<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
COMMISSION FILE NUMBER 0-21695
Manchester Equipment Co., Inc.
(Exact name of registrant as specified in its charter)
New York 11-2312854
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
160 Oser Avenue
Hauppauge, New York 11788
(Address of registrant's principal executive offices)
(516) 435-1199
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date.
There were 8,525,000 outstanding shares of COMMON STOCK at June 12, 1997.
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MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheets April 30, 1997
(unaudited) and July 31, 1996 3
Condensed Consolidated Statements of Income Three
months and nine months ended April 30, 1997
and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine months ended April 30, 1997 and 1996 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports 13
<PAGE> 3
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
<TABLE>
<CAPTION>
April 30, 1997 July 31, 1996
(Unaudited)
------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 15,649 $ 5,774
Marketable securities 2,947 -
Accounts receivable, net 22,570 19,068
Inventory 11,177 8,957
Deferred income taxes 334 334
Prepaid expenses and other current assets 83 197
----- ------
Total current assets 52,760 34,330
Property and equipment, net 2,676 2,244
Goodwill, net 1,493 -
Deferred income taxes 395 395
Other assets 1,000 792
----- -----
$58,324 $37,761
======= =======
Liabilities:
Current maturities under capital
lease obligation $ 99 $ 99
Notes payable - bank 1,264 6,500
Notes payable - shareholder - 353
Notes payable - other 307 -
Accounts payable and accrued expenses 20,108 17,113
Deferred service revenue 113 129
Income taxes payable - 295
------ ------
Total current liabilities 21,891 24,489
Capital lease obligation, less current maturities 111 175
Deferred compensation payable 268 183
------ -----
Total liabilities 22,270 24,847
------ ------
Redeemable common stock - 4,739
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 25,000,000 shares
authorized, 8,525,000 and 6,200,000 shares
issued and outstanding 85 62
Additional paid-in capital 20,397 -
Retained earnings 15,572 8,113
------ -----
Total shareholders' equity 36,054 8,175
------ -----
$58,324 $37,761
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 30, April 30,
1997 1996 1997 1996
Unaudited Unaudited
--------- ---------
<S> <C> <C> <C> <C>
Revenues $44,170 $50,764 $139,841 $141,264
Cost of revenues 37,732 43,848 119,923 121,816
------ ------ ------- -------
Gross profit 6,438 6,916 19,918 19,448
Selling, general and
administrative expenses 5,194 6,070 15,487 15,330
----- ----- ------ ------
Income from operations 1,244 846 4,431 4,118
Interest expense (2) (110) (193) (300)
Interest income 217 5 344 15
Other income (expense) - - 23 (7)
---- ---- ---- ----
Income before income taxes 1,459 741 4,605 3,826
Provision for income taxes 589 296 1,885 1,537
--- --- ----- -----
Net income $ 870 $ 445 $2,720 $2,289
====== ======== ====== ======
Net Income per share $0.10 $ 0.07 $0.36 $0.37
===== ======== ===== =====
Weighted average
shares outstanding 8,525,000 6,262,626 7,530,978 6,262,626
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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Manchester Equipment Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the nine months
ended April 30,
1997 1996
(Unaudited)
----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,720 $2,289
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 450 297
Allowance for doubtful accounts 210 319
Stock options granted to sales representatives 6 -
Change in assets and liabilities, net of the
effects of the purchase of Electrograph:
Increase in accounts receivable (1,606) (2,305)
(Increase) decrease in inventory (514) 865
Decrease in prepaid expenses and
other current assets 128 29
Increase in other assets (168) (98)
Increase (decrease) in accounts payable and
accrued expenses 1,009 (143)
Decrease in deferred service contract revenue (16) (28)
Increase (decrease) in income taxes payable (295) 416
Increase in deferred compensation payable 85 2
---- ----
Net cash provided by operating activities 2,009 1,643
----- -----
Cash flows from investing activities:
Capital expenditures (881) (413)
Proceeds from sale of assets 54 18
Purchases of marketable securities (2,947) -
Payment for purchase of Electrograph, net
of cash acquired (1,857) -
------ ----
Net cash used in investing activities (5,631) (395)
------ ----
Cash flows from financing activities:
Net repayments of borrowings (6,500) (2,100)
Payments on notes payable-shareholder (353) -
Payments on capital lease obligation (64) -
Net proceeds from initial public offering 20,414 -
------ -----
Net cash (used in) provided by
financing activities 13,497 (2,100)
------ ------
Net increase (decrease) in cash and cash equivalents 9,875 (852)
Cash and cash equivalents at beginning of period 5,774 1,834
----- -----
Cash and cash equivalents at end of period $15,649 $982
======= ====
</TABLE>
See notes to condensed consolidated financial statements.
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Manchester Equipment Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Organization and Basis of Presentation
Manchester Equipment Co., Inc. (the "Company") is a systems integrator and
reseller of computer hardware, software and networking products, primarily for
commercial customers. The Company offers its customers single-source solutions
customized to their information systems needs by combining value-added services
with hardware, software, networking products and peripherals from leading
vendors.
Sales of hardware, software and networking products comprise most of the
Company's revenues. Service revenues have not comprised a significant part of
revenues to date. The Company has entered into agreements with certain suppliers
and manufacturers which provide the Company favorable pricing and price
protection in the event the vendor reduces its prices.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting of only
normal and recurring accruals) necessary to present fairly the financial
position of the Company as of April 30, 1997 and the results of operations for
the three and nine months ended April 30, 1997 and 1996 and cash flows for the
nine months ended April 30, 1997 and 1996. Although the Company believes that
the disclosures herein are adequate to make the information not misleading,
these financial statements should be read in conjunction with the audited
financial statements and the notes thereto for the year ended July 31, 1996,
included in the Company's Prospectus dated November 25, 1996 prepared in
connection with the Company's initial public offering.
2. Net Income Per Share
Net income per share is based upon the weighted average number of common
shares and common share equivalents outstanding during each period. Common share
equivalents include dilutive stock options and warrants, if any, using the
treasury stock method.
3. Initial Public Offering
On December 2, 1996, the Company completed an initial public offering (the
"Offering") of 2,325,000 shares of its common stock (including 200,000
overallotment shares) at an initial public offering price of $10 per share. Net
proceeds to the Company were approximately $20.4 million, after deducting the
underwriting discounts and commissions and other costs associated with the
Offering.
4. Redeemable Common Stock
Prior to the consummation of the Offering, the Company had an agreement
with a retired shareholder whereby the Company would be required to redeem all
of the shares held by the shareholder in accordance with terms set forth in the
agreement. In September 1996, among other provisions, the retired shareholder
agreed to terminate his option to sell his remaining shares to the Company,
subject to successful completion of the Offering. As a result of the successful
completion of the Offering, in the April 30, 1997 Condensed Consolidated Balance
Sheet, the amounts which would have been due under this agreement have been
reclassified from redeemable common stock to retained earnings.
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5. Purchase of Electrograph Systems, Inc.
On April 25, 1997, the Company, through a newly formed wholly-owned
subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Electrograph Systems, Inc., a wholly owned subsidiary of Bitwise
Designs, Inc. Electrograph is a specialized distributor of microcomputer
peripherals, primarily in the eastern United States. The purchase price and
transaction costs, aggregated approximately $2.6 million, of which $2.5 million
was paid in cash at closing. In connection with the acquisition, the Company
assumed certain liabilities of Electrograph including debt with balances of
$1,264,000 in notes payable - bank and $307,000 in notes payable - other as of
April 30, 1997.
The acquisition has been accounted for as a purchase and the operating
results of Electrograph are included in the Condensed Consolidated Statements of
Income from the date of acquisition. The acquisition resulted in goodwill of
approximately $1,500,000 which is being amortized on the straight-line basis
over 20 years.
The following unaudited pro forma consolidated results of operations for
the nine months ended April 30, 1997 and 1996 assume that the Electrograph
acquisition occurred on August 1, 1995 and reflect the historical operations of
the purchased business adjusted for lower interest on invested funds and
increased amortization, net of applicable income taxes resulting from the
acquisition: <TABLE> <CAPTION>
1997 1996
(in thousands)
--------------
<S> <C> <C>
Revenues $155,579 $153,270
Net income 2,837 2,353
Net income per share $0.38 $0.38
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results that would have occurred had the acquisition been made at the
beginning of the period, or of results which may occur in the future.
6. Litigation
On March 28, 1997 a complaint was filed by plaintiff Vincent Manguard in
the United States District Court for the Eastern District of New York against
the Company, its President and Chief Executive Officer, its Executive Vice
President and Secretary, and its Chief Financial Officer. The plaintiff claims
to have purchased shares in the Company's Offering and purports to sue on his
own behalf and on behalf of a class of persons who purchased the Company's
common stock either pursuant to the Offering or in the period November 26, 1996
through February 13, 1997. The Complaint asserts that the Company and the
individual defendants made false or misleading statements and omissions in
connection with the Offering in violation of Sections 11, 12(a)(2) and 15 of the
federal Securities Act of 1933, and seeks damages on behalf of the putative
class in an unspecified amount and/or rescission, together with costs and
expenses of litigation.
The Company believes that the allegations in the complaint are entirely
without merit and intends vigorously to defend this matter.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and with the Company's
Prospectus dated November 25, 1996. This discussion and analysis contains
forward-looking statements within the meaning of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are not historical facts, and involves risks and uncertainties that could
cause actual results to differ from those expected and projected. These risks
and uncertainties include, but are not limited to, those set forth below and the
risk factors described in the Company's Prospectus.
GENERAL
Manchester is a systems integrator and reseller of computer hardware,
software and networking products, primarily for commercial customers. The
Company offers its customers single-source solutions customized to their
information systems needs by combining value-added services with hardware,
software, networking products and peripherals from leading vendors. To date,
most of the Company's revenues have been derived from product sales. The Company
generally does not develop or sell software products. However, certain computer
hardware products sold by the Company are loaded with pre-packaged software
products.
As a result of intense price competition within the computer industry as
well as other industry conditions, the Company has experienced increasing
pressure on its gross profit and operating margins with respect to the sale of
products. The Company's strategy includes increasing its focus on providing
value added services with operating margins that are higher than those obtained
with respect to the sale of products. The Company's future performance will
depend in part on its ability to manage successfully a continuing shift in its
operations to value-added services.
The Company directly competes with local, regional and national systems
integrators, value-added resellers ("VARs") and distributors as well as with
certain computer manufacturers that market through direct sales forces. In the
future, the Company may face further competition from new market entrants and
possible alliances between existing competitors. In addition, certain suppliers
and manufacturers may choose to market products directly to end users through a
direct sales force rather than or in addition to channel distribution. Some of
the Company's competitors have, or may have, greater financial, marketing and
other resources, and may offer a broader range of products and services, than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing or
devote greater resources to the promotion of their products and services. There
can be no assurance that the Company will be able to compete successfully in the
future with these or other current or potential future competitors.
The Company's business is dependent upon its relationships with major
manufacturers in the computer industry. There can be no assurance that the
pricing and related terms offered by major manufacturers will not adversely
change in the future. The failure to obtain an adequate supply of products, the
loss of a major manufacturer, the deterioration of the Company's relationship
with a major manufacturer or the Company's inability in the future to develop
new relationships with other manufacturers could have a material adverse effect
on the Company's business, results of operations and financial condition.
8
<PAGE>9
The Company's largest customer accounted for approximately 14% and 16% (or
$20,069,000, and $22,346,000, respectively) of the Company's revenues for the
nine months ended April 30, 1997 and 1996, respectively, substantially all of
which revenues were derived from the sale of hardware products. This customer
accounted for 16% of revenues for the fiscal year ended July 31, 1996. There can
be no assurance that the Company will continue to derive substantial revenues
from this customer.
The Company's profitability has been enhanced by its ability to obtain
volume discounts from certain manufacturers, which has been dependent in part
upon the Company's ability to sell products to computer resellers, including
VARs. There can be no assurance that the Company will be able to continue to
sell products to resellers and thereby obtain the desired discounts from the
manufacturers or that the Company will be able to increase sales to end-users to
offset the need to rely upon sales to resellers.
The markets for the Company's products and services are characterized by
rapidly changing technology and frequent introductions of new hardware and
software products and services, which render many existing products
noncompetitive, less profitable or obsolete. The Company believes that its
inventory controls have contributed to its ability to respond effectively to
these technological changes. As of April 30, 1997 and 1996, inventories
represented 19% and 27%, respectively of total assets. For the nine months ended
April 30, 1997 and 1996, annualized inventory turnover was 14 and 19 times,
respectively. Inventory turned 18 times in the fiscal year ended July 31, 1996.
The failure of the Company to anticipate technology trends or to continue to
effectively manage its inventory could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes its controls on accounts receivable have contributed
to its profitability. The Company's bad debt expense represented 0.2% of total
revenues in each of the nine month periods ended April 30, 1997 and 1996. For
the fiscal year ended July 31, 1996, bad debt expense represented 0.1% of total
revenues.
The Company's quarterly revenues and operating results have varied
significantly in the past and are expected to continue to do so in the future.
Quarterly revenues and operating results generally fluctuate as a result of the
demand for the Company's products and services, the introduction of new hardware
and software technologies with improved features, the introduction of new
services by the Company and its competitors, changes in the level of the
Company's operating expenses, the timely availability of product supply,
competitive conditions and economic conditions. In particular, the Company
currently is increasing its fixed operating expenses, including a significant
increase in personnel, as part of its strategy to increase its focus on
providing higher margin, value-added services. Accordingly, the Company believes
that period-to-period comparisons of its operating results should not be relied
upon as an indication of future performance. In addition, the results of any
quarterly period are not indicative of results to be expected for a full fiscal
year.
As a result of rapid changes which are taking place in computer and
networking technologies, product life cycles are short. Accordingly, the
Company's product offerings change constantly. Prices of products change with
generally higher prices early in the life cycle of the product and lower prices
near the end of the product's life cycle. The Company believes that the impact
of price or volume changes of any particular product or products is not material
to the Company's Consolidated Financial Statements.
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The Company's Chief Executive Officer has entered into an employment
agreement with the Company under which he will receive $550,000 in compensation,
exclusive of fringe benefits, for each of the fiscal years ending July 31, 1997
and 1998. In addition, the Company's Executive Vice President has agreed to
receive base compensation, exclusive of fringe benefits, of $450,000 for the
fiscal years ending July 31, 1997 and 1998. These officers have agreed that they
will not be entitled to any bonuses for fiscal 1997 and that any bonus payable
to either of these officers in fiscal 1998 will require the approval of a
majority of the independent directors of the Company. The Company leases certain
warehouse and offices from entities that are owned or controlled by the
Company's majority shareholder. Each of the leases with related parties has been
amended effective with the closing of the Offering to reduce the rent payable
under that lease to then current market rates.
RECENT ACQUISITION
On April 25, 1997, the Company, through a newly formed wholly-owned
subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Electrograph Systems, Inc., a wholly owned subsidiary of Bitwise
Designs, Inc. Electrograph is a specialized distributor of microcomputer
peripherals, primarily in the eastern United States. The purchase price and
transaction costs, aggregated approximately $2.6 million, of which $2.5 million
was paid in cash at closing. In connection with the acquisition, the Company
assumed certain liabilities of Electrograph including debt with balances of
$1,264,000 in notes payable - bank and $307,000 in notes payable - other as of
April 30, 1997.
The acquisition has been accounted for as a purchase and the operating
results of Electrograph are included in the Condensed Consolidated Statements of
Income from the date of acquisition. The acquisition resulted in goodwill of
approximately $1,500,000 which is being amortized on the straight-line basis
over 20 years.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's Condensed Consolidated Statements of Income expressed
as a percentage of revenues.
<TABLE> <CAPTION>
Percentage of Revenues
Three Months Ended Nine Months Ended
April 30 April 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 85.4 86.4 85.8 86.2
---- ---- ---- ----
Gross profit 14.6 13.6 14.2 13.8
Selling, general and
administrative expenses 11.8 12.0 11.0 10.9
---- ---- ---- ----
Income from operations 2.8 1.7 3.2 2.9
Interest and other income, net .5 ( .2) .1 (.2)
-- ---- --- ---
Income before income taxes 3.3 1.5 3.3 2.7
Provision for income taxes 1.3 .6 1.4 1.1
--- -- --- ---
Net income 2.0% .9% 1.9% 1.6%
=== == === ===
</TABLE>
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Three Months Ended April 30, 1997 Compared to Three Months Ended April 30, 1996
- --------------------------------------------------------------------------------
Revenues. The Company's revenues decreased $6.6 million or 13.0% from $50.8
million for the three months ended April 30, 1996 to $44.2 million for the three
months ended April 30, 1997 due to a general softness in the marketplace for
personal computers and peripherals, as well as lower revenues from the Company's
major customer.
Gross Profit. Cost of revenues includes the direct costs of products sold,
freight and the personnel costs associated with providing technical services,
offset in part by certain market development funds provided by manufacturers.
All other operating costs are included in selling, general and administrative
expenses. Gross profit decreased $478,000 or 6.9% from $6.9 million for the
third quarter of fiscal 1996 to $6.4 million for the most recent fiscal quarter.
As a percentage of revenues, gross profit increased from 13.6% in fiscal 1996 to
14.6% in fiscal 1997. The decrease in gross profit dollars is principally due to
the decrease in revenues. Competitive pressures, changes in the types of
products or services sold and product availability result in fluctuations in
gross profit from period to period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $876,000 or 14.4% from $6.1 million in the
third quarter of fiscal 1996 to $5.2 million in the third quarter of fiscal
1997. This decrease is principally a result of lower officers' salaries and
rents paid to related parties due to agreements that were entered into in
connection with the Company's initial public offering. Giving pro forma effect
to the changes in officers compensation and rents to related parties, described
above and under General, the pro forma selling, general and administrative
expenses would have been approximately $5.0 million or 9.8% of revenues for the
three months ended April 30, 1996.
Interest Income. Interest income increased from $5,000 in fiscal 1996 to
$217,000 in fiscal 1997 due to earnings on short term investments made with
certain of the proceeds from the Company's initial public offering.
Provision for Income Taxes. The effective income tax rate remained constant
at 40% of pre tax income.
NINE MONTHS ENDED APRIL 30, 1997 COMPARED TO NINE MONTHS ENDED APRIL 30, 1996
Revenues. The Company's revenues decreased $1.4 million or 1.0% from $141.3
million for the nine months ended April 30, 1996 to $139.8 million for the nine
months ended April 30, 1997 due to somewhat softer demand for personal computers
and peripherals as well as lower revenue from the Company's major customer.
Gross Profit. Gross profit increased $470,000 or 2.4% from $19.4 million
for the first nine months of fiscal 1996 to $19.9 million for the most recent
fiscal nine months. As a percentage of revenues, gross profit increased from
13.8% to 14.2%. The increase in gross profit percentage is primarily due to
changes in product mix. Competitive pressures, changes in the types of products
or services sold and product availability result in fluctuations in gross profit
from period to period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $157,000 or 1.0% from $15.3 million in the
first nine months of fiscal 1996 to $15.5 million in the first nine months of
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fiscal 1997. This increase is principally a result of higher payroll and related
costs due to the hiring of additional technical and administrative staff in
support of the Company's strategy to increase its value-added services revenue
partially offset by lower officers' salaries and rents paid to related parties.
In addition, the Company incurred higher insurance, depreciation and
professional fees during the current period. Giving pro forma effect to the
changes in officers compensation and rents to related parties, described above
and under General, the pro forma selling, general and administrative expenses
would have been $14.3 million or 10.1% of revenues for the nine months ended
April 30, 1996.
Interest Income. Interest income increased from $15,000 for the first nine
months of fiscal 1996 to $344,000 for the first nine months of fiscal 1997 due
to the earnings on the short term investments made with certain of the proceeds
from the Company's initial public offering.
Provision for Income Taxes. The effective income tax rate increased
slightly from 40% for the nine months ended April 30, 1996 to 41% for the nine
months ended April 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of financing have been internally generated
working capital from profitable operations and a line of credit from a financial
institution.
For the nine months ended April 30, 1997, cash provided by operating
activities was $2.0 million consisting primarily of net income offset by
increases in accounts receivable and inventory net of an increase in accounts
payable and accrued expenses. The Company's accounts receivable and accounts
payable and accrued expenses balances as well as its investment in inventory can
fluctuate significantly from one period to the next due to the receipt of large
customer orders or payments or variations in product availability and vendor
shipping patterns at any particular date. Generally, the Company's experience is
that increases in accounts receivable, inventory and accounts payable and
accrued expenses will coincide with growth in revenue and increased operating
levels. In addition, during the nine months ended April 30, 1997 the Company
used approximately $900,000 for capital expenditures, $1.9 million (net of cash
acquired) for the purchase of Electrograph Systems, Inc. and $2.9 million for
the purchase of marketable securities and generated $13.5 million in cash from
financing activities primarily from the net proceeds of the Offering ($20.4
million) partially offset by the net repayments of bank debt ($6.5 million).
The Company and a subsidiary have available lines of credit with a
financial institution in the aggregate amount of $13.5 million. All amounts
outstanding under this line at the completion of the Offering were repaid by the
Company with the proceeds from the Offering described below. At April 30, 1997,
a subsidiary of the Company has $1.3 million outstanding under its line of
credit.
On December 2, 1996, the Company completed an initial public offering (the
"Offering") of 2,325,000 shares (including 200,000 overallotment shares) of its
common stock resulting in net proceeds to the Company, after deducting
underwriting discount and expenses, of approximately $20.4 million. The Company
utilized $7.7 million of the proceeds from the Offering to repay the balance
outstanding at that date under its line of credit with a financial institution.
The remaining net proceeds have been invested in short-term, interest bearing,
investment grade securities.
The Company believes that its current balances in cash and cash equivalents
and marketable securities, expected cash flows from operations and available
borrowings under the line of credit will be adequate to support current
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<PAGE>13
operating levels for the foreseeable future, specifically through at least the
end of fiscal 1998. The Company has entered into commitments for the renovation
and expansion of certain of its sales and service facilities as well as for the
acquisition of a new internal telecommunications system. The aggregate
commitment for these projects is approximately $1.0 million which will be paid
out of the Company's available cash balances. The Company currently has no other
material commitments for capital expenditures. Future capital requirements of
the Company include those for the growth of working capital items such as
accounts receivable and inventory and the purchase of equipment and expansion of
facilities as well as the possible opening of new offices and potential
acquisitions.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 28, 1997 a complaint was filed by plaintiff Vincent Manguard in
the United States District Court for the Eastern District of New York against
the Company, its President and Chief Executive Officer, its Executive Vice
President and Secretary, and its Chief Financial Officer. The plaintiff claims
to have purchased shares in the Company's Offering and purports to sue on his
own behalf and on behalf of a class of persons who purchased the Company's
common stock either pursuant to the Offering or in the period November 26, 1996
through February 13, 1997. The Complaint asserts that the Company and the
individual defendants made false or misleading statements and omissions in
connection with the Offering in violation of Sections 11, 12(a)(2) and 15 of the
federal Securities Act of 1933, and seeks damages on behalf of the putative
class in an unspecified amount and/or rescission, together with costs and
expenses of litigation.
The Company believes that the allegations in the complaint are entirely
without merit and intends vigorously to defend this matter.
Item 6. Exhibits and Reports
(a) Exhibits
Exhibit No. Description
10.10 Asset Purchase Agreement among Electrograph Systems, Inc.,
Bitwise Designs, Inc. and Electrograph Acquisition, Inc.,
Manchester Equipment Co., Inc., April 15, 1997
27 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE>14
MANCHESTER EQUIPMENT CO., INC.
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.
MANCHESTER EQUIPMENT CO., INC.
(Registrant)
DATE: June 12, 1997 /s/ Barry Steinberg
----------------------
Barry Steinberg
President and Chief Executive Officer
DATE: June 12, 1997 /s/ Joseph Looney
-----------------
Joseph Looney
Chief Financial Officer
ASSET PURCHASE AGREEMENT
AMONG
ELECTROGRAPH SYSTEMS, INC.,
BITWISE DESIGNS, INC.
AND
ELECTROGRAPH ACQUISITION, INC.
MANCHESTER EQUIPMENT CO., INC.
April 15, 1997
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions ....................................
2. Basic Transaction ..............................
(a) Purchase and Sale of Assets ................
(b) Assumption of Liabilities ..................
(c) Preliminary Purchase Price..................
(d) Preliminary Purchase Price Adjustment.......
(e) Payment of Intercompany Liabilities.........
(f) The Closing ................................
(g) Deliveries at the Closing ..................
(h) Allocation .................................
3. Representations and Warranties of ESI...........
(a) Organization of ESI.........................
(b) Authorization of Transaction ...............
(c) Noncontravention ...........................
(d) Brokers' Fees ..............................
(e) Title to Assets ............................
(f) Financial Statements .......................
(g) Events Subsequent to Most Recent Fiscal
Year End .................................
(h) Undisclosed Liabilities ....................
(i) Legal Compliance ...........................
(j) Tax Matters ................................
(k) Real Property ..............................
(l) Intellectual Property ......................
(m) Tangible Assets ............................
(n) Inventory ..................................
(o) Contracts ..................................
(p) Notes and Accounts Receivable ..............
(q) Powers of Attorney .........................
(r) Insurance ..................................
(s) Litigation .................................
(t) Product Warranty ...........................
(u) Product Liability ..........................
(v) Employees ..................................
(w) Employee Benefits ..........................
(x) Guaranties .................................
(y) Environment, Health, and Safety ............
(z) Disclosure .................................
4. Representations and Warranties of Manchester
and EAI...................................
(a) Organization of Manchester .................
(b) Authorization of Transaction ...............
(c) Noncontravention ...........................
(d) Brokers' Fees ..............................
5. Pre-Closing Covenants ..........................
(a) General ....................................
(b) Notices and Consents .......................
(c) Operation of Business ......................
(d) Preservation of Business ...................
(e) Full Access ................................
(f) Notice of Developments .....................
6. Post-Closing Covenants .........................
(a) General ....................................
(b) Litigation Support .........................
(c) Transition .................................
(d) Confidentiality ............................
(e) Covenant Not to Compete ....................
<PAGE>
7. Conditions to Obligation to Close ..............
(a) Conditions to Obligation of Manchester
and EAI...................................
(b) Conditions to Obligation of ESI.............
8. Remedies for breaches of This Agreement ........
(a) Survival of Representations and Warranties .
(b) Indemnification Provisions for Benefit of
ESI............................................
(c) Indemnification Provisions for Benefit of
the Target ....................................
(d) Matters Involving Third Parties .............
(e) Determination of Adverse Consequences .......
(f) Other Indemnification Provisions ............
9. Termination .....................................
(a) Termination of Agreement ....................
(b) Effect of Termination .......................
10. Miscellaneous ...................................
(a) Press Releases and Public Announcements .....
(b) No Third-Party Beneficiaries ................
(c) Entire Agreement ............................
(d) Succession and Assignment ...................
(e) Counterparts ................................
(f) Headings ....................................
(g) Notices .....................................
(h) Governing Law ...............................
(i) Amendments and Waivers ......................
(j) Severability ................................
(k) Expenses ....................................
(l) Construction ................................
(m) Incorporation of Exhibits and Schedules .....
(n) Specific Performance ........................
(o) Submission to Jurisdiction ..................
(p) Tax Matters .................................
(q) Employee Benefits Matters ...................
(r) Bulk Transfer Laws ..........................
Exhibit A Statement of Assets
Exhibit B Form of Bill of Sale and Assignment
Exhibit C Allocation Schedule
Exhibit D November 30, 1996 Financial Statements
Exhibit E Form of Opinion of Counsel to ESI and Bitwise
Exhibit F Form of Opinion of Counsel to Manchester
and EAI
Exhibit G Manchester Promissory Note
Disclosure Schedule Exceptions to Representations and Warranties
<PAGE>
ASSET PURCHASE AGREEMENT
AGREEMENT entered into on April 15, 1997 by and among Manchester Equipment
Co., Inc., a New York corporation ("Manchester"), Electrograph Acquisition,
Inc., a New York Corporation ("EAI"), Bitwise Designs, Inc., a Delaware
corporation ("Bitwise") and Electrograph Systems, Inc., a New York corporation
("ESI"). Manchester, EAI, Bitwise and ESI are sometimes referred to collectively
herein as the "Parties."
WHEREAS, ESI is a value added distributor of microcomputer peripherals,
components and accessories;
WHEREAS, ESI is a wholly-owned subsidiary of Bitwise;
WHEREAS, Manchester desires to purchase substantailly all of the assets of
ESI and ESI desires to sell to Manchester substantially all of its assets upon
the terms contained herein.
WHEREAS, EAI is a newly formed subsidiary of Manchester which has been
created to acquire the assets of ESI.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. Definitions.
"Acquired Assets" means all right, title, and interest in and to all of the
assets of ESI as set forth on Exhibit A, including all of its (a) real property,
leaseholds and subleaseholds therein, improvements, fixtures, and fittings
thereon, and easements, rights-of-way, and other appurtenants thereto (such as
appurtenant rights in and to public streets), (b) tangible personal property
(such as machinery, equipment, Inventory), (c) Intellectual Property, goodwill
associated therewith, the tradename including "Electrograph Systems, Inc."
licenses and sublicenses granted and obtained with respect thereto, and rights
thereunder, remedies against infringements thereof, and rights to protection of
interests therein under the laws of all jurisdictions, (d) leases, subleases,
and rights thereunder, (e) agreements, contracts, indentures, mortgages,
instruments, Security Interests, guaranties, other similar arrangements, and
rights thereunder, (f) accounts, notes, and other receivables, (g) securities,
if any, (h) claims, deposits, prepayments, refunds, causes of action, choses in
action, rights of recovery, rights of set
<PAGE>
off, and rights of recoupment (including any such item relating to the payment
of Taxes), (i) franchises, approvals, permits, licenses, orders, registrations,
certificates, variances, and similar rights obtained from governments and
governmental agencies, (j) books, records, ledgers, files, documents,
correspondence, lists, plats, architectural plans, drawings, and specifications,
creative materials, advertising and promotional materials, studies, reports, and
other printed or written materials, (k) any Cash excluding the Mitsubishi Letter
of Credit Deposit; provided, however, that the Acquired Assets shall not include
(i) the corporate charter, qualifications to conduct business as a foreign
corporation, arrangements with registered agents relating to foreign
qualifications, taxpayer and other identification numbers, seals, minute books,
stock transfer books, blank stock certificates, and other documents relating to
the organization, maintenance, and existence of ESI as a corporation (ii) any of
the rights of ESI under this Agreement (or under any other agreement between ESI
on the one hand and Manchester on the other hand entered into on or after the
date of this Agreement) and (iii) any and all rights of ESI in and to the
Mitsubishi Letter of Credit Deposit.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and
fees, including court costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of Code
Sec. 1504(a) or any similar group defined under a similar provision of state,
local, or foreign law.
"Assumed Liabilities" means (a) all Liabilities of ESI as recorded on the
November 30, 1996 balance sheet, and as adjusted for the passage of time through
the Closing Date in accordance with past custom and practice and in the ordinary
course of business of ESI, and to be recorded on the Closing Date Financial
Statements, and subject to the representations and warranties of ESI herein, (b)
all obligations of ESI under the agreements, contracts, leases, licenses, and
other arrangements referred to in the definition of Acquired Assets either (i)
to furnish goods, services, and other non-Cash benefits to another party after
<PAGE>
the Closing or (ii) to pay for goods, services, and other non-Cash
benefits that another party will furnish to it after the Closing, (c) any
Liability of ESI for unpaid Taxes (with respect to ESI or otherwise) for periods
prior to the Closing which were not due and payable prior to Closing, exclusive
of federal and state income taxes and (d) any Liability or obligation under any
insurance policy, health or medical or life insurance plan of ESI in effect as
of the Closing Date; provided, however, the Assumed Liabilities shall not
include (i) any obligation of ESI to indemnify any Person by reason of the fact
that such Person was a director, officer, employee, or agent of ESI or was
serving at the request of ESI as a partner, trustee, director, officer,
employee, or agent of another entity (whether such indemnification is for
judgments, damages, penalties, fines, costs, amounts paid in settlement, losses,
expenses, or otherwise and whether such indemnification is pursuant to any
statute, charter document, bylaw, agreement, or otherwise), (ii) any Liability
of ESI for costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby, (iii) any Liability or obligation of ESI under
this Agreement (or under any other agreement between ESI on the one hand and EAI
or Manchester on the other hand entered into on or after the date of this
Agreement), (iv) any Liability or obligation of ESI under the Employee Benefit
Plan, (v) any Liability or obligation of ESI under the Nationsbank Loan
Agreements, (vi) any Liability or obligation with respect to the Mitsubishi
Letter of Credit or (vii) any Liability resulting from any breach of contract,
breach of warranty, tort infringement or violation of law or (viii) any
Liability not disclosed and expressly assumed.
"Bad Debt Account Receivables" means those account receivables of ESI
existing on the Closing Date which have not been collected within 120 days of
the Closing Date; provided, however, that EAI has used its best efforts to
collect such account receivables. "Best efforts" for purposes of this defined
term shall mean the sending of at least two lawyer letters to the account
debtor.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence.
"Book Value Adjustment" has the meaning set forth in Section 2(d) below.
"Cash" means cash and cash equivalents (including marketable securities and
short term investments) calculated in accordance with GAAP applied on a basis
consistent with the preparation of the Closing Date Financial Statements.
<PAGE>
"Closing" has the meaning set forth in Section 2(e) below.
"Closing Date" has the meaning set forth in Section 2(e) below.
"Closing Date Financial Statements" means the financial statements of ESI
to be prepared by Manchester at its cost reflecting the financial condition of
ESI as of the day prior to the Closing Date, prepared in accordance with GAAP
and in accordance with ESI's previous financial statements and to be delivered
to the Parties within 90 days of the Closing Date and accepted by the Parties in
writing. In the event of a dispute regarding the Closing Date Financial
Statements which cannot be resolved by the Parties within 15 days of delivery of
the Closing Date Financial Statements, the Closing Date Financial Statements
shall be reviewed by the Jericho, New York office of KPMG Peat Marwick, which
costs of review shall be split equally by Bitwise and Manchester, and the
decision of KPMG Peat Marwick shall be final.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of ESI that is not already generally available to the public.
"Controlled Group of Corporations" has the meaning set forth in Code Sec.
1563.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
"Employee Benefit Plan" means the Bitwise Designs, Inc. 401 K Plan.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec.
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec.
3(1).
"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,
<PAGE>
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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"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.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Indemnified Party" has the meaning set forth in Section 8(d) below.
"Indemnifying Party" has the meaning set forth in Section 8(d)below.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuance, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
<PAGE>
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including data and
related documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
"Intercompany Liabilities" means those Liabilities of ESI to Bitwise
Designs, Inc. in existence as of the day prior to the Closing Date other than
the sum equal to the value of the Mitsubishi Letter of Credit Deposit and
evidenced by a Certificate of the Chief Financial Officer of Bitwise and the
President of ESI delivered to EAI at Closing.
"Inventory" means all goods in process and finished goods, manufactured and
purchased parts and supplies and other items deemed inventory in accordance with
GAAP in the operation of ESI's business.
"Knowledge" means actual knowledge after reasonable investigation.
"Liability" means any liability (whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due), including
any liability for Taxes.
"Manchester Promissory Note" means the promissory note of EAC and
Manchester delivered to Bitwise in payment of the Intercompany Liabilities,
substantially in the form of Exhibit G annexed hereto.
"Mitsubishi Letter of Credit" means the letter of credit issued by the Bank
of New York to Mitsubishi Electronics on behalf of ESI.
"Mitsubishi Letter of Credit Deposit" means the $350,000 deposit made by
ESI in the Bank of New York in July, 1995 plus all accrued interest thereon to
the Closing Date as evidenced by certificate of deposit account number
697-0599965.
"Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37).
"Nationsbank" means Nations Credit Commercial Corporation.
<PAGE>
"Nationsbank Loan Agreements" means that certain Cross-Collateral Security
Agreement dated as of July 19, 1995, as amended by and among Bitwise, ESI and
Nationsbank.
"Non-Saleable Inventory" means any Inventory of ESI on the Closing Date
that is not sold within 180 days of the Closing Date; provided, however, that
EAI has used its best efforts to sell such Inventory. "Best efforts" for
purposes of this defined term shall mean that EAI has used commercially
reasonable efforts to sell such Inventory, including the implementation of
mark-downs in ESI's Ordinary Course of Business; provided, however, Bitwise
shall bear all financial responsibility as an adjustment for Non-Saleable
Inventory as set forth in Section 2(d)(ii) hereof for any mark-down which
reduces the sale price of any Inventory below cost.
"November 30, 1996 Financial Statements" has the meaning set forth in
Section 3(f) below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Prohibited Transaction" has the meaning set forth in ERISA Sec. 406 and
Code Sec. 4975.
"Preliminary Purchase Price" has the meaning set forth in Section 2(c)
below.
"Purchase Price" has the meaning set forth in Section 2(d) below.
"Preliminary Purchase Price Adjustment" has the meaning set forth on
Section 2(d) below.
"Reportable Event" has the meaning set forth in ERISA Sec. 4043.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
<PAGE>
"Subsidiary" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of sufficient securities to elect a majority of the
directors.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Sec. 59A), customs
duties, capital stock, franchise, profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 8(d) below.
2. Basic Transaction.
(a) Purchase and Sale of Assets. On and subject to the terms and conditions
of this Agreement, Manchester and EAI agree to purchase from ESI, and ESI agrees
to sell, transfer, convey, and deliver to Manchester and EAI, all of the
Acquired Assets at the Closing for the consideration specified below in this
Section 2.
(b) Assumption of Liabilities. On and subject to the terms and conditions
of this Agreement, Manchester and EAI agree to assume and become responsible for
all of the Assumed Liabilities at the Closing. Neither, Manchester nor EAI shall
assume or have any responsibility, however, with respect to any other obligation
or Liability of ESI not included within the definition of Assumed Liabilities.
Notwithstanding any other term or provision of this Agreement, the Parties
hereby acknowledge and agree that neither EAI nor Manchester shall assume any
obligation of ESI under (i) the Employee Benefit Plan or (ii) any employee
deferred compensation plan incurred prior to the Closing; (iii) the Nationsbank
Loan Agreement; or (iv) the Mitsubishi Letter of Credit or the Mitsubishi Letter
of Credit Deposit.
<PAGE>
(c) Preliminary Purchase Price. The preliminary purchase price
("Preliminary Purchase Price") payable by Manchester to ESI shall equal (i)
$2,500,000 by delivery of cash payable by wire transfer or delivery of other
immediately available funds (ii) the Intercompany Liabilities payable by
delivery of the Manchester Promissory Note and in accordance with Paragraph (d)
below; and (iii) assumption of the Assumed Liabilities and (iv) 50% of the Book
Value Adjustment, if any, payable by Manchester pursuant to paragraph (d) below.
(d) Preliminary Purchase Price Adjustments. The Preliminary Purchase Price
shall be subject to adjustment ("Preliminary Purchase Price Adjustment") in
accordance with this Paragraph (d). Any and all Preliminary Purchase Price
Adjustments required to be made by Bitwise shall be payable first through
reduction of principal of the Manchester Promissory Note and second, by cash
payments by Bitwise to EAC or Manchester and otherwise in accordance with this
Paragraph (d) and Paragraph (e) below. All Preliminary Purchase Price
Adjustments shall be subject to the agreement of the Parties and shall be
evidenced by written agreement thereof.
(i) Book Value Adjustment. The Parties agree that the Purchase Price shall
be subject to upward or downward adjustment in an amount equal to 50% of the
amount ("Book Value Adjustment") by which the book value of ESI (as determined
in accordance with GAAP) on the Closing Date Financial Statements varies from
the book value (as determined in accordance with GAAP) of ESI as set forth on
the November 30, 1996 Financial Statements. In the event the book value
increased from November 30, 1996, then Manchester or EAI shall pay the 50%
difference thereof to Bitwise within 10 days of receipt of the Closing Date
Financial Statements. In the event the book value of ESI decreased from November
30, 1996, then Bitwise shall pay the 50% difference thereof to EAI or Manchester
within 10 days of receipt of the Closing Date Financial Statements. For purposes
herein, "book value" shall be defined to mean Assets minus Liabilities, all as
determined in accordance with GAAP.
(ii) Adjustment for Non-Saleable Inventory. At the Closing, ESI shall
deliver to EAI or Manchester a list of all Inventory which list shall include
the cost of each item of Inventory. The Preliminary Purchase Price shall be
subject to reduction in the event that there exists Non-Saleable Inventory. At
the expiration of 180 days of the Closing Date, Manchester and EAI shall deliver
to ESI and/or Bitwise a list of all Non-Saleable Inventory. The Preliminary
Purchase Price shall be reduced to the extent that the cost of such Non-Saleable
Inventory exceeds the Inventory Reserve as set forth on the Closing Date
Financial Statements. In addition, the Preliminary Purchase Price shall also be
reduced to reflect the sale of any Inventory below cost. The Parties agree that
the Inventory Reserve on the Closing Date Financial Statements shall not be less
than $50,000.
<PAGE>
(iii) Adjustment for Bad Debt Accounts Receivable. At the Closing, ESI
shall deliver to EAC and Manchester a detailed statement of outstanding accounts
receivable as of a date which is within five days of the Closing Date. The
Preliminary Purchase Price shall be subject to reduction in the event that there
exists Bad Debt Account Receivable which cannot be collected within 120 days
from the Closing Date. The Preliminary Purchase Price shall be reduced to the
extent that the value of such Bad Debt Receivables exceeds the Bad Debt Reserve
as set forth on the Closing Date Financial Statements. For purposes hereof, the
value of the Bad Debt Receivables shall be the face value thereof.
The "Purchase Price" shall be deemed to be the Preliminary Purchase Price
as adjusted pursuant to this Paragraph (d).
(e) Payment of Intercompany Liabilities; Reduction of Manchester Promissory
Note for Preliminary Purchase Price Adjustments. Manchester shall deliver to
Bitwise the Manchester Promissory Note in payment of the Intercompany
Liabilities. Any and all Preliminary Purchase Price Adjustments required to be
made by Bitwise shall be made first through reduction in the principal amount of
the Manchester Promissory Note. In no event shall the amount of either
Preliminary Purchase Price Adjustment set forth in each of clause (d)(ii) or
(d)(iii) above separately exceed the amount of $100,000.
Any and all disputes among the Parties shall be set forth in writing. In
the event that the Parties cannot in good faith resolve their dispute within a
reasonable period of time, not to exceed 30 days, then the dispute will be
submitted to the Jericho, New York office of KPMG Peat Marwick. The costs of any
submission to KPMG Peat Marwick shall be shared by each Party.
In the event that any Inventory is deemed to Non-Saleable Inventory and an
adjustment is made under Section 2 (d)(ii) hereof or in the event that any
account receivable is deemed to be a Bad Debt Account Receivable and an
adjustment is made under Section 2(d)(iii) hereof, Bitwise shall have the right
to obtain such Non-Saleable Inventory or Bad Debt Account Receivable from EAI
and to sell such Non-Saleable Inventory or to collect upon such Bad Debt Account
Receivable.
<PAGE>
(f) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Goldstein &
DiGioia, LLP at 369 Lexington Avenue, New York New York 10017, commencing at
10:00 a.m. local time on April 18, 1997, or such other date as the Parties may
mutually determine (the "Closing Date"); provided, however, that the Closing
Date shall be no later than May 2, 1997.
(g) Deliveries at the Closing. At the Closing, (i) ESI will deliver to
Manchester the various certificates, instruments, and documents referred to in
Section 7(a) below; (ii) Manchester will deliver to ESI the various
certificates, instruments, and documents referred to in Section 7(b) below;
(iii) ESI will execute, acknowledge (if appropriate), and deliver to Manchester
(A) the Bill of Sale and Assignment (including real property and Intellectual
Property transfer documents) in the form of Exhibit B; (B) such other
instruments of sale, transfer, conveyance, and assignment as Manchester and its
counsel reasonably may request; (iv) Manchester will execute, acknowledge (if
appropriate), and deliver to ESI such instruments of assumption as ESI and its
counsel reasonably may request; and (v) Manchester and EAI will deliver to ESI
the consideration specified in Section 2(c) above.
(h) Allocation. The Parties agree to allocate the Purchase Price (and all
other capitalizable costs) among the Acquired Assets for all purposes (including
financial accounting and tax purposes) in accordance with the allocation
schedule attached hereto as Exhibit C.
3. Representations and Warranties of ESI. ESI represents and warrants to
Manchester and EAI that the statements contained in this Section 3 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3), except as
set forth in the disclosure schedule accompanying this Agreement and initialed
by the Parties (the "Disclosure Schedule"). The Disclosure Schedule will be
arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Section 3.
<PAGE>
(a) Organization of ESI. ESI is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation.
(b) Authorization of Transaction. ESI has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. Without limiting the
generality of the foregoing, the board of directors of ESI and Bitwise Designs,
Inc., as the sole stockholder of ESI, have duly authorized the execution,
delivery, and performance of this Agreement by ESI. This Agreement constitutes
the valid and legally binding obligation of ESI, enforceable in accordance with
its terms and conditions.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which ESI is subject or any provision of the
charter or bylaws of ESI or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which ESI is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Security Interest upon any of its
assets) (subject to the right of any third party to consent to any assignment).
ESI does not need to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement (including the assignments and assumptions referred to in Section 2
above).
(d) Brokers' Fees. ESI has no Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which Manchester could become liable or
obligated. ESI does not have any Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
(e) Title to Assets. Except as set forth in Paragraph 3(e) to the
Disclosure Schedule, ESI has good and marketable title to, or a valid leasehold
interest in, the properties and assets used by them, located on their premises,
or shown on the Most Recent Financial Statements or acquired after the date
thereof, free and clear of all Security Interests, except for properties and
assets disposed of in the Ordinary Course of Business since the date of the Most
Recent Balance Sheet. Without limiting the generality of the foregoing, ESI has
good and marketable title to all of the Acquired Assets, free and clear of any
Security Interest or restriction on transfer except as set forth in Paragraph
3(e) to the Disclosure Schedule.
<PAGE>
(f) Financial Statements. Attached hereto as Exhibit C are the unaudited
balance sheets and statements of income, and cash flow as of and for the
five-month period ended November 30, 1996 (collectively, the "November 30, 1996
Financial Statements"). The November 30, 1996 Financial Statements (including
the notes thereto, if any) have been prepared in accordance with GAAP applied on
a consistent basis throughout the periods covered thereby, present fairly the
financial condition of ESI as of such dates and the results of operations of ESI
for such periods, are correct and complete, and are consistent with the books
and records of ESI (which books and records are correct and complete) provided,
however, that the November 30, 1996 Financial Statements are subject to normal
year-end adjustments (which will not be material individually or in the
aggregate) and lack footnotes and other presentation items.
(g) Events Subsequent to November 30, 1996 Financial Statements. Since the
November 30, 1996 Financial Statements, there has not been any material adverse
change in the business, financial condition, operations, results of operations,
or future prospects ESI. Without limiting the generality of the foregoing, since
that date:
(i) ESI has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration in the
Ordinary Course of Business;
(ii) ESI has not entered into any agreement, contract, lease, or
license (or series of related agreements, contracts, leases, and licenses)
either involving more than $25,000 or outside the Ordinary Course of
Business;
(iii)no party (including any of ESI) has accelerated, terminated,
modified, or cancelled any agreement, contract, lease, or license (or
series of related agreements, contracts, leases, and licenses) involving
more than $25,000 to which ESI is a party or by which any of them is bound;
(iv) ESI has not imposed any Security Interest upon any of its assets,
tangible or intangible;
(v) ESI has not made any capital expenditure (or series of related
capital expenditures) either involving more than $25,000 or outside the
Ordinary Course of Business;
(vi) ESI has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money or capitalized lease obligation either involving more than $25,000
singly or $75,000 in the aggregate;
(viii) ESI has not delayed or postponed the payment of accounts
payable and other Liabilities outside the Ordinary Course of Business;
(ix) ESI has not cancelled, compromised, waived, or released any right
or claim (or series of related rights and claims) the Ordinary Course of
Business;
(x) ESI has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
<PAGE>
(xi) ESI has not issued, sold, or otherwise disposed of any of its
capital stock, or granted any options, warrants, or other rights to
purchase or obtain (including upon conversion, exchange, or exercise) any
of its capital stock;
(xii)ESI has not declared, set aside, or paid any dividend or made any
distribution with respect to its capital stock (whether in cash or in kind)
or redeemed, purchased, or otherwise acquired any of its capital stock;
(xiii) ESI has not experienced any material damage, destruction, or
loss (whether or not covered by insurance) to its property;
(xiv)ESI has not made any loan to, or entered into any other
transaction with, any of the directors, officers, and employees of ESI
outside the Ordinary Course of Business;
(xv) Other than as set forth on Schedule G (XV) of the Disclosure
Schedule ESI has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any
existing employment contract or collective bargaining agreement; (xvi) ESI
has not granted any increase in the base compensation of any of its
directors, officers, and outside the Ordinary Course of Business;
(xvii) ESI has not adopted, amended, modified, or terminated any
bonus, profit-sharing, incentive, severance, or other plan, contract, or
commitment for the benefit of any of the directors, officers, and employees
of ESI or taken any such action with respect to the Employee Benefit Plan;
(xviii) ESI has not made any other change in employment terms for any
of its directors, officers, and employees outside the Ordinary Course of
Business;
(xix)ESI has not made or pledged to make any charitable or other
capital contribution outside the Ordinary Course of Business;
(xx) ESI has not paid any amount to any third party with respect to
any Liability or obligation (including any costs and expenses ESI has
incurred or may incur in connection with this Agreement and the
transactions contemplated hereby) which would not constitute an Assumed
Liability if in existence as of the Closing other than the liabilities
arising under the Nationsbank Loan Agreement;
(xxi) there has not been any other material occurrence, event,
incident, action, failure to act, or transaction outside the Ordinary
Course of Business involving ESI; and
(xxii) ESI has not committed to any of the foregoing.
<PAGE>
(h) Undisclosed Liabilities. ESI does not have any Liability (and, to its
knowledge, there is no Basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against any of them
giving rise to any Liability), except for (i) Liabilities set forth on the face
of the November 30, 1996 Financial Statements (rather than in any notes thereto)
and (ii) Liabilities which have arisen after the November 30, 1996 in the
Ordinary Course of Business (none of which results from, arises out of, relates
to, is in the nature of, or was caused by any breach of contract, breach of
warranty, tort, infringement, or violation of law).
(i) Legal Compliance. To its Knowledge ESI has materially complied with all
applicable 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), and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand, or notice
has been filed or, to its knowledge, commenced against any of them alleging any
failure so to comply except where failure to comply would not have any material
adverse effect upon ESI or its business.
(j) Tax Matters.
(i) ESI has filed all Tax Returns that it was required to file prior
to the Closing Date. All such Tax Returns were correct and
complete in all respects. All Taxes owed by ESI (whether or not
shown on any Tax Return) have been paid. ESI currently is not the
beneficiary of any extension of time within which to file any Tax
Return. No claim has ever been made by an authority in a
jurisdiction where ESI does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of ESI that arose in
connection with any failure (or alleged failure) to pay any Tax.
(ii) ESI has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other
third party.
(iii)Neither ESI nor any director nor officer (or employee responsible
for Tax matters) expects any authority to assess any additional
Taxes with respect to ESI for any period for which Tax Returns
have been filed. There is no dispute or claim concerning any Tax
Liability of ESI either (A) claimed or raised by any authority in
writing or (B) as to which any directors and officers (and
employees responsible for Tax matters) of ESI.
(iv) ESI has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax
assessment or deficiency.
<PAGE>
(v) ESI has not filed a consent under Code Sec. 341(f) concerning
collapsible corporations. ESI has not been a United States real
property holding corporation within the meaning of Code Sec.
897(c)(2) during the applicable period specified in Code Sec.
897(c)(1)(A)(ii). ESI has not been a member of an Affiliated
Group filing a consolidated federal income Tax Return (other than
a group the common parent of which was Bitwise) or (B) has any
Liability for the Taxes of any Person (other than any of ESI and
its Subsidiaries) under Treas. Reg.ss.1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(vi) Section 3(j) of the Disclosure Schedule sets forth the the
basisof ESI in its assets as of March 31, 1997;
(k) Real Property.
(i) ESI does not own any real property.
(ii) Section 3(k)(ii) of the Disclosure Schedule lists and describes
briefly all real property leased or subleased by ESI. ESI has delivered to
Manchester correct and complete copies of the leases and subleases listed in
Section 3(k)(ii) of the Disclosure Schedule (as amended to date). With respect
to Each lease and sublease listed in Section 3(k)(ii) of the Disclosure
Schedule:
(A) the lease or sublease is legal, valid, binding, enforceable, and
in full force and effect;
(B) the lease or sublease will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms
following the consummation of the transactions contemplated
hereby (subject to the rights of any third party to consent to
any assignments and assumptions);
(C) ESI is not in material breach or material default, and no event
was occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(D) to the best of ESI's knowledge, no party to the lease or sublease
has repudiated any provision thereof;
(E) to the best of ESI's knowledge, there are no disputes, oral
agreements, or forbearance programs in effect as to the lease or
sublease;
(F) with respect to Each sublease, the representations and warranties
set forth in subsections (A)-(E) above are true and correct with
respect to the underlying lease;
<PAGE>
(G) to the best of ESI's Knowledge, ESI has not assigned,
transferred, conveyed, mortgaged, deeded in trust, or encumbered
any interest in the leasehold or subleasehold, except pursuant to
the Nationsbank Loan Agreements;
(l) Intellectual Property.
(i) ESI owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property necessary for the operation
of its businesses as presently conducted. Each item of Intellectual Property
owned or used by ESI immediately prior to the Closing hereunder will be owned or
available for use by Manchester or EAI on identical terms and conditions
immediately subsequent to the Closing hereunder.
(ii) To the best of ESI's knowledge, ESI has not interfered with, infringed
upon, misappropriated, or otherwise come into conflict with any Intellectual
Property rights of third parties, and neither ESI nor its directors and officers
(and employees with responsibility for Intellectual Property matters) has ever
received any charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any claim
that ESI must license or refrain from using any Intellectual Property rights of
any third party). To the Knowledge of ESI and its directors and officers (and
employees with responsibility for Intellectual Property matters), no third party
has interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of ESI.
(m) Tangible Assets. ESI owns or leases all buildings, machinery,
equipment, and other tangible assets necessary for the conduct of their
businesses as presently conducted. To ESI's Knowledge, Each such tangible asset
is free from 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.
(n) Inventory. The inventory of ESI consists of manufactured and purchased
parts, goods in process, and finished goods, all of which is merchantable and
fit for the purpose for which it was procured, and none of which is slow-moving,
obsolete, damaged, or defective, subject only to the reserve for inventory
writedown set forth on the face of the November 30, 1996 Financial Statements as
adjusted for the passage of time through the Closing Date in accordance with
past custom and practice.
<PAGE>
(o) Contracts. Section 3(0) of the Disclosure Schedule lists the following
contracts and other agreements to which ESI is a party:
(i) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease
payments in excess of $20,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services,
the performance of which will extend over a period of more than one
year, result in a material loss to any of ESI, or involve
consideration in excess of $20,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which
it has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
$20,000 or under which it has imposed a Security Interest on any of
its assets, tangible or intangible;
(v) any agreement concerning confidentiality or noncompetition;
(vi) any agreement involving any of Bitwise or its Affiliates;
(vii)any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan
or arrangement for the benefit of the current or former directors,
officers, and employees;
(viii) any collective bargaining agreement;
(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $20,000 or providing severance benefits;
(x) any agreement under which it has advanced or loaned any
amount to any of the directors, officers, and employees outside the
Ordinary Course of Business; (xi) any agreement under which the
consequences of a default or termination could have a material adverse
effect on the business, financial condition, operations, results of
operations, or future prospects of ESI; or
<PAGE>
(xii)any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $20,000.
ESI has delivered to Manchester and EAI a correct and complete copy of Each
written agreement listed in Section 3(o) of the Disclosure Schedule (as amended
to date). With respect to Each such agreement: (A) the agreement is legal,
valid, binding, enforceable, and in full force and effect; (B) the agreement
will continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby subject to the right of any third party to consent to such
assignment; (C) to its knowledge, no party is in breach or default, and no event
has occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; and (D) to its knowledge, no party has repudiated any provision of
the agreement.
(p) Notes and Accounts Receivable. All notes and accounts receivable of ESI
are reflected properly on ESI's books and records, are valid receivables subject
to no setoffs or counterclaims, are current and collectible, and will be
collected in accordance with their terms at their recorded amounts, subject only
to the reserve for bad debts set forth on the face of the November 30, 1996
Financial Statements (rather than in any notes thereto) as adjusted for the
passage of time through the Closing Date in accordance with the past custom and
practice of ESI.
(q) Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of ESI other than as set forth in the Nationsbank Loan
Agreement.
(r) Insurance. Section 3(r) of the Disclosure Schedule sets forth to each
insurance policy (including policies providing property, casualty, liability,
and workers' compensation coverage and bond and surety arrangements) to which
ESI is currently a party, a named insured, or otherwise the beneficiary of
coverage:
With respect to each such insurance policy: (A) the policy is legal, valid,
binding, enforceable, and in full force and effect; (B) ESI is not in breach or
default (including with respect to the payment of premiums or the giving of
notices), and no event has occurred which, with notice or the lapse of time,
would constitute such a breach or default, or permit termination, modification,
or acceleration, under the policy; and (C) no party to the policy has repudiated
any provision thereof.
<PAGE>
(s) Litigation. Section 3(s) of the Disclosure Schedule sets forth each
instance in ESI (i) is subject to any outstanding injunction, judgment, order,
decree, ruling, or charge or (ii) is a party or, to the Knowledge of any of
ESI's directors and officers (and employees with responsibility for litigation
matters) of ESI, is threatened to be made a party to any action, suit,
proceeding, hearing, or investigation of, in, or before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator. None of the actions, suits, proceedings,
hearings, and investigations set forth in Section 3(s) of the Disclosure
Schedule could result in any material adverse change in the business, financial
condition, operations, results of operations, or future prospects of any of ESI.
(t) Product Warranty. Each product manufactured, sold, leased, or delivered
by ESI has been in conformity with all applicable contractual commitments and
all express and implied warranties, and ESI to the best of its Knowledge, has no
Liability (and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any of them giving rise to any Liability) for replacement or repair thereof or
other damages in connection therewith, subject only to the reserve for product
warranty claims set forth on the face of the November 30, 1996 Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice. No product
manufactured, sold, leased, or delivered by ESI is subject to any guaranty,
warranty, or other indemnity beyond the applicable standard terms and conditions
of sale or lease.
(u) Product Liability. To the best of its Knowledge, ESI has no Liability
(and there is no Basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against any of them
giving rise to any Liability) arising out of any injury to individuals or
property as a result of the ownership, possession, or use by it.
(v) Employees. To the best of ESI's Knowledge no executive, key employee,
or group of employees has any plans to terminate employment. ESI is not a party
to or bound by any collective bargaining agreement, nor has any of them
experienced any strikes, grievances, claims of unfair labor practices, or other
collective bargaining disputes.
<PAGE>
(w) Employee Benefits.
(i) Section 3(w) of the Disclosure Schedule lists each Employee
Benefit Plan that ESI maintains or to which ESI contributes.
(a) Each such Employee Benefit Plan (and Each related trust,
insurance contract, or fund) complies in form and in operation in all
respects with the applicable requirements of ERISA, the Code, and
other applicable laws.
(b) To its knowledge, each such Employee Benefit Plan which is an
Employee Pension Benefit Plan meets the requirements of a "qualified
plan" under Code Sec. 401(a).
(c) ESI has delivered to Manchester and EAI correct and complete
copies of the plan documents and summary plan descriptions.
(d) ESI does not currently maintain, has not maintained since
August 7, 1994 and has no Liability with respect to any Multiemployer
Plan.
(ii) Section 3 (w) of the Disclosure Schedule also sets forth all
other fringe benfits such as medical, health or life insurance plans
provided by ESI to its employees. ESI shall deliver a copy of all such
plans to Manchester prior to closing.
(x) Guaranties. Except as set forth in Paragraph 3(X) of the Disclosure
Schedule, ESI is not a guarantor or otherwise is liable for any Liability or
obligation (including indebtedness) of any other Person.
(y) Environment, Health, and Safety.
To its knowledge, ESI 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, ESI 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.
<PAGE>
(z) Disclosure. The representations and warranties contained in this
Section 3 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.
4. Representations and Warranties of Manchester and EAI. Each of EAI and
Manchester represents and warrants to ESI that the statements contained in this
Section 4 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
Section 4), except as set forth in the Disclosure Schedule. The Disclosure
Schedule will be arranged in paragraphs corresponding to the lettered and
numbered paragraphs contained in this Section 4.
(a) Organization of EAI and Manchester. Each of EAI and Manchester is a
corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation.
(b) Authorization of Transaction. Each of EAI and Manchester has full power
and authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of Each of EAI and
Manchester, enforceable in accordance with its terms and conditions.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Manchester or EAI is subject or any
provision of its charter or bylaws or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which Manchester or EAI is a party or by which it is bound or to which any of
its respective assets is subject. Neither EAI nor Manchester needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement.
<PAGE>
(d) Brokers' Fees. Neither EAI nor Manchester has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which ESI, or
Bitwise could become liable or obligated.
5. Pre-Closing Covenants. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
(a) General. Each of the Parties will use its best efforts to take all
action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 7 below).
(b) Notices and Consents. ESI will give any notices to third parties, and
ESI will use its reasonable best efforts to obtain any third party consents
and/or estoppels that Manchester or EAI reasonably may request in connection
with the matters referred to in Section 3(c) above. Each of the Parties will
give any notices to, make any filings with, and use its reasonable best efforts
to obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred to in Section 3(c)
and Section 4(c) above.
(c) Operation of Business. ESI will not engage in any practice, take any
action, or enter into any transaction outside the Ordinary Course of Business.
Without limiting the generality of the foregoing, ESI will not (i) pay any
amount to any third party with respect to any Liability or obligation (including
any costs and expenses ESI has incurred or may incur in connection with this
Agreement and the transactions contemplated hereby) which would not constitute
an Assumed Liability if in existence as of the Closing, or (ii) otherwise engage
in any practice, take any action, or enter into any transaction of the sort
described in Section 3(g) above.
(d) Preservation of Business. ESI will keep its business and properties
substantially intact, including its present operations, physical facilities,
working conditions, and relationships with lessors, licensors, suppliers,
customers, and employees.
(e) Full Access. ESI will permit representatives of Manchester and EAI to
have full access at all reasonable times, and in a manner so as not to interfere
with the normal business operations to all premises, properties, personnel,
books, records (including Tax records), contracts, and documents.
<PAGE>
(f) Notice of Developments. Each Party will give prompt written notice to
the other Party of any material adverse development causing a breach of any of
its own representations and warranties in Section 3 and Section 4 above. No
disclosure by any Party pursuant to this Section 5(f), however, shall be deemed
to amend or supplement the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
(g) Exclusivity. ESI will not (i) solicit, initiate, or encourage the
submission of any proposal or offer from any Person relating to the acquisition
of any capital stock or other voting securities, or any substantial portion of
its assets, (including any acquisition structured as a merger, consolidation, or
share exchange) or (ii) participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any Person to do or seek
any of the foregoing. ESI will notify Manchester immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
6. Post-Closing Covenants. The Parties agree as follows with respect to the
period following the Closing.
(a) General. In case at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement, Each of the
Parties will take such further action (including the execution and delivery of
such further instruments and documents) as the other Party reasonably may
request, all the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Section 8 below).
ESI acknowledges and agrees that from and after the Closing EAI and Manchester
will be entitled to possession of all documents, books, records (including Tax
records), agreements, and financial data of any sort relating to the business
except for stock ledgers and minute books.
(b) Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection with (i) any
transaction contemplated under this Agreement or (ii) any fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction on or prior to the Closing Date
involving the business of ESI as conducted prior to the Closing Date, the other
Pary will cooperate with the contesting or defending Party and its counsel in
the contest or defense, make available its personnel, and provide such testimony
and access to its books and records as shall be necessary in connection with the
contest or defense, all at the sole cost and expense of the contesting or
defending Party (unless the contesting or defending Party is entitled to
indemnification therefor under Section 8 below).
<PAGE>
(c) Transition. ESI will not take any action that is designed or intended
to have the effect of discouraging any lessor, licensor, customer, supplier, or
other business associate from maintaining the same business relationships with
EAI or Manchester after the Closing as it maintained with ESI prior to the
Closing. ESI will refer all customer inquiries relating to the business of ESI
to EAI or Manchester from and after the Closing.
(d) Confidentiality. ESI will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential Information
except in connection with this Agreement, and deliver promptly to Manchester or
destroy, at the request and option of Manchester, all tangible embodiments (and
all copies) of the Confidential Information which are in its possession. In the
event that ESI is requested or required (by oral question or request for
information or documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar process) to disclose any Confidential
Information, ESI will notify Manchester promptly of the request or requirement
so that Manchester may seek an appropriate protective order or waive compliance
with the provisions of this Section 6(d). If, in the absence of a protective
order or the receipt of a waiver hereunder, ESI is, on the advice of counsel,
compelled to disclose any Confidential Information to any tribunal or else stand
liable for contempt, ESI may disclose the Confidential Information to the
tribunal; provided, however, that ESI shall use its reasonable best efforts to
obtain, at the reasonable request of Manchester, an order or other assurance
that confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as Manchester shall designate.
(e) Covenant Not to Compete. For a period of five years from and after the
Closing Date, neither Bitwise, its affiliates nor ESI will engage directly or
indirectly in any business that ESI conducts as of the Closing Date in any
geographic area in which ESI conducts that business as of the Closing Date;
provided, however, that (i) Manchester acknowledges and consents to the
continued operation of present businesses conducted by Bitwise and its
affiliates as of the date hereof and agrees that Bitwise and its affiliates may
continue such business after the Closing Date and (ii) no owner of less than 5%
of the outstanding stock of any publicly traded corporation shall be deemed to
engage solely by reason thereof in any of its businesses. In order to effectuate
the covenant contained herein, Bitwise and its affiliates agree that it shall
not represent Mitsubishi, Sony or Nokia in the sale of computer monitors. In
addition, Bitwise and its affiliates represent and warrant that it does not have
possession of any customer lists of ESI and if it comes into possession of any
such lists it will immediately return such lists to Manchester. If the final
judgment of a court of competent jurisdiction declares that any term or
provision of this Section 6(e) is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
<PAGE>
7. Conditions to Obligation to Close.
(a) Conditions to Obligation of Manchester. The obligation of Manchester
and EAI to consummate the transactions to be performed by Each of them in
connection with the Closing is subject to satisfaction of the following
conditions:
(i) the representations and warranties of ESI set forth in
Section 3 above shall be true and correct in all material respects at
and as of the Closing Date;
(ii) ESI shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) ESI shall have procured all of the third party consents
and/or estoppels specified in Section 5(b) above including; without
limitation, the consent of all distributors of the assignment of all
distribution and service agreements to Manchester in form acceptable
to Manchester;
(iv) no action, suit, or proceeding shall be pending before any
court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge
would (A) prevent consummation of any of the transactions contemplated
by this Agreement, (B) cause any of the transactions contemplated by
this Agreement to be rescinded following consummation, (C) affect
adversely the right of EAI to own the Acquired Assets or to operate
the former businesses of ESI as conducted prior to the Closing, or (D)
affect adversely the its right to own its assets and to operate its
businesses (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
(v) ESI shall have delivered to Manchester and EAI a certificate
to the effect that Each of the conditions specified above in Section
7(a)(i)-(iv) is satisfied in all respects;
<PAGE>
(vi) ESI shall have delivered to EAI a copy of a certificate of
name change to be filed with the Secretary of State of New York within
five days of the closing;
(vii) Manchester and EAI shall have received from counsel to ESI
an opinion in form and substance as set forth in Exhibit E attached
hereto, addressed to Manchester and EAI, and dated as of the Closing
Date;
(viii) all actions to be taken by ESI in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to Manchester and EAI.
Manchester and EAI may waive any condition specified in this Section 7(a) if it
executes a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of ESI. The obligation of ESI to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 4
above shall be true and correct in all material respects at and as of
the Closing Date; (ii) Each of Manchester and EAI shall have performed
and complied with all of its covenants hereunder in all material
respects through the Closing;
(iii) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
(iv) Each of EAI and Manchester shall have delivered to ESI a
certificate to the effect that Each of the conditions specified above
in Section 7(b)(i)-(iii) is satisfied in all respects;
(v) ESI shall have obtained a release of ESI and Bitwise from
Mitsubishi Electronics of America and Sony with respect to all
guarantees and letters of credit issued in connection with the
agreements set forth on Schedule 3(o) annexed hereto, and ESI shall
have received the original Mitsubishi Letter of Credit;
(vi) Manchester shall have paid to Nationsbank all amounts owed
by ESI as of the Closing Date under the Nationsbank Loan Agreement;
<PAGE>
(vii) Manchester shall have obtained the written release of ESI
and Bitwise with respect to any and all Assumed Liabilities or
Acquired Assets, or, in the alternative, in the event that such
releases cannot be obtained, indemnified Bitwise and ESI with respect
thereto;
(viii) ESI shall have received from counsel to Manchester and EAI
an opinion in form and substance as forth in Exhibit F attached
hereto, addressed to ESI, and dated as of the Closing Date;
(ix) Manchester and EAC shall have delivered the Manchester
Promissory Note;
(x) EAI and Sam Taylor shall have entered into an employment
agreement upon terms acceptable to EAI; and
(xi) all actions to be taken by Manchester and/or EAI in
connection with consummation of the transactions contemplated hereby
and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be
reasonably satisfactory in form and substance to ESI.
ESI may waive any condition specified in this Section 7(b) if it executes a
writing so stating at or prior to the Closing.
8. Remedies for Breaches of This Agreement.
(a) Survival of Representations and Warranties.
All of the representations and warranties of Manchester and EAI and ESI
contained in this Agreement shall survive the Closing and continue in full force
and effect for a period of six (6) months.
(b) Indemnification Provisions for Benefit of Manchester and EAI.
(i) In the event ESI or Bitwise breaches (or in the event any
third party alleges facts that, if true, would mean ESI has breached)
any of its respective representations, warranties, and covenants
contained in this Agreement, and, if there is an applicable survival
period pursuant to Section 8(a) above, provided that Manchester or EAI
makes a written claim for indemnification against ESI pursuant to
Section 10(g) below within such survival period, then ESI and Bitwise
agree, jointly and severally, to indemnify Manchester and EAI from and
against the entirety of any Adverse Consequences Manchester or EAI may
suffer through and after the date of the claim for indemnification
(including any Adverse Consequences Manchester or EAI may suffer after
the end of any applicable survival period) resulting from, arising out
of, relating to, in the nature of, or caused by the breach (or the
alleged breach) provided, however, that ESI or Bitwise shall not have
any obligation to indemnify Manchester or EAI from and against any
Adverse Consequences resulting from, arising out of, relating to, in
the nature of, or caused by the breach (or alleged breach) of any
representation or warranty of ESI or Bitwise until Manchester or EAI
<PAGE>
has suffered Adverse Consequences by reason of all such breaches (or
alleged breaches) in excess of a $75,000 aggregate threshold and after
application of the accrued contingency reserve as set forth in the
Closing Date Financial Statements(at which point ESI will be obligated
thereafter to indemnify Manchester and EAI from and against all such
Adverse Consequences). The $75,000 aggregate threshold provided for
herein shall not be applicable to the Preliminary Purchase Price
Adjustments provided for in Sections 2(d)(ii) or (iii) herein.
(ii) ESI and Bitwise agree to indemnify Manchester and EAI from
and against the entirety of any Adverse Consequences Manchester or EAI
may suffer resulting from, arising out of, relating to, in the nature
of, or caused by any Liability of ESI which is not an Assumed
Liability including any Liability of ESI that becomes a Liability of
Manchester or EAI under any bulk transfer law (other than bulk
transfer sales taxes) of any jurisdiction, under any common law
doctine of de facto merger or successor liability, or otherwise by
operation of law .
(iii) The Parties agree that any and all obligations incurred
hereunder for indemnification for the benefit of Manchester or EAI
shall be satisfied first through reduction of the principal amount of
the Manchester Promissory Note.
(c) Indemnification Provisions for Benefit of ESI.
(i) In the event Manchester or EAI breaches (or in the event any
third party alleges facts that, if true, would mean Manchester or EAI
has breached) any of its representations, warranties, and covenants
contained in this Agreement, and, if there is an applicable survival
period pursuant to Section 8(a) above, provided that ESI makes a
written claim for indemnification against Manchester pursuant to
Section 10(g) below within such survival period, then Manchester
agrees to indemnify ESI from and against the entirety of any Adverse
Consequences ESI may suffer through and after the date of the claim
for indemnification (including any Adverse Consequences ESI may suffer
after the end of any applicable survival period) resulting from,
arising out of, relating to, in the nature of, or caused by the breach
(or the alleged breach).
(ii) Manchester agrees to indemnify ESI and Bitwise from and
against the entirety of any Adverse Consequences ESI may suffer
resulting from, arising out of, relating to, in the nature of, or
caused by any Assumed Liability (including any Liability of ESI that
becomes a Liability of Manchester or EAI for any bulk transfer sales
taxes of any jurisdiction);
<PAGE>
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may
give rise to a claim for indemnification against the other Party (the
"Indem-nifying Party") under this Section 8, then the Indemnified
Party shall promptly notify the Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the Indemnified Party
in notifying the Indemnifying Party shall relieve the Indemnifying
Party from any obligation hereunder unless (and then solely to the
extent) the Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its
choice reasonably satis-factory to the Indemnified Party so long as
(A) the Indemnifying Party notifies the Indemnified Party in writing
within 15 days after the Indemnified Party has given notice of the
Third Party Claim that the Indemnifying Party will indemnify the
Indemnified Party from and against the entirety of any Adverse
Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party
Claim, (B) the Indemnifying Party provides the Indemnified Party with
evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against
the Third Party Claim and fulfill its indemnification obligations
hereunder, (C) the Third Party Claim involves only money damages and
does not seek an injunction or other equitable relief, (D) settlement
of, or an adverse judgment with respect to, the Third Party Claim is
not, in the good faith judgment of the Indemnified Party, likely to
establish a precedential custom or practice materially adverse to the
continuing business interests of the Indemnified Party, and (E) the
Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(iii) So long as the Indemnifying Party is conducting the defense
of the Third Party Claim in accordance with Section 8(d)(ii) above,
(A) the Indemnified Party may retain separate co-counsel at its sole
cost and expense and participate in the defense of the Third Party
Claim, (B) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party (not
to be withheld unreasonably), and (C) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
<PAGE>
(iv) In the event any of the conditions in Section 8(d)(ii) above
is or becomes unsatisfied, however, (A) the Indemnified Party may
defend against, and consent to the entry of any judgment or enter into
any settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, the Indemnifying Party in
connection therewith), (B) the Indemnifying Party will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees
and expenses), and (C) the Indemnifying Party will remain responsible
for any Adverse Consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of, or
caused by the Third Party Claim to the fullest extent provided in this
Section 8.
(e) Determination of Adverse Consequences. All indemnification payments
under this Section 8 shall be deemed adjustments to the Purchase Price.
(f) Other Indemnification Provisions. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of representation,
warranty, or covenant.
9. Termination.
(a) Termination of Agreement. The Parties may terminate this Agreement as
provided below:
(i) Manchester or ESI may terminate this Agreement by mutual
written consent at any time prior to the Closing;
(ii) Manchester may terminate this Agreement by giving written
notice to ESI at any time prior to the Closing (A) in the event ESI or
Bitwise has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect,
Manchester has notified ESI of the breach, and the breach has
continued without cure for a period of 10 days after the notice of
breach or (B) if the Closing shall not have occurred on or before
April 30, 1997, by reason of the failure of any condition precedent
under Section 7(a) hereof (unless the failure results primarily from
Manchester or EAI itself breaching any representation, warranty, or
covenant contained in this Agreement); and
<PAGE>
(iii) ESI may terminate this Agreement by giving written notice
to Manchester at any time prior to the Closing (A) in the event
Manchester or EAI has breached any material representation, warranty,
or covenant contained in this Agreement in any material respect, ESI
has notified Manchester of the breach, and the breach has continued
without cure for a period of 10 days after the notice of breach or (B)
if the Closing shall not have occurred on or before April 30, 1997, by
reason of the failure of any condition precedent under Section 7(b)
hereof (unless the failure results primarily from ESI or Bitwise
itself breaching any representation, warranty, or covenant contained
in this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to Section 9(a) above, all rights and obligations of the Parties hereunder shall
terminate without any Liability of any Party to the other Party (except for any
Liability of any Party then in breach).
10. Miscellaneous.
(a) Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of the other
Party; provided, however, that any Party 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 best efforts to advise the other Party
prior to making the disclosure).
(b) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the Parties and supersedes any
prior understandings, agreements, or representations by or between the Parties,
written or oral, to the extent they have related in any way to the subject
matter hereof.
(d) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party; provided, however, that Manchester may (i) assign any or all
of its rights and interests hereunder to one or more of its Affiliates and (ii)
designate one or more of its Affiliates to perform its obligations hereunder (in
any or all of which cases Manchester nonetheless shall remain responsible for
the performance of all of its obligations hereunder).
<PAGE>
(e) Counterparts. This Agreement may be executed in one or more
counterparts, Each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if it is sent by (i)
registered or certified mail, return receipt requested, postage prepaid, and
shall be deemed received within three business days of mailing and (ii) by
overnight courier service addressed to the intended recipient as set forth below
and be deemed received on the next business day:
If to ESI or Bitwise: Copy to: Goldstein & DiGioia LLP
Bitwise Designs, Inc. 396 Lexington Avenue
Technology Center New York, NY 10017
Rotterdam Industrial Park Attn: Victor J. DiGioia, Esq.
Schenectady, NY 12306
If to Manchester or EAI: Copy to: Kressel Rothlein & Roth, Esqs.
Manchester Equipment Co. Inc. 684 Broadway
50 Marcus Blvd. Massapequa, NY 11758
Hauppauge, NY 11788 Attn: Joel Rothlein, Esq.
Attn: Joe Looney
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, messenger service, telecopy,
telex, ordinary mail, or electronic mail), but no such notice, request, demand,
claim, or other communication shall be deemed to have been duly given unless and
until it actually is received by the intended recipient. Any Party may change
the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Party notice in
the manner herein set forth.
<PAGE>
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New York without giving effect
to any choice or conflict of law provision or rule (whether of the State of New
York or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of New York.
(i) Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by Manchester and
ESI. No waiver by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
(j) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) Expenses. Each Party will bear his or its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(l) Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. Nothing in the
Disclosure Schedule shall be deemed adequate to disclose an exception to a
representation or warranty made herein unless the Disclosure Schedule identifies
the exception with reasonable particularity and describes the relevant facts in
reasonable detail. Without limiting the generality of the foregoing, the mere
listing (or inclusion of a copy) of a document or other item shall not be deemed
adequate to disclose an exception to a representation or warranty made herein
(unless the representation or warranty has to do with the existence of the
document or other item itself). The Parties intend that Each representation,
warranty, and covenant contained herein shall have independent significance. If
any Party has breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the
relative levels of specificity) which the Party has not breached shall not
detract from or mitigate the fact that the Party is in breach of the first
representation, warranty, or covenant.
(m) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
<PAGE>
(n) Specific Performance. Each of the Parties acknowledges and agrees that
the other Party would be damaged irreparably in the event any of the provisions
of this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, Each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 10(o) below), in addition
to any other remedy to which it may be entitled, at law or in equity.
(o) Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in New York, New York, in any
action or proceeding arising out of or relating to this Agreement and agrees
that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each Party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the Parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other Party with respect thereto. Each
Party agrees that a final judgment in any action or proceeding so brought shall
be conclusive and may be enforced by suit on the judgment or in any other manner
provided by law or in equity.
(p) Tax Liability. Manchester and EAI shall indemnify and hold harmless
Bitwise and ESI from any and all additional income tax liability up to $23,500,
if any, as a result of this transaction being consummated as an asset purchase
instead of a sale of the stock of ESI to Manchester. The amount of such
liability shall be determined by the Albany, New York office of KPMG Peat
Marwick. Such amount shall be paid within 10 days of receipt of written notice
from KPMG Peat Marwick.
(q) Employee Benefits Matters. Neither EAI nor Manchester will adopt or
assume at and as of the Closing any of the Employee Benefit Plans or deferred
compensation plans (except the health, medical and life insurance plans) that
ESI maintains or any trust, insurance contract, annuity contract, or other
funding arrangement that ESI has established with respect thereto. ESI and
Bitwise will not transfer (or cause the plan administrators to transfer) at and
as of the Closing any of the corresponding assets associated with the Employee
Benefit Plans.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
<PAGE>
(r) Bulk Transfer Laws. Manchester acknowledges that ESI will not comply
with the provisions of any bulk transfer laws of any jurisdiction in connection
with the transactions contemplated by this Agreement. Manchester hereby agrees
to indemnify and hold harmless ESI and Bitwise for any and all bulk sales taxes
to which ESI or Bitwise may become subject as a result of or in connection with
any bulk transfer law of any jurisdiction.
* * * * *
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the
date first above written.
ELECTROGRAPH SYSTEMS, INC.
By: /s/ John Botti
------------------
Name: John Botti
Title: Chairman
MANCHESTER EQUIPMENT CO., INC.
By:/s/ Barry Steinberg
----------------------
Name: Barry Steinberg
Title: President
BITWISE DESIGNS, INC.
By:/s/ John Botti
-----------------
Name: John Botti
Title:
ELECTROGRAPH ACQUISITIONS INC.
By: /s/ Barry Steinberg
------------------------
Name: Barry Steinberg
Title:
<PAGE>
April 15, 1997
Manchester Equipment Co., Inc.
Electrograph Acquisition, Inc.
50 Marcus Blvd.
Hauppauge, New York 11788
Re: Electrograph Asset Purchase Agreement
Gentlemen:
Reference is made to that certain Asset Purchase Agreement dated as of this
date among Manchester Equipment Co., Inc. ("Manchester"), Electrograph
Acquisition Inc. ("EAC"), Bitwise Designs, Inc. and Electrograph Systems, Inc.
("ESI"). This letter shall confirm our mutual agreement that neither Manchester
nor EACX shall assume any liability or obligation related to the general
insurance policies (such as general liability, real property, casuality and the
like) of ESI. EAC shall assume the employee health, medical and life policies of
ESI. ESI shall have the right to terminate all of such policies immediately
after the Closing.
The parties hereby agree that the definition of "Assumed Liabilities" as
set forth in the Asset Purchase Agreement shall be deemed amended to effectuate
the terms of this letter.
ELECTROGRAPH SYSTEMS, INC. BITWISE DESIGNS, INC.
By: /s/ John Botti, Chairman By: /s/ John Botti, Chairman
- ---------------------------- ----------------------------
Name: John Botti Name: John Botti
ACCEPTED AND AGREED:
MANCHESTER EQUIPMENT CO., INC. ELECTROGRAPH ACQUISITION INC.
By: /s/ Barry Steinberg, President By: /s/ Barry Steinberg
- ---------------------------------- -----------------------
Name: Barry Steinberg Name: Barry Steinberg
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> APR-30-1997
<CASH> 15,649
<SECURITIES> 2,947
<RECEIVABLES> 23,705
<ALLOWANCES> 1,135
<INVENTORY> 11,177
<CURRENT-ASSETS> 52,760
<PP&E> 6,371
<DEPRECIATION> 3,695
<TOTAL-ASSETS> 58,324
<CURRENT-LIABILITIES> 21,891
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 35,969
<TOTAL-LIABILITY-AND-EQUITY> 58,324
<SALES> 139,841
<TOTAL-REVENUES> 139,841
<CGS> 119,923
<TOTAL-COSTS> 119,923
<OTHER-EXPENSES> 15,487
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> 4,605
<INCOME-TAX> 1,885
<INCOME-CONTINUING> 2,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,720
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
