UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MarkOne)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from to
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2351 South 2300 West, Salt Lake City, UT 84119
(Address of Principal Executive Offices) (Zip Code)
(801) 973-6090
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
<PAGE>
As of January 15, 1997, the issuer had 3,033,407 shares of its common
stock, par value $0.01 per share, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
FORM 10-QSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Financial Information 3
Balance Sheets at
December 31, 1996 and September 30, 1996 4-5
Statements of Earnings for the three months
ended December 31, 1996 and 1995 6
Statements of Cash Flows for the three months
Ended December 31, 1996 and 1995 7-9
Notes to Condensed Financial Statements 10-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in the Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6(a). Exhibits 18
Item 6(b). Reports on Form 8-K 18
Signatures 19
2
<PAGE>
PEN INTERCONNECT, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
Pen Interconnect, Inc. (the "Issuer"), has included the unaudited condensed
balance sheet of the Issuer as of December 31, 1996 and audited balance
sheet as of September 30, 1996 (the Issuer's most recent fiscal year),
unaudited condensed statements of earnings for the three months ended
December 31, 1996 and 1995, and unaudited condensed statements of cash
flows for the three months ended December 31, 1996 and 1995, together with
unaudited condensed notes thereto. In the opinion of management of the
Issuer, the financial statements reflect all adjustments, all of which are
normal recurring adjustments, considered necessary to fairly present the
financial condition, results of operations and cash flows of the Issuer for
the interim periods presented. The financial statements included in this
report on Form 10-QSB should be read in conjunction with the audited
financial statements of the Issuer and the notes thereto included in the
annual report of the Issuer on Form 10-KSB for the year ended September 30,
1996. The results of operations for the three months ended December 31,
1996 may not be indicative of the results that may be expected for the year
ending September 30, 1997.
3
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31 September 30,
1996 1996
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 21,221 $ 169,445
Receivables (Note C)
Trade accounts, less allowance for doubtful accounts of $251,167 and
$273,852 at December 31, and September 30, 1996,
respectively. 2,783,245 4,259,298
Current maturities of notes receivable 348,882 37,494
Income tax refund receivable 228,241 228,241
Inventories (Notes B and C) 4,768,486 6,198,392
Prepaid & other assets 549,104 386,494
Deferred tax asset 525,800 525,800
------------- -------------
Total current assets 9,224,979 11,805,164
PROPERTY AND EQUIPMENT, AT COST
(Note C)
Production equipment 2,469,195 3,010,575
Furniture and fixtures 623,392 717,821
Transportation equipment 49,373 49,373
Leasehold improvements 365,260 354,150
----------- --------------
3,507,220 4,131,919
Less accumulated depreciation 1,032,607 1,065,205
----------- ------------
2,474,613 3,066,714
OTHER ASSETS
Notes receivable, less current maturities 594,630 19,630
Investments 400,000 -
Goodwill (net) 1,562,692
1,589,313
Other 129,020 176,097
------------ -------------
2,686,342 1,785,040
----------- ------------
$14,385,934 $16,656,918
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Line of credit (Note C) $2,791,377 $4,969,864
Current maturities of long-term obligations 17,765 19,265
Current maturities of capital leases 53,435 59,878
Accounts payable 2,391,507 2,954,601
Accrued liabilities 416,843 611,739
Income taxes payable 272,823 -
-------------- ---------------
Total current liabilities 5,943,750 8,615,347
LONG-TERM OBLIGATIONS, less current
maturities 94,758 96,758
CAPITAL LEASE OBLIGATIONS, less current
maturities 123,564 150,382
DEFERRED INCOME TAXES 225,800 225,800
------------ -----------
Total liabilities 6,387,872 9,088,287
STOCKHOLDERS' EQUITY (Notes A and D)
Preferred stock, $0.01 par value, authorized
5,000,000 shares, none issued - -
Common stock, $0.01 par value, authorized
50,000,000 shares, issued and outstanding
3,033,407 shares at December 31 and
September 30, 1996, respectively. 30,334 30,334
Additional paid-in capital 7,431,669 7,431,669
Retained earnings 536,059 106,628
------------ -----------
Total stockholders' equity 7,998,062 7,568,631
----------- -----------
$14,385,934 $16,656,918
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended December 31,
1996 1995
<S> <C> <C>
Net sales $ 5,258,386 $ 4,570,313
Cost of sales 4,357,136 3,563,356
Gross profit 901,250
1,006,957
Operating expenses
Sales and marketing 202,319 264,307
Research and development 45,308 -
General and administrative 334,358 275,123
Depreciation and amortization 92,289 39,000
--------------- -------------
Total operating expenses 674,274 578,430
-------------- -----------
Operating income 226,976 428,527
Other income (expense)
Interest expense (140,163) (114,362)
Gain on sale of division (Note A) 611,912 -
Other income (expense) 16,258 (18,029)
----------------- ----------------
Total other income (expense) 488,007 (132,391)
--------------- -------------
Earning before income taxes 714,983 296,136
Provision for income taxes 285,551 115,840
-------------- --------------
Net earnings $ 429,432 $ 180,296
================ =============
Earnings per common share - Primary $ 0.14 $ 0.08
=================== ===============
- Fully dilutive $ 0.14 $ 0.08
=================== ===============
Weighted average common
shares outstanding - Primary 3,033,407 2,200,000
=============== ===========
- Fully dilutive 3,088,975 2,200,000
=============== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For three months ended December 31,
1996 1995
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 429,432 $ 180,296
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation and amortization 92,289 39,000
Bad debts (4,230) 4,570
Gain on sale of division (611,912) -
Changes in assets and liabilities
Trade accounts receivable 799,863 (350,889)
Inventories (214,430) (418,822)
Prepaid expenses and other assets (174,803) (109,817)
Deferred offering costs - 294,158
Accounts payable (285,665) (110,654)
Accrued liabilities (159,523) (67,789)
Income taxes 272,823 (172,184)
--------------- ---------------
Total adjustments (285,588) (892,427)
--------------- --------------
Net cash (used in) or
provided by operating activities 143,844 (712,131)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment (112,949) (211,045)
Proceeds from sale of division 2,000,000 -
Issuance of notes receivable - (12,393)
Collections on notes receivable 13,612 3,000
--------------- -------------
Net cash (used in) or provided
by investing activities 1,900,663 (220,438)
-------------- ----------
</TABLE>
(Continued)
7
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
For the three months ended December 31,
1996 1995
Cash flows from financing activities
<S> <C> <C>
Principal payments on notes payable - (1,600,000)
Proceeds from line of credit 5,488,922 3,635,006
Principal payments on line of credit (7,667,409) (4,226,688)
Principal payments on long-term obligations (14,244) (60,156)
Proceeds from sale of common stock - 4,860,398
-------------------- ---------------
Net cash (used in) or provided
by financing activities (2,192,731) 2,608,560
--------------- -------------
Net increase (decrease) in cash
and cash equivalents (148,224) 1,675,991
Cash and cash equivalents at beginning of period 169,445 376,488
---------------- ---------------
Cash and cash equivalents at end of period $ 21,221 $ 2,052,479
=============== ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 129,294 $ 117,507
Income taxes - 288,024
</TABLE>
(Continued)
8
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the three months ended December 31, 1996 and 1995
Noncash investing and financing activities
Effective November 1, 1996, the Company sold substantially all assets and
certain liabilities of the San Jose Division for $2 million cash and other
consideration. Assets and liabilities sold were as follows:
<TABLE>
<S> <C> <C>
Accounts receivable $680,420
Inventories 1,644,336
Prepaid expenses 34,177
Other assets 26,099
Property and equipment 638,373
Accounts payable (277,429)
Accrued liabilities (35,373)
Capital leases (22,515)
------------------
Net assets sold 2,688,088
Less non cash consideration received
Notes 900,000
Stock 400,000
1,300,000
Cash consideration 2,000,000
Gain on sale of division $ 611,912
=========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS AND DISPOSITION OF ASSETS
Effective April 1, 1996, the Company entered into an agreement to acquire
substantially all assets and assumed certain liabilities and the operations of
InCirT Technology, a division of the Cerplex Group, Inc. for $5.3 million
comprised of $3.5 million in cash and 333,407 shares of common stock. In
addition, the Company will deliver to Cerplex .09261 shares of its common stock
for every dollar of past due over 90 days accounts receivable of InCirt
Technology collected by the Company during the first 180 days after the date of
the acquisition closing up to a maximum of 55,568 shares of common stock. This
transaction was accounted for using the purchase method of accounting. The
results of operations of the aquired business have been included in the
financial statements since the effective date of the acquisition.
Effective January 1, 1996, the Company acquired the assets of Overland
Communication, Inc. dba MOTO- SAT by assuming that company's debt and offering
future stock distributions contingent upon achievement of performance
milestones. MOTO-SAT is a manufacturer of high-end satellite television systems
for recreational vehicles. This transaction was accounted for using the purchase
method of accounting; accordingly the purchased assets and liabilities have been
recorded at their fair value at the date of acquisition. The results of
operations of the acquired business have been included in the financial
statements since the effective date of the acquisition.
Effective March 24, 1995, the Company acquired substantially all assets and
assumed certain liabilities and the operations of Quintec Interconnect Systems
(QIS) of San Jose, California (San Jose Division) for $2,107,457 including
acquisition costs of $107,457. This transaction was accounted for using the
purchase method of accounting; accordingly the purchased assets and liabilities
were recorded at their estimated fair value at the date of acquisition.
However, effective November 1, 1996, the Company sold all of the net assets used
by the San Jose Division ("Division") to Touche Electronics, Inc. ("Touche"), a
subsidary of TMCI Electronics, Inc. ("TMCI"). The sales price for the net assets
of the Division was $3,300,000; consisting of $2,000,000 in cash, $900,000 in
promissory notes, and 53,669 shares of TMCI common stock with an agreed upon
guaranteed value of $400,000. In addition, Pen has the rights to receive
$700,000 in contingent earnouts for a potential total sale price of $4,000,000.
Pen originally purchased the Division in March 1995 for approximately
$2,100,000. As part of the transaction, Touche and TMCI also assumed certain
liabilities associated with the operations of the Division.
(Continued)
10
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS AND DISPOSITION OF ASSETS - CONTINUED
The $900,000 in promissory notes are comprised of two promissory notes in the
amounts of $400,000 and $500,000, respectively. The $400,000 promissory note
bears interest at one-half of one percent above the prime rate and is to be
fully amortized and paid monthly over a 24 month period. The $500,000 promissory
note bears interest at the rate of one-half of one percent above the prime rate,
is amortized over a 48 month period and is payable monthly with the entire
balance coming due on October 31, 1999.
In addition, Pen has the right to receive up to $700,000 of contingent earnouts.
These contingent earnouts are described as follows:
1. Accounts Receivable Over 120 Days. Pen is entitled to receive .13417 shares
of TMCI common stock for every $1 of past due over 120 days accounts
receivable of the Division as of October 31, 1996 collected within 180 days
of the closing date, up to a maximum of 13,417 shares of stock or $100,000.
2. Division Earnings. Pen has the right to receive up to 80,503 shares of TMCI
-------- ---------
common shares or cash equivalent at the option of TMCI contingent upon the
earnings of the Division. To the extent the earnings of the Division,
determined before interest, income taxes and corporate overhead
allocations, exceed $800,000 in any one year, Pen shall be entitled to
receive such excess on a dollar for dollar basis in the form of TMCI common
shares valued at $7.4532 per share until Pen has received up to $600,000 in
the aggregate worth of TMCI common stock or 80,503 shares or cash
equivalent at the option of TMCI. Pen has the right to earn these shares
during the calendar years 1997 through 2000. Based on the historical
earnings if the transaction had occurred in March 1995 (the date the
Division was purchased) the earnout amount would have been approximately
$600,000 at June 30, 1996. However, the actual earnout amount may vary
based on future earnings of the Division and the timing of such earnings.
The net assets sold by the Company include all of the assets used by the
Division in its operations including, but not limited to, inventory, accounts
receivable, furniture, fixtures and equipment, customer lists, intellectual
property and the assumption of accounts payable and other liabilities.
The sales price for the Division was determined on the basis of arms-length
negotiations between the Company, Touche and TMCI and was based in a large part
on the earnings and net assets of the Division. There was no material
relationship between the Company and TMCI prior to the acquisition however, the
Company leased space and sold product to Touche in the normal course of
business.
(Continued)
11
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS AND DISPOSITION OF ASSETS - CONTINUED
The results of operations include one month of operations for the three month
period ended December 31, 1996 and three months of operations for the period
ended December 31, 1995. The balance sheet excludes the Division as of December
31, 1996 and includes it as of September 30, 1996.
Pro forma data. The following unaudited pro forma summary represents the
combined results of operations as if the acquisitions of InCirT and Moto-Sat and
the disposition of the San Jose Division had occured on October 1, 1994, and do
not purport to be indicative of what would have occurred had the transactions
been made as of October 1, 1994, or of results which may occur in the future.
The pro forma weighted shares is reported as if outstanding at the beginning of
the period.
Three months ended December 31,
(amounts in thousands,
except share data)
1996 1995
Net sales $ 4,972 $ 7,579
Operating income 210 861
Net earnings 61 95
Earnings per share 0.02 0.03
Weighted shares outstanding 3,033,407 3,033,407
NOTE B - INVENTORIES
Inventories consist of the following:
December 31, September 30,
1996 1996
Raw materials $2,981,240 $ 3,780,800
Work-in-process 1,624,918 1,830,891
Finished goods 162,328 586,701
------- -----------
$ 4,768,486 $ 6,198,392
----------- ------------
12
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE C - CREDIT FACILITY
On April 8, 1996, the Company completed a new 3 year financing agreement with a
bank for a $6 million revolving line of credit with interest at one-half (.5)
percent over the prime rate. The line of credit is collateralized by accounts
receivable, inventory, property and equipment. This agreement requires that the
Company maintain certain financial ratios and meet specified minimum levels of
total assets, earnings and restrictions on the payments of dividends. Because
the Company did not comply with certain of these requirements, the bank
exercised its right to increase the interest rate to 2.5% over prime (10.75% at
December31, and September 30, 1996) until such time as these requirements are
met. This new line of credit replaced the previous $3,000,000 revolving line of
credit. The Company has borrowed $2,791,377 and $4,969,864 under the new line of
credit at December 31, and September 30, 1996, respectively (the Company still
has $3,208,623 available under the line at December 31, 1996). As a result of
the Company's failure to meet these requirements the Company was in default at
September 30, 1996 under the loan agreement. The lender has waived these
defaults as of September 30, 1996.
NOTE D - STOCK TRANSACTIONS
Initial public offering
On November 17, 1995, the Company successfully completed an initial public
offering of 1,000,000 shares of its Common Stock and warrants to purchase
1,000,000 shares of Common Stock. The initial public offering price was $6.00
per share of Common Stock and $0.10 per Warrant. Each Warrant was immediately
exercisable and entitled the registered holder to purchase one share of Common
Stock at a price of $6.50 and expires on November 17, 2000. The outstanding
Warrants may be redeemed by the Company upon 30 days' written notice at $0.05
per Warrant, provided that the closing bid quotations of the Common Stock have
averaged at least $9.00 per share for a period of any 20 trading days ending on
the third day prior to the day on which the Company gives notice.
(Continued)
13
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE D - STOCK TRANSACTIONS
Initial public offering - Continued
In connection with the offering, the Company granted the underwriter the right
to purchase up to 100,000 shares of common stock and 100,000 warrants. The
underwriter was also granted an over-allotment option of 150,000 shares of
common stock and/or warrants to purchase an additional 150,000 shares of common
stock. In December 1995, the underwriter exercised its option and purchased the
150,000 warrants. The option to purchase the 150,000 shares of common stock has
expired.
Shares issued in Acquisition
As discussed in Note A, the Company issued 333,407 shares of common stock in
connection with an acquisition in May 1996. In addition, the Company has agreed
to issue a maximum of 55,568 shares of common stock ("Contingent Stock") to The
Cerplex Group, Inc. based on collections of amounts over 90 days in the accounts
receivable .
14
<PAGE>
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides certain information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the three months
ended December 31, 1996 and 1995. This discussion should be read in conjunction
with the audited financial statements of the Company and notes thereto included
in the Annual Report of the Company on Form 10-KSB for the year ended September
30, 1996.
General
The Company develops and produces on a turnkey basis interconnection solutions
for original equipment manufacturers ("OEMs") in the computer, computer
peripheral and other computer related industries such as the telecommunications,
instrumentation and testing equipment industries. The Company's products connect
electronic equipment, such as computers, to various external devices (such as
video screens, printers, external disk drives, modems, telephone jacks,
peripheral interfaces and networks) and connect devices within the equipment
(such as power supplies, computer hard drives and PC cards). Most of the
Company's sales consist of custom cable interconnections developed in close
collaboration with its customers. The Company's customers include OEMs of
computers including mainframes, desktops, portables, laptops, notebooks, pens
and palmtops as well as OEMs of computer peripheral equipment such as modems,
memory cards, LAN adapters, cellular phones, faxes and printers. Other customers
include OEMs of telecommunications, instrumentation and testing equipment. The
InCirT Division is engaged in the electronic manufacturing services industry
(EMSI), and provides sophisticated ISO 9002-certified assembly and testing
services for complex printed circuit boards and subsystems. In addition, the
Company's MOTO-SAT Division is a manufacturer of high-end satellite television
systems for recreational vehicles.
15
<PAGE>
Results of Operations
Effective April 1, 1996, the Company acquired the net assets InCirT Technology
(InCirT), which has been accounted for as a purchase. The statement of earnings
data for the three months ended December 31, 1996 includes the results of
operations for this division.
Effective January 1, 1996, the Company acquired the net assets of MOTO-SAT which
has been accounted for as a purchase. The statement of earnings data for the
three months ended December 31, 1996 includes the results of operations for this
division.
Effective March 24, 1995, The Company acquired the net assets of QIS which has
been accounted for as a purchase. This division was sold on November 1, 1996
(see Note A). Therefore, the statement of earnings data include the results of
operations for only one month in the quarter ended December 31, 1996 and for
three months in the quarter ended December 31, 1995 amounts.
Net sales. Net sales for the Company increased approximately 15% for the three
month period ended December 31, 1996 as compared to the same period in the prior
year. This increase principally resulted from the inclusion of the recent
acquisitions of the InCirT Division and the MOTO-SAT Division which more than
offset the loss revenue from the sold division. There have been no material
increases in prices of any of the Company's products between the two periods and
the Company anticipates that prices will remain subject to competitive pressures
in the foreseeable future which may prohibit a significant price increase.
Cost of sales. Cost of sales as a percentage of net sales have increased to
approximately 83% for the three months ended December 31, 1996, as compared to
78% for the same period in the prior year. This increase in costs resulted
primarily from reduced margins from a few large customers and a loss of earnings
from the San Jose Division that was sold. The San Jose Division had earnings in
the prior year but was operating at a loss in the current year prior to its sale
on November 1, 1996. In addition, the Salt Lake City Division has increased its
per hour wages due to an increased demand for skilled workers in the region and
a very low unemployment rate.
Operating expenses. Operating expenses in total as a percent of net sales have
remained relatively constant at about 13% for both periods presented. These
costs have not decreased as a percent of sales because of the recent
acquisitions and the effects of assimilate the operations of the acquisitions.
In addition, the Company has added research and development costs with its
recent acquisitions and experienced an increase in depreciation and amortization
due to machinery and equipment purchases and the recording of goodwill.
16
<PAGE>
Other income and expenses. Other income and expenses (not including the gain on
the sale of the San Jose Division) have decreased as a percent of sales to
approximately 2% for the three months ended December 31, 1996 from approximately
3% for the same period in the prior year. The Company also sold its San Jose
Division as of November 1, 1996 which resulted in a current gain of
approximately $612,000. This Division was profitable in the prior year but was
not producing to the same level of sales and profits in the current year.
Net Earnings and Earnings Per Share. Net earnings for the first fiscal quarter
ended December 31, 1996 totaled $429,432 or $0.14 per share, compared with
$180,296 or $0.08 per share for the first fiscal quarter of 1995. This
significant increase resulted from a gain on the sale of a division of
approximately $367,000 or $0.12 per share and income from operations of
approximately $62,000 or $0.02 per share. These current per share amounts
occurred despite increasing the weighted shares outstanding by more than 833,000
shares in the current period compared to the prior years period.
Liquidity and Capital Resources
The Company has historically financed its operations through operating cash flow
and lines of credit. However, on November 17, 1995, the Company completed an
initial public offering which produced net proceeds of approximately $4.8
million. This offering significantly increased the cash and equity balances. It
also allowed the Company to retire the $1,600,000 debt associated with the QIS
acquisition, and to purchase additional inventory and equipment to support the
increased production levels.
Working capital increased to approximately $3.3 million at December 31, 1996
compared to approximately $3.2 million despite the sale of the San Jose Division
in November of 1996.The current ratio has increased to 1.6 at December 31, 1996
from 1.4 at September 30, 1996.
Management believes that additional working capital may be required to meet its
future operating costs, for business expansion opportunities and to adequately
support its China strategic manufacturing alliance in addition to its existing
cash balances, borrowings available under the line of credit, and cash generated
from operations. However, there can be no assurance that such additional
financing, if required, would be available on favorable terms if at all.
Inflation and Seasonality
The Company does not believe that it is significantly impacted by inflation.
Historically, the industry sales tend to decline in January, February, July and
August when activity in the personal computer industry as a whole is reduced.
17
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company has been a party to various legal proceedings
arising in the ordinary course of business. The Company is not currently a party
to any material litigation and is not aware of any litigation threatened against
it that could have a materially adverse effect on its business.
Item 2. Changes in the Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None during the
quarter.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
A: Reports on Form 8-K
During the quarter ended December 31, 1996, the Issuer filed a report
on form 8-K dated November 12, 1996 associated with the sale of the
San Jose Division .
B. Exhibits
10 Material contracts -
Asset Purchase Agreement for the sale of the San Jose Division to
Touche Electronics, a subsidiary of TMCI Electronics, Inc. The
Schedules to this agreement are in standard form and are omitted.
Registrant will on request of the Securities and Exchange
Commission supplementally file all omitted schedules.
11 Calculation of earnings per share.
27 Financial Data Schedule.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton
James S. Pendleton,
CEO and Director
By: /s/ Wayne R. Wright
Wayne R. Wright,
CFO, Principal Accounting
Officer and Director
19
<PAGE>
EXHIBIT 10
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement"), dated as of 12:01 a.m.,
November 1, 1996, by and among PEN INTERCONNECT, INC., a Utah corporation
("Company"), as seller, and TOUCHE ELECTRONICS, INC., a California corporation
("Purchaser"), as purchaser and TMCI ELECTRONICS, INC., a Delaware corporation
("TMCI").
RECITALS:
WHEREAS, the Company wishes to sell to Purchaser, and Purchaser wishes to
purchase from the Company all of the assets and business of the Company related
to or used in connection with its San Jose division ("Division"), upon the
terms, conditions and provisions hereinafter set forth; and
WHEREAS, Purchaser is the wholly-owned subsidiary of TMCI.
NOW, THEREFORE, in consideration of the mutual terms, conditions and other
agreements set forth herein, Purchaser, TMCI and the Company hereby agree as
follows:
ARTICLE I
DEFINITIONS
I.1 Certain Definitions. As used in this Agreement, the following terms
have the following meanings unless the context otherwise requires:
"Accounts Receivable" has the meaning specified in Section 2.1(k).
"Act" has the meaning specified in Section 3.19.
"Action or Proceeding" means any action, suit, proceeding, claim pending or
filed or arbitration by any Person or any investigation or audit by any
Governmental or Regulatory Body.
"Additional Common Stock" has the meaning specified in Section 2.5.
"Affiliate" with respect to any Person, means any other Person controlling,
controlled by or under common control with such Person, except that the
Purchaser, TMCI and the Company shall not be deemed to be affiliates of each
other after the Closing.
"Agreement" means this Asset Purchase Agreement.
20
<PAGE>
"Assets" has the meaning specified in Section 2.1.
"Assignable Contracts" has the meaning specified in Section 2.1(c).
"Assignment and Assumption Agreement" has the meaning specified in Section
5.1(g).
"Associate" means, with respect to any Person, any corporation or other
business organization of which such Person is an officer or partner or is the
beneficial owner, directly or indirectly, of ten percent (10%) or more of any
class of equity securities, any trust or estate in which such Person has a
substantial beneficial interest or as to which such Person serves as a trustee
or in a similar capacity and any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person or any child or
sibling of such Person or such Person's spouse.
"Assumed Liabilities" has the meaning specified in Section 2.2.
"Benefits" has the meaning specified in Section 6.5(c)(ii).
"Bentley" has the meaning specified in Section 4.5.
"best knowledge", "knowledge" or words to that effect shall mean, as to any
Person, to the best knowledge of such Person after due inquiry and
investigation.
"Books and Records" of any Person means all files, documents, instruments,
papers, books and records relating to the business, operations, conditions of
(financial or other), results of operations and assets and properties of such
Person, including without limitation, financial statements, Tax Returns and
related work papers and letters from accountants, budgets, pricing guidelines,
ledgers, journals, deeds, title policies, minute books, stock certificates and
books, stock transfer ledgers, contracts and other agreements, licenses,
customer lists, computer files and programs, retrieval programs, operating data
and plans and environmental studies and plans.
"Bulk Sales or Transfer Laws" means Sections 6101 et seq. of the Uniform
Commercial Code as adopted by the State of California.
"Business Day" means those days as defined in California Civil Code Section
9.
"Business" has the meaning specified in Section 2.1.
"Cash Payment" has the meaning specified in Section 2.4(a).
"Claim" has the meaning specified in Section 2.6.
"Claim Notice" has the meaning specified in Section 7.4(a).
"Closing" has the meaning specified in Section 2.8.
21
<PAGE>
"Closing Date" has the meaning specified in Section 2.8.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" has the meaning specified in Section 2.4(a).
"Company" has the meaning specified in the first paragraph of this
Agreement.
"Company Plan" means each "employee benefit plan" (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and each other policy, arrangement or practice that either covers any
employee of the Company or is maintained by the Company with respect to which
the Company makes or has an obligation to make contributions in connection with
the Business.
"Company's Restrictive Covenants" has the meaning specified in Section
6.5(c).
"Company's Restricted Customers" has the meaning specified in Section
6.5(b)(i).
"Confidential Company Information" has the meaning specified in Section
6.5(b)(ii).
"Contracts and other Agreements" means all executory contracts, agreements,
understandings, indentures, notes, bonds, loans, instruments, leases, mortgages,
franchises, licenses, commitments or other legally binding arrangements which
pertain to the Division or the Business.
"Delivery Date" has the meaning specified in Section 2.6.
"Division" has the meaning specified in the Recitals.
"document or other papers" means any document, agreement, instrument,
certificate, notice, consent, affidavit, letter, telegram, telex, statement,
schedule (including any Schedule to this Agreement) or exhibit (including any
Exhibit to this Agreement).
"Environmental, Health and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes
into ambient air, surface water, ground water, or lands or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes.
22
<PAGE>
"Extremely Hazardous Substance" has the meaning set forth in Sec. 302 of
the Emergency Planning and Community Right-to-Know Act of 1986, as amended.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means each entity required to be aggregated with the
Company under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of
ERISA.
"Escrow Agents" has the meaning specified in Section 2.6.
"GAAP" means generally accepted accounting principles.
"Governmental or Regulatory Body" means court, tribunal, arbitrator or any
government or political subdivision thereof, whether federal, state, county,
local or foreign, or any agency, authority, official or instrumentality of any
such government or political subdivision.
"Guaranty" has the meaning specified in Section 2.4(c).
"Holdback Stock" has the meaning specified in Section 2.6.
"Inventory" has the meaning specified in Section 2.1(d).
"Investor Rights Agreement" has the meaning specified in Section 3.19.
"Indemnified Party" has the meaning specified in Section 7.4.
"Indemnifying Party" has the meaning specified in Section 7.4.
"Intellectual Property" has the meaning specified in Section 2.1(a).
"IRS" means the Internal Revenue Service.
"Law" means any law, statute, rule, regulation, ordinance and other
pronouncement having the effect of law of the United States, any foreign country
or any domestic or foreign state, county, city or other political subdivision or
of any Governmental or Regulatory Body.
"Liability" or "Liabilities" means any direct or indirect indebtedness,
liability, claim, loss, damage, deficiency, obligation or responsibility, fixed
or unfixed, choate or inchoate, liquidated or unliquidated, secured or
unsecured, accrued, absolute, contingent or otherwise.
"Lien" means any lien, pledge, hypothecation, mortgage, security interest,
claim, lease, charge, option, right of first refusal, easement, servitude,
transfer restriction under any stockholder or similar agreement, encumbrance or
any other restriction or limitation whatsoever.
23
<PAGE>
"Loss" or "Losses" has the meaning specified in Section 7.2.
"Market Price" means with respect to the date of determination, the average
of the last reported sale price of one share of TMCI's Common Stock, par value
$0.001, for the twenty (20) trading days immediately preceding the date of
determination.
"Material Adverse Effect" means, in the case of any Person, any change or
changes or effect or effects that individually or in the aggregate are or may
reasonably be expected to be materially adverse to (i) the assets, properties,
business, operations, income, prospects or condition (financial or otherwise) of
such Person or the transactions contemplated by this Agreement or (ii) the
ability of such Person to perform its obligations under this Agreement.
"Material Contracts" means:
(a) The Assignable Contracts;
(b) Contracts and other Agreements with any current or former employee,
consultant, agent, other representative of the Business;
(c) Contracts or other Agreements for the sale, distribution or license of
any of the Assets or for the grant to any Person of any preferential
rights to purchase any of the Assets;
(d) Contracts and other Agreements under which the Company agrees to
indemnify any Person for use of the Assets;
(e) Contracts and other Agreements relating to the creation of Liens on
any of the Assets; and
(f) Contracts and other Agreements for the sale or lease of Tangible
Property.
"Order" means any writ, judgment, decree, injunction or similar order of
any Governmental or Regulatory Body, in each case whether preliminary or final.
"Person" means any individual, corporation, partnership, limited liability
company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental or Regulatory Body or other entity.
"Promissory Notes" has the meaning specified in Section 2.4(a).
"Purchase Price" has the meaning specified in Section 2.4(a).
"Purchaser" has the meaning specified in the first paragraph of this
Agreement.
"Purchaser's Restricted Customers" has the meaning specified in Section
6.5(a).
24
<PAGE>
"Records" has the meaning specified in Section 2.1(h).
"Restricted Area" has the meaning specified in Section 6.5(a).
"Restricted Period" has the meaning specified in Section 6.5(a).
"Restricted Products" has the meaning specified in Section 6.5(a).
"Restrictive Covenants" has the meaning specified in Section 6.5(e).
"Sale Completion Date" has the meaning specified in Section 2.5.
"Sale Proceeds" means the proceeds, net of brokerage commissions, from the
sale of the Common Stock by the Company pursuant to the Investor Rights
Agreement.
"Second Anniversary Date" has the meaning specified in Section 2.5.
"Security Agreement" has the meaning specified in Section 2.4(c).
"Shortfall Amount" means the amount (if any) of four hundred thousand
dollars ($400,000) subject to adjustment as provided in Section 2.7 over (i) the
Sale Proceeds, if the Holdback Stock is sold under a registration statement
pursuant to the Investor Rights Agreement, or (ii) otherwise, the value of the
Holdback Stock determined by multiplying number of shares of Holdback Stock by
the Market Price on the Second Anniversary Date.
"Tangible Property" has the meaning specified in Section 3.11.
"Tax Return" means any return, report, information return, or other
document (including any related or supporting information) filed or required to
be filed with any federal, state, local or foreign governmental entity or other
authority in connection with the determination, assessment or collection of any
Tax (whether or not such Tax is imposed on the Company) or the administration of
any laws, regulations or administrative requirements relating to any Tax.
"Tax" and "Taxes" means all taxes, charges, fees, levies or other
assessments imposed by any federal, state, local or foreign taxing authority,
whether disputed or not, including, without limitation, income, capital,
estimated, excise, property, sales, use, transfer, withholding employment,
payroll, and franchise taxes and such terms shall include any interest,
penalties or additions attributable to or imposed on or with respect to such
assessments.
"TMCI" has the meaning specified in the first paragraph of this Agreement.
"TMCI's Restrictive Covenants" has the meaning specified in Section 6.5(d).
25
<PAGE>
"Transfer Taxes" has the meaning specified in Section 6.3.
"Unaudited Financial Statements" has the meaning specified in Section 3.6.
ARTICLE II
ACQUISITION OF THE ASSETS;
ASSUMED LIABILITIES AND PURCHASE PRICE
II.1 Purchase of the Assets. On the terms and subject to the conditions set
forth in this Agreement, the Company hereby sells, transfers, assigns, conveys
and delivers to Purchaser, and Purchaser hereby purchases, acquires and accepts
from the Company, all of the right, title and interest of the Company in and to
all of the assets (excluding intercompany and cash accounts), properties and
rights owned by the Company, and which either (a) are used primarily by the
Company in the business and operations of the Division as such business is
conducted on the date hereof ("Business"), or (b) are held at the primary
location of the Business, except as set forth in Section 2.1(l), both tangible
and intangible, free and clear of any Liens (the foregoing are hereinafter
collectively referred to as the "Assets"). The Assets include, without
limitation, all of the right, title and interest of the Company in or to the
following:
(a) Intellectual Property. Except as set forth in Section 6.5(b), all
------------ ---------
intellectual property rights used or held for use in the conduct of
the Business (including the Division's goodwill therein) and all
rights, privileges, claims, causes of action and options relating to
the Business or its assets or properties, including but not limited to
trademarks, copyrights, whether or not registered, applied for, or
under common law, and internet domain registrations, if any, trade
names, service marks, goodwill, trade secrets (including the property
defined as "trade secrets" in the California Uniform Trade Secrets
Act), know-how, manufacturing methods, engineering drawings and
specifications, inventions, patents or patents pending, if any, or
improvements thereto (whether or not patentable or reduced to
practice) and all other proprietary information used in the conduct of
the Business (the "Intellectual Property"), as set forth in Schedule
2.1(a), including, but not limited to, all trademarks and servicemarks
used in or useful to, the Business and any registered copyrights or
patents. Notwithstanding anything to the contrary contained herein,
neither Purchaser nor TMCI shall have any right to the name "Pen
Interconnect" or any derivative thereof;
(b) IP Licenses. All licenses, sublicenses and other agreements used in
the Business under which the Company is a licensor or licensee of any
Intellectual Property (the "IP Licenses"), as set forth on Schedule
2.1(b);
(c) Assignable Contracts. All of the contracts and other agreements used
in the Business to which the Company is a party and which are utilized
in the conduct of the Business, as set forth on Schedule 2.1(c) (the
"Assignable Contracts");
26
<PAGE>
(d) Inventory. All inventories or work-in-process, finished goods,
---------
merchandise, demonstration equipment, office and other supplies,
parts, packaging materials, advertising materials and other
accessories related thereto which is otherwise used or held for use by
the Division or in the conduct of the Business, which are held at, or
are in transit from or to, the locations at which the Business is
conducted or including any of the foregoing purchased subject to any
conditional sales or title retention agreement in favor of any other
Person, together with all rights of the Company against suppliers of
such inventories (the "Inventory"), all as set forth on Schedule
2.1(d);
(e) Tangible Personal Property. In addition to the Inventory separately
-------- -------- ---------
described above, all furniture, fixtures, equipment, tooling, molds,
and dyes, machinery and other tangible personal property used or held
primarily for use in the conduct of the Business or which are held at
the primary location at which the Business is conducted, including
those located at suppliers' premises or customers' premises on
consignment, or otherwise used or held for use by the Company in the
conduct of the Business, including any of the foregoing purchased, all
as set forth on Schedule 2.1(e);
(f) Warranties. All rights of the Company under or pursuant to all
warranties, representations and guarantees made by suppliers,
manufacturers or contractors in connection with products sold to or
services provided to the Company for the Division or the Business, or
affecting the IP Licenses, property, machinery or equipment used in
the conduct of the Business;
(g) Telephone Numbers and E Mail Accounts. All rights in and to the
telephone numbers and E Mail accounts of the Division, subject to the
regulations of the California Public Utilities Commission;
(h) Books and Records. All books, records and information or copies
thereof relating to the Assets or the Business except for records
pertaining to employees or consultants not employed or retained by the
Company or the Division on November 1, 1996 (the "Records");
(i) Advertising. All customer and market record referral data and
materials, and all advertising and promotional literature and material
relating to the Assets, including without limitation, catalogs,
brochures, pamphlets, art work and printing plates;
(j) Customer List. Subject to the restrictions of Section 6.5(b), the list
of all of the past and current customers of the Division;
(k) Accounts Receivable. All accounts receivable of the Division
including, without limitation, those set forth on Schedule 2.1(k)
("Accounts Receivable"); and
(l) Other Assets. Any and all other assets used primarily in connection
with the operation of the Business or which are held at the primary
location of the Business, as set forth on Schedule 2.1(l)(1) except
for those assets set forth on Schedule 2.1(l)(2).
27
<PAGE>
II.2 Assumed Liabilities. Subject to the terms and conditions set forth
herein, Purchaser hereby assumes those liabilities of the Company set forth on
Schedule 2.2 and agrees to perform and discharge promptly and fully when due all
of the outstanding obligations of the Company under the Assignable Contracts as
listed in Schedule 2.1(c) arising and to be performed on or after the Closing
Date (collectively, the "Assumed Liabilities"). In the event of any claim
against Purchaser with respect to any of the Assumed Liabilities hereunder,
Purchaser shall have, and the Company hereby assigns to Purchaser, any defense,
counterclaim, or right of set off which would have been available to the Company
if such claim had been asserted against the Company. The Company agrees to
cooperate with Purchaser in the defense of any such claim against Purchaser,
provided that Purchaser shall be obligated to reimburse the Company for
out-of-pocket expenses incurred by it in cooperating with Purchaser.
II.3 Liabilities Not Assumed. Except for the Assumed Liabilities, Purchaser
does not assume nor have any responsibility for or with respect to, nor have any
duty under any other obligation, debt, agreement or Liability of the Company.
II.4 Purchase Price.
(a) Subject to adjustment as provided herein and in addition to the
Assumed Liabilities, the purchase price (the "Purchase Price") for the
Assets to be purchased by Purchaser from the Company hereunder shall
be a total of four million dollars ($4,000,000) payable at Closing as
follows: (i) two million dollars ($2,000,000) to be a cash payment
(the "Cash Payment"), (ii) a promissory note in the face amount of
five hundred thousand dollars ($500,000) in substantially the form of
Exhibit "A", (iii) a promissory note in the face amount of four
hundred thousand dollars ($400,000) in substantially the form of
Exhibit "B", and (iv) the issuance by TMCI to the Company of fifty
three thousand six hundred sixty-nine (53,669) shares of its common
stock, par value $0.001 per share ("Holdback Stock"; (v) the issuance
by TMCI to the Company of eighty thousand five hundred three (80,503)
shares of its common stock, par value $.001 per share, subject to the
terms and conditions of the Earn Out Agreement in substantially the
form of Exhibit "C" hereto and (vi) the right of the Company to
receive up to one hundred thousand dollars ($100,000) pursuant to
Section 2.7 hereof. The TMCI common stock delivered to the Company
pursuant to (iv) and (v) herein is collectively referred to as the
"Common Stock". The number of shares of Common Stock to be delivered
to the Company at Closing is determined by dividing one million
dollars ($1,000,000) by $7.4532, which is the average of the last
reported sale price of one share of TMCI's common stock for the twenty
(20) trading days immediately preceding November 1, 1996. Any fraction
of a share resulting therefrom will be remitted to the Company in cash
and no fractional shares shall be issued. The promissory notes
referred to in (ii) and (iii) above are collectively referred to as
the "Promissory Notes."
(b) The Cash Payment shall be paid to the Company by Purchaser on the
Closing Date by delivery of certified funds or by wire transfer of
immediately available funds to an account designated by the Company.
28
<PAGE>
(c) The payment of the Promissory Notes will be secured by the Assets, as
evidenced by a Security Agreement in substantially the form of Exhibit
"D" ("Security Agreement"), and the personal guaranty of Rolando
Loera, the president of Purchaser in substantially the form of Exhibit
"E" ("Guaranty").
II.5 Additional Consideration. Within ten business days after the second
anniversary of the issuance of the Holdback Stock (as defined below) to the
Company ("Second Anniversary Date"), or if the Holdback Stock is sold pursuant
to the Investor Rights Agreement, within thirty (30) days following the date of
the completion of such sale (the "Sale Completion Date"), Purchaser shall
deliver to the Company a sum of cash equal to the Shortfall Amount, provided
that Purchaser may, at its sole option, pay all or any portion of the Shortfall
Amount by the delivery of a number of additional shares of TMCI's common stock
(the "Additional Common Stock") equal to the Shortfall Amount (or portion
thereof), if any, divided by (x) the Market Price on the Second Anniversary Date
if the Additional Common Stock is delivered pursuant to this Section 2.5, or (y)
the Market Price on the Sale Completion Date if the Additional Common Stock is
delivered pursuant to a sale of the Holdback Stock under the Investor Rights
Agreement. Any Additional Common Stock which is delivered to Pen pursuant to a
sale of the Holdback Stock under the Investor Rights Agreement will be
"unregistered" securities under the Act.
II.6 Common Stock Holdback. As security for the Company's representations
and warranties in Article III and the Company's indemnification obligations in
Article VII, Purchaser shall deliver the Holdback Stock to an escrow account
(the "Escrow Account") in which Parsons Behle & Latimer will serve as escrow
agent (the "Escrow Agent"). Subject to any reductions in the amount of the
Holdback Stock pursuant to this Section 2.6, the Holdback Stock shall be
released to the Company on the earlier of (i) the date which is one (1) year
after the Closing Date, or (ii) the effective date of a registration statement
with the United States Securities and Exchange Commission (the "Delivery Date"),
except to the extent there is any claim pending under this Section 2.6 on any
amount of such Holdback Stock. To be entitled to reimbursement under this
Section 2.6, Purchaser must comply with the provisions of this Section, but
compliance with this section will not relieve Purchaser of its obligations to
comply with the provisions of Article VII hereof.
(a) Delivery of Notice. Purchaser shall provide notice to the Company
within thirty (30) days of the discovery of any breach of the
representations and warranties contained in Article III or the
indemnities set forth in Article VII, and such notice shall detail (i)
the nature and amount of any such breach, (ii) the Purchaser's right
to indemnification from the Company and (iii) the nature and amount of
a cure acceptable to the Purchaser (the "Claim").
(b) Company's Right to Object. The Company shall have twenty (20) days
--------- ----- -- -------
from the date of its receipt of any notice under Section 2.6(a) to
deliver a written objection to such Claim to Purchaser and the Escrow
Agents. If the Company does not object to the Claim within such time,
then it shall have twenty (20) days, after expiration of the initial
twenty (20) day period, to satisfy the Claim and notify Purchaser that
the Claim is satisfied, without reduction in the amount of the
Holdback Stock. Purchaser shall, thereafter, notify the Company that
it approves or does not approve the Company's satisfaction of the
Claim, which approval shall not be unreasonably withheld.
29
<PAGE>
(c) Procedure to Arbitrate Disputes. If the Company objects to the Claim
--------- -- --------- ---------
pursuant to Section 2.6(b), or if Purchaser does not approve the
Company's satisfaction of a Claim, then the parties shall have sixty
(60) days to negotiate a satisfactory settlement of the Claim. Such
sixty (60) days shall be measured from the time that either (i)
Purchaser receives the Company's objection to the Claim, or (ii)
Purchaser notifies the Company that it does not approve the Company's
satisfaction of the Claim. If the parties are unable to negotiate a
satisfactory settlement of their dispute regarding any Claim within
sixty (60) days, then either party may submit the dispute to
arbitration in accordance with Section 8.15 hereof.
(d) Reduction of the Amount of Holdback Stock. If it is ultimately
--------- -- --- ------ -- -------- ------
determined that the Company is indebted to Purchaser under this
Section 2.6, then the Escrow Agents shall, upon receipt of
instructions from an appropriate officer of the Company, release, and
deliver to Purchaser, the number of shares of the Holdback Stock equal
in value to the dollar amount of the indebtedness. The number of
shares shall be determined by dividing the amount of the indebtedness
by the average of the last reported sales price of one share of the
Common Stock for the twenty (20) trading days immediately prior to the
date that Purchaser became entitled to recover under this Section 2.6.
(e) Close of Escrow/Escrow Instructions. The escrow created hereby shall
----- -- ------------- -------------
close on the earlier of (i) the Delivery Date, or (ii) the date that
the number of shares of Holdback Stock is reduced to zero. The parties
shall prepare escrow instructions and deliver them to the Escrow
Agents. The escrow instructions shall provide, at a minimum, that none
of the Holdback Stock shall be released from escrow prior to the
Delivery Date unless both Escrow Agents authorize such release in
writing. The instructions shall also require the Escrow Agents to
deliver the Holdback Stock, or the remaining portion thereof, to the
Company on the Delivery Date.
II.7 Additional Stock for Collection of Accounts Receivable. Purchaser will
deliver to the Company .13417 shares of its common stock ("Additional Stock")
for every $1.00 of the Division's past due over 120 days accounts receivable as
of October 31, 1996 collected by the Purchaser and the Company jointly within
one hundred eighty (180) days of the Closing Date, up to a maximum of thirteen
thousand four hundred seventeen (13,417) shares of stock. Purchaser and the
Company agree to use practices consistent with their ordinary business practices
in collecting the past due over 120 days accounts receivable of the Division as
set forth on Schedule 2.1(k). The parties acknowledge that as of October 31,
1996 the past due over 120 days accounts receivable is in the amount of
$272,427. The certificate representing the stock to be issued to the Company
pursuant to this Section 2.7 will be delivered to the Company by Purchaser
within 30 days after the expiration of the period during which Purchaser may
collect the past due over 120 days accounts receivable. Such stock shall become
Holdback Stock and shall be governed by the provisions of Section 2.6 hereof.
II.8 Closing Date. The consummation of the purchase and sale of the Assets
(the "Closing") shall be held simultaneously with the execution of this
Agreement ("Closing Date"). The Closing may be held by the Purchaser, TMCI and
the Company exchanging facsimile signature pages and complying with the
conditions set forth in Article V.
30
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Purchaser and TMCI with the
knowledge that Purchaser and TMCI are relying on such representations and
warranties in entering into this Agreement, and that the statements contained in
this Article III are true, correct, complete and current as of the date of this
Agreement.
III.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Utah and has all requisite corporate power and authority to (a) enter into this
Agreement and to perform its obligations hereunder, (b) own, lease and operate
its properties and assets used in the Business as they are now owned, leased and
operated and (c) carry on its business, including, without limitation, the
Business, as now presently conducted. The Company is duly qualified to do
business and is in good standing in each jurisdiction, including, but not
limited to, California, in which the nature of its business or properties makes
such qualification necessary, except where the failure to do so would not have a
Material Adverse Effect after the Closing Date on the Business, the Assets or
Purchaser.
III.2 Validity and Execution of Agreement. The Company has the full legal
right, capacity and power and has all requisite corporate authority and approval
required to enter into, execute and deliver this Agreement and to perform fully
its obligations hereunder. The board of directors of the Company has approved
the transactions contemplated pursuant to this Agreement and each of the other
documents contemplated by this Agreement. Pursuant to the provisions of the Utah
Code Annotated, the shareholders of the Company are not required to approve the
transactions contemplated by this Agreement. This Agreement constitutes the
valid and binding obligation of the Company and is enforceable against it in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general and by general
principles of equity.
III.3 No Conflict. Except as set forth on Schedule 3.3, neither the
execution and delivery of this Agreement by the Company nor the performance by
the Company of the transactions contemplated hereby will: (a) violate or
conflict with any of the provisions of the Articles of Incorporation or By-Laws
(or similar governing documents) of the Company; (b) except as would not have a
Material Adverse Effect after the Closing Date on the Company, the Business, the
Assets or Purchaser, violate, conflict with, result in the acceleration of, or
entitle any party to accelerate the maturity or the cancellation of the
performance of any obligation under, or result in the creation or imposition of
any Lien in or upon any of Assets or constitute a default (or an event which
might, with the passage of time or the giving of notice, or both, constitute a
default) under any mortgage, indenture, deed of trust, lease, contract, loan or
credit agreement, license or other instrument to which the Company is a party or
by which its or any of its properties or assets may be bound or affected; or (c)
except as would not have a Material Adverse Effect after the Closing Date on the
Company, the Business, the Assets or Purchaser, violate or conflict with any
provision of any Law or Order applicable to the Company or require any consent
or approval of or filing or notice with any
31
<PAGE>
Governmental or Regulatory Body. The Company has obtained all necessary and
proper consents from its lenders, customers, suppliers, and similar parties, as
necessary to prevent or avoid a Material Adverse Effect after the Closing Date
on the Business, the Assets, the Division or Purchaser by reason of a failure by
the Company to obtain such consent.
III.4 Books and Records. Except as set forth on Schedule 3.4, the Records
of the Company as supplied to Purchaser are true, correct, complete and current
in all material respects.
III.5 Certificate of Incorporation and By-Laws. The Company has heretofore
delivered to Purchaser true, correct, complete and current copies of the
Certificate or Articles of Incorporation and By-Laws or similar governing
documents of the Company as in full force and effect on the date hereof.
III.6 Financial Statements. The unaudited financial statements (the
"Unaudited Financial Statements") of the Division for the year ended September
30, 1996 and the period ended October 31, 1996, attached hereto as Schedule 3.6
were prepared in accordance with GAAP consistently applied for the periods
covered thereby. The statement of income contained therein fairly presents the
results of operations of the Division for the year ended on such date.
III.7 No Material Adverse Change. Except as set forth on Schedule 3.7,
since September 30, 1996, to the Company's knowledge there has been no material
adverse change in the assets, properties, business, operations, income or
condition (financial or otherwise) of the Business, nor is any such change
threatened, nor has there been any damage, destruction or loss which could have
a Material Adverse Effect after the Closing Date on the Business, the Assets or
Purchaser, whether or not covered by insurance.
III.8 Tax Matters. All Tax Returns required to be filed with respect to the
Company have been timely filed and all such Tax Returns were correct and
complete in all respects. The Company has timely paid to the appropriate tax
authorities all Taxes due or claimed to be due from it by any Tax authority. No
adjustment relating to any Tax Return required to be filed with respect to the
Company has been proposed formally or informally by any Tax authority, and to
the best knowledge of the Company no basis exists for any such adjustment. The
Company is not currently the beneficiary of any extension of time within which
to file any Tax Return. There are no liens for Taxes upon assets or properties
of the Company. There is no examination or proceeding pending or, to the
knowledge of the Company, threatened by any tax authority relating to the
determination, assessment or collection of, or any delinquencies in filing
related to any Taxes of the Company. Notwithstanding anything contained herein
to the contrary contained herein, the Company shall not be deemed to be in
breach of this Section 3.8 if the breach of any of the statements contained in
this Section 3.8 does not have a Material Adverse Effect after the Closing Date
upon the Assets, the Division, the Business or the Purchaser. The Company holds
a valid California resale certificate.
III.9 Litigation. Except as set forth on Schedule 3.9, there are no
outstanding Orders by which the Company, or any of its securities, assets,
properties or businesses are bound. Except as set forth on Schedule 3.9, there
is no Action or Proceeding pending or, to the knowledge of the Company
threatened (whether or not the defense thereof or liabilities in respect thereof
are covered by insurance)
32
<PAGE>
against or affecting the Company or any of its assets, properties or businesses,
including without limitation the Business and the Assets, which if adversely
decided would have a Material Adverse Effect after the Closing on the Company,
the Purchaser, the Business, the Division or the Assets, nor are there any facts
known to the Company which are likely to give rise to any such Action or
Proceeding which if adversely decided, would have a Material Adverse Effect
after the Closing on the Company, the Purchaser, the Business, the Division or
the Assets.
III.10 Contracts and Other Agreements. True, complete and current copies of
all of the Material Contracts have been delivered to Purchaser or made available
to Purchaser for inspection. A list of the Material Contracts is attached hereto
as Schedule 3.10. All of the Material Contracts are valid, subsisting, in full
force and effect and binding upon the Company and to the best knowledge of the
Company, the Company has satisfied in full or provided for all of its
liabilities and obligations thereunder requiring performance prior to the date
hereof in all material respects, is not in default under any of them, nor does
any condition exist that with notice or lapse of time or both would constitute
such a default. To the knowledge of the Company, no other party to any such
Material Contract is in default thereunder, nor does any condition exist that
with notice or lapse of time or both would constitute such a default. Except as
separately identified on Schedule 3.10, no approval or consent of any Person is
needed for the Material Contracts to continue to be in full force and effect,
and all of the Company's rights under Material Contracts to be assigned to
Purchaser hereunder will be conveyed to Purchaser, upon consummation of the
transactions contemplated by this Agreement.
III.11 Tangible Property. Schedule 3.11 sets forth a true, complete,
correct and current list of all categories of tangible personal property (other
than Inventory), including, without limitation, equipment, furniture, leasehold
improvements, fixtures, vehicles, structures, any related capitalized items and
other similar tangible property, in each case owned or leased by the Company and
material to the Business (collectively, the "Tangible Property") together with a
description of all leases or subleases of Tangible Property to which the Company
(on behalf of the Business) is the lessor, sublessor, lessee or sublessee and
all options to purchase or sell the underlying property. The Tangible Property
is free from material defects (patent and latent), has been maintained in
accordance with normal industry practice, is in good operating condition and
repair (subject to normal wear and tear), and is suitable for the purposes for
which it presently is used.
III.12 Intellectual Property.
(a) The Company owns or is licensed to use all "Intellectual Property"
that is necessary for the conduct of the Business, free and clear of
any Liens of any kind that may interfere with the conduct of the
Business. Except as disclosed in Schedule 3.12, the Company is not a
party to any agreement limiting the use of Intellectual Property.
(b) No litigation is pending or, to the knowledge of the Company,
threatened, that challenges the validity, enforceability, ownership
of, or right to use, sell, license or dispose of any Intellectual
Property, nor does the Company know of any valid grounds for any such
claim.
33
<PAGE>
(c) None of the material trade secrets of the Company as are material to
the Business has been disclosed to any Person, except as required
pursuant to the filing of a patent application by the Company, unless
such disclosure was necessary and the use was made pursuant to a
confidentiality agreement. All such trade secrets are protected
against their use by other Persons to an extent and in a manner
customary in the industries in which the Company operates, except that
the Company has not required its employees to sign confidentiality or
similar agreements.
III.13 ERISA. The Company has provided to the Purchaser a true, correct and
complete copy of each Company Plan, or if no copy exists, a written description
thereof. All of the Company Plans are, and have been maintained and
administered, in all material respects in compliance with all applicable
requirements of ERISA and the Internal Revenue Code of 1986, as amended (the
"Code"), to the extent such Company Plans are subject to ERISA and the Code.
Each Company Plan that is intended to be a qualified plan under Section 401(a)
of the Code has received all necessary favorable determination letters from the
Internal Revenue Service and, to the Company's knowledge, such Company Plans
have not been operated in any way which would adversely affect their qualified
status. As a result of the transactions contemplated by this Agreement, the
Purchaser shall have no liability with respect to any Company Plan maintained by
the Company or any trade or business under common control with the Company
within the meaning of Section 414(b), (c) or (m) of the Code. Other than usual
claims for benefits arising under the Company Plans in the normal course, there
are no pending claims, and the transactions contemplated by this Agreement will
not give rise to any material claims, suits or proceedings which might cause the
Company to incur liability to any employee under any Company Plan, including any
liability for severance payments to any employee or former employee of the
Company, which may have a Material Adverse Effect after the Closing Date upon
the Assets, the Division, the Business or the Purchaser.
III.14 Title; Liens. At the Closing, Company will deliver to Purchaser one
or more Forms UCC-2 -- Termination Statement from National Bank of Canada. At
such time as the Termination Statements are properly filed with the appropriate
state agency, except as set forth on Schedule 3.14, the title to the Assets will
be in each case free and clear of any Lien and the Company will have good and
marketable title to the Assets.
III.15 Compliance with Laws. Except as set forth in Schedule 3.15, the
Company (a) is in compliance with all, and not in violation of any, and has not
received any claim or notice that it is not in compliance in any material
respect with, or that it is in violation in any material respect of, any Law or
Order to which the Business or any of the Assets (including the use thereof) are
subject and (b) has not failed to obtain or to adhere to the requirements of any
governmental permit, license, registration and other governmental consent or
authorization necessary in connection with the Business or the Assets, which
failure would have a Material Adverse Effect after the Closing Date on the
Business, the Assets, the Division or Purchaser. The Company has advised
Purchaser in writing of any proposed health or other law, rule or regulation
which, to its knowledge, could reasonably be expected to have a Material Adverse
Effect on the Business, the Division, the Assets or Purchaser on or which, to
its knowledge, could reasonably be expected to require substantial new capital
investments by Purchaser in the Business.
34
<PAGE>
III.16 Entire Business. Except as otherwise provided herein, the sale of
the Assets to be sold by the Company to Purchaser pursuant to this Agreement
will convey to Purchaser the entire Business and all of the tangible and
intangible property used by the Company (whether owned, leased or held under
license by the Company, by any of the Company's Affiliates, Associates or by
others, including, without limitation, any of the assets of the Business)
primarily in connection with the conduct of the Business as heretofore conducted
by the Company or held at the primary location of the Business. Except as
disclosed in Schedule 3.16, there are no material facilities, services, assets
or properties shared with any other Person which are used by the Company in the
Business.
III.17 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Company directly
with Purchaser without the intervention of any person on behalf of the Company
in such manner as to give rise to any valid claim by any Person against
Purchaser for a finder's fee, brokerage commission or similar payment. Any
brokers or finders retained by the Company or the Division shall be entitled to
a fee only upon completion of the transactions contemplated by this Agreement.
The Company agrees that it shall be solely responsible to pay the fees and costs
of any broker or finder which it has retained.
III.18 Environmental, Health and Safety Laws.
(a) Each of the Company, its Affiliates and, to its knowledge, it's
predecessors has complied with all Environmental, Health and Safety
Laws, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced
against any of them alleging any failure so to comply. Without
limiting the generality of the preceding sentence, each of the
Company, its Affiliates and, to its knowledge, its predecessors has
obtained and been in compliance with all of the terms and conditions
of all permits, licenses, and other authorizations which are required
under, and has complied with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules, and timetables which are contained in, all Environmental,
Health and Safety Laws.
(b) None of the Company or its Affiliates has any Liability (and none of
the Company, its Affiliates and, to its knowledge, its predecessors
has handled or disposed of any substance, arranged for the disposal of
any substance, exposed any employee or other individual to any
substance or condition, or owned or operated any property or facility
in any manner that could form the basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against any of the Company and its Affiliates giving
rise to any Liability) for damage to any site, location, or body of
water (surface or subsurface), for any illness of or personal injury
to any employee or other individual, or for any reason under any
Environmental, Health, and Safety Law.
(c) All properties and equipment used in the business of the Company, its
Affiliates and, to its knowledge, its predecessors have been and are
free of asbestos, PCB's, methylene chloride, trichloroethylene,
1,2-transdichloroethylene, dioxins, dibenzofurans, and Extremely
Hazardous Substances.
35
<PAGE>
(d) Notwithstanding anything contained herein to the contrary, the Company
shall not be deemed to be in breach of this Section 3.18 if the breach
of any of the representations and warranties contained in Section
3.18(a), (b) and (c) does not have a Material Adverse Effect after the
Closing upon the Assets, the Division, the Business or the Purchaser.
III.19 Restrictions on Common Shares. The Common Stock when issued to the
Company, will constitute "restricted securities" as that term is defined in Rule
144, as promulgated under the Securities Act of 1933, as amended (the "Act"),
and as such may not be transferred except pursuant to an effective registration
statement filed under the Act, or pursuant to a valid exemption from the
registration requirements of the Act. Except as provided in the Investors'
Rights Agreement dated of even date herewith, neither TMCI nor the Purchaser has
any obligation, whatsoever, to register the Common Stock under the Act and has
no present intention to so register the Common Stock. If the Company desires to
sell or transfer any interest in the Common Stock pursuant to an exemption from
registration under the Act and under state securities laws, the Company shall
first provide the Purchaser with a description of the circumstances and an
opinion of counsel reasonably satisfactory to counsel to Purchaser that such
sale or transfer is so exempt. Investor understands that resale to the public
will not be available for at least two years under Rule 144. The Common Stock is
being acquired by the Company for investment purposes only, solely for its own
account, and without any present intention of participating directly or
indirectly in the distribution or resale of all or any portion of the Common
Stock then being acquired. The following legend shall be placed upon the
certificate or certificates representing the Common Stock:
The shares represented by this certificate have not been registered under
the Securities Act of 1933. The shares have been acquired for investment and may
not be sold, transferred or assigned in the absence of an effective registration
statement for these shares under the Securities Act of 1933 or an opinion of the
Company's [TMCI Electronics, Inc.] counsel that registration is not required
under said Act.
In addition, an appropriate legend for the State of California shall be
placed upon the certificates. Purchaser may place a "stop transfer order"
regarding the Common Stock with its transfer agent as appropriate to comply with
the requirements of this Section 3.19.
III.20 Accounts Receivable. All accounts receivable of the Company which
are sixty (60) days or less past due are reflected properly in the Unaudited
Financial Statements, are valid receivables subject to no setoffs or
counterclaims, are collectible, and will be collected within one hundred eighty
(180) days, in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth in the Unaudited Financial
Statements as adjusted for the passage of time through the Closing Date, subject
to Purchaser and TMCI using their normal and customary collection practices. The
amount of the accounts receivable subject to this paragraph 3.20 is four hundred
twenty thousand nine hundred forty-eight dollars ($420,948). To the extent the
sixty (60) days or less past due accounts receivable are not collected within
the aforementioned one hundred eighty (180) day period, the amount of the
uncollected receivables shall be offset against the Holdback Stock.
36
<PAGE>
III.21 Relationship With Customers. The Company has not received notice
from any of its material customers that such customer intends to discontinue its
business relationship with the Division.
III.22 Securities. The Company is an "accredited investor" as defined in
Rule 501(a) of Regulation D promulgated under the Act. The Company acknowledges
that TMCI has delivered to it its Prospectus dated March 5, 1996, its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995 and its
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996. The Company
has had the opportunity to review and discuss the above-referenced documents
with TMCI and has had the opportunity to ask questions and make inquiries of
representatives of TMCI regarding TMCI's financial condition, assets and
operations and the Company has received satisfactory answers to such questions
and inquiries.
III.23 Disclosure. None of the representations, warranties or covenants
contained in this Agreement, nor in any Schedule or Exhibit hereto contains or
will contain an untrue statement of a material fact or omits a material fact
necessary to make the statements contained herein or therein not misleading.
III.24 Equipment. All equipment used in the operation of the Business is in
good operating condition, ordinary wear and tear excepted.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND TMCI
Purchaser and TMCI represent and warrant to the Company with knowledge that
Company is relying upon such representation and warranties in entering into this
Agreement, and that the statements contained in this Article IV are true,
correct, complete and current as of the date of this Agreement.
IV.1 Organization and Capitalization of TMCI. TMCI is a corporation duly
organized and validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to (a) enter
into this Agreement and to perform its obligations hereunder, (b) own, lease and
operate its properties and assets as they are now owned, leased and operated and
(c) carry on its business as now conducted. The authorized capital stock of TMCI
as of the Closing Date consists of 25,000,000 shares of common stock, par value
$0.001 per share of which approximately 3,365,600 shares are issued and
outstanding.
IV.2 Organization and Capitalization of Purchaser. Purchaser is a
corporation duly organized and validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to (a) enter into this Agreement and to perform its obligations
hereunder, (b) own, lease and operate its properties and assets as they are now
owned, leased and operated and (c) carry on its business as now conducted.
Purchaser is the wholly-owned subsidiary of TMCI.
37
<PAGE>
IV.3 Validity and Execution of Agreement. Purchaser and TMCI have the full
legal right, capacity and power and have all requisite corporate authority and
approval required to enter into, execute and deliver this Agreement and to
perform fully its obligations hereunder. The Boards of Directors of TMCI and
Purchaser have approved the transactions contemplated pursuant to this Agreement
and each of the other documents contemplated by this Agreement. This Agreement
constitutes the valid and binding obligation of TMCI and Purchaser,
respectively, enforceable against TMCI and Purchaser in accordance with its
terms, except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general and by general principles of equity.
IV.4 No Conflict. Neither the execution and delivery of this Agreement by
TMCI and Purchaser nor the performance by TMCI and Purchaser of the transactions
contemplated hereby will: (a) violate or conflict with any of the provisions of
the articles of incorporation or by-laws of TMCI and Purchaser (or similar
governing documents) as the case may be, (b) violate or conflict with any
provisions of any Law or Order applicable to TMCI or Purchaser; or (c) require
any consent or approval by or filing or notice with any Governmental or
Regulatory Body.
IV.5 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by TMCI and Purchaser
directly with the Company without the intervention of any Person on behalf of
Purchaser in such manner as to give rise to any valid claim by any Person
against the Company for a finder's fee, brokerage commission or similar payment,
except to The Bentley Companies ("Bentley"). All amounts so payable to Bentley
shall be paid by TMCI or the Purchaser.
IV.6 Articles of Incorporation and Bylaws. TMCI and Purchaser have each
heretofore delivered to the Company true, correct and complete copies of their
Articles of Incorporation and Bylaws or similar governing documents as in full
force and effect on the date hereof.
IV.7 Delivery of Documents. TMCI has delivered to the Company its true,
correct, complete and current Prospectus dated March 5, 1996, its Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995, its quarterly
reports on Form 10-QSB for the quarter ended June 30, 1996. Each of these
documents contain the information required to be included therein by applicable
law and as to such required information do not contain any untrue statements of
material fact or omit a material fact necessary to make the statements contained
thereof not misleading. Each audited and unaudited financial statement (and the
notes relating thereto) contained in such reports was prepared in accordance
with generally accepted accounting principles consistently applied (except as
otherwise indicated therein) and fairly presents the consolidated financial
condition of TMCI and its subsidiaries as of the respective date thereof and the
related consolidated results of operations, stockholders' equity, and cash flows
or changes in financial position, as applicable, of TMCI and its subsidiaries
for and during the respective period covered thereby.
IV.8 Consents and Approvals. Except for Form 8-K, no consent approval or
authorization of, or declaration, filing or registration with, any third party,
including any governmental or regulatory authority, United States or foreign, is
required in connection with the execution, delivery and performance of this
Agreement by TMCI or Purchaser.
38
<PAGE>
IV.9 Absence of Certain Changes or Events. Except as previously disclosed
to the Company, since September 30, 1996 there has been no material adverse
change in the assets, properties, business, operations, income or condition
(financial or otherwise) of TMCI or Purchaser nor is any such change threatened,
nor has there been any damage, destruction or loss which could have a Material
Adverse Effect after the Closing Date on TMCI or Purchaser, whether or not
covered by insurance. TMCI has not (i) declared any dividend or made any payment
or other distribution with respect to its shares of capital stock, (ii) acquired
or disposed of any shares of its capital stock or granted any options, warrants
or other rights to acquire or convert any obligation into any shares of its
capital stock, (iii) sold, assigned, transferred, conveyed or otherwise disposed
of, or agreed to sell or dispose of, a substantial portion of its assets, except
for sales of inventory in the ordinary course of business, (iv) entered into any
transaction of merger or consolidation with any other entity, or (v) agreed or
entered into any commitment to take any of the above actions.
IV.10 Litigation. Except as set forth on Schedule 4.9, there are no
outstanding Orders by which TMCI or Purchaser, or any of its securities, assets,
properties or businesses are bound. Except as set forth on Schedule 4.9, there
is no Action or Proceeding pending or, to the knowledge of TMCI or Purchaser
threatened (whether or not the defense thereof or liabilities in respect thereof
are covered by insurance) against or affecting TMCI or Purchaser or any of its
assets, properties or businesses, including without limitation the Business and
the Assets, which if adversely decided would have a Material Adverse Effect
after the Closing on TMCI or Purchaser, nor are there any facts which are likely
to give rise to any such Action or Proceeding which if adversely decided, would
have a Material Adverse Effect after the Closing on TMCI, the Purchaser, the
Business, the Division or the Assets.
IV.11 Status of Shares. The Common Stock when issued in accordance with the
terms of this Agreement will be duly authorized, validly issued, fully paid and
nonassessable and free of liens, encumbrances or preemptive rights contained in
the Certificate of Incorporation or Bylaws of TMCI; provided, however, that the
Common Stock may be subject to restrictions on transfer under state and/or
federal securities laws and the Holdback Stock and Earn Out Stock is subject to
forfeiture as provided in this Agreement.
IV.12 Disclosure. None of the representations, warranties or covenants
contained in this Agreement, any document provided by TMCI or Purchaser to the
Company, nor in any Schedule or Exhibit hereto made by TMCI or Purchaser,
contains or will contain any untrue statement of material fact or omits a
material fact necessary to make the statements contained herein or therein not
misleading.
ARTICLE V
CONDITIONS PRECEDENT TO THE CLOSING
V.1 Conditions Precedent to the Obligations of Purchaser to Complete the
Closing. The obligations of Purchaser to enter into and complete the Closing are
subject to the fulfillment at or prior to the Closing of the following
conditions, any one or more of which may be waived by Purchaser:
39
<PAGE>
(a) Representations, Warranties and Covenants. The representations and
warranties of the Company contained in this Agreement shall be true,
complete and correct in all material respects.
(b) Consents, Waivers, Licenses, Filings, etc. The consents, approvals,
authorizations, licenses, registrations, declarations or filings
listed on Schedule 3.3, if any, hereto shall have been obtained or
made, as the case may be.
(c) Third Party Consents. Except as otherwise waived by Purchaser, all
----- ----- ---------
consents, permits and approvals from parties to contracts or other
agreements with the Company set forth on any Schedule to this
Agreement, including, but not limited to, the Assignable Contracts,
and any other material consent, permit or approval that may be
required in connection with the performance by the Company of its
obligations under this Agreement or the consummation of the
transactions contemplated by this Agreement or the continuance of the
Company's contracts or other agreements with Purchaser after the
Closing shall have been obtained.
(d) Injunction, etc. At the Closing, there shall not be any Order
outstanding against any party hereto or Law promulgated that prevents
consummation of the transactions contemplated by this Agreement or any
of the conditions to the consummation of the transactions contemplated
by this Agreement or would be likely to have any Material Adverse
Effect on the Business or the Assets to be purchased hereunder.
(e) Opinion of Counsel to the Company. Purchaser shall have been provided
with an opinion of Parsons Behle & Latimer, counsel to the Company, in
form and substance satisfactory to Purchaser and dated the date of the
Closing.
(f) Approval of Counsel to Purchaser. All actions and proceedings
hereunder and all documents and other papers required to be delivered
by the Company hereunder or in connection with the consummation of the
transaction contemplated hereby and all other related matters shall
have been approved by Rosenblum, Parish & Isaacs, counsel to
Purchaser, as to their form and substance, which approval shall not be
unreasonably withheld.
(g) Conveyancing Documents. The Company shall have executed and delivered
to Purchaser an Assignment and Assumption Agreement (an "Assignment
and Assumption Agreement") in substantially the form of Exhibit "F"
hereto, and such further instruments and documents as may be
reasonably requested by Purchaser in order to complete the transfer of
the Assets to Purchaser and as may be necessary for the Purchaser's
operation of the Business.
(h) Earn Out Agreement. The Company shall have executed and delivered to
Purchaser the Earn Out Agreement.
(i) Investors' Rights Agreement. The Company shall have executed and
delivered to Purchaser an Investors' Rights Agreement in form and
substance satisfactory to both parties hereto.
40
<PAGE>
(j) Strategic Marketing and Manufacturing Agreement. The Company shall
have executed and delivered to Purchaser and TMCI the Strategic
Marketing and Manufacturing Agreement in form and substance
satisfactory to both parties hereto.
(k) Subordination Agreement. The Company shall have executed and delivered
to Purchaser and TMCI the Subordination Agreement in form and
substance satisfactory to both parties hereto.
(l) Resolutions. The Company shall have delivered to Purchaser a copy of
the resolution of its Board of Directors authorizing and approving the
execution of this Agreement and the consummation of the transactions
contemplated hereby.
V.2 Conditions Precedent to the Obligations of the Company to Complete the
Closing. The obligations of the Company to enter into and complete the Closing
are subject to the fulfillment on or prior to the Closing, of the following
conditions, any one or more of which may be waived by the Company:
(a) Representations, Warranties and Covenants. The representations,
warranties and covenants of Purchaser and TMCI shall be true, complete
and correct in all material respects.
(b) Injunction, etc. At the Closing, there shall not be any Order
outstanding against any party hereto or Law promulgated that prevents
consummation of the transactions contemplated by this Agreement or any
of the conditions to the consummation of the transaction contemplated
by this Agreement or would be likely to have any Material Adverse
Effect on the Business or the Assets to be purchased by Purchaser
hereunder.
(c) Opinion of Counsel to Purchaser. Purchaser shall have been provided
with an opinion of Rosenblum, Parish & Isaacs, counsel to Purchaser
and TMCI, in form and substance satisfactory to the Company and dated
the date of the Closing.
(d) Delivery of Purchase Price. Purchaser shall have delivered to the
Company the Cash Payment, the Promissory Notes, and a stock
certificate representing fifty three thousand six hundred eight-eight
(53,688) shares of TMCI's common stock.
(e) Delivery of Security Agreements. Purchaser and TMCI shall have
delivered to the Company the Security Agreement and underlying Form
UCC-1 and caused to be delivered to the Company the Guaranty.
(f) Conveyancing Documents. Purchaser and TMCI shall have executed and
delivered to the Company the Assignment and Assumption Agreement.
(g) Resolutions. Purchaser and TMCI shall have delivered to the Company a
copy of the resolution of their respective Boards of Directors
authorizing and approving the execution of this Agreement and the
consummation of the transactions contemplated hereby.
41
<PAGE>
(h) Investors' Rights Agreement. Purchaser and TMCI shall have executed
and delivered to the Company an Investors' Rights Agreement in form
and substance satisfactory to both parties hereto.
(i) Strategic Marketing and Manufacturing Agreement. The Purchaser and
TMCI shall have executed and delivered to the Company the Strategic
Marketing and Manufacturing Agreement in form and substance
satisfactory to both parties hereto.
(j) Earn Out Agreement. The Purchaser shall have executed and delivered to
the Company the Earn Out Agreement.
(k) Subordination Agreement. The Purchaser and TMCI shall have executed
and delivered to the Company the Subordination Agreement in form and
substance satisfactory to both parties hereto.
(l) Approval of Counsel to Company. All actions and proceedings hereunder
and all documents and other papers required to be delivered by the
Purchaser and TMCI hereunder or in connection with the consummation of
the transaction contemplated hereby and all other related matters
shall have been approved by Parsons Behle & Latimer, counsel to the
Company, as to their form and substance, which approval shall not be
unreasonably withheld.
ARTICLE VI
POST-CLOSING COVENANTS
The parties covenant to take the following actions after the Closing Date:
VI.1 Further Information. Following the Closing, each party will afford to
the other party, its counsel and its accountants, during normal business hours,
reasonable access to the books, records and other data of the Company or
relating to the Business, the Assets, or the Assumed Liabilities in its
possession with respect to periods prior to the Closing and the right to make
copies and extracts therefrom, to the extent that such access may be reasonably
required by the requesting party (a) to facilitate the investigation, litigation
and final disposition of any claims which may have been or may be made against
any party or its Affiliates and (b) for any other reasonable business purpose.
VI.2 Record Retention. Each party agrees that for a period of not less than
seven (7) years following the Closing Date, it shall not destroy or otherwise
dispose of any of the Records relating to the Business, the Assets, the Assumed
Liabilities, or the Company in its possession with respect to periods prior to
the Closing. Each party shall have the right to destroy all or part of such
Records after the seventh anniversary of the Closing Date or, at an earlier time
by giving each other party hereto thirty (30) days prior written notice of such
intended disposition and by offering to deliver to the other parties, at the
other parties' expense, custody of such Records as such party may intend to
destroy.
42
<PAGE>
VI.3 Transfer and Property Taxes. The Company agrees to pay all sales, use,
transfer, real property transfer, recording, gains, stock transfer and other
similar taxes and fees ("Transfer Taxes") arising out of or in connection with
the transactions effected pursuant to this Agreement, and shall indemnify,
defend and hold harmless the Purchaser and TMCI with respect to such Transfer
Taxes. The Company shall file all necessary documentation and Tax Returns with
respect to such Transfer Taxes. Personal property taxes assessed against the
Assets for the year 1996 shall be prorated as of the Closing Date.
VI.4 Post-Closing Assistance. The Company, on the one hand, and Purchaser,
on the other hand, will provide each other with such assistance as may
reasonably be requested in connection with the preparation of any Tax Return,
any audit or other examination by any taxing authority, or any judicial or
administrative proceedings relating to liability for Taxes, and each will retain
and provide the requesting party with any records or information that may be
reasonably relevant to such return, audit or examination, proceedings or
determination. The party requesting assistance shall reimburse the other party
for reasonable out-of-pocket expenses (other than salaries or wages of any
employees of the parties) incurred in providing such assistance. Any information
obtained pursuant to this Section 6.4 or pursuant to any other Section hereof
providing for the sharing of information or the review of any Tax Return or
other schedule relating to Taxes shall be kept confidential by the parties
hereto.
VI.5 Non-Compete.
(a) Company's Covenants Against Competition. In consideration for the
--------- --------- ------- ------------
payment by Purchaser of the Purchase Price on the Closing Date,
Company for itself (and for and on behalf of its current officers and
directors) agrees that it will not at any time within the four (4)
year period immediately following the Closing Date ("Restricted
Period"), directly or indirectly, engage in, or have any ownership
interest in any person, firm, corporation, or business which engages
in, in any way, (i) the manufacturing of harness, ribbon, or
non-molded specialty cables ("Restricted Products") within the
counties of Alameda, Contra Costa, Marin, San Francisco, San Mateo,
Santa Clara, Sacramento, Santa Cruz, or Sonoma, State of California
("Restricted Area"); or (ii) soliciting orders for or selling the
Restricted Products to any customers in the Restricted Area
("Purchaser's Restricted Customers"). Notwithstanding anything
contained herein to the contrary, the restrictions contained in this
6.5(a) shall not preclude the Company from directly or indirectly
engaging in, or having any interest in any person, firm, corporation
or business which engages in, in any way manufacturing the Restricted
Products in any area outside of the Restricted Area (as long as it
does not sell to any of Purchaser's Restricted Customers) nor shall
the restriction, set forth above preclude in any way the Company from
selling to or soliciting orders from any customers in the Restricted
Area for molded cables or any product which is not a Restricted
Product. Notwithstanding the foregoing, neither the Company nor any
officer or director of the Company shall be in breach of this Section
6.5(a) merely because it owns five percent (5%) or less of the
outstanding common stock of a corporation, if, at the time of the
acquisition of such stock by the Company (or its officers or
directors), such stock is listed on a national securities exchange, is
quoted on NASDAQ, or is regularly traded in the over-the-counter
market by a member of a national securities exchange.
43
<PAGE>
(b) Purchaser's and TMCI's Covenants Against Competition; Acknowledgment
of Confidential Information and Trade Secrets.
(i) Purchaser and TMCI acknowledge and agree that the Company has
invested significant amounts of time and money in developing its
molded specialty cable business and that Company would not sell
the Assets to Purchaser but for the agreements and covenants of
the Purchaser contained in this Section 6.5(b). Accordingly, the
Purchaser and TMCI for themselves (and for and on behalf of each
of their respective Affiliates) each covenants and agrees that it
will not at any time, during the Restricted Period, directly or
indirectly engage in, or have any ownership interest in any
person, firm, corporation, or business that engages in, in any
way, the manufacturing of, the sale of or the solicitation of
orders for molded specialty cables to or from any customer in the
State of California to which the Company is currently selling
such products ("Company's Restricted Customers"). A list of
certain of the Company's customers ("Company's Customer List")
which includes the Company's Restricted Customers will be
delivered by the Company to Purchaser at Closing. Notwithstanding
anything contained herein to the contrary, this Section 6.5(b)
shall not preclude Purchaser from selling to nor soliciting
orders from the Company's Restricted Customers for harness,
ribbon and non-molded specialty cables or from selling or
soliciting orders from persons who are not the Company's
Restricted Customers for Molded Specialty Cables. Notwithstanding
the foregoing, neither Purchaser, TMCI nor any affiliate of
Purchaser or TMCI shall be in breach of this Section 6.5(b)
merely because it owns five percent (5%) or less of the
outstanding common stock of a corporation, if, at the time of the
acquisition of such stock by Purchaser, TMCI (or any affiliate of
Purchaser or TMCI), such stock is listed on a national securities
exchange, is quoted on NASDAQ, or is regularly traded in the
over-the-counter market by a member of a national securities
exchange.
(ii) During and after the Restricted Period, Purchaser, TMCI and each
Affiliate shall keep secret and retain in strictest confidence,
and shall not use for the benefit of itself or himself or others,
any and all confidential information with respect to the
operations by the Company of its molded specialty cable business
learned by TMCI, the Purchaser and each Affiliate heretofore or
hereafter directly or indirectly from the Company, including,
without limitation, information with respect to (a) prospective
facilities, (b) sales figures, (c) profit or loss figures, (d)
customers, clients, suppliers, sources of supply and customer
lists (including those entities designated on the Company's
Customer List) and (e) pricing information ("Confidential Company
Information"), and shall not disclose such Confidential Company
Information to anyone outside of Purchaser, TMCI and its
Affiliates except with the Company's express written consent and
except for Confidential Company Information which (i) is at the
time of receipt or thereafter becomes publicly known through no
wrongful act of the Purchaser, TMCI or an Affiliate or (ii) is
received from a third party not under an obligation to keep such
information confidential and without breach of this Agreement.
Notwithstanding anything contained herein to the contrary,
Purchaser, TMCI and its Affiliates shall not disclose the
Confidential Company Information to any person or entity which
subsequent to the date hereof directly or indirectly acquires the
Purchaser, TMCI and, thereby becomes an affiliate of the
Purchaser or TMCI. Purchaser and TMCI hereby acknowledge and
agree that the Company's Customer List is the proprietary and
confidential information of the Company and is a trade secret
under the laws of the State of California.
44
<PAGE>
(c) Rights and Remedies of Purchaser Upon Breach. If the Company or any
------ --- -------- -- --------- ---- -------
Affiliate breaches, or threatens to commit a breach of, any of the
provisions of Section 6.5(a) (the "Company's Restrictive Covenants"),
Purchaser shall have the following rights and remedies, each of which
rights and remedies shall be independent of the other and severally
enforceable and shall not be affected by the provisions of Article VI,
and all of which rights and remedies shall be in addition to, and not
in lieu of, any other rights and remedies available to Purchaser under
law or in equity:
(i) The right and remedy to have the Company's Restrictive Covenants
specifically enforced (without posting any bond) by any court
having equity jurisdiction, including, without limitation, the
right to an entry against the Company or such Affiliate of
restraining orders and injunctions (preliminary, mandatory,
temporary and permanent) against violations, threatened or
actual, and whether or not then continuing, of such covenants, it
being acknowledged and agreed that any such breach or threatened
breach will cause irreparable injury to Purchaser and that money
damages will not provide adequate remedy to Purchaser.
(ii) The right and remedy to require the Company or such Affiliate to
account for and pay over to Purchaser all profits ("Benefits")
derived or received by such person the result of any transactions
constituting a breach of any of the Company's Restrictive
Covenants, and such person shall account for and pay over such
Benefits to Purchaser.
(d) Rights and Remedies of Company Upon Breach. If the Purchaser or TMCI
------ --- -------- -- ------- ---- -------
or any Affiliate breaches, or threatens to commit a breach of, any of
the provisions of Section 6.5(b) ("TMCI's Restrictive Covenants"), the
Company shall have the following rights and remedies (upon compliance
with any necessary prerequisites imposed by law upon the availability
of such remedies), each of which rights and remedies shall be
independent of the other and severally enforceable and shall not be
affected by the provisions of Article VI, and all of which rights and
remedies shall be in addition to, and not in lieu of, any other rights
and remedies available to the Company under law or in equity:
(i) The right and remedy to have the TMCI's Restrictive Covenants
specifically enforced (without posting any bond) by any court
having equity jurisdiction, including, without limitation, the
right to an entry against TMCI and Purchaser or such Affiliate of
restraining orders and injunctions (preliminary, mandatory,
temporary and permanent) against violations, threatened or
actual, and whether or not then continuing, of such covenants, it
being acknowledged and agreed that any such breach or threatened
breach will cause irreparable injury to the Company and that
money damages will not provide adequate remedy to the Company.
(ii) The right and remedy to require TMCI and Purchaser or such
Affiliate to account for and pay over to the Company all
compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by such
person the result of any transactions constituting a breach of
any of the TMCI's Restrictive Covenants, and such person shall
account for and pay over such Benefits to the Company.
45
<PAGE>
(e) Severability of Covenants. If any court determines that any of the
Company's Restrictive Covenants or TMCI's Restrictive Covenants
(collectively, the "Restrictive Covenants"), or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants
shall not thereby be affected and shall be given full effect, without
regard to the invalid portions.
(f) Blue-Pencilling. If any court determines that any of the Restrictive
Covenants, or any part thereof, is unenforceable because of the
duration of such provision or the area covered thereby, such court
shall have the power to reduce the duration or area of such provisions
and, in its reduced form, such provision shall then be enforceable and
shall be enforced.
(g) Enforceability in Jurisdictions. Purchaser and the Company intend to
-------------- -- --------------
and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the geographical scope of
the Restrictive Covenants. If the courts of any one or more of such
jurisdictions hold the Restrictive Covenants wholly unenforceable by
reason of the breadth of such scope or otherwise, it is the intention
of Purchaser and the Company that such determination not bar or in any
way affect Purchaser's or the Company's, as the case may be, right to
the relief provided above in the courts of any other jurisdiction
within the geographical scope of such Restrictive Covenants, as to
breaches of such Restrictive Covenants in such other respective
jurisdictions, such Restrictive Covenants as they relate to each
jurisdiction being, for this purpose, severable into diverse and
independent covenants, subject, where appropriate, to the doctrine of
res judicata.
VI.6 Delivery of Certificates. The Company will use its best efforts to
provide the Purchaser with a sales tax clearance certificate from the State
Board of Equalization and a certificate of no claims from the Economic
Development Department in a commercially reasonable manner and time.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
VII.1 Survival of Representations, Warranties, Covenants and Agreements.
The representations, warranties, covenants and agreements of the Company,
Purchaser and TMCI contained in this Agreement will survive the Closing for a
period of three (3) years.
VII.2 Indemnification of Purchaser. Subject to the limitations contained in
this Article VII, the Company agrees to indemnify, defend and hold harmless
Purchaser and its directors, officers, shareholders, partners, employees,
successors and assigns from and against any and all losses, Liabilities
(including punitive or exemplary damages and fines or penalties and any interest
thereon), expenses (including fees and disbursements of counsel and expenses of
investigation and defense), claims, liens or other obligations of any nature
whatsoever (hereinafter individually, a "Loss" and collectively, "Losses")
which, directly or indirectly, arise out of, result from or relate to (a) any
inaccuracy in or any breach of any representation and warranty, or any breach of
any covenant or agreement, of the Company contained in this Agreement or in any
document or other papers delivered pursuant to this Agreement, (b) any liability
or obligation of the Company which is not an Assumed
46
<PAGE>
Liability, including any sales or use tax arising from this transaction,
including, but not limited to, any liability resulting from the operation of
California Revenue and Tax Code ss. 6811, et seq. (c) the failure of the Company
to comply with any Bulk Sales or Transfer Laws or failure to comply with any
other applicable laws, rules or regulations and Purchaser's waiver of compliance
with such laws, including California Civil Code ss. 3440, (d) the Company's
misappropriation of trade secrets, or its infringement or alleged infringement
of any patent, copyright, trademark, servicemark, or any other proprietary right
of any Person, (e) any claims which arise from the operations of the Business by
the Company prior to the Closing Date other than the Assumed Liabilities, (f)
any obligations of the Company for claims under ERISA, and (g) violations of the
Environmental, Health and Safety Laws by the Company prior to the Closing Date.
VII.3 Indemnification of the Company. Subject to the limitations contained
in this Article VII, Purchaser and TMCI agree to indemnify, defend and hold
harmless the Company, its respective directors, officers, shareholders,
partners, employees, successors and assigns from and against any and all Losses
which, directly or indirectly, arise out of, result from or relate to (a) any
inaccuracy in or any breach of any representation and warranty, or any breach of
any covenant or agreement, of Purchaser contained in this Agreement or in any
documents or other papers delivered pursuant to this Agreement, (b) any Assumed
Liability assumed by Purchaser pursuant to Section 2.2, (c) operations of the
Business by the Purchaser subsequent to the Closing Date, (d) violations of the
Environment, Health and Safety laws by Purchaser subsequent to the Closing Date,
and (e) the failure by Purchaser to pay any Transfer Taxes.
VII.4 Method of Asserting Claims. The party making a claim under this
Article VII is referred to as the "Indemnified Party" and the party against whom
such claims are asserted under this Article VII is referred to as the
"Indemnifying Party." all claims by any Indemnified Party under this Article VII
shall be asserted and resolved as follows:
(a) In the event that any claim or demand for which an Indemnifying Party
would be liable to an Indemnified Party hereunder is asserted against
or sought to be collected from such Indemnified Party by a third
party, said Indemnified Party shall with reasonable promptness notify
in writing the Indemnifying Party of such claim or demand, specifying
the basis for such claim or demand, and the amount or the estimated
amount thereof to the extent then determinable (which estimate shall
not be conclusive of the final amount of such claim and demand; the
"Claim Notice"); provided, however, that any failure to give such
Claim Notice will not be deemed a waiver of any rights of the
Indemnified Party except to the extent the rights of the Indemnifying
Party are actually prejudiced by such failure. The Indemnifying Party,
upon request of the Indemnified Party, shall retain counsel (who shall
be reasonably acceptable to the Indemnified Party) to represent the
Indemnified Party and shall pay the reasonable fees and disbursements
of such counsel with regard thereto' provided, however, that any
Indemnified Party is hereby authorized prior to the date on which it
receives written notice from the Indemnifying Party designating such
counsel, to retain counsel, whose fees and expenses shall be at the
expense of the Indemnifying Party, to file any motion, answer or other
pleading and take such other action which it reasonably shall deem
necessary to protect its interests or those of the Indemnifying Party
until the date on which the Indemnified Party receives such notice
from the Indemnifying Party. After the Indemnifying Party shall retain
such counsel, the Indemnified Party shall have the right to
47
<PAGE>
retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party unless (x) the
Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (y) the named parties of
any such proceeding (including any impleaded parties) include both the
Indemnifying Party and the Indemnified Party and representation of
both parties by the same counsel would be inappropriate due to actual
or potential differing interests between them. The Indemnifying Party
shall not, in connection with any proceedings or related proceedings
in the same jurisdiction, be liable for the fees and expenses of more
than one such firm for the Indemnified Party (except to the extent the
Indemnified Party retained counsel to protect its (or the Indemnifying
Party's) rights prior to the selection of counsel by the Indemnifying
Party.) If requested by the Indemnifying Party, the Indemnified Party
agrees to cooperate with the Indemnifying Party and its counsel in
contesting any claim or demand which the Indemnifying Party defends. A
claim or demand may not be settled by the Indemnifying Party without
the prior written consent of the Indemnified Party (which consent will
not be unreasonably withheld) unless, as part of such settlement, the
Indemnified Party shall receive a full and unconditional release
reasonably satisfactory to the Indemnified Party.
(b) In the event any Indemnified Party shall have a claim against any
Indemnifying Party hereunder which does not involve a claim or demand
being asserted against or sought to be collected from it by a third
party, the Indemnified Party shall send a Claim Notice with respect to
such claim to the Indemnifying Party.
(c) After delivery of a Claim Notice, so long as any right to
indemnification exists pursuant to this Article VII, the affected
parties each agree to retain all Books and Records related to such
Claim Notice. In each instance, the Indemnified Party shall have the
right to be kept fully informed by the Indemnifying Party and its
legal counsel with respect to any legal proceedings. Any information
or documents made available to any party hereunder and designated as
confidential by the party providing such information or documents and
which is not otherwise generally available to the public and not
already within the knowledge of the party to whom the information is
provided (unless otherwise covered by the confidentiality provision of
any other agreement among the parties hereto, or any of them), and
except as may be required by applicable law, shall not be disclosed to
any third Person (except for the representatives of the party being
provided with information, in which event the party being provided
with the information shall request its representatives not to disclose
any such information which is otherwise required hereunder to be kept
confidential).
VII.5 Limitation on Indemnification.
(a) The obligation of the Company under Section 7.2 above shall be limited
to an amount equal to the Purchase Price.
(b) The indemnification of the Purchaser as set forth herein by the
Company shall be limited to only those matters specifically provided
in Section 7.2 above; Purchaser hereby releases, discharges and
acquits the Company from any other damage, claim, liability,
deficiency, loss, cost or expense, known or unknown incurred by
Purchaser arising out of or resulting from any other matter not
specifically covered or provided in Section 7.2 above. The obligation
of Purchaser under Section
48
<PAGE>
7.2 shall be limited to the unpaid portion of the Promissory Notes and
the fair market value as of the date hereof (determined without
discounts for restrictions on marketability) of any stock held in
escrow at the time a claim is tendered, excluding any stock held in
escrow pursuant to the Earn Out Agreement of equal date hereto.
(c) The indemnification of the Company by the Purchaser and TMCI as set
forth herein shall be limited to only those matters specifically
provided in Section 7.3 above; the Company hereby releases, discharges
and acquits the Purchaser from any other damage, claim, liability,
deficiency, loss, cost or expense, known or unknown incurred by the
Company arising out of or resulting from any other matter not
specifically covered or provided in Section 7.3 above.
ARTICLE VIII
MISCELLANEOUS
VIII.1 Expenses. Each of the parties hereto shall pay its own expenses
(including, without limitation, attorney's and accountants' fees and
out-of-pocket expenses) incidental to this Agreement and the transactions
contemplated hereby.
VIII.2 Further Assurances. At any time and from time to time after the
Closing Date at the request of Purchaser, and without further consideration, the
Company will execute and deliver such other instruments of sale, transfer,
conveyance, assignment and confirmation and take such other action as Purchaser
may reasonably deem necessary or desirable in order to transfer, convey and
assign more effectively to Purchaser, the Assets to put Purchaser in actual
possession and operating control of the Business and to assist Purchaser in
exercising all rights with respect thereto.
VIII.3 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
given personally, telegraphed, telexed, sent by facsimile transmission or sent
by prepaid air courier or certified, registered or express mail, postage
prepaid. Any such notice shall be deemed to have been given (a) when received,
if delivered in person, telegraphed, telexed, sent by facsimile transmission and
confirmed in writing within three (3) Business Days thereafter or sent by
prepaid air courier or (b) three (3) Business Days following the mailing
thereof, if mailed by certified first class mail, postage prepaid, return
receipt requested, in any such case as follows (or to such other address or
addresses as a party may have advised the other in the manner provided in this
Section 8.3):
If to TMCI:
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, California 95133
Attention: Rolando Loera, CEO
49
<PAGE>
If to the Purchaser:
Touche Electronics, Inc.
1875 Dobbin Drive
San Jose, California 95133
Attention: Rolando Loera, CEO
With a copy to:
Rosenblum, Parish & Isaacs
160 West Santa Clara Street, 15th Floor
San Jose, California 95113
Attention: Thomas Chaffin
If to the Company:
Pen Interconnect, Inc.
2351 South 2300 West
Salt Lake City, Utah 84119
Attention: James S. Pendleton & Wayne R. Wright
With a copy to:
Parsons Behle & Latimer
201 South Main Street, Suite 1800
Salt Lake City, Utah 84111
Attention: Stuart A. Fredman
VIII.4 Publicity. No public release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Purchaser and the Company; provided, however, that either
party hereto may make any public disclosure it believes in good faith is
required by applicable law or any listing or trading agreement concerning its
publicly-traded securities (in which case the disclosing party will use its
reasonable efforts to advise the other party prior to making the disclosure).
VIII.5 Entire Agreement. This Agreement (including the Exhibits and
Schedules) and the agreements, certificates and other documents delivered
pursuant to this Agreement contain the entire agreement among the parties with
respect to the transactions described herein, and supersede all prior
agreements, written or oral, with respect thereto.
VIII.6 Waivers and Amendments. This Agreement may be amended, superseded,
cancelled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by the parties or, in the case of a waiver, by the
party waiving compliance. No delay on the party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof. The rights and
remedies of any parties based upon, arising out of or otherwise in respect of
any inaccuracy in or breach of any
50
<PAGE>
representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
other state of facts upon which any claim of any such inaccuracy or breach is
based may also be the subject matter of any other representation, warranty,
covenant or agreement contained in this Agreement (or in any other agreement
between the parties as to which there is no inaccuracy or breach).
VIII.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to
principles of conflicts of law.
VIII.8 Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. This Agreement is not assignable by any party hereto without
the prior written consent of the other parties hereto, which consent will not be
unreasonably withheld except by operation of law and any other purported
assignment shall be null and void; provided, however, that Purchaser may assign
this Agreement without the consent of the other parties hereto to any lender of
Purchaser.
VIII.9 Variations in Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the context
may require.
VIII.10 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may constitute a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
VIII.11 Exhibits and Schedules. The Exhibits and Schedules are a part of
this Agreement as if fully set forth herein. All references herein to Sections,
subsections, clauses, Exhibits and Schedules shall be deemed references to such
parts of this Agreement, unless the context shall otherwise require.
VIII.12 Effect of Disclosure on Schedules. Any item disclosed on any
Schedule to this Agreement shall only be deemed to be disclosed in connection
with (a) the specific representation and warranty to which such Schedule is
expressly referenced, (b) any specific representation and warranty which
expressly cross-references such Schedule and (c) any specific representation and
warranty to which any other Schedule to this Agreement is expressly referenced
if such other Schedule expressly cross-references such Schedule.
VIII.13 Headings. The headings in this Agreement are for reference only,
and shall not affect the interpretation of this Agreement.
VIII.14 Severability of Provisions. If any provision or any portion of any
provision of this Agreement or the application of such provision or any portion
thereof to any Person or circumstance, shall be held invalid or unenforceable,
the remaining portion of such provision and the remaining provisions of this
Agreement or the application of such provision or portion of such provision as
is held invalid or unenforceable to persons or circumstances other than those as
to which it is held invalid or unenforceable, shall not be affected thereby.
51
<PAGE>
VIII.15 Arbitration. Any dispute arising under or pursuant to or affecting
the subject matter of this Agreement shall be resolved in arbitration in Santa
Clara County, California under the arbitration provisions of the California Code
of Civil Procedure Sections 1282 through 1284. Any judgment upon the award may
be confirmed and entered in any court having jurisdiction thereof. The
arbitrator(s) shall be required to, in all determinations, apply California law.
Further, the arbitrator(s) are afforded the jurisdiction to provide and order
all provisional remedies, including, without limitation, injunctive relief,
writs for recovery or possession or such similar relief as may be necessary to
protect the interests of either of the parties or their property rights. In the
event that it is determined that the arbitrator(s) do not have the jurisdiction
to grant those remedies conferred upon them by this provision and requested by
the parties, then such remedies shall be reserved to a court of competent
jurisdiction. The prevailing party in said arbitration shall be awarded by the
arbitrator(s) the costs of arbitration (inclusive of the arbitrator(s)' fees and
costs), as allocated by the arbitrator(s). The parties hereto agree to request
that in awarding non-injunctive relief the arbitrator shall submit to the
parties a formal finding of facts and conclusions of law, no less than one (1)
week before the rendering of any final judgment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton
Its: CEO Pen Interconnect, Inc.
TMCI ELECTRONICS, INC.
By: /s/ Rolando Loera
Its: CEO TMCI Electronics, Inc.
52
<PAGE>
EXHIBIT 11
PEN INTERCONNECT, INC.
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Months Fully
Common Out- Primary Dilutive
1996 Shares standing Shares Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1996 3,033,407 3 3,033,407 3,033,407
Contingent shares 55,568 3 - 55,568
--------------- -----------------
Balance at December 31, 1996 3,033,407 3,088,975
================ =========
Earnings for three months ended December 31, $ 429,432 $ 429,432
Earnings per share $ 0.14 $ 0.14
=================================
</TABLE>
<TABLE>
<CAPTION>
Months Fully
Common Out- Primary Dilutive
1995 Shares standing Shares Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1995 1,700,000 3 1,700,000 1,700,000
Issued on November 17, 1995 1,000,000 1.5 500,000 500,000
---------------------------------
Balance at December 31, 1995 2,200,000 2,200,000
=================================
Earnings for three months ended December 31, $ 180,296 $ 180,296
==============================
Earnings per share $ 0.08 $ 0.08
=================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pen
Interconnect, Inc. December 31, 1996 financial statements and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000266
<NAME> Pen Interconnect Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 21,221
<SECURITIES> 0
<RECEIVABLES> 3,034,412
<ALLOWANCES> (251,167)
<INVENTORY> 4,768,486
<CURRENT-ASSETS> 9,224,979
<PP&E> 3,507,220
<DEPRECIATION> (1,032,607)
<TOTAL-ASSETS> 14,385,934
<CURRENT-LIABILITIES> 5,943,750
<BONDS> 0
0
0
<COMMON> 30,334
<OTHER-SE> 7,967,728
<TOTAL-LIABILITY-AND-EQUITY> 14,385,934
<SALES> 5,258,386
<TOTAL-REVENUES> 5,258,386
<CGS> 4,357,136
<TOTAL-COSTS> 5,031,410
<OTHER-EXPENSES> 628,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,163
<INCOME-PRETAX> 741,983
<INCOME-TAX> 285,551
<INCOME-CONTINUING> 429,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 429,432
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
