories of the Company as defined in the agreements expiring September 13, 1998. Borrowings thereunder bear interest at the higher of the (i) bank's prime rate or the Federal funds rate plus 1/2% or (ii) at the Company's option, LIBOR plus 2.0% for fixed time periods. Of the outstanding balance on the revolving line of credit facility, $7,168,315 at June 30, 1996, $4,168,315 bears interest at the bank's prime rate (8.25%) and $3,000,000 bears interest at LIBOR plus 2% (7.63%). Pursuant to the same agreement, at June 30, 1996, a term loan with a remaining balance of $1,017,857 requires monthly principal payments of $17,857, together with interest at the bank's prime rate through September 13, 1998, with a final payment of $553,600 on September 13, 1998. Borrowings under this facility are collateralized by substantially all of the assets of the Company. The agreement contains provisions for maintenance of certain financial ratios, all of which the Company is in F-15 45 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED) compliance with, and prohibits the payment of cash dividends. The agreement also provides for the issuance of letters of credit by the Bank on the Company's behalf. At June 30, 1996, $500,000 of such letters of credit were outstanding. (b) Other Term Loans Other term loans as of June 30, 1996 are as follows:
Monthly Date of loan Balance Term payment ------------ ------- ---- ------- March 16, 1995 $ 46,639 60 months $1,160 March 16, 1995 161,195 84 months 2,730 March 16, 1995 216,887 84 months 4,216 --------- $ 424,721 =========
The above loans are collateralized by the related equipment acquired, having a carrying value of approximately $464,000 at June 30, 1996 and $413,000 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, 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 the bank's prime rate, respectively. (c) Equipment Notes The equipment notes are payable through September 1999, bearing implicit interest rates from 7.55% to 9.68%. (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 October 1999, with implicit interest rates from 7.07% to 7.55%. F-16 46 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE E - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED) The following is a summary of the aggregate annual maturities of long-term debt and capitalized lease obligations as of June 30, 1996:
Long-term Capitalized debt leases Year ending June 30, 1997 $ 392,563 $ 98,984 1998 418,147 99,014 1999 7,953,524 95,588 2000 86,503 21,359 2001 74,141 Thereafter 59,623 ---------- -------- $8,984,501 $314,945 ========== ========
NOTE F - COMMITMENTS AND CONTINGENCIES 1. Leases The Company leases certain office and warehouse facilities under noncancellable operating leases. The leases also provide for the payment of real estate taxes and other operating expenses of the buildings. The minimum annual lease payments under such leases are as follows:
Year ending June 30, 1997 $ 732,869 1998 639,172 1999 604,165 2000 629,791 2001 646,757 Thereafter 1,706,170 ---------- $4,958,924 ==========
F-17 47 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE F - COMMITMENTS AND CONTINGENCIES (CONTINUED) In addition, the Company leases office and warehouse facilities from a partnership owned by two officers and directors of the Company. The lease expires in December 2003 and requires minimum annual lease payments as follows:
Year ending June 30, 1997 $ 516,600 1998 542,430 1999 569,550 2000 598,000 2001 627,900 Thereafter 1,706,170 ---------- $4,560,650 ==========
In addition, the Company is contingently liable as a guarantor of a mortgage on such property in the amount of approximately $327,000 as of June 30, 1996. The Company's rent expense was approximately $571,000, $571,000 and $528,000 for the years ended June 30, 1994, 1995 and 1996, respectively, in connection with the above lease. Rent expense on office and warehouse facilities leases for the years ended June 30, 1994, 1995 and 1996 was approximately $872,000, $909,000 and $846,000, respectively, net of sublease income of approximately $147,000, $135,000 and $120,000, 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, 1996 are as follows:
Year ending June 30, 1997 $ 240,899 1998 176,262 1999 70,095 2000 9,618 --------- $ 496,874 =========
F-18 48 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE F - COMMITMENTS AND CONTINGENCIES (CONTINUED) 3. Employment Agreement Effective July 1, 1993, the Company entered into an employment agreement with its Chairman expiring July 1, 1997, pursuant to which the Chairman receives a base annual salary of $325,000. In addition, the Chairman will be entitled to an annual bonus equal to 4% of earnings before income taxes, if earnings for a particular fiscal year exceed $1,000,000 or 6% if earnings before income taxes are in excess of $2,500,000. The agreement also provides for the continuation of the deferred compensation arrangement first established in fiscal 1985, whereby $50,000 per year has been accrued and becomes payable in its entirety no later than January 15 of the year next following the last to occur of the following events: (1) the Chairman's attainment of age 60 (fiscal 1999) or (2) cessation of the Chairman's employment with or without cause after July 1, 1993. In the event of a change in control resulting in termination of the Chairman's employment, the Chairman will receive between $450,000 and $600,000 depending on the date of termination. For the years ended June 30, 1994, 1995 and 1996, bonuses of approximately $76,000, $193,000 and $387,000, respectively, were earned pursuant to the Chairman's employment agreement. Further, the Chairman had outstanding demand loans at June 30, 1995 aggregating $309,808 which bore interest at 9-3/4% per annum and were paid in full in September 1995. The Company's Board of Directors further adopted a policy of requiring a majority of outside directors to approve any further loans. 4. Other Matters The Company is a party to legal matters arising in the general conduct of business. The ultimate outcome of such matters is not expected to have a material adverse effect on the Company's results of operations or financial position. NOTE G - RETIREMENT PLAN The Company maintains a 401(k) Plan that is available to all employees, to which the Company contributes up to a maximum of 1% of each employee's salary. For the years ended June 30, 1994, 1995 and 1996, the Company contributed to this plan approximately $61,000, $90,000 and $104,000, respectively. NOTE H - SHAREHOLDERS' EQUITY On October 20, 1995, the Company completed a public offering of 1,600,000 shares of its common stock at $12.75 per share. The offering consisted of 1,325,000 shares offered by the Company and 275,000 shares offered by certain officers and directors of the Company. On December 8, 1995, the underwriters of the public offering exercised a portion of their overallotment option for an additional 160,000 shares at a price per share equal to that of the public offering. The Company's net proceeds from the public offering of $17,139,966, after deducting the underwriters' commission and costs of F-19 49 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE H - SHAREHOLDERS' EQUITY (CONTINUED) the public offering, were used to reduce its bank indebtedness. In connection with the public offering, the Company also issued stock warrants, to the representative underwriters, to purchase up to 70,000 shares of common stock at an exercise price per share equal to 180% of the public offering price, which expire on October 20, 1999. On February 3, 1995, the Company declared a 10% stock dividend which was paid on March 10, 1995. Further, on August 30, 1995, the Company authorized a 4-for-3 stock split. The 4-for-3 split was distributed on October 3, 1995 to shareholders of record as of September 22, 1995. All references to the number of common shares and earnings per common 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 were generally exercisable for a period of five years at a price not less than the market value on the date of grant. The 1981 Plan terminated in November 1991. Options granted prior to expiration of the 1981 Plan which, by their terms, do not expire until after November 1991 remain outstanding in accordance with their terms until their individual expiration dates. During fiscal 1996, all outstanding options under the 1981 Plan had been exercised. In December 1992, the Board of Directors approved the adoption of a nonqualified stock option plan, known as the "1993 Non-Qualified Stock Option Plan," hereinafter referred to as the "1993 Plan." The Board of Directors or Plan Committee is responsible for the granting of and price of these options. Such price shall be equal to the fair market value of the common stock subject to such option at the time of grant. The options expire five years from the date of grant and are exercisable over the period stated in each option. The Company has reserved 293,333 shares of common stock for the 1993 Plan, of which 158,934 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 105,601 options currently available for grant under the F-20 50 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE H - SHAREHOLDERS' EQUITY (CONTINUED) 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 41,066 options are outstanding. Outstanding options granted to employees, directors and officers for the last three fiscal years are summarized as follows:
Incentive Nonqualified stock options stock options ----------------------------- ---------------------------- Price range Shares Price range Shares ----------- ------ ----------- ------ 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 July 1, 1995 $1.02 2,750 $ 4.77-5.80 135,300 Granted $11.50-12.75 68,366 Exercised $1.02 (2,750) $ 4.77 (3,666) ------- ------- OUTSTANDING AT JUNE 30, 1996 -- 200,000 ======= ======= AMOUNTS EXERCISABLE AT JUNE 30, 1996 -- 200,000 ======= =======
F-21 51 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE H - SHAREHOLDERS' EQUITY (CONTINUED) On April 15, 1996, the Company announced that its Board of Directors has authorized the purchase of up to 250,000 shares of its common stock or approximately 6.3% of the then outstanding shares, under a stock repurchase program. The purchases may be made by the Company from time to time in the open market at the Company's discretion. Through August 16, 1996, the Company purchased 37,500 shares of its common stock for aggregate consideration of $303,750. NOTE I - SEGMENT INFORMATION 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, $378,650, 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, 1996, net of accumulated amortization of $103,275. 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-22 52 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE I - SEGMENT INFORMATION (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.
Year ended June 30, -------------------------------------- 1994 1995 1996 -------- -------- -------- (in thousands) Sales Electronics components distribution $102,493 $126,545 $156,303 Contract manufacturing 2,720 12,138 10,846 -------- -------- -------- $105,213 $138,683 $167,149 ======== ======== ======== Operating profit Electronics components distribution $ 2,991 $ 4,666 $ 7,640 Contract manufacturing 29 563 157 -------- -------- -------- $ 3,020 $ 5,229 $ 7,797 ======== ======== ======== Identifiable assets Electronics components distribution $ 39,545 $ 47,909 $ 53,376 Contract manufacturing 6,140 8,414 7,543 -------- -------- -------- $ 45,685 $ 56,323 $ 60,919 ======== ======== ======== Capital expenditures Electronics components distribution $ 828 $ 342 $ 524 Contract manufacturing 48 566 266 -------- -------- -------- $ 876 $ 908 $ 790 ======== ======== ======== Depreciation and amortization Electronics components distribution $ 329 $ 397 $ 422 Contract manufacturing 84 296 298 -------- -------- -------- $ 413 $ 693 $ 720 ======== ======== ========
F-23 53 Jaco Electronics, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1994, 1995 and 1996 NOTE J - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ----------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 ----------- ----------- ----------- ----------- NET SALES $40,083,485 $43,589,877 $43,176,834 $40,299,189 GROSS PROFIT 8,541,214 8,821,196 8,633,057 8,048,691 NET EARNINGS 807,951 1,079,907 1,112,740 849,180 EARNINGS PER COMMON SHARE NET EARNINGS PER COMMON SHARE $ .32 $ .30 $ .28 $ .21 =========== =========== =========== ===========
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 =========== =========== =========== ===========
(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-24 54 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 16, 1996, which is included in this annual report on Form 10-K, we have also audited Schedule II for each of the three years in the period ended June 30, 1996. 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 16, 1996 F-25 55 Jaco Electronics, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 1994, 1995 and 1996
Column A Column B Column C Column D Column E -------- -------- ------------------------------ -------- -------- Additions (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts - Deductions - at end of Description of period expenses describe describe period ----------- --------- -------- -------- -------- ------ Allowance for doubtful accounts 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 ======== ======== ======== ======== ======== Year ended June 30, 1996 $610,000 $761,000 $153,000 (b) $766,000 (a) $758,000 ======== ======== ======== ======== ========
(a) Represents write-offs of uncollectible accounts. (b) Recoveries of accounts. (c) Includes balance attributable to acquired subsidiary. F-26 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JACO ELECTRONICS, INC. Date: September 27, 1996 By: /s/ Joel H. Girsky -------------------------------- Joel H. Girsky, Chairman of the Board, President and Treasurer (Principal Executive Officer) Date: September 27, 1996 By: /s/ Jeffrey D. Gash -------------------------------- Jeffrey D. Gash, Vice President- Finance (Principal Financial and Accounting Officer) Pursuant to the Requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Date: September 27, 1996 /s/ Stephen A. Cohen ------------------------------------ Stephen A. Cohen, Director Date: September 27, 1996 /s/ Edward M. Frankel ------------------------------------ Edward M. Frankel, Director Date: September 27, 1996 /s/ Charles B. Girsky ------------------------------------ Charles B. Girsky, Executive Vice President and Director 30 57 EXHIBIT INDEX Exhibit No. - ------- 3.1 Restated Certificate of Incorporation adopted November, 1987, incorporated by reference to the Company's definitive proxy statement distributed in connection with the Company's annual meeting of shareholders held in November, 1987, filed with the SEC on November 3, 1986, as set forth in Appendix A to the aforesaid proxy statement. 3.1.1 Certificate of Amendment of the Certificate of Incorporation, adopted December, 1995. 3.2 Restated By-Laws adopted June 18, 1987, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1987 ("the Company's 1987 10-K"), Exhibit 3.2. 4.1 Form of Common Stock Certificate, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 4.1. 10.1 Sale and leaseback with Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1983, Exhibit 10(1), pages 48-312. 10.2 Amendment No. 1 to Lease between the Company and Bemar Realty Company (as assignee of Hi-Tech Realty Company), incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.2. 10.2.2 Lease Between the Company and Bemar Realty Company, dated January 1, 1996. 10.3 Employment Agreement between Joel Girsky and the Company, dated December 29, 1989, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1990 ("the Company's 1990 10-K"), Exhibit 10.3 pages 47-52. 10.4 1980 Stock Incentive Plan, incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit 10.4, pages 168-172. 10.5 Restated 1981 Incentive Stock Option Plan, incorporated by reference to the Company's 1987 10-K, Exhibit 10.1. 10.6 1993 Non-Qualified Stock Option Plan, incorporated by reference to the Company's 1993 10-K, Exhibit 10.6. 58 10.7 Stock Purchase Agreement, dated as of February 8, 1994 by and among the Company and Reilrop, B.V. and Guaranteed by Cray Electronics Holdings PLC, incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1994. 10.8 1993 Stock Option Plan for Outside Directors, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.8. 10.9 Employment Agreement between Joel Girsky and the Company, dated October 5, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 10.9. 10.10 Authorized Electronic Industrial Distributor Agreement, dated as of August 24, 1970 by and between AVX and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.10. 10.11 Electronics Corporation Distributor Agreement, dated November 15, 1974, by and between Kemet and the Company, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 10.11. 21.1 Subsidiaries of the Company. 23.1 Consent of Grant Thornton LLP. 27. Financial Data Schedule. 99.1 General Loan and Security Agreement dated January 20, 1989, between the Company as borrower and The Bank of New York Commercial Corporation ("BNYCC") as secured party, incorporated by reference to the Company's Current Report on Form 8-K, filed January 31, 1989, Exhibit 28(1). 99.2 Loan and Security Agreement - Accounts Receivable and Inventory, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(2). 99.3 Letter of Credit and Security Agreement, dated January 20, 1989, between the Company and BNYCC, incorporated by reference to the Company's Current Report on Form 8-K filed January 31, 1989, Exhibit 28(3). 59 99.4 Amendment to Term Loan Notes (the "Term Notes") executed by the Company in favor of BNYCC dated January 13, 1992, together with Letters from R.C. Components, Inc., Quality Components, Inc., Micatron, Inc. and Distel, Inc., each a subsidiary of the Company and a guarantor of the obligations evidenced by the Term Notes, to BNYCC acknowledging the amendment to the Term Notes for the extension of the maturity date of each such note, incorporated by reference to the Company's 1992 10-K, Exhibit 28.4. 99.5 Amendment Nos. 1 through 4 to Loan and Security Agreement between the Company and BNYCC, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.5. 99.6 $1,500,000 Additional Term Loan Note, executed by the Company in favor of BNYCC, dated March 11, 1994, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994, Exhibit 99.6. 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., incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995, Exhibit 99.7. 99.8 Second Restated and Amended Loan and Security Agreement dated September 13, 1995 among the Company, Nexus Custom Electronics, Inc., BNYCC and NatWest Bank, N.A. ("Second Restated and Amended Loan and Security Agreement"), incorporated by reference to the Company's Registration Statement on Form S-2, Commission File No. 33-62559, filed October 13, 1995, Exhibit 99.8. 99.8.1 Amendment to the Second Restated and Amended Loan and Security Agreement, dated as of April 10, 1996. EX-3.1.1 2 CERTIFICATE OF AMENDMENT OF THE CERT. OF INCORP. 1 EXHIBIT 3.1.1 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF JACO ELECTRONICS, INC. Under Section 805 of the Business Corporation Law of the State of New York --------------------------------- The undersigned, for purposes of amending the Certificate of Incorporation of Jaco Electronics, Inc., a corporation organized under the Business Corporation Law of the State of New York, does hereby certify that: 1. The name of the corporation is: JACO ELECTRONICS, INC. 2. The date of filing of its original Certificate of Incorporation with the Secretary of State of the State of New York was July 7, 1961. The date of filing of its Restated Certificate of Incorporation with the Secretary of the State of New York was December 3, 1987. 3. Article FIFTH of the Certificate of Incorporation is hereby amended to increase the aggregate number of shares of common stock which the corporation shall authority to issue from 5,000,000 to 10,000,000, and substituted in its entirety so that it shall now read: "FIFTH: The aggregate number of shares which the Corporation shall have authority to issue is 10,100,000 shares, of which 10,000,000 shares shall be common shares, ten cents ($.10) par value, and 100,000 of which shall be preferred shares, Ten Dollars ($10.00) par value, which may be issued in series, and shall have such relative rights, preferences and limitations as the Board of Directors shall determine upon issuance of such preferred shares." 4. The Amendment made hereby has been authorized by Resolution of the Corporation's Board of Directors at a meeting held on September 29, 1995. The Amendment made hereby has been 1 2 duly approved and adopted by the shareholders at an annual meeting on December 11, 1995. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of its Certificate of Incorporation to be duly adopted in accordance with Section 803 of the Business Corporation Law of the State of New York, and has caused this Certificate of Amendment of its Certificate of Incorporation to be signed by its President this 27th day of December, 1995. JACO ELECTRONICS, INC. By: /s/ Jeffrey D. Gash ------------------------------- Its: Jeffrey D. Gash/Vice President By: /s/ Joel Girsky ------------------------------- Its: Joel Girsky, CEO/President VERIFICATION STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) I, Adelaide Rodler, a notary public do hereby certify that on the 4 day of Jan., 1996, Jeffrey D. Gash and Joel Girsky personally appeared before me and being first duly sworn by me acknowledged that each signed as his free act and deed the foregoing document in the capacity therein set forth and declared that the statements therein contained are true to their best knowledge and belief. IN WITNESS WHEREOF, I hereunto set my hand and seal the day and year above written. /s/ Adelaide Rodler ------------------- Notary Public Notarial Seal My commission expires: 5/31/96 [SEAL] 2 EX-10.2.2 3 LEASE 1 EXHIBIT 10.2.2 ------------------------------------------------- STANDARD FORM OF OFFICE LEASE THE REAL ESTATE BOARD OF NEW YORK, INC. ------------------------------------------------- AGREEMENT OF LEASE, made as of this first (1st) day of January 1996, between BEMAR REALTY CO., a New York general partnership, having an office at 145 Oser Avenue, Hauppauge, New York 11788 party of the first part, hereinafter referred to as OWNER, and JACO ELECTRONICS, INC., a New York corporation, having an office at 145 Oser Avenue, Hauppauge, New York 11788 party of the second part, hereinafter referred to as TENANT, WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner the building known as 145 Oser Avenue (the "Premises") Hauppauge, New York, for the term of eight (8) years (or until such term shall sooner cease and expire as hereinafter provided) to commence on the 1st day of January nineteen hundred and ninety-six, and to end on the 31st day of December two thousand and four both dates inclusive, at an annual rental rate of Five Hundred Four Thousand ($504,000), subject to increases in accordance with Article 37. which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other place as Owner may designate, without any set off or deduction whatsoever, except that Tenant shall pay the first monthly installment(s) on the execution hereof (unless this lease be a renewal). In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby convenant as follows: RENT OCCUPANCY 1. Tenant shall pay the rent as above and as hereinafter provided. 2. Tenant shall use and occupy demised premises for warehouse and office and for no other purpose. TENANT ALTERATIONS: 3. Tenant shall make no changes in or to the demised premises of any nature without Owner's prior written consent. Subject to the prior written consent of Owner, and to the provisions of this article, Tenant at Tenant's expense, may make alterations, installations, additions or improvements which are non-structural and which do not affect utility services or plumbing and electrical lines, in or to the interior of the demised premises by using contractors or mechanics first approved by Owner. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner and Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by filing the bond required by law. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises unless Owner, by notice to Tenant no later than twenty days prior to the date fixed as the termination of this lease, elects to relinquish Owner's right thereto and to have them removed by Tenant, in which event the same shall be removed from the premises by Tenant prior to the expiration of the lease, at Tenant's expense. Nothing in this Article shall be construed to give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the premises or upon removal of other installations as may be required by Owner, Tenant shall immediately and at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All property permitted or required to be removed, by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or may be removed from the premises by Owner, at Tenant's expense. MAINTENANCE AND REPAIRS 4. Tenant shall, throughout the term of this lease, take good care of the demised premises and the fixtures and appurtenances therein. Tenant shall be responsible for all damage or injury to the demised premises or any other part of the building and the systems and equipment thereof, whether requiring structural or nonstructural repairs caused by or resulting from carelessness, omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents, employees, invitees or licensees, or which arise out of any work, labor, service or equipment done for or supplied to Tenant or any subtenant or arising out of the installation, use or operation of the property or equipment of Tenant or any subtenant or for any other reason. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's expense, all repairs in and to the demised premises for which Tenant is responsible, using only the contractor for the trade or trades in question, selected from a list of at least two contractors per trade submitted by Owner. Any other repairs in or to the building or the facilities and systems thereof for which Tenant is responsible shall be performed by Tenant at the Tenant's expense. Tenant shall maintain in good working order and repair the exterior and the structural portions of the building, including the structural portions of its demised premises, and the public portions of the building interior and the building plumbing, electrical, heating and ventilating systems (to the extent such systems presently exist) serving the demised premises. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. It is specifically agreed that Tenant shall not be entitled to any setoff or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this Lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of an action for damages for breach of contract. The provisions of this Article 4 shall not apply in the case of fire or other casualty which are dealt with in Article 9 hereof. WINDOW CLEANING: 5. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS: 6. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant's sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof, (including Tenant's permitted use) or, with respect to the building whether or not arising out of Tenant's 2 use or manner of use of the premises or the building (including the use permitted under the lease) including structural and non-structural repairs. Tenant may, after securing Owner to Owner's satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorney's fees, by cash deposit or by surety bond in an amount and in a company satisfactory to Owner, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal offense or constitute a default under any lease or mortgage under which owner may be obligated, or cause the demised premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the demised premises or the building of which the demised premises form a part, or which shall or might subject Owner to any liability or responsibility to any person or for property damage. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or damages, which may be imposed upon Owner by reason of Tenant's failure to comply with the provisions of this article and if by reason of such failure the fire insurance rate shall, at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" of rate for the building or demised premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's judgement, to absorb and prevent vibration, noise and annoyance. SUBORDINATION: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall execute promptly any certificates that Owner may request. PROPERTY -- LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence of owner, its agents, servants or employees. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said building or caused by operations in construction of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to Owner's own acts, Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Owner shall not be reimbursed by insurance, including reasonable attorneys fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any sub-tenant, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld. DESTRUCTION, FIRE AND OTHER CASUALTY: 9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner, subject to Owner's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casualty, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Landlord's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owning shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume five (5) days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery against the other or any one claiming through or under each of them by way of subrogation or otherwise. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, then the party benefitting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. EMINENT DOMAIN: 10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease and assigns to Owner, Tenant's entire interest in any such award. ASSIGNMENT, MORTGAGE, ETC.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. ELECTRIC CURRENT:* 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which, in Owner's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain. ACCESS TO PREMISES: 13. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times, to examine the same and to make such repairs, replacements, and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided they are concealed within the walls, floor, or ceiling. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours for the purpose of showing the - ------------------ * Rider to be added if necessary. 3 same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants. If Tenant is not present to open and permit an entry into the premises, Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. If during the last month of the term Tenant shall have removed all or substantially all of Tenant's property therefrom Owner may immediately enter, alter, renovate or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation and such act shall have no effect on this lease or Tenant's obligations hereunder. VAULT, VAULT SPACE, AREA: 14. No Vaults, vault space or area, whether or not enclosed or covered, not within the property line of the building is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. OCCUPANCY: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. In any event, Owner makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations, whether or not of record. BANKRUPTCY: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by the sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor; or (2) the making by Tenants of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or be reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) it is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be relet by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. DEFAULT: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent; or if the demised premises become vacant or deserted; or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if this lease be rejected under Section 235 of Title 11 of the U.S. Code (bankruptcy code); or if Tenant shall fail to move into or take possession of the premises within fifteen (15) days after the commencement of the term of this lease, then, in any one or more of such events, upon Owner serving a written five (5) days notice upon Tenant specifying the nature of said default and upon the expiration of said five (5) days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said five (5) days period, and if Tenant shall not have diligently commenced curing such default within such five (5) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written three (3) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said three (3) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such three (3) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the demised premises to Owner but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required; then and in any of such events Owner may without notice, re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. REMEDIES OF OWNER AND WAIVER OF REDEMPTION: 18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may incur in connection with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's sole judgement, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Owner obtaining possession of demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise. FEES AND EXPENSES 19. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease , then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to attorney's fees, in instituting, prosecuting or defending any action or proceeding, then Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within five (5) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. BUILDING ALTERATIONS AND MANAGEMENT: 20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the building and to change the name, number of designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenants making any repairs in the building or any such alterations, additions and improvements. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of such controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. NO REPRESENTATIONS BY OWNER: 21. Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the building, the land upon which 4 it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the premises except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as is" and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. END OF TERM: 22. Upon the expiration or other termination of the term of this lease. Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. QUIET ENJOYMENT: 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 31 hereof and to the ground leases underlying, leases and mortgages hereinbefore mentioned. FAILURE TO GIVE POSSESSION: 24. NO WAIVER: 25. The failure of Owner to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises, and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. WAIVER OF TRIAL BY JURY: 26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding including a counterclaim under Article 4. INABILITY TO PERFORM: 27. This Lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but not limited to, government preemption in connection with a National Emergency or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. BILLS AND NOTICES: 28. Except as otherwise in this lease provided, a bill, statement, notice or communication which Owner may desire or be required to give to Tenant, shall be deemed sufficiently given or rendered if, in writing, delivered to Tenant personally or sent by registered or certified mail addressed to Tenant at the building of which the demised premises form a part or at the last known residence address or business address of Tenant or left at any of the aforesaid premises addressed to Tenant, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be the time when the same is delivered to Tenant, mailed, or left at the premises as herein provided. Any notice by Tenant to Owner must be served by registered or certified mail addressed to Owner at the address first hereinabove given or at such other address as Owner shall designate by written notice. SERVICES PROVIDED BY OWNERS 29. * CAPTIONS: 30. The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof. DEFINITIONS: 31. The term "office", or "offices", wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes or for manufacturing. The term "Owner" means a landlord or lessor, and as used in this lease means only the owner, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays (except such portion thereof as is covered by specific hours in Article 29 hereof), Sundays and all days observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service. - ---------- * Rider to be added if necessary. 5 ADJACENT EXCAVATION -- SHORING: 32. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Owner, or diminution or abatement of rent. RULES AND REGULATIONS 33. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to time adopt. Notice of any additional rules or regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within ten (10) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. SECURITY 34. Tenant has deposited with Owner the sum of $*__________ as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Owner may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the re-letting of the premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building or leasing of the building, of which the demised premises form a part, Owner shall have the right to transfer the security to the vendee or lessee and Owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner solely for the return of said security, and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Owner. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. ESTOPPEL CERTIFICATE 35. Tenant, at any time, and from time to time, upon at least 10 days' prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this Lease, and, if so, specifying each such default. SUCCESSORS AND ASSIGNS: 36. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. - ---------------------------------- *Space to be filled in or deleted. IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this lease as of the day and year first above written. Witness for Owner: BEMAR REALTY COMPANY By: /s/ Joel Girsky - ---------------------------------- -------------------------------- Witness for Tenant: JACO ELECTRONICS, INC. By: /s/ Jeffrey D. Gash V.P. - ---------------------------------- --------------------------------- ACKNOWLEDGEMENTS CORPORATE OWNER CORPORATE TENANT STATE OF NEW YORK, ss.: STATE OF NEW YORK, ss.: County of County of On this ___ day of __________, On this ___ day of ___________, 19___, before me personally came 19___, before me personally came _________________________________ ___________________________________ to me known, who being by me duly to me known, who being by me duly sworn, did depose and say that he sworn, did depose and say that he resides in _______________________ resides in _______________________ _________________________________: _________________________________: that he is the ________________ of that he is the ________________ of ______________________________ the ______________________________ the corporation described in and which corporation described in and which executed the foregoing instrument, executed the foregoing instrument, as OWNER: that he knows the seal as TENANT: that he knows the seal of said corporation; that the seal of said corporation; that the seal affixed to said instrument is such affixed to said instrument is such corporate seal; that it was so corporate seal; that it was so affixed by order of the Board of affixed by order of the Board of Directors of said corporation, and Directors of said corporation, and that he signed his name thereto by that he signed his name thereto by like order. like order. .................................. ................................... INDIVIDUAL OWNER INDIVIDUAL TENANT STATE OF NEW YORK, ss.: STATE OF NEW YORK, ss.: County of County of On this ___ day of __________, On this ___ day of ______________, 19___, before me personally came 19___, before me personally came __________________________________ __________________________________ to me known and known to me to be to me known and known to me to be the individual ___________________ the individual ___________________ described in and who, as OWNER, described in and who, as TENANT, executed the foregoing instrument executed the foregoing instrument and acknowledged to me that and acknowledged to me that __________________________________ ___________________________________ he executed the same. he executed the same. .................................. ................................... 6 GUARANTY FOR VALUE RECEIVED, and in consideration for, and as an inducement to Owner making the within lease with Tenant, the undersigned guarantees to Owner, Owner's successors and assigns, the full performance and observance of all the covenants, conditions and agreements, therein provided to be performed and observed by Tenant, including the "Rules and Regulations" as therein provided, without requiring any notice of non-payment, non-performance, or non-observance, or proof, or notice, or demand, whereby to charge the undersigned therefor, all of which the undersigned hereby expressly waives and expressly agrees that the validity of this agreement and the obligations of the guarantor hereunder shall in no wise be terminated, affected or impaired by reason of the assertion by Owner against Tenant of any of the rights or remedies reserved to Owner pursuant to the provisions of the within lease. The undersigned further covenants and agrees that this guaranty shall remain and continue in full force and effect as to any renewal, modification or extension of this lease and during any period when Tenant is occupying the premises as a "statutory tenant." As a further inducement to Owner to make this lease and in consideration thereof, Owner and the undersigned covenant and agree that in any action or proceeding brought by either Owner or the undersigned against the other on any matters whatsoever arising out of, under, or by virtue of the terms of this lease or of this guarantee that Owner and the undersigned shall and do hereby waive trial by jury. Dated:______________________________ 19______ _____________________________________________ Guarantor _____________________________________________ Witness _____________________________________________ Guarantor's Residence _____________________________________________ Business Address _____________________________________________ Firm Name STATE OF NEW YORK ) ss.: COUNTY OF ) On this ______ day of _____________________________, 19___, before me personally came _______________________ to me known and known to me to be the individual described in, and who executed the foregoing Guaranty and acknowledged to me that he executed the same. _______________________________________________ Notary IMPORTANT - PLEASE READ RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 33. 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the building; and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the building by reason of noise, odors, and/or vibrations, or interfere in any way with other Tenants or those having business therein, nor shall any animals or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Owner. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or on the inside of the demised premises if the same is visible from the outside of the premises without the prior written consent of Owner, except that the name of Tenant may appear on the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Owner may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by Owner at the expense of such Tenant, and shall be of a size, color and style acceptable to Owner. 6. No Tenant shall mark, paint, drill into, or in any way deface any part of the demised premises or the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or other similar floor covering is desired to be used an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Owner. Owner reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations of the lease or which these Rules and Regulations are a part. 9. Canvassing, soliciting and peddling in the building is prohibited and each Tenant shall cooperate to prevent the same. 10. Owner reserves the right to exclude from the building between the hours of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all persons who do not present a pass to the building signed by Owner. Owner will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Owner for all acts of such persons. 11. Owner shall have the right to prohibit any advertising by any Tenant which in Owner's opinion, tends to impair the reputation of the building or its desirability as a building for offices, and upon written notice from Owner, Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible or explosive fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the demised premises. 13. If the building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by the Owner with respect to such services. If Tenant requires air conditioning or ventilation after the usual hours, Tenant shall give notice in writing to the building superintendent prior to 3:00 P.M. in the case of services required on week days, and prior to 3:00 P.M. on the day prior in the case of after hours service required on weekends or on holidays. 14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the building without Owner's prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto and shall be done during such hours as Owner may designate. Address Premises ========================================== to ========================================== STANDARD FORM OF [SEAL] OFFICE [SEAL] LEASE The Real Estate Board of New York, Inc. (c)Copyright 1983. All rights Reserved. Reproduction in whole or in part prohibited. =========================================== Dated 19 Rent per Year Rent per Month Term From To Drawn by ___________ Checked by ____________ Entered by _________ Approved by ___________ ============================================ 7 RIDER TO LEASE BETWEEN BEMAR REALTY COMPANY, AS LANDLORD AND JACO ELECTRONICS, AS INC. TENANT 37. The annual rate at which rent ("Base Rent") shall be paid shall be adjusted as of the times and in the manner set forth herein. Base Rent shall be payable in equal monthly installments in advance, due on the first day of each calendar month at the address of Landlord. (A) For the purposes of this Section, the following definitions shall apply: (i) The term "Initial Base Rent" shall mean: Five Hundred Four Thousand Dollars ($504,000) per annum. The parties confirm that for purposes of this Lease, the agreed square footage of the Building is 72,000 square feet and the Initial Base Rent has been calculated on the basis thereof. (ii) The term "CPI" shall mean: "the Consumer Price Index for Urban Wage Earners and Clerical Workers (1982-4=100) issued monthly by the Bureau of Labor Statistics of the United States Department of Labor for New York, NY--Northeastern NJ (1982-4=100)" or any successor index appropriately adjusted. (iii) The term "Current CPI" shall mean: the CPI for the month of December of the year immediately preceding the year for which the Base Rent is being determined. By way of example, if the Base Rent is being determined for 1997, the Current CPI would be the CPI for December, 1996. (iv) The term "Base CPI" shall mean: the CPI published for the month of December of the year which precedes by two years, the year for which the Base Rent is being determined. By way of example, if the Base Rent is being determined for 1997, the Base CPI would be the CPI for December, 1995. (v) The term "Minimum Annual Escalation" shall mean: five (5%) percent. (vi) The term "CPI Change" shall mean a fraction, the numerator of which is the Current CPI for December of the year immediately preceding the year for which the Base Rent is being determined and the denominator of which is the Base CPI for December of the year which precedes by two years, the year for which the Base Rent is being determined. By way of example, if the Base Rent is being determined for 1997, the CPI Change would be: December, 1996 CPI ------------------ December, 1995 CPI (B) It is the intention of the parties that during each calendar year after the first calendar year, the Base Rent shall increase over the prior year Base Rent by the greater of five percent (5%) or the change in the CPI during the preceding year and that the 8 amount of Base Rent so determined for any calendar year shall be used in determining the amount of increase to Base Rent for the next following calendar year. Accordingly, (i) during the first calendar year included within the Term, the Base Rent shall be equal to the Initial Base Rent, and (ii) during each subsequent calendar year included within the Term, the Base Rent shall be equal to the Base Rent for the immediately preceding year, multiplied by the greater of (a) the Minimum Annual Escalation or (b) the CPI Change. (C) In the event that the CPI ceases to be used or if a substantial change is made in the terms or number of items contained in the CPI, the CPI shall be adjusted to the figure that would have been arrived at had the manner of computing the CPI in effect on the Commencement Date not been changed. In the event the CPI (or successor or substitute index) is not available, a reliable governmental or other non-partisan publication evaluating the information theretofore used in determining the CPI shall be used. (D) On the first day of January during each calendar year during the term year hereof beginning January 1, 1997, the Base Rent shall automatically be preliminarily increased by the Minimum Annual Escalation above the amount of the Base Rent for the immediately preceding year and when the Current CPI is published, the actual Base Rent shall be determined. If such determination results in a higher Base Rent than such preliminarily established Base Rent, then Tenant shall, within fifteen (15) days of notice from Landlord, pay to Landlord the difference in Base Rent for the number of months then elapsed, whereupon the Base Rent as so established shall be applicable for the balance of such calendar year. 38. ANYTHING HEREIN CONTAINED TO THE CONTRARY NOTWITHSTANDING, TENANT ACKNOWLEDGES AND AGREES THAT IT IS INTENDED THAT THIS IS A TRIPLE NET LEASE THAT IS COMPLETELY CAREFREE TO THE LANDLORD, EXCEPT AS EXPRESSLY SET OUT IN THIS LEASE; THAT THE LANDLORD IS NOT RESPONSIBLE DURING THE TERM FOR SUPPLYING ANY SERVICES, MAKING ANY STRUCTURAL OR NON-STRUCTURAL REPAIRS OR FOR ANY COSTS, CHARGES, EXPENSES OR OUTLAYS OF ANY NATURE WHATSOEVER ARISING FROM OR RELATING TO THE DEMISED PREMISES, OR THE USE AND OCCUPANCY THEREOF, OR THE CONTENTS THEREOF, OR THE BUSINESS CARRIED ON THEREIN; AND TENANT SHALL PAY ALL CHARGES, EXPENSES, COSTS, AND OUTLAYS OF EVERY NATURE AND KIND RELATING TO THE DEMISED PREMISES, EXCEPT AS EXPRESSLY SET OUT IN THIS LEASE. 39. (A) Tenant shall at its sole cost and expense procure, maintain and pay the premiums for liability insurance coverage naming as an insured Landlord, insuring and saving harmless the Landlord from all liabilities arising from any injury, or death, or damages sustained by any person(s), or the property of any person, firm, corporation, or entity 2 9 by reason of any use of the Premises, which insurance shall be carried by companies of adequate financial responsibility and licensed to do business in the State of New York, and shall be in such form that the limit of liability thereunder, for all injury, death and damage, in the case of injury and damage to any person in one accident shall be $5,000,000.00 and the limit of liability in case of injury to property or property damage, direct or consequential, shall be $1,000,000.00. Tenant agrees to deliver to Landlord, within five (5) days after the commencement of this lease, certificates evidencing the existence of the insurance referred to above, together with proof of payment of the premiums therefor, and to deliver renewal certificates from time to time during the term as renewals shall occur. (B) Tenant shall not do or permit any act or thing to be done in or to the Premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Landlord, or which shall or might subject Landlord to any liability or responsibility to any person or for property damage. Tenant shall not keep anything on or in the Premises, except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction. Tenant shall pay all costs, expenses, fines, penalties, or damages which may be imposed upon Landlord by reason of Tenant's failure to comply with the provisions of this Article. 40. Tenant shall purchase its utilities, including electricity, directly from the utility company supplying the same. 41. Tenant represents that all activities undertaken on or about the Premises, by Tenant, any subtenant, assignee, licensee, occupant or user of the Premises shall not violate any applicable federal, state or local statutes, rules or regulations (whether now existing or hereafter enacted or promulgated) or any judicial or administrative interpretation thereof, including any judicial or administrative orders or judgments (hereinafter collectively referred to as "statutes, rules or regulations"), governing the use, storage, transportation and disposal of any hazardous substances, including petroleum, petroleum products and other petrochemicals, asbestos, polychlorinated biphenyls, or any other hazardous or toxic materials or waste. The provisions of this Article shall survive the expiration or sooner termination of this Lease. 42. Tenant shall carry replacement value hazard insurance on the Premises at its sole cost and expense. To the extent Tenant and Landlord carry hazard insurance on the Premises or on the property therein, whether or not required hereby, each such policy of insurance shall contain a provision waiving subrogation against Landlord or Tenant as the case may be. Tenant hereby releases Landlord from any liability which Landlord may have for damage by fire or other casualty with respect to which Tenant shall be insured under a policy of insurance containing such provision waiving subrogation. Landlord hereby releases Tenant from any liability which Tenant may have for damage by fire or other 3 10 casualty with respect to which Landlord shall be insured under a policy of insurance containing such provision waiving subrogation. 43. Tenant shall not sublet the Premises nor any portion thereof, nor shall this Lease be assigned by Tenant without the prior written consent of Landlord, in each instance, which Landlord shall not reasonably withhold. Notwithstanding the foregoing, without releasing Tenant from its obligations herein, Tenant may assign or sublet the premises to corporations which are wholly-owned subsidiaries of Tenant. 44. In no event shall Tenant be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord has unreasonably withheld or unreasonably delayed its consent or approval. Tenant's sole remedy shall be an action or proceeding to enforce any such provision, or for specific performance, injunction or declaratory judgment. 45. (A) All notices by either party to the other shall be given by certified mail, return receipt requested. If intended for the Landlord, the same shall be mailed to the Landlord at its address set forth above on page one of this lease or such other address as the Landlord shall designate in writing. If intended for the Tenant, the same shall be mailed to Tenant at its address set forth above on page one of this lease or such other address as Tenant shall designate in writing. (B) Service of notice by any party to this lease to any other party shall be sufficient if forwarded by certified mail, return receipt requested, to the address of such other party as set forth above, or as hereafter changed by a notice, forwarded in accordance with the terms of this paragraph, by the party desiring to change the address to which notices directed to such party shall be addressed. Service by overnight delivery by Federal Express, shall be equivalent to service by certified mail under the terms of this paragraph provided that a signed receipt for delivery or a record of the name of the individual receiving delivery and the date of delivery is obtained. 46. Tenant may, at its own cost and expense, make such temporary modifications or alterations to the Premises as shall be required or necessary for the operation of Tenant's business (including the installation of temporary partitions) with Landlord's prior written consent, which consent shall not be unreasonably withheld, provided that no such modification or alteration shall result in any structural or permanent change to the Building, provided, further, that such partitions or alterations shall be removed at the end of the term of this Lease. Tenant shall hold Landlord harmless from any liability, charge or expense, including attorney fees and disbursements, resulting from any such modification or alteration. 47. Tenant shall make all repairs to the Premises, including structural and non-structural, interior and exterior repairs throughout the term of this Lease. 4 11 48. (A) Tenant, upon the expiration or earlier termination of this lease, shall peaceably and quietly surrender the Premises broom clean, free of debris, in good order, repair and condition, reasonable wear and tear excepted, and shall repair all damage to the Premises caused by or resulting from the removal of any removable property of Tenant or any subtenant. Any removable property of Tenant or any subtenant which shall remain in the Premises after the expiration of the term of this lease or the sooner termination thereof and the removal of Tenant from the Premises may, at the option of Landlord, be deemed to have been abandoned, and either may be retained by Landlord as its property or may be disposed in such manner as Landlord may see fit, without liability of Landlord. If such personal property or any part thereof shall be sold, Landlord may receive and retain the proceeds of such sale and apply the same, at its option, against the expense of the sale, the cost of moving and storage, any arrears of rent or additional rent payable hereunder and any damages to which Landlord may be entitled hereunder or pursuant to law. (B) Tenant will save Landlord harmless against all liability or expense (including attorneys' fees and disbursements) resulting from delay in surrendering the Premises, including any claims made by any succeeding tenant. Landlord and Tenant agree that the damage to Landlord resulting from any failure by Tenant timely to surrender the Premises will be substantial, will exceed the amount of monthly rent previously payable under this lease, and will be impossible of accurate measurement. Tenant, therefore, agrees that if possession of the Premises is not timely surrendered to Landlord, then Tenant will pay Landlord, at Landlord's option, as liquidated damages for each month and for each portion of any month during which Tenant holds over in the Premises, a sum equal to 125% of the rent and additional rent which was payable for the last month of the term of this lease. 49. If Tenant shall fail to fully comply with any of its obligations under this lease, Landlord, without thereby waiving such default and without liability to Tenant, may, but shall not be obligated to, perform the same for the account and at the expense of Tenant without notice in case of emergency and upon thirty (30) days prior notice in all other cases. Landlord may enter the Premises at any time to cure any default. Bills for all costs and expenses incurred by Landlord in connection with any such performance (including, without limitation, bills for any property, material, labor or services provided, furnished or rendered, and attorneys' fees and disbursements) shall be paid by Tenant as additional rent within thirty (30) days of demand. 50. In the event any payment of rent and/or additional rent required to be made hereunder shall not be made within ten (10) days after due under the provisions of this lease, Tenant shall pay to Landlord monthly, on the first day of each and every month, a sum equal to two (2) cents for each and every dollar of rent and/or additional rent which continues to be so overdue. It is expressly acknowledged and agreed that nothing herein contained shall be deemed or construed as permitting or allowing Tenant to make any payment of rent and/or additional rent at a time other than when same shall be required 5 12 to be paid pursuant to the provisions of this lease. The acceptance of the late charge referred to in this Article shall not in any manner preclude Landlord from enforcing any of its rights contained elsewhere in this lease. 51. Tenant agrees that the liability of Landlord under this lease and all matters pertaining to or arising out of the tenancy and the use and occupancy of the Premises shall be limited to Landlord's interest in the Premises, and in no event shall Tenant make any claim against or seek to impose any personal liability upon any individual, general or limited partner of any partnership, or principal of any firm, company or corporation that may now be or hereafter become the Landlord. 52. In the event of any conflict or inconsistency between the provisions of this Rider and the provisions of the printed form of this lease to which this Rider is annexed, the provisions of this Rider shall govern and control. 53. This lease may be executed in two or more counterparts and all counterparts so executed shall for all purposes constitute one agreement binding on all the parties hereto notwithstanding that all parties shall not have executed the same counterpart. 54. This lease shall be governed in all respects by the laws of the State of New York and shall be in all respects governed, construed, applied and enforced in accordance with the laws of said State and no defense given or allowed by the laws of any other state or government shall be interposed in any action or proceeding herein unless such defense is also given or allowed by the laws of the State of New York. BEMAR REALTY CO. By: /s/ Joel Girsky -------------------------------- JACO ELECTRONICS, INC. By: /s/ Jeffrey D. Gash -------------------------------- 6 EX-21.1 4 SUBSIDIARIES 1 EXHIBIT 21.1 The following subsidiaries, all of which were 100% directly owned, were included in the Registrant's consolidated financial statements. NAME OF SUBSIDIARY STATE OR JURISDICTION OF INCORPORATION - ------------------ -------------------------------------- Distel, Inc. California RC Components, Inc. Massachusetts Micatron Inc. New York Quality Components, Inc. Texas Jaco Overseas, Inc. Virgin Islands Nexus Custom Electronics, Inc. New Jersey Jaco Electronics Canada, Inc. Canada EX-23.1 5 CONSENT OF GRANT THORNTON LLP 1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated August 16, 1996 accompanying the consolidated financial statements and schedule of Jaco Electronics, Inc. as of June 30, 1995 and 1996 and for each of the three years in the period ended June 30, 1996 contained in this annual report of Jaco Electronics, Inc. on Form 10-K for the year ended June 30, 1996. We hereby consent to the incorporation by reference of the aforementioned reports in the Registration Statement of Jaco Electronics, Inc. on Form S-8/S-3 (File No. 33-89994, effective March 3, 1995). GRANT THORNTON LLP Melville, New York September 24, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND THE AUDITED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1996 JUN-30-1996 $164,161 $493,281 $22,974,984 $757,854 $30,089,508 $54,411,610 $7,382,240 $3,155,623 $61,142,729 $17,447,904 $9,391,270 $0 $0 $395,572 $33,907,983 $61,142,729 $167,149,385 $167,149,385 $133,105,227 $133,105,227 $26,246,741 $0 $1,347,639 $6,449,778 $2,600,000 $3,849,778 $0 $0 $0 $3,849,778 $1.08 $1.08
EX-99.8.1 7 AMENDMENT TO SECOND RESTATED LOAN AND SEC. AGMT. 1 EXHIBIT 99.8.1 [THE BANK OF NEW YORK COMMERCIAL CORPORATION LETTERHEAD] As of April 10, 1996 JACO ELECTRONICS, INC. ("Jaco") 145 Oser Avenue Hauppague, NY 11778 NEXUS CUSTOM ELECTRONICS, INC. ("Nexus") Prospect Street Brandon, VT 05733 Re: The Second Restated and Amended Loan and Security Agreement between Jaco and Nexus, as Debtor and The Bank of New York Commercial Corporation, as Lender, and each other Lender a party thereto, dated September 13, 1995, as amended and supplemented (the "Loan Agreement") Ladies/Gentlemen: In connection with the above referenced Loan Agreement, you have requested: (a) a prospective reduction in the Contract Rate (with all initially capitalized terms not defined herein, but which are defined in the Loan Agreement, to have the meaning therein set forth) applicable to LIBO Rate Loans first arising after the date hereof; and (b) the consent of the Lenders in order to permit a repurchase by Debtor of up to $3,000,000 in their capital stock. The purpose of this letter is to set forth our mutual understanding in respect of such matters as of the date hereof as follows: (a) Subdivision (A) of the definition of "Contract Rate" in the Loan Agreement (which immediately precedes the word "or" appearing therein) is hereby amended to read as follows: "(A) in the case of LIBO Rate Loans first arising, or first continued or converted thereto on or after 4/10/96, (i) the applicable LIBO Rate plus (ii) two percent (2%), and, in the case of LIBO Rate Loans first arising, or first continued or converted thereto before 4/10/96, (i) the applicable LIBO Rate plus (ii) two and one-half percent (2-1/2%);" (b) Each of the Lenders also hereby consents to the repurchase by Debtor of up to $3,000,000 in their capital stock, provided however that: (i) immediately following any such repurchase and to the extent that after giving effect thereto, the maximum amount that would then otherwise be permitted pursuant to the terms and conditions of Paragraph 4 (a) of the Loan Agreement 2 would exceed the outstanding balance of all Loans, inclusive of the Term Loans and all Letters of Credit, by an amount of not less than ten million dollars ($10,000,000); and (ii) any such repurchase occurs before the third anniversary of the Closing Date at the very latest; and (c) Furthermore, each of the undersigned additionally hereby confirm that: (i) as of May 1, 1996, a merger of Fleet Bank of New York, N.A. into NatWest Bank N.A. is to occur, with the resulting bank title of such merged institution being Fleet Bank, N.A., (ii) by reason of the merger and name change and as of May 1, 1996, any and all references to NatWest Bank N.A. in the Loan Agreement shall be replaced by references to Fleet Bank, N.A. f/k/a NatWest Bank N.A. instead, and (iii) accordingly, as of May 1, 1996, the Loan Agreement shall be amended, in order to reflect all of the matters described in this paragraph and the identification of Fleet Bank, N.A. as a "Lender" and as a "Secured Party" thereunder, with a corresponding amendment to be simultaneously made to all related agreements, instruments and documentation. Except to the extent herein specifically set forth, no change to the Loan Agreement is intended or implied and the Loan Agreement, modified as set forth above is hereby ratified and confirmed in all respects. If the foregoing is in accordance with your understanding, would you kindly sign below to so indicate. Very truly yours, THE BANK OF NEW YORK COMMERCIAL CORPORATION as Agent and a Lender By /s/ Dan Murray ---------------------------------------- Title: VP FLEET BANK, N.A. f/k/a NATWEST BANK N.A. as Lender By /s/ Alice Adelberg ---------------------------------------- Title: Vice President Read and Agreed: JACO ELECTRONICS, INC. By /s/ Jeffrey D. Gash, V.P. ---------------------------------------- Title: NEXUS CUSTOM ELECTRONICS, INC. By /s/ Jeffrey D. Gash, V.P. ---------------------------------------- Title: -----END PRIVACY-ENHANCED MESSAGE-----