<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File No. 0-20190
BITWISE DESIGNS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 14-1673067
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
Technology Center, Rotterdam Industrial Pk,Schenectady,NY, 12306
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(518) 356-9740
_______________________________________________________________________________
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No _____
7,344,720 shares of Common Stock, par value $.001 per share, were
outstanding at May 7, 1997.
Page 1 of 14
<PAGE> 2
BITWISE DESIGNS INCORPORATED
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 1997 and June 30, 1996 3-4
Consolidated Statements of Operations -
Three and nine months ended March 31, 1997
and March 31, 1996 5
Consolidated Statements of Cash Flows -
Nine months ended March 31, 1997
and March 31, 1996 6-7
Notes to Consolidated Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II OTHER INFORMATION
Item 5 Other Information 13
Safe Harbor Statement 13
Signatures 14
</TABLE>
Page 2 of 14
<PAGE> 3
PART I FINANCIAL INFORMATION
BITWISE DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,504,819 $ 3,377,305
Accounts receivable, net of allowance
for doubtful accounts of $173,061 at March
31, 1997 and $215,000 at June 30, 1996 7,626,067 5,271,933
Due from related parties 205,846 124,136
Inventories 5,191,906 4,061,645
Income taxes receivable 1,109 16,810
Prepaid expenses and other current assets 288,197 249,893
----------- -----------
Total current assets 14,817,944 13,101,722
Property and equipment, net 996,535 946,931
----------- -----------
Other assets:
Due from related parties -- 128,123
Software development costs, net 74,813 36,275
Other assets 80,210 57,931
Excess of cost over net assets of
acquired companies, net 5,392,195 5,609,055
----------- -----------
Total assets $21,361,697 $19,880,037
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 3 of 14
<PAGE> 4
BITWISE DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, June 30,
1997 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $ 4,189,624 $ 2,815,942
Current portion of long-term debt 1,730 20,205
Current portion of obligations under
capital leases 6,019 26,885
Accounts payable 5,503,741 3,968,248
Accrued expenses and other liabilities 366,846 403,569
------------ ------------
Total current liabilities 10,067,960 7,234,849
------------ ------------
Long-term debt, net of current portion 475 1,905
Obligations under capital leases, net of
current portion 4,636 9,268
Other liabilities -- 6,776
------------ ------------
Total liabilities 10,073,071 7,252,798
------------ ------------
Shareholders' equity:
Preferred stock -$.10 par value, 5,000,000 shares authorized:
Series A -200 shares issued and outstanding 20 20
Series B convertible preferred-112,003 shares
issued and outstanding at June 30, 1996 -- 11,200
Common stock-$.001 par value; 20,000,000
shares authorized; shares issued:
7,344,720 at March 31, 1997 and
6,754,606 at June 30, 1996 7,345 6,755
Additional paid-in capital 18,962,001 18,277,114
Accumulated deficit (7,680,317) (5,667,427)
------------ ------------
11,289,049 12,627,662
Less cost of common shares in treasury,
338 shares (423) (423)
------------ ------------
Total shareholders' equity 11,288,626 12,627,239
------------ ------------
Total liabilities and shareholders' equity $ 21,361,697 $ 19,880,037
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4 of 14
<PAGE> 5
BITWISE DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the 3 months ended For the 9 months ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 14,063,762 $ 7,190,970 $ 40,820,293 $ 20,735,114
Cost of goods sold 12,180,848 5,968,519 33,965,316 17,526,101
------------ ----------- ------------ ------------
Gross profit 1,882,914 1,222,451 6,854,977 3,209,013
Selling, general and
administrative expenses 2,789,670 2,072,275 8,456,481 4,614,275
Product development costs 36,697 29,896 124,467 65,342
------------ ----------- ------------ ------------
Operating loss (943,453) (879,720) (1,725,971) (1,470,604)
Other income (expense):
Interest expense (133,727) (62,968) (327,343) (152,435)
Interest and other income 25,733 67,340 83,361 109,607
------------ ----------- ------------ ------------
Loss before taxes (1,051,447) (875,348) (1,969,953) (1,513,432)
Income tax expense (9,944) (4,010) (42,937) (23,036)
------------ ----------- ------------ ------------
Net loss ($ 1,061,391) ($ 879,358) ($ 2,012,890) ($ 1,536,468)
============ =========== ============ ============
Per share amounts:
Net loss per common
share ($ 0.14) ($ 0.15) ($ 0.28) ($ 0.30)
============ =========== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5 of 14
<PAGE> 6
BITWISE DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the 9 months ended
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,012,890) ($1,536,468)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 496,321 363,210
Provision for doubtful accounts 42,826 11,750
Changes in operating assets and liabilities:
Accts. receivable & from related parties (2,350,547) (1,095,666)
Inventories (1,130,261) (1,320,460)
Prepaid expenses & other assets (38,541) (76,847)
Accounts payable and accrued expenses 1,491,995 518,676
Income taxes receivable 15,701 4,027
Other (7,187) --
----------- -----------
Net cash used in
operating activities (3,492,583) (3,131,778)
----------- -----------
Cash flows from investing activities:
Property and equipment expenditures (275,421) (324,277)
Software development costs (82,038) (21,830)
Trademarks (25,000) --
Notes receivable -- (125,658)
Acquisition of business, net of cash
acquired -- (34,179)
Deferred licensing costs -- (4,978)
----------- -----------
Net cash used in investing
activities (382,459) (510,922)
----------- -----------
Cash flows from financing activities:
Incr.borrowings under lines of credit, net 1,373,682 921,930
Principal payments on long-term debt (19,905) (141,062)
Principal payments - capital lease obligations (25,498) (23,675)
Dividends (7,610) (22,831)
Payment of deferred offering costs (29,940) --
Proceeds - exercise of common stock warrants 711,827 657,773
Proceeds from issuance of common stock, net -- 4,263,147
----------- -----------
Net cash provided by
financing activities 2,002,556 5,655,282
----------- -----------
Net increase(decrease) in cash & cash equivalents (1,872,486) 2,012,582
Cash and cash equivalents, beginning of year 3,377,305 2,058,498
----------- -----------
Cash and cash equivalents, end of period $ 1,504,819 $ 4,071,080
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
Page 6 of 14
<PAGE> 7
BITWISE DESIGNS, INC.
SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
OTHER SUPPLEMENTAL INFORMATION: For the 9 months ended
March 31, March 31,
1997 1996
-------- --------
<S> <C> <C>
Interest Paid $310,454 $141,887
Income Taxes Paid $ 26,536 $ 19,009
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
CONVERSION OF 112,003 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK TO
COMMON STOCK:
See accompanying notes to the consolidated financial statements.
Page 7 of 14
<PAGE> 8
BITWISE DESIGNS, INC.
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its wholly-owned subsidiaries, Electrograph Systems, Inc.,
System Solutions Technology, Inc. and DJS Marketing Group, Inc. (the Company).
All significant intercompany accounts and transactions have been eliminated in
consolidation. The management of the Company believes the accompanying unaudited
consolidated financial statements contain all adjustments necessary to fairly
present the financial position as of March 31, 1997 and June 30, 1996 and
results of operations and cash flows for each of the periods presented.
2. The results of operations for the three and nine months ended March 31, 1997
and 1996 are not necessarily indicative of the results to be expected for the
full year.
3. Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
Form 10-KSB for the fiscal year ended June 30, 1996.
4. On April 25, 1997, Bitwise completed the sale of one of its subsidiaries,
Electrograph Systems, Inc. for $2,500,000 plus other consideration. The sale was
structured as an asset sale and all liabilities were assumed by the purchaser.
In addition, Bitwise received approximately $335,000 for the payment of
intercompany accounts owed by Electrograph to Bitwise, and Bitwise retained
$350,000 in Electrograph cash deposits. The consolidated financial statements
include the financial position, results of operations and cash flows of
Electrograph for the three and nine months ended March 31, 1997.
5. On March 8, 1996, Bitwise completed its acquisition of DJS Marketing Group,
Inc. (DJS). The shareholders of DJS received $80,000 in cash and 200,000 shares
of restricted common stock of Bitwise in exchange for 4,000 outstanding shares
of DJS common stock. The cost of the acquisition was $1,130,000.
6. In December 1995, the Company completed a private equity offering exempt from
registration under Regulation D of the Securities Act of 1933. The offering
consisted of units, each unit comprised of common stock and redeemable common
stock warrants of $5,000,000. Net proceeds of the offering approximated
$4,200,000 after all expenses.
7. In connection with the acquisition of SST, 112,003 shares of preferred stock
designated as Series B Convertible Preferred Stock were issued. In August 1996,
all of the Series B shareholders elected to convert their shares into common
stock.
Page 8 of 14
<PAGE> 9
8. During the nine months ended March 31, 1997, 352,142 common stock warrants
were exercised with the proceeds totaling approximately $712,000.
9. Net income/(loss) per share of common stock is computed using the weighted
average number of shares of common stock outstanding during each year. The
weighted average number of shares of common stock used in calculating earnings
per share was 7,322,517 and 7,140,042 for the three and nine months ended March
31, 1997, respectively and 6,054,899 and 5,124,635 for the three and nine months
ended March 31, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(Statement 128), which establishes standards for computing and presenting
earnings per share (EPS). This Statement simplifies the standards for computing
EPS making them comparable to international EPS standards and supercedes
Accounting Principles Board Opinion No. 15, "Earnings per Share" and related
interpretations. Statement 128 replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution (such as the effect of the Company's
outstanding stock options) and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity (such as the Company's stock options). This
Statement is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented.
The Company will present its EPS information in accordance with
Statement 128 as of December 31, 1997. Management has not yet assessed the
effect the adoption of this Statement will have on the Company's consolidated
financial statements.
Page 9 of 14
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
consolidated financial statements and notes contained elsewhere in this Form
10-QSB.
RESULTS OF OPERATIONS
THE THREE AND NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE AND NINE
MONTHS ENDED MARCH 31, 1996.
The Company realized a consolidated net loss of $1,061,391 and
$2,012,890 for the three and nine months ended March 31, 1997, respectively.
This compares to a consolidated net loss of $879,358 and $1,536,468 for the same
periods last year. The Company had consolidated net sales of $14,063,762 and
$40,820,293 for the three and nine months ended March 31, 1997, respectively.
This compares to consolidated net sales of $7,190,970 and $20,735,114 for the
same periods last year.
The sales increase is due to the acquisition of DJS Marketing Group,
Inc. ("DJS") on March 8, 1996. DJS had sales of $5,007,852 and $12,163,307 for
the three and nine months ended March 31, 1997, respectively. The consolidated
sales increase is also due to the growth in the Company's DocStar product line,
which is a document imaging and retrieval system. DocStar sales totaled
$1,190,803 and $4,822,901 for the three and nine months ended March 31, 1997,
respectively; compared to $554,149 and $812,921 for the same periods last year.
The Company's year-to-date and current quarter loss is due to losses
incurred by the Company's Imaging Division, which markets the DocStar product
line. DocStar was introduced to the national market place in January 1996.
Previously it was only test marketed in the Albany, NY region. The DocStar
product line has not yet achieved sufficient sales volume to generate a profit.
In the last fiscal year the Company incurred and for the current fiscal year
ending June 30, 1997 expects to continue to incur significant costs to
introduce, market and sell the DocStar product line, as well as continued
Research and Development expenditures. The DocStar product line is sold
nationally through the office equipment dealer channel. The Company continues to
recruit new dealers across the country which results in significant personnel,
advertising, marketing and travel expenditures.
Gross profit for the three and nine months ended March 31, 1997, was
$1,882,914 and $6,854,977, respectively. This compares to gross profit of
$1,222,451 and $3,209,013 for the same periods last year. The gross profit
margin was 13.4% and 16.8% for the three and nine months ended March 31 , 1997
compared to 17.0% and 15.5% for the same periods last year. The gross profit
margin (which is defined as gross profit as a percentage of sales) increased
from 15.5% to 16.8% during the current fiscal year compared to the prior year
due to the growth of the Company's DocStar product line which has significantly
higher margins than other product lines of the Company.
Page 10 of 14
<PAGE> 11
Selling, general and administrative expenses (S,G&A) consist of all
other Company expenses except product development costs and interest. S,G&A
expenses amounted to $2,789,670 and $8,456,481 for the three and nine months
ended March 31, 1997, respectively; compared to $2,072,275 and $4,614,275 for
the same periods last year. S,G&A expenses increased due to the addition of DJS
Marketing Group, Inc. in March 1996, which incurred S,G&A expenses of $430,337
and $1,181,339 during the three and nine months ended March 31, 1997. Only
minimal costs related to DJS were incurred the prior year as DJS was acquired on
March 8, 1997. In addition, the Company incurred significant expenses related to
the DocStar product line. DocStar S,G&A expenses amounted to $1,362,153 and
$3,972,493 for the three and nine months ended March 31, 1997 compared to
$874,300 and $1,448,661 for the same periods last year.
As a percentage of sales, S,G&A costs decreased from 28.8% and 22.3%
for the three and nine months ended March 31, 1996 to 19.8% and 20.7% for the
three and nine months ended March 31, 1997, respectively. The decrease is due to
the sales growth in all Company businesses and the fact that sales have grown at
a faster rate than S,G&A costs, so that as a percentage of sales S,G&A costs
have decreased.
Interest expenses totaled $133,727 and $327,343 for the three and nine
months ended March 31, 1997, respectively; and $62,968 and $152,435 for the same
periods last year. The increase in interest cost is due to the acquisition of
DJS which incurred interest on its line of credit borrowings. It is also due to
increased borrowings by all other operations of the Company under an existing
line of credit caused by an increase in sales and related increases in inventory
and accounts receivable. Interest rates decreased slightly during the nine
months ended March 31, 1997 compared to the same period during last year.
Product development expenses relate primarily to software development
of the Company's DocStar product line and increased from $29,896 and $65,342 for
the three and nine months ended March 31, 1996 to $36,697 and $124,467 for the
three and nine months ended March 31, 1997. The Company has a policy of
capitalizing software development costs and amortizing those costs over three
years as product development expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to date have been the issuance
of equity and the incurrence of third party debt. The principal balance of
long-term debt at March 31, 1997 totaled $2,205.
The Company also has two working capital lines of credit totaling
$7,300,000 which are collateralized by all accounts receivable, inventory and
all other assets of the Company and its subsidiaries. At March 31, 1997 the
total outstanding balance was $4,189,624. One of the credit lines, in the
principal amount of $2,300,000 , may only be utilized by DJS. The other line of
credit of $5,000,000 may be utilized by Bitwise, Electrograph (ESI) and System
Solutions (SST). Each company's availability under the $5,000,000 line is based
on a formula of accounts receivable and inventory and may not exceed $5,000,000
in total.
Page 11 of 14
<PAGE> 12
With the sale of ESI in April 1997, the $5,000,000 line will be reduced
to $3,000,000 and may be utilized by Bitwise and SST.
The debt accrues interest at rates ranging from the prime rate plus
1.75% to 2% per annum. The line of credit agreements include various covenants
which require the Company and the subsidiaries to maintain a minimum tangible
net worth, maximum debt to tangible net worth and for DJS a minimum tangible
current ratio. They also require delivery of periodic financial information and
quarterly audits conducted by the lender. At March 31, 1997 Management believes
that the Company was in compliance with all of the above mentioned financial
covenants.
The Company completed a private equity offering including common stock
and warrants with gross proceeds of $5,000,000 in December 1995 under Section
4(2) of the Securities Act of 1933 or Regulation D; net proceeds approximated
$4,200,000, after expenses. The Company has used and anticipates using most of
the proceeds to fund sales, marketing and distribution of its DocStar product
line on a national basis. These expenditures include staffing, advertising and
promotion, travel, consulting, office expansion, equipment, furniture and other
related costs.
In April 1997, the Company announced the sale of substantially all of
the assets of Electrograph for $2,500,000 plus approximately $335,000 to satisfy
intercompany payables owed to Bitwise by Electrograph. Bitwise will also retain
$350,000 in Electrograph cash deposits.
During the quarter the Company had outstanding a standby letter of
credit in the amount of $350,000 as of March 31, 1997 which had been issued on
behalf of Electrograph. In April, 1997 the letter of credit was no longer
required as a result of the Electrograph transaction and was terminated.
Property, plant and equipment expenditures totaled $275,421 for the
nine months ended March 31, 1997. There were no purchase commitments outstanding
or contemplated.
The Company anticipates that cash expected to be provided by operations
together with the proceeds from the sale of Electrograph and borrowings under
its lines of credit will be sufficient to satisfy normal operating obligations.
The Company experienced a negative cash flow of $1,872,486 during the
nine months ended March 31, 1997. To date, the Company has been largely
dependent on its ability to sell additional shares of its common stock to fund
its operating deficits. Under its current operating plan to obtain a national
acceptance of the DocStar product line, the Company's ability to improve
operating cash flow is highly dependent on the market acceptance of DocStar. If
the Company is unable to attain projected sales levels for its DocStar systems,
it may be necessary to raise additional capital to fund operations and meet its
obligations.
Page 12 of 14
<PAGE> 13
PART II OTHER INFORMATION
Item 5 Other Information
In January 1997, the Company announced the signing of a letter of
intent for the private sale of $5,000,000 of senior convertible preferred stock
and common stock purchase warrants to an institutional private equity investor.
In April 1997, the Company terminated discussions with this investor because
current market conditions rendered the terms of the proposed investment
unacceptable.
In April 1997, the Company sold substantially all of the assets of its
subsidiary, Electrograph Systems, Inc., for $2.5 million, plus approximately
$335,000 to satisfy intercompany payables owed to Bitwise by Electrograph.
Bitwise will also retain $350,000 in Electrograph cash deposits. The sale was
structured as an asset sale in which all of the assets were sold and all of the
liabilities were assumed by the buyer, a subsidiary of Manchester Equipment Co.,
Inc. which is a publicly traded Company.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.24 Asset Purchase Agreement among Electrographic Systems, Inc.,
Bitwise Designs, Inc. and Electrograph Acquisition, Inc.
and Manchester Equipment Co., Inc.
(b) Reports on Form 8-K
None
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, including information set forth
under Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the Act). The Company
desires to avail itself of certain "safe harbor" provisions of the Act and is
therefore including this special note to enable the Company to do so.
Forward-looking statements in this Form 10-QSB or hereafter included in other
publicly available documents filed with the Securities and Exchange Commission,
reports to the Company's stockholders and other publicly available statements
issued or released by the Company involve known and unknown risks, uncertainties
and other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ from the future results,
performance (financial or operating) or achievements expressed or implied by
such forward-looking statements. Such future results are based upon management's
best estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to risks associated with
the market acceptance of the DocStar product line, competition and technological
changes and other risks as discussed in the Company's filings with the
Securities and Exchange Commission, in particular its Annual Report on Form
10-KSB for the year ended June 30, 1996, and Registration Statement on Form S-3
declared effective on July 30, 1996 all of which risk factors could adversely
affect the Company's business and the accuracy of the forward-looking statements
contained herein.
Page 13 of 14
<PAGE> 14
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.
BITWISE DESIGNS INCORPORATED
May 15, 1997 /s/ John T. Botti
- ----------------------- ----------------------------------------
DATE JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
----------------------------------------
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
Page 14 of 14
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description
10.24 Asset Purchase Agreement
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.24
ASSET PURCHASE AGREEMENT
AMONG
ELECTROGRAPH SYSTEMS, INC.,
BITWISE DESIGNS, INC.
AND
ELECTROGRAPH ACQUISITION, INC.
MANCHESTER EQUIPMENT CO., INC.
April 15, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 ...................
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
(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 ....................
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 ..........................
</TABLE>
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
ii
<PAGE> 4
Disclosure Schedule Exceptions to Representations and
Warranties
iii
<PAGE> 5
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 substantially 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
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<PAGE> 6
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
2
<PAGE> 7
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
3
<PAGE> 8
in accordance with GAAP applied on a basis consistent with the preparation of
the Closing Date Financial Statements.
"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
4
<PAGE> 9
(including rules, regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof) concerning pollution or protection of the
environment, public health and safety, or employee health and safety, including
laws relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials
or wastes into ambient air, surface water, ground water, or lands or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes.
"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
5
<PAGE> 10
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.
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<PAGE> 11
"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
7
<PAGE> 12
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.
"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;
8
<PAGE> 13
(iii) the Nationsbank Loan Agreement; or (iv) the Mitsubishi Letter of Credit or
the Mitsubishi Letter of Credit Deposit.
(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
9
<PAGE> 14
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.
(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
10
<PAGE> 15
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.
(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.
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<PAGE> 16
(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
12
<PAGE> 17
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.
(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;
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(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;
(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;
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(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.
(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,
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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.
(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
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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.
Section 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 basis of 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;
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(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
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for the passage of time through the Closing Date in accordance with past custom
and practice.
(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;
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(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
(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
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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.
(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
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experienced any strikes, grievances, claims of unfair labor practices, or other
collective bargaining disputes.
(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 benefits 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,
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standards, prohibitions, requirements, obligations, schedules, and timetables
which are contained in, all Environmental, Health, and Safety Laws.
(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
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governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
(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
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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.
(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,
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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 Party 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).
(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
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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.
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
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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;
(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;
28
<PAGE> 33
(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;
(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
29
<PAGE> 34
(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
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
30
<PAGE> 35
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 doctrine 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);
(d) Matters Involving Third Parties.
31
<PAGE> 36
(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 "Indemnifying 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 satisfactory 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
32
<PAGE> 37
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).
(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
33
<PAGE> 38
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
(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.
34
<PAGE> 39
(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).
(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,
35
<PAGE> 40
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.
(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
36
<PAGE> 41
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.
(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
37
<PAGE> 42
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
38
<PAGE> 43
(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:_____________________________________
Name:
Title:
MANCHESTER EQUIPMENT CO., INC.
By:_____________________________________
Name:
Title:
BITWISE DESIGNS, INC.
By:_____________________________________
Name:
Title:
ELECTROGRAPH ACQUISITIONS INC.
By:_____________________________________
Name:
Title:
39
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,504,819
<SECURITIES> 0
<RECEIVABLES> 7,831,913
<ALLOWANCES> 173,061
<INVENTORY> 5,191,906
<CURRENT-ASSETS> 14,817,944
<PP&E> 996,535
<DEPRECIATION> 841,086
<TOTAL-ASSETS> 21,361,697
<CURRENT-LIABILITIES> 10,067,960
<BONDS> 0
0
20
<COMMON> 7,345
<OTHER-SE> 11,281,261
<TOTAL-LIABILITY-AND-EQUITY> 21,361,697
<SALES> 40,820,293
<TOTAL-REVENUES> 40,820,293
<CGS> 33,965,319
<TOTAL-COSTS> 42,546,264
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 42,826
<INTEREST-EXPENSE> 327,343
<INCOME-PRETAX> (1,969,953)
<INCOME-TAX> 42,937
<INCOME-CONTINUING> (2,012,890)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,012,890)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
