-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q9D9Op7rJ/W2bZmdwcnveq78FgKRNMEblt8IbOTGPT6gv0kTXBKmaC94ynhPFQWz 4WofGwDW8U1K+7FaBx1SWQ== 0001023876-97-000014.txt : 19971029 0001023876-97-000014.hdr.sgml : 19971029 ACCESSION NUMBER: 0001023876-97-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971028 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANCHESTER EQUIPMENT CO INC CENTRAL INDEX KEY: 0001023876 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 112312854 STATE OF INCORPORATION: NY FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21695 FILM NUMBER: 97701683 BUSINESS ADDRESS: STREET 1: 160 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164351199 MAIL ADDRESS: STREET 1: 160 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 10-K 1 ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - - EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 1997 OR - - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 0-21695 MANCHESTER EQUIPMENT CO., INC. (Exact name of Registrant as specified in its charter) New York 11-2312854 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) I. D. Number) 160 Oser Avenue 11788 Hauppauge, New York (Zip Code) Address of principal executive offices) Registrant's telephone number, including area code: (516) 435-1199 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ------------------ Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES __X__ NO _____ Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of October 21, 1997 was $15,194,231 (3,241,436 shares at a closing sale price of $4.6875). As of October 21, 1997, 8,525,000 shares of Common Stock ($.01 par value) of the Registrant were issued and outstanding. -------------------- DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ MANCHESTER EQUIPMENT CO., INC. FORM 10-K YEAR ENDED JULY 31, 1997 TABLE OF CONTENTS Page ---- Part I Item 1. Business 3 Item 2. Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Part II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 16 Item 9. Disagreements on Accounting and Financial Disclosures 16 Part III Item 10. Directors and Executive Officers of the Registrant 17 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Transactions 20 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22 Signatures Chief Executive Officer, Chief Financial Officer, and Directors 40 PART I This Report contains certain forward-looking statements that are based on current expectations. The actual results of Manchester Equipment Co., Inc. (the "Company") may differ materially from the results discussed herein as a result of a number of unknown factors. Such factors include, but are not limited to , there being no assurance that the acquisition of Electrograph Systems, Inc. will continue to add to the Company's profitability, the Company will be successful in its efforts to focus on value-added services, the Company will be successful in attracting and retaining highly skilled technical personnel and sales representatives necessary to implement the Company's growth strategies, the Company will be adversely affected by continued intense competition in the computer industry, a lack of product availability or deterioration in relationships with manufacturers, or a loss or decline in sales to any of its major customers. See "Products" and "Competition" in Part I, Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this report for a discussion of important factors that could affect the validity of any forward looking statements. ITEM 1. Business General Manchester Equipment Co., Inc. ("Manchester" or the "Company") is a systems integrator and reseller of computer hardware, software and networking products, primarily for commercial customers. The Company offers its customers single-source solutions customized to their information systems needs by combining value-added services with hardware, software, networking products and peripherals from leading vendors. Over the past 20 years, the Company has forged long-standing relationships with both customers and suppliers and capitalized on the rapid developments in the computer industry, including the shift toward client/server-based platforms. Manchester's marketing focus is on mid- to large-sized companies, which have become increasingly dependent upon complex information systems in an effort to gain competitive advantages. While many of these companies have the financial resources to make the required capital investments in information systems, often they do not have the necessary information technology personnel to design, install or maintain complex systems or to incorporate the continuously evolving technologies. As a result, these companies are turning to independent third parties to procure, design, install, maintain and upgrade their information systems. The Company offers its customers a variety of value-added services, such as consulting, integration and support services, together with a broad range of computer and networking products from leading vendors. Consulting services include systems design, performance analysis, and migration planning. Integration services include product procurement, configuration, testing and systems installation and implementation. Support services include network management, "help-desk" support, and enhancement, maintenance and repair of computer systems. Most of the Company's revenues are derived from sales to customers located in the New York Metropolitan area, with approximately 90% of the Company's revenues being generated from its Long Island and New York City offices. The Company was incorporated in New York in 1973 and has three active wholly-owned subsidiaries; Manchester International, Ltd., a New York corporation which sells computer hardware, software and networking products to resellers domestically and internationally; Mantech Computer Services, Inc. a New York corporation which identifies and provides temporary information technology positions and solutions for commercial customers; and Electrograph Systems, Inc. a New York corporation which distributes microcomputer peripherals throughout the United States. Industry Businesses have become increasingly dependent upon complex information systems in an effort to gain competitive advantages or to maintain competitive positions. Computer technology and related products are continuously evolving, making predecessor technologies or products obsolete within a few years or, in some cases, within months. The constant changes in hardware and software and the competitive pressure to upgrade existing products create significant challenges to companies. Over the last several years, the increase in performance of personal computers, the development of a variety of effective business productivity software programs and the ability to interconnect personal computers in high speed networks have led to an industry shift away from mainframe computer systems to client/server systems based on personal computer technology. In such systems, the client computer, in addition to its stand-alone capabilities, is able to obtain resources from a central server or servers. Accordingly, personal computers may share everything from data files to printers. Recently, networked applications such as electronic mail and work group productivity software, 3 coupled with widespread acceptance of Internet technologies, have led companies to implement corporate intranets (networks that enable end-users (e.g., employees) to share information). The use of a corporate intranet allows a company to warehouse valuable information, which may be "mined" or accessed by employees or other authorized users through readily available Internet tools such as Web browsers and other graphical user interfaces. With these advances in information systems and networking, many companies are reengineering their businesses using these technologies to enhance their revenues and productivity. However, as the design of information systems has become more complex to accommodate the proliferating network applications, the configuration, selection and integration of the necessary hardware and software products have become increasingly more difficult and complicated. While many companies have the financial resources to make the required capital investments, they often do not have the necessary information technology personnel to design, install or maintain complex systems and may not be able to provide appropriate or sufficient funding or internal management for the maintenance of their information systems. As a result, such companies are increasingly turning to independent third parties to procure, design, install, maintain and upgrade their information systems. By utilizing the services of such third parties, companies are able to acquire state-of-the-art equipment and expertise on a cost-effective basis. The Manchester Solution Manchester offers its customers single-source solutions customized to their information systems needs. The Manchester solution includes a variety of value-added services, including consulting, integration, network management, "help-desk" support, and enhancement, maintenance and repair of computer systems, together with a broad range of computer and networking products from leading vendors. Manchester believes it provides state-of-the-art, cost-effective information systems designed to meet its customers' particular needs. As a result of the Company's long-standing relationships with certain suppliers and its large volume purchases, the Company is often able to obtain significant purchase discounts which can result in cost-savings for its customers. Manchester's relationships with its suppliers, its inventory management system and industry knowledge generally enable it to procure desired products on a timely basis and therefore to offer its customers timely product delivery. Strategy The key elements of the Company's strategy include: Emphasizing Value-added Services. Value-added services, such as consulting, integration and support services, generally provide higher profit margins than computer hardware sales. The Company has increased its focus on providing these services through a number of key strategies. The Company has and continues to recruit additional technical personnel with broad-based knowledge in systems design and specialized knowledge in different areas of systems integration, including application software, inter-networking (including bridges, routers and switches), database design and management. The Company actively promotes the benefits of corporate intranets and has introduced additional services, including remote network management services and fee-based "help desk" services. The remote network management system consists of dedicated servers and software located at the Company's Long Island headquarters. This system allows the Company's specially trained engineers to solve their customers' network systems problems from the Company's facilities. The fee-based "help desk" services are available for end-users, regardless of whether they purchase products or other services from the Company. Increasing Marketing Focus on Companies Outside the Fortune 500. Manchester has decided to increase its marketing focus on those companies outside the Fortune 500 in order to increase its value-added services revenue. Manchester's experience is that companies are increasingly looking to third parties to provide a complete solution to their information systems needs from both a service and product standpoint. Such companies often do not have the necessary information technology personnel to procure, design, install or maintain complex systems or to incorporate continuously evolving technologies. Manchester believes that it can provide these companies with solutions to their information systems requirements by providing a variety of value-added services together with a broad range of computer and networking products. Introducing an Electronic Ordering System. Manchester has implemented an electronic ordering system. This ordering system enables participating customers to access the Company via the Internet, review various products, systems and services offered by the Company and place their orders on-line. Customers will also be able to obtain immediate customized information regarding products, systems and services that meet their specific requirements. The ordering system produces a matrix of alternative fully compatible packages, together with their availability and related costs, based on parameters indicated by the customer. Customers are not be granted access to this system without prior credit clearance. Increasing Sales Force Productivity. Manchester is addressing a variety of strategies to increase sales force productivity. The Company is implementing an electronic sales information system utilizing similar technology to the electronic ordering system described above. The electronic sales information system will allow the Company's sales representatives to obtain immediate 4 customized information regarding products and services that meet the specific system requirements of customers and the availability and related costs of such products and services. The Company believes that this system will increase the productivity of its sales representatives by enabling them to offer rapid and comprehensive solutions to their customers' needs while reducing the possibility of returns based on incompatible products. Manchester also has upgraded its internal telecommunications system. Through this enhanced system, installed in August, 1997, the Company intends to institute a system whereby telephone calls can be automatically placed to a targeted list of existing or potential customers and, upon connection, routed automatically to available sales representatives with on-screen information containing product and service data for current customers and market demographic data for potential customers. The system also has the capability to route automatically in-coming calls to available sales representatives in response to a caller's answers to automated queries. The Company provides training of its sales representatives in matters relating to value-added services, such as consulting and integration services. To facilitate such training, the Company constructed a dedicated training facility located in one of its existing offices in Long Island. Expanding New York Metropolitan Area Presence. The Company believes that it has a strong presence and wide name recognition in the New York Metropolitan area, where there is a growing corporate demand for computer products and services. Manchester is seeking to expand its presence in this area by enlarging its New York City office and increasing the sales and service capabilities of such office, and expanding its sales, service and training capabilities at its Long Island headquarters. The Company believes that these steps will enable it to capture a greater percentage of the New York Metropolitan area market. In fiscal 1997, the Company entered into a lease for new office space in New York City which is approximately double the size of the existing space. Occupancy of the new space is anticipated in November 1997. Expanding into Additional Business Centers. The Company has regional offices in Newton, Massachusetts and Boca Raton and Tampa, Florida, from which it derived approximately 10% of its revenues for the fiscal year ended July 31, 1997. The Company intends to continue to expand geographically into growing business centers in the eastern half of the United States. It is anticipated that each office would have the capability to perform a broad array of services as well as engage in product sales. Services and Products The Company offers customized single-source solutions to its customers' information systems requirements, including consulting, integration and support services, together with a broad range of computer and networking products from a variety of leading vendors. The Company provides its services through a skilled staff of engineers who are trained and certified in leading products and technology, including Microsoft Windows NT, Novell NetWare and Cisco Systems routers and switches. Services. The Company's services include consulting, integration and support services. Consulting. The Company's staff of senior systems engineers provides consulting services consisting of systems design, performance and security analysis and migration planning services. Systems design services include network, communications, applications and custom solutions design. Network design services involve analysis of a customer's overall network needs, including access to the Internet; communications design services involve analysis and creation of enterprise-wide networks, including corporate intranets; applications design services include creation of relational databases meeting customers' specific business requirements; and custom solutions design services include design of storage systems, remote access systems and document retention through scanning technology. Performance analysis involves analyzing a customer's information systems to assess potential points of failure, to determine where performance could be increased and to prepare for change and growth. This service includes the evaluation of applications and their interaction with the network in order to maximize existing computer resources. Through this evaluation process, which includes a detailed report to the end-user, a plan for the optimization of the customer's existing system is created, as well as recommendations for enhancements and future systems. Security analysis involves working with customers to develop security policies covering network security, as well as risk analysis. After a policy is developed, a security strategy is planned and deployed using a variety of tools, including physical firewalls, packet filtering, encryption and user authentication. Migration planning involves the performance of a detailed assessment of existing mission critical systems, followed by an analysis of the end-user's future requirements. Working closely with the customer, Manchester's consultants develop a migration strategy using a defined project plan that encompasses skills transfer and training, checking for data integrity, project management and consolidation and reallocation of resources. The primary objective of this service is to rapidly move the customer from a slow or expensive system to a newer, more efficient and cost-effective solution. 5 Integration. Integration services include product procurement, configuration, testing, installation and implementation. The Company maintains a sophisticated systems build and test area, adjacent to its warehousing facilities, where computer systems are configured and tested through the use of automated systems. Manchester manages the installation and implementation of its customers' information systems, and provides critical path analysis, vendor management and facility management services. Critical path analysis involves the management and coordination of the various hardware and software networking components of a systems design project. The Company's engineers prepare reports setting forth coordinated timetables with respect to installing and integrating the customer's information systems. Vendor management includes interfacing with the suppliers of computer products in installing a project; facility management involves management of the labor aspects of a project, including supervision of electricians and other tradesmen. Support. The Company offers support services for its customers' existing information systems, including network management, "help-desk" services, and enhancement, maintenance and repair. Network management consists of managing the compatibility of, and communication between, the various components comprising a customer's information system. The increased expense associated with the ownership of information systems has encouraged customers to outsource the management of computer networks, including local area networks ("LANs") and wide area networks ("WANs"). Currently, the Company's engineers provide network management services on site at customers' facilities. "Help-desk" services consist of providing customers with telephone support. In addition, the Company's service call management system, which the Company is in the process of enhancing, will enable the Company's "help-desk" technicians to access an archive of prior service calls concerning similar problems and their solutions, resulting in a more efficient response to customers' calls. Enhancement, maintenance and repair services range from broad on-site coverage to less expensive, basic maintenance and repair of itemized hardware or software, as well as enhancements such as upgrades of existing systems. Field representatives are equipped with notebook computers to facilitate the exchange of information with both the information systems at the Company's headquarters and with technical databases available on the Internet. The Company maintains a laboratory at its Long Island facilities where the Company prototypes customer problems for quicker solutions without jeopardizing customers' information systems. Products. Manchester offers a wide variety of personal computer and networking products and peripherals, including: Bridges and Routers Servers Desktop Computers Software Internet Access Products Storage Subsystems Modems Switches Monitors Supplies and Accessories Network Equipment Teleconferencing Equipment Notebook Computers Terminals Printers Wireless Products Scanners Workstations The Company has long-standing relationships with many manufacturers, which the Company believes assists it in procuring desired products on a timely basis and on desirable financial terms. The Company sells products from most major manufacturers, including: AST Research, Inc. Motorola, Inc.. Bay Networks, Inc. NEC Technologies, Inc. Cisco Systems, Inc. Novell, Inc. Compaq Computer Corporation Philips Electronics N.V. Epson America, Inc. Seagate Technology, Inc. Hayes Microcomputer Products, Inc. Standard Microsystems Corporation Hewlett-Packard Company Texas Instruments Inc. Intel Corporation 3Com Corp. Microsoft Corporation Toshiba America Information Systems, Inc. For the fiscal years ended July 31, 1997, 1996 and 1995, sales by the Company of products manufactured by Toshiba, Hewlett-Packard, NEC and Compaq collectively comprised approximately 56%, 53% and 52%, respectively, of the Company's revenues. In these fiscal years, sales of products manufactured by Toshiba accounted for approximately 26%, 23% and 24%, respectively, of the Company's revenues, substantially all of which were sales of notebook computers and related accessories. The total dollar volume of products purchased directly from manufacturers, as opposed to distributors or resellers, was approximately $103 million, $117 million and $118 million for the fiscal years ended July 31, 1997, 1996 and 1995, respectively, and as a percentage of total cost of products sold was approximately 64%, 72% and 82%, respectively. 6 The Company has entered into agreements with its principal suppliers that include provisions providing for periodic renewals and permitting termination by the vendor without cause, generally upon 30 to 90 days written notice, depending upon the vendor. Toshiba, Hewlett-Packard, NEC and Compaq have regularly renewed their respective agreements with the Company, although there can be no assurance that the regular renewal of the Company's dealer agreements will continue. The termination, or non-renewal, of any or all of these dealer agreements would materially adversely affect the Company's business. The Company, however, is not aware of any reason for the termination, or non-renewal, of any of those dealer agreements and believes that its relationships with Toshiba, Hewlett-Packard, NEC and Compaq are satisfactory. The Company is dependent upon the continued supply of products from its suppliers, particularly Toshiba, Hewlett-Packard, NEC and Compaq. Historically certain suppliers occasionally experience shortages of select product that render components unavailable or necessitate product allocations among resellers. While certain shortages existed throughout fiscal 1997, the Company believes that product availability issues are as a result of the present dynamics of the personal computer industry as a whole, which include high customer product demand, shortened product life cycles and increased frequency of new product introductions into the marketplace. While there can be no assurance that product unavailability or product allocation, or both, will not increase in fiscal 1998, the impact of such an interruption is not expected to be unduly troublesome due to the breadth of alternative product lines available to the Company. The Company seeks to obtain volume discounts for large customer orders directly from manufacturers and through aggregators and distributors. Customers The Company believes that it benefits from its long-standing relationships with many of its customers, providing opportunities for continued sales and services. Manchester believes that its broad range of capabilities with respect to both products and services is attractive to companies of all sizes. Although Manchester is planning to target companies outside the Fortune 500 as one part of its strategy, it has sold, and anticipates that it will continue to sell, to some of the largest companies in the United States. For the fiscal years ended July 31, 1997, 1996 and 1995, approximately 15%, 16% and 22% of the Company's total revenues, respectively, were derived from United Parcel Service of America, Inc. Some of the Company's other significant commercial customers currently include Barnes & Noble Inc., Cabletron Systems Inc., J&R Music World, National Broadcasting Company Inc., Sterling Doubleday Enterprises (New York Mets), Pfizer Inc., Reuters America Inc., SONY Theaters, Time Warner Inc., United Nations International Children's Emergency Fund and the United States Merchant Marine Academy. The Company's return policy generally allows customers to return hardware and unopened software, without restocking charges, within 30 days of the original invoice date, subject to advance approval and certain other conditions. The Company grants credit to customers meeting specified criteria and maintains a centralized credit department that reviews credit applications. Accounts are regularly monitored for collectibility and appropriate action is taken upon indication of risk. Sales and Marketing The Company's sales are generated primarily by its 65 person sales force. These sales representatives generally are responsible for meeting all of their customers' product and service needs and are supervised by sales managers with significant industry experience. The sales managers are responsible for overseeing sales representative training, establishing sales objectives and monitoring account management principles and procedures. Sales representatives attend seminars conducted by manufacturers' representatives at the Company's facilities, at which the Company's new and existing product and service offerings are discussed. The Company's sales representatives are assisted by technical personnel who support and supplement the sales efforts. The responsibilities of technical support personnel include answering preliminary inquiries from customers regarding systems design, and on-site visits to customers' facilities. At customers' facilities, the technical personnel gather information necessary to assist customers in making informed decisions regarding their information systems. Such data include the nature of the customer's current information systems, the existing hardware and networking environment, the customer's level of expertise and its applications needs. Manchester believes that its name is widely recognized for high quality, competitively priced products and services. The Company promotes name recognition and the sale of its products and services through regional business directories, trade magazine advertisements, radio advertisements, direct mailings to customers and participation in computer trade shows and special events. The Company advertises at numerous sporting events in the New York metropolitan region, including full page four-color advertisements in yearbooks and/or program guides for sports teams such as the New York Mets, the New York Knicks and the New York Rangers. The Company also promotes interest in its products and services through its website on the Internet, and has expanded its website information to provide an electronic catalog of its products and services. Several manufacturers offer market development funds, cooperative advertising and other promotional programs, on which the Company relies for many of its advertising and promotional campaigns. 7 Sales force training is an integral part of the Company's strategy to increase its focus on providing value-added services. As client/server-based systems, applications and network capabilities grow in complexity, the need for technically knowledgeable sales personnel becomes critical to the sale of value-added services. Accordingly, the Company has expanded its training capabilities at one of its Long Island facilities to conduct seminars for sales representatives. The seminars address such topics as general developments in the computer industry, systems integration services and the Company's management information systems. The Company utilizes its technical personnel to conduct such seminars and may hire additional dedicated trainers as needed. Management Information Systems The Company currently uses an IBM AS/400 integrated management information system, which is an on-line system enabling instantaneous access. The Company maintains a proprietary inventory management system on its computer system pursuant to which product purchases and sales are continually tracked and analyzed. The Company's computer system is also used for accounting, billing and invoicing. The Company's information system assists management in maintaining controls over the Company's inventory and receivables. Manchester's average inventory turnover was 17, 18 and 16 times for the fiscal years ended July 31, 1997, 1996 and 1995, respectively, and Manchester experienced bad debt expense of less than .3% of revenues in each of these years. During the fiscal year ended July 31, 1997, the Company invested in its management information systems, including upgrading and expanding the IBM AS/400 system, implementing a client/server-based management system to track services rendered for customers, and upgrading servers and network infrastructures for its headquarters. The Company utilizes experienced in-house technical personnel, assisted by the Company's senior engineers, to upgrade and integrate additional functions into the Company's management information systems. Competition The computer industry is characterized by intense competition primarily in the area of price, product availability and breadth of product line. The Company directly competes with local, regional and national systems integrators, value-added resellers and distributors as well as with certain computer manufacturers that market through direct sales forces. While the Company's competitors vary depending upon the particular market, some of the national and regional competitors of the Company include Alphanet Solutions, Inc., CompuCom Systems, Inc., Dataflex Corporation, Entex Information Services, Inc., Pomeroy Computer Resources, Inc., and Vanstar Corporation. The computer industry has recently experienced a significant amount of consolidation through mergers and acquisitions, and manufacturers of personal computers may increase competition by offering a range of services in addition to their current product and service offerings. In the future, the Company may face further competition from new market entrants and possible alliances between existing competitors. Some of the Company's competitors have, or may have, greater financial, marketing and other resources, and may offer a broader range of products and services, than the Company. As a result, they may be able to respond more quickly to new or emerging technologies or changes in customer requirements, benefit from greater purchasing economies, offer more aggressive hardware and service pricing or devote greater resources to the promotion of their products and services. The Company's ability to compete successfully depends on a number of factors such as breadth of product and service offerings, sales and marketing efforts, product and service pricing, and quality and reliability of services. In addition, product margins may decline due to pricing to win new business and increasing pricing pressures from competition. The Company believes that gross margins will continue to be reactive to industry-wide changes. Future profitability will depend on the Company's ability to increase focus on providing technical service and support to customers, competition, manufacturer pricing strategies, as well as the Company's control of operating expenses, product availability, and effective utilization of vendor programs. It will also depend on the ability to attract and retain quality service personnel and sales representatives while effectively managing the utilization of such personnel and representatives. There can be no assurance that the Company will be able to attract and retain such skilled personnel and representatives. The loss of a significant number of the Company's existing technical personnel or sales representatives or difficulty in hiring or retaining additional technical personnel or sales representatives or reclassification of the Company's sales representatives as employees could have a material adverse effect on the Company's business, results of operations and financial condition. Recent Acquisition On April 25, 1997, the Company, through a newly formed wholly-owned subsidiary, acquired substantially all of the assets and assumed certain liabilities of Electrograph Systems, Inc. ("Electrograph"). Electrograph is a specialized distributor of microcomputer peripherals, throughout the United States. The purchase price and transaction costs aggregated approximately $2.6 million. The major categories of products presently distributed by Electrograph include printers and monitors. Electrograph does not stock significant amounts of inventory relative to the number of different products it carries. Most products are stocked to provide a 30-day supply. 8 Electrograph provides technical assistance to customers through its Hauppauge, New York office. Electrograph will ship returns of defective products to the manufacturer or to an authorized repair center. Returns have historically been approximately 3% of revenue. The Company does not believe that such a breakdown or the dollar amounts of product returns is material, however, as substantially all of these costs are reimbursed to Electrograph by its suppliersthrough credits and replacements, and also through restocking charges and resale. As a result, Electrograph's costs charged to operations for such returns have been minimal. Products are selected by Electrograph to minimize competition among suppliers' products while maintaining some overlap to provide protection against product shortages and discontinuations and to provide different price points for certain items. Management believes Electrograph's relationships with its suppliers are enhanced by providing feedback to suppliers on products, advising suppliers of customer preferences, working with suppliers to develop marketing programs, and offering suppliers the opportunity to provide seminars for Electrograph's customers. Like most of its competitors, Electrograph distributes products for manufacturers throughout the United States on a non-exclusive basis without geographic restrictions. Electrograph has supplier agreements with many of its suppliers which it believes are in a form customarily used by each manufacturer. These agreements usually contain provisions which allow termination without cause, by the supplier generally upon 30 to 60 days notice. None of Electrograph's material supplier agreements require the sale of specified quantities of products or restrict Electrograph from selling similar products manufactured by competitors. Electrograph, therefore, has the ability to terminate or curtail sales of one product line in favor of another product line as a result of technological change, pricing considerations, customer demand or supplier distribution policy. Electrograph has never been terminated by any of its suppliers. Most of Electrograph's major suppliers provide price protection, by way of credits, against price reductions by the supplier between the time of the initial sale to Electrograph and the subsequent sale by Electrograph to its customer. Additionally, most of Electrograph's suppliers accept defective merchandise returned within 12 to 15 months after shipment to Electrograph. Some suppliers permit Electrograph to rotate its inventory by returning slow moving inventory for other inventory. Credits, refunds or other payments to which Electrograph was entitled by reason of price protection, advertising allowances, stock rotations and refunds for defective merchandise totaled approximately 1% of revenue for fiscal 1997. While Electrograph distributes products of more than 15 suppliers, approximately 48% of Electrograph's revenue in fiscal 1997 was derived from products manufactured by Mitsubishi, Electrograph's largest supplier. Electrograph's distribution operations are currently conducted from two distribution centers in Hauppauge, New York and Long Beach, California. Electrograph also maintains sales offices in Baltimore, Maryland, Northville, New York and Long Beach, California. Credit is extended in most circumstances, and is generally limited to 30-day payment terms. Employees At August 31, 1997, the Company had 263 full-time employees consisting of 23 sales representatives, 26 management personnel, 50 technical personnel and 123 distribution and clerical personnel. In addition, at August 31, 1997, the Company had 36 independent sales representatives. The Company is not a party to any collective bargaining agreements and believes its relations with its employees are good. Intellectual Property The Company owns one federally registered service mark with respect to its name and logo. Most of the Company's various dealer agreements permit the Company to refer to itself as an "authorized dealer" of the products of those manufacturers and to use their trademarks and trade names for marketing purposes. The Company considers the use of these trademarks and trade names in its marketing to be important to its business. 9 ITEM 2. Properties Properties The Company and Electrograph currently have nine sales branches nationwide including the corporate headquarters located in Hauppauge, New York. The following table identifies the principal leased facilities.
Approximate Square Footage Lease Facility Location Office Warehouse Expiration Date - -------- -------- ------ --------- --------------- Corporate 160 Oser Avenue(1) Headquarters Hauppauge, NY 30,000 - July 2000 Warehouse and 40 and 50 Marcus Blvd.(1) October 2005 - 40 Service Center Hauppauge, NY 20,000 43,000 January 1998 - 50 Warehouse 125 Marcus Blvd. - 5,000 June 1998 Hauppauge, NY Office 684 Broadway(1) Massapequa, NY 500 - Month to month New York City 469 Seventh Avenue(2) Sales office New York, NY 13,000 January 1999 352 Seventh Avenue Fl 12A 7,000 - July 1999 New York, NY Boca Raton 902 Clint Moore Road Sales Office Boca Raton, FL 2,500 - July 1998 Boston 25-27 Christina Street(2) 3,000 - October 2002 Sales office Newton, MA Tampa 6304 Benjamin Road Sales office Tampa, FL 1,200 - December 1997 Electrograph 175 Commerce Drive Corporate HQ Hauppauge, NY 5,000 5,000 June 2002 Baltimore 57 W. Timonium Rd. 650 - Month to month Sales Office Timonium, MD
(1) Leased from entities controlled by or affiliated with certain of the Company's executive officers, directors and principal shareholders. Effective with the consummation of the Company's initial public offering in November 1996, the leases with related parties were amended to provide terms comparable to those that could be obtained from independent third parties. (2) Lease signed during fiscal 1997, occupancy expected in the first quarter of fiscal 1998. 10 ITEM 3. Legal Proceedings On March 28, 1997 a complaint was filed by plaintiff Vincent Manngard in the United States District Court for the Eastern District of New York against the Company, its President and Chief Executive Officer, its Executive Vice President and Secretary, and its Chief Financial Officer. The plaintiff claims to have purchased shares in the Company's Offering and purports to sue on his own behalf and on behalf of a class of persons who purchased the Company's common stock either pursuant to the Offering or in the period from November 26, 1996 through February 13, 1997. The Complaint asserts that the Company and the individual defendants made false or misleading statements and omissions in connection with the Offering in violation of Section 11, 12(a)(2) and 15 of the federal Securities Act of 1933, and seeks damages on behalf of the putative class in an unspecified amount and/or rescission, together with costs and expenses of litigation. The Company believes that the allegations in the complaint are entirely without merit and intends vigorously to defend this matter. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, based on advice from its legal counsel, the ultimate disposition of these matters will not have a material adverse effect. ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the security holders during the fourth quarter of the fiscal year ended July 31, 1997. PART II ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock commenced trading on November 26, 1996 at $10.00 and is traded on the Nasdaq National Market under the symbol MANC. The following table sets forth the quarterly high and low sale prices for the Common Stock as reported by the Nasdaq National Market.
Fiscal Year 1997 High Low ---- --- Second Quarter (starting November 26, 1996) 10-1/2 6-1/4 Third Quarter 7 3-1/4 Fourth Quarter 4-1/2 3-3/8
On October 21, 1997 the closing sale price for the Company's Common Stock was $4.6875 per share. As of October 21, 1997 there were 28 shareholders of record of the Company's Common Stock. Manchester has never declared or paid any dividends to shareholders. At this time the Company intends to continue its policy of retaining earnings for the continued development and expansion of its business. Report on Sale of Securities and Uses of Proceeds Therefrom Subsequent to the Company's initial public offering, effective November 25, 1996 (Registration No. 333-13345), and pursuant to the requirements of the Securities Act of 1993, as amended and then in effect, the Company filed an initial report on Form SR with the Securities and Exchange Commission on March 6, 1997. The following table sets forth the amount of direct or indirect payments to others from such effective date through July 31, 1997 which have changed since the most recently filed report on Form SR.
USE OF PROCEEDS DIRECT OR INDIRECT PAYMENTS TO OTHERS Construction of plant, building and facilities $ 250,000 Purchase and installation of machinery and equipment $ 500,000 Acquisition of other business(es) $2,600,000 Working capital $9,361,493
11 ITEM 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except share and per share amounts) The selected consolidated financial data presented below are derived from the audited consolidated financial statements of the Company. The Consolidated Financial Statements as of July 31, 1997 and 1996 and for each of the years in the three-year period ended July 31, 1997 and the report thereon of KPMG Peat Marwick LLP, independent auditors, are included elsewhere in this Report. The data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report.
Fiscal Year Ended July 31, -------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Income Statement Data: Revenue $187,801 $ 189,659 $ 170,818 $ 137,361 $ 118,898 Cost of revenue 161,186 163,128 146,323 117,377 101,046 ------- --------- --------- --------- --------- Gross profit 26,615 26,531 24,495 19,984 17,852 Selling, general and administrative expenses 21,023 22,598 21,280 17,380 16,065 ------ --------- --------- --------- --------- Income from operations 5,592 3,933 3,215 2,604 1,787 Interest and other income (expenses), net 395 (365) (392) (172) 34 Provision for income taxes 2,450 1,430(1) 1,160 1,042 689 Cumulative effect of change in accounting for income taxes - - - 386 _____- ------- -------- -------- --------- - Net income $3,537 $ 2,138(1) $ 1,663 $ 1,776 $ 1,132 ===== ========= ========= ========= ========= Net income per share $0.45 $ .34(1) $ .27 $ .28 $ .18 ==== ========= ========= ======== ========= Weighted average shares of common stock outstanding 7,779,484 6,246,970 6,262,626 6,262,626 6,262,626 ========= ========= ========= ========= ========= July 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital $30,578 $ 9,841 $ 9,189 $ 7,701 $ 6,274 Total assets 58,208 37,761 31,635 25,879 22,002 Short-term debt, including current maturities of capital lease obligation 1,637 6,952 5,600 5,400 2,200 Capital lease obligation, excluding current maturities 77 175 - - - Redeemable common stock(2) - 4,739 5,210 5,210 5,210 Shareholders' equity 36,877 8,175 6,037 4,374 2,598
- --------------------- (1) Pro forma provision for income taxes, pro forma net income and pro forma net income per share for the fiscal year ended July 31, 1996 would have been $2,835, $4,246 and $.68 per share, respectively, after giving effect to the assumed reduction of (i) $3,209 in officers' compensation payable to the Company's Chief Executive Officer, Executive Vice President and Chief Financial Officer to an aggregate of $1,125, exclusive of fringe benefits, to reflect (A) the annual compensation that the Company's Chief Executive Officer and Executive Vice President have agreed to receive without any diminished duties or responsibilities, and (B) the reduction from the amount of annual compensation paid to the former Chief Financial Officer to the annual compensation currently payable to the present Chief Financial Officer, net of applicable income taxes, and (ii) $304 in rent paid to related parties to amounts stipulated in current leases, net of applicable income taxes. See "Management" and "Certain Transactions." (2) Represents the aggregate amounts payable by the Company to redeem shares of common stock under the shareholder put right and shareholders' agreements between the Company and certain shareholders. See Note 12 of notes to the consolidated financial statements. 12 ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto appearing elsewhere in this Report. The following discussion contains certain forward-looking statements within the meaning of Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from the results anticipated in those forward-looking statements. These risks and uncertainties include, but are not limited to those set forth below and the risk factors described in the Company's prospectus dated November 25, 1996. General Manchester is a systems integrator and reseller of computer hardware, software and networking products, primarily for commercial customers. The Company offers its customers single-source solutions customized to their information systems needs by combining value-added services with hardware, software, networking products and peripherals from leading vendors. To date, most of the Company's revenues have been derived from product sales. The Company generally does not develop or sell software products. However, certain computer hardware products sold by the Company are loaded with pre-packaged software products. As a result of intense price competition within the computer industry as well as other industry conditions, the Company has experienced increasing pressure on per unit prices as well as on its gross profit and operating margins with respect to the sale of products. Manchester's strategy includes increasing its focus on providing value-added services with operating margins that are higher than those obtained with respect to the sale of products. The Company's future performance will depend in part on its ability to manage successfully a continuing shift in its operations towards value-added services. The Company directly competes with local, regional and national systems integrators, value-added resellers ("VARs") and distributors as well as with certain computer manufacturers that market through direct sales forces. In the future, the Company may face further competition from new market entrants and possible alliances between existing competitors. In addition, certain suppliers and manufacturers may choose to market products directly to end users through a direct sales force rather than or in addition to channel distribution. Some of the Company's competitors have, or may have, greater financial marketing and other resources, and may offer a broader range of products and services, than the Company. As a result, they may be able to respond more quickly to new or emerging technologies or changes in customer requirements, benefit from greater purchasing economies, offer more aggressive hardware and service pricing or devote greater resources to the promotion of their products and services. There can be no assurance that the Company will be able to compete successfully in the future with these or other current or potential future competitors. The Company's business is dependent upon its relationships with major manufacturers in the computer industry. There can be no assurance that the pricing and related terms offered by major manufacturers will not adversely change in the future. The failure to obtain an adequate supply of products, the loss of a major manufacturer, the deterioration of the Company's relationship with a major manufacturer or the Company's inability in the future to develop new relationships with other manufacturers could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's largest customer accounted for approximately 15%, 16% and 22% of the Company's revenues for the fiscal years ended July 31, 1997, 1996 and 1995, respectively, substantially all of which revenues were derived from the sale of hardware products. There can be no assurance that the Company will continue to derive substantial revenues from this customer. The Company's profitability has been enhanced by its ability to obtain volume discounts from certain manufacturers, which has been dependent, in part, upon Manchester's ability to sell large quantities of products to computer resellers, including VARs. There can be no assurance that the Company will be able to continue to sell products to resellers and thereby obtain the desired discounts from manufacturers or that the Company will be able to increase sales to end-users to offset the need to rely upon sales to resellers. The markets for the Company's products and services are characterized by rapidly changing technology and frequent introductions of new hardware and software products and services, which render many existing products noncompetitive, less profitable or obsolete. The Company believes that its inventory controls have contributed to its ability to respond effectively to these technological changes. As of July 31, 1997, 1996 and 1995, inventories represented 17%, 24% and 30% of total assets, respectively. During these same fiscal years, the Company's average inventory turnover was 17, 18 and 16 times, respectively. The failure of the Company to anticipate technology trends or to continue to effectively manage its inventory could have a material adverse effect on the Company's business, results of operations and financial condition. The Company believes its controls on accounts receivable have contributed to its profitability. The Company's bad debt expense represented .2%, .1% and .1% of total revenues for the fiscal years ended July 31, 1997, 1996 and 1995, respectively. 13 The Company's quarterly revenue and operating results have varied significantly in the past and are expected to continue to do so in the future. Quarterly revenues and operating results generally fluctuate as a result of the demand for the Company's products and services, the introduction of new hardware and software technologies with improved features, the introduction of new services by the Company and its competitors, changes in the level of the Company's operating expenses, competitive conditions and economic conditions. In particular, the Company currently is increasing certain of its fixed operating expenses, including a significant increase in personnel, as part of its strategy to increase its focus on providing higher margin, value-added services. Accordingly, the Company believes that period-to-period comparisons of its operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. As a result of the rapid changes which are taking place in computer and networking technologies, product life cycles are short. Accordingly, the Company's product offerings change constantly. Prices of products change with generally higher prices early in the life cycle of the product and lower prices near the end of the product's life cycle. The Company believes that the impact of price or volume changes of any particular product or products is not material to the Company's Consolidated Financial Statements. The Company's Chief Executive Officer has entered into an employment agreement with the Company under which he will receive $550,000 in compensation, exclusive of fringe benefits, for each of the fiscal years ending July 31, 1997 and 1998. In addition, the Company's Executive Vice President has agreed to receive base compensation, exclusive of fringe benefits, of $450,000 for the fiscal years ending July 31, 1997 and 1998. These officers have agreed that they will not be entitled to any bonuses for fiscal 1997 and that any bonus payable to either of these officers in fiscal 1998 will require the approval of a majority of the independent directors of the Company. The Company leases certain warehouses and offices from entities that are owned or controlled by the Company's majority shareholder. Each of the leases with related parties has been amended effective with the closing of the Company's initial public offering to reduce the rent payable under that lease to then current market rates. Recent Acquisition On April 25, 1997, the Company, through a newly formed wholly-owned subsidiary, acquired substantially all of the assets and assumed certain liabilities of Electrograph Systems, Inc., a wholly owned subsidiary of Bitwise Designs, Inc. Electrograph is a specialized distributor of microcomputer peripherals, primarily in the eastern United States. The purchase price and transaction costs aggregated approximately $2.6 million. Included in the assumed liabilities of Electrograph was debt with balances of $1,274,000 in notes payable - bank and $264,000 in notes payable - other as of July 31, 1997. The acquisition has been accounted for as a purchase and the operating results of Electrograph are included in the consolidated statements of income from the date of acquisition. The acquisition resulted in goodwill of approximately $1,500,000 which is being amortized on the straight-line basis over 20 years. Results of Operations The following table sets forth, for the periods indicated, information derived from the Company's consolidated statements of income expressed as a percentage of revenues.
Percentage of Revenue for the Year Ended July 31, 1997 1996 1995 ---- ---- ---- Revenue 100.0% 100.0% 100.0% Cost of revenue 85.8 86.0 85.7 ---- ---- ----- Gross profit 14.2 14.0 14.3 Selling, general and administrative expenses 11.2 11.9 12.4 ---- ---- ----- Income from operations 3.0 2.1 1.9 Interest and other income (expenses), net .2 ( 0.2) ( 0.2) ---- ----- ----- Income before income taxes 3.2 1.9 1.7 Provision for income taxes 1.3 0.8 0.7 --- --- --- Net income 1.9% 1.1% 1.0% === ==== ====
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996 Revenue. The Company's revenue decreased $1.9 million or 1.0% from $189.7 million in fiscal 1996 to $187.8 in fiscal 1997. This decrease is due primarily to lower shipments to the Company's major customer as well as generally lower prices for personal computers, partially offset by increases in units shipped and $5.1 million of revenue from the Company's Electrograph subsidiary which was acquired on April 25, 1997. Gross Profit. Cost of revenues includes direct costs of products sold, freight and the personnel costs associated with providing technical services, 14 offset in part by certain market development funds provided by manufacturers. All other operating costs are included in selling, general and administrative expenses. Gross profit increased by $84,000 or 0.3% from $26.5 million in fiscal 1996 to $26.6 million in fiscal 1997. Gross profit as a percentage of revenues increased from 14.0% in fiscal 1996 to 14.2% in fiscal 1997. The improvement in gross profit as a percentage of revenue reflects a more favorable product mix. Competitive pressures, changes in the types of products or services sold and product availability result in fluctuations in gross profit from period to period. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.6 million or 7.0% from $22.6 million in fiscal 1996 to $21.0 million in the most recent fiscal year. This decrease is primarily due to lower officer salaries and rents paid to related parties due to agreements that were entered into in connection with the Company's initial public offering, partially offset by higher salaries, legal expenses, bad debts and depreciation costs as well as additional operating expenses incurred as a result of the acquisition of Electrograph Systems, Inc. on April 25, 1997. Giving pro forma effect to the changes in officers' compensation and rents to related parties, described below and under General, the pro forma selling, general and administrative expenses would have been approximately $19.1 million or 10.1% of revenues for the year ended July 31, 1996. Interest Income. Interest income increased significantly in 1997 due to earnings on short term investments made with certain of the proceeds from the Company's initial public offering. Provision For Income Taxes. The effective tax rate increased slightly from 40.1% in fiscal 1996 to 40.9% in fiscal 1997. Year Ended July 31, 1996 Compared to Year Ended July 31, 1995 Revenue. The Company's revenue increased $18.8 million or 11.0% from $170.8 million in fiscal 1995 to $189.7 million in fiscal 1996 due to increased revenues from both new and existing customers. Many factors contributed to this increase, including new product introductions, special product purchases and volume and price changes with no one factor having a material effect on this increase. Gross Profit. Gross profit increased $2.0 million or 8.3% from $24.5 million in fiscal 1995 to $26.5 million in fiscal 1996 primarily as a result of the increase in revenue. Gross profit as a percentage of revenue decreased from 14.3% to 14.0%. The decrease in the gross profit percentage was due to changes in product mix as well as increased pricing pressures prevalent within the industry. Competitive pressures, changes in the types of products or services sold and product availability result in fluctuations in gross profit from period to period. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.3 million or 6.2% from $21.3 million in fiscal 1995 to $22.6 million in fiscal 1996. Approximately $261,000 of this increase related to higher payroll and related costs due primarily to a $917,000 increase associated with the hiring of additional technical and administrative staff in support of the Company's strategy to increase its value-added services revenue partially offset by a $656,000 reduction in officers' compensation from approximately $5.0 million in fiscal 1995 to approximately $4.3 million in fiscal 1996. Rent and occupancy costs increased by approximately $408,000 due primarily to higher rent principally paid to related parties as well as the leasing of an additional facility to meet the Company's current and future needs. In addition, commissions paid to the Company's sales force increased approximately $328,000 due to the increase in revenues in fiscal 1996. The Company's Chief Executive Officer has entered into an employment agreement with the Company under which he will receive $550,000 in compensation, exclusive of fringe benefits, for each of the fiscal years ending July 31, 1997 and 1998. In addition, the Company's Executive Vice President has agreed to receive base compensation, exclusive of fringe benefits, of $450,000 for the fiscal years ending July 31, 1997 and 1998. These officers have agreed that they will not be entitled to any bonuses for fiscal 1997 and that any bonus payable to either of these officers in fiscal 1998 will require the approval of a majority of the independent directors of the Company. The compensation to be paid to the Company's President and Executive Vice President in fiscal 1999 and thereafter will be based upon agreements to be negotiated at the expiration of their current respective employment agreements, which compensation the Company believes will reflect the then fair value of the services to be rendered to the Company by such individuals. If the revised compensation terms had been in effect for the entire fiscal 1996 period, and had the Company's former Chief Financial Officer been compensated at the annual compensation payable to the current Chief Financial Officer, officers' compensation would have been reduced by approximately $3.2 million. See "Management." Each of the leases with related parties has been amended effective with the closing of this offering, to reduce the rent payable under that lease to current market rates. If the revised leases had been in effect for the entire fiscal 1996 period, rent expense would have been reduced by $304,000 from the reported amount. Giving pro forma effect to the foregoing reductions in officers' compensation and rents to related parties, the pro forma selling, general and administrative expenses would have been approximately $19.1 million or 10.1% of revenues in fiscal 1996. Interest Expense, Net. Interest expense, net increased from $346,000 in fiscal 1995 to $374,000 in fiscal 1996 primarily due to increased borrowings. 15 Provision for Income Taxes. The effective income tax rate decreased slightly from approximately 41% in fiscal 1995 to approximately 40% in fiscal 1996. Liquidity and Capital Resources The Company's primary sources of financing have been internally generated working capital from profitable operations and a line of credit from a financial institution. For the year ended July 31, 1997, cash provided by operating activities was $4.6 million consisting primarily of net income and a decrease in inventory, offset by increases in accounts receivable net of an increase in accounts payable and accrued expenses. The Company's accounts receivable and accounts payable and accrued expenses balances as well as its investment in inventory can fluctuate significantly from one period to the next due to the receipt of large customer orders or payments or variations in product availability and vendor shipping patterns at any particular date. Generally, the Company's experience is that increases in accounts receivable, inventory and accounts payable and accrued expenses will coincide with growth in revenue and increased operating levels. In addition, during the year ended July 31, 1997 the Company used approximately $2.4 million for capital expenditures, $1.9 million (net of cash acquired) for the purchase of Electrograph Systems, Inc. and $4.4 million for the purchase of marketable securities and generated $13.4 million in cash from financing activities primarily from the net proceeds of the Company's initial public offering (IPO) ($20.4 million) partially offset by the net repayments of $7.0 million of debt. The Company and a subsidiary have available lines of credit with a financial institution in the aggregate amount of $10.0 million. All amounts outstanding under this line at the completion of the IPO were repaid by the Company with the proceeds from the IPO described below. At July 31, 1997, a subsidiary of the Company had $1.3 million outstanding under its line of credit. This outstanding balance was repaid in full in August 1997. On December 2, 1996, the Company completed the IPO of 2,325,000 shares of its common stock resulting in net proceeds to the Company, after deducting underwriting discount and expenses, of approximately $20.4 million. The Company utilized $7.7 million of the proceeds from the IPO to repay the balance outstanding at that date under its line of credit with a financial institution. In addition, the Company utilized $2.4 million for capital improvements and $1.9 million (net of cash acquired) for the purchase of Electrograph Systems, Inc. The remaining net proceeds have been invested in short-term, interest bearing, investment grade securities. The Company believes that its current balances in cash and cash equivalents and marketable securities, expected cash flows from operations and available borrowings under the lines of credit will be adequate to support current operating levels for the foreseeable future, specifically through at least the end of fiscal 1998. The Company has entered into commitments for the renovation and expansion of certain of its sales and service facilities which is currently underway and expected to be completed in the next fiscal year. The aggregate commitment for these projects is approximately $1.0 million which will be paid out of the Company's available cash balances. The Company currently has no other material commitments for capital expenditures. Future capital requirements of the Company include those for the growth of working capital items such as accounts receivable and inventory and the purchase of equipment and expansion of facilities as well as the possible opening of new offices and potential acquisitions. Inflation The Company does not believe that inflation has had a material effect on the Company's operations. New Accounting Standard Net income per share is based on the weighted average number of shares of Common Stock and dilutive common stock equivalents (stock options and warrants) outstanding during the period. Statement of Financial Accounting Standards No. 128, "Earnings Per Share", is required to be adopted for interim and annual periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and restate all prior periods. Basic and diluted earnings per share will replace primary and fully diluted earnings per share. The dilutive effect of stock options and other common stock equivalents will be excluded from the calculation of basic earnings per share, but will be reflected in diluted earnings per share. The implementation of SFAS No. 128 would not have had an impact on fiscal 1997 net income per share. ITEM 8. Financial Statements and Supplementary Data See Item 14. ITEM 9. Changes and Disagreements with Accountants and Accounting and Financial Disclosure None. 16 PART III ITEM 10. Directors and Executive Officers of the Registrant The following table sets forth information concerning each of the directors and executive officers of the Company: Name Age Position Barry R. Steinberg 55 Chairman of the Board, President, Executive Chief Officer and Director Joel G. Stemple, Ph.D 55 Executive Vice President, Secretary and Director Joseph Looney 40 Chief Financial Officer William F. Scheibel, Jr. 42 Chief Technology Officer Joel Rothlein, Esq. 68 Director George Bagetakos 51 Director Julian Sandler 53 Director Barry R. Steinberg, the founder of the Company, has served as its Chairman of the Board, President and Chief Executive Officer and as a director since Manchester's formation in 1973. Mr. Steinberg previously served as a systems analyst for Sleepwater, Inc. and Henry Glass and Co. Joel G. Stemple, Ph.D. has served as Executive Vice President since September 1996 and as Vice President and as a director since August 1982. Dr. Stemple previously performed consulting services for the Company and, from 1966 to 1982, served as Assistant and Associate Professor of Mathematics at Queens College, City University of New York. Joseph Looney has served as the Company's Chief Financial Officer since May 1996. Prior to joining the Company, from 1984 to 1996, Mr. Looney served in various positions with KPMG Peat Marwick LLP, including Senior Audit Manager at the end of his tenure at such firm. Mr. Looney is a Certified Public Accountant, a member of the AICPA, the New York State Society of Certified Public Accountants and the Institute of Internal Auditors. William F. Scheibel, Jr. has served as the Company's Chief Technology Officer since September 1996 and served as Manager of Technical Services and Support from September 1995 through August 1996. Before joining the Company, from 1990 to 1995, Mr. Scheibel served in various positions with Bay Networks, Inc., a manufacturer of computer networking equipment, including Director of Field Support for North and South America at the end of his tenure at such firm. Joel Rothlein, Esq. has been a director of the Company since October 1996. Mr. Rothlein is a partner in the law firm of Kressel Rothlein & Roth, Esqs., Massapequa, New York, where he has practiced law since 1955. Kressel Rothlein & Roth, Esqs. and its predecessor firms have acted as outside general counsel to the Company since the Company's inception. George Bagetakos became a director on December 2, 1996. Mr. Bagetakos has been the Director of Sales, Major Accounts for Northern Telecom, Inc., a supplier of telecommunications equipment products, since July 1995, and served as Manager, National Accounts for Northern Telecom, Inc. from 1984 to June 1995. Prior to joining Northern Telecom, Mr. Bagetakos was Corporate Vice President, Telecommunications for American Express Company from 1979 to 1983. 17 Julian Sandler became a director on December 2, 1996. Mr. Sandler is Chief Executive Officer of Rent-a-PC, Inc., a full-service provider of short-term computer rentals, which Mr. Sandler founded in 1984. Mr. Sandler is also the founder and was the President from 1974 to 1993 of Brookvale Associates, a national organization specializing in the remarketing of hardware manufactured by Digital Equipment Corporation. Mr. Sandler also co-founded and from 1970 to 1973 was Vice President of Periphonics Corporation, a developer and manufacturer of voice response systems. Section 16(a) Beneficial Reporting Compliance Section 16 of the Securities Exchange Act of 1934, as amended, requires that officers, directors and holders of more than 10% of the Common Stock (collectively, "Reporting Persons") file reports of their trading in the Company's equity securities with the Securities and Exchange Commission. Based on a review of Section 16 forms filed by the Reporting Persons during the last fiscal year, (a) the Reporting Persons filed Form 3 two days late; b) Barry R. Steinberg, a Reporting Person, filed his Form 4 reporting the acquisition of additional shares of the Common Stock approximately two and one-half months late; and (c) Julian Sandler, a Director of the Company, filed his Form 4 reporting the acquisition of shares of the Common Stock approximately ten months late. Except as noted, the Company believes that the Reporting Persons timely complied with all applicable Section 16 filing requirements. ITEM 11. Summary Compensation. The following table sets forth a summary of the compensation paid or accrued by the Company during the fiscal years ended July 31, 1997 and 1996 to the Company's Chief Executive Officer and the other executive officers whose compensation exceeded $100,000:
Summary Compensation Table Annual Compensation ------------------- Other Annual Name and Principal Position Year Salary Bonus Compensation(5) - --------------------------- ---- ------ ----- --------------- Barry R. Steinberg, Chief Executive Officer 1997 $550,000 - $59,252(1) 1996 $271,800 $1,816,439 $59,210(1) Joel G. Stemple, Executive Vice President 1997 50,000 - $33,050(2) 1996 $251,800 $1,669,193 $29,000(2) Joseph Looney, Chief Financial Officer(3) 1997 $125,489 $ 47,500 $ 7,610 1996 $ 31,250 $ 10,000 $1,275 William F. Scheibel, Jr., Chief Technology Officer(4) 1997 $128,956 $ 22,500 $ 8,266 1996 $ 96,157 $ 17,500 $ 4,250 - ---------------------
(1) Includes $50,000 of premiums paid by the Company for a whole life insurance policy in the name of Mr. Steinberg having a face value of $2,600,000 and under which his daughters, on the one hand, and the Company, on the other hand, are beneficiaries and share equally in the death benefits payable under the policy. (2) Includes $25,000 of premiums paid by the Company for a whole life insurance policy in the name of the executive officer having a face value of $1,300,000 and under which his spouse and the Company are beneficiaries and are entitled to $600,000 and $700,000, respectively, of the death benefits payable under the policy. (3) Began employment with the Company on May 2, 1996. (4) Began employment with the Company on September 7, 1995. (5) Includes in fiscal 1997 employer matching contributions to the Company's defined contribution plan of $6,252, $6,675, $2,510, and $3,166 for Messrs. Steinberg, Stemple, Looney and Scheibel, respectively. 18 No restricted stock awards, stock appreciation rights or long-term incentive plan awards (all as defined in the proxy regulations promulgated by the Securities and Exchange Commission) were awarded to, earned by, or paid to the Named Executive Officers during the fiscal year ended July 31, 1997. Barry R. Steinberg has agreed with the Company that his annual base salary for services rendered to the Company in his current positions as President and Chief Executive Officer shall be $550,000 in each of the fiscal years ending July 31, 1997 and 1998. Mr. Steinberg has agreed that he will not be eligible to receive any bonus in fiscal 1997 and that any bonus payable for fiscal 1998 will require the approval of a majority of the independent directors of the Company. The Company will continue to make available to him the car allowance and deferred compensation benefits that he is currently receiving. Mr. Steinberg will also be able to participate in other benefits that the Company makes generally available to its employees, such as medical and other insurance, and Mr. Steinberg will be able to participate under the Company's stock option plan. In the event Mr. Steinberg's employment with the Company were terminated, he would not be precluded from competing with the Company. The Company has an employment agreement with Joel G. Stemple, Ph.D., under which Dr. Stemple receives a base salary of $450,000 in each of the fiscal years ending July 31, 1997 and 1998. Under the employment agreement, Dr. Stemple is not eligible to receive any bonus in fiscal 1997 and any bonus payable to Dr. Stemple for fiscal 1998 must be approved by a majority of the independent directors of the Company. Under the employment agreement, the Company provides Dr. Stemple with an automobile and certain deferred compensation benefits and provides Dr. Stemple with medical and other benefits generally offered by the Company to its employees. Dr. Stemple also is able to participate in the Company's stock option plan. The employment agreement is terminable by either party on 90 days' prior notice. In the event the Company so terminates Dr. Stemple's employment, or the Company elects not to renew his employment agreement, he is entitled to severance equal to 12 months of his then current base salary. This severance will be payable in accordance with the Company's customary payroll practices. Under the employment agreement, if Dr. Stemple terminates his employment, or the Company terminates his employment for cause, Dr. Stemple is prohibited, for a two-year period from such termination, from competing with the Company in the eastern half of the United States. Option Grants in the Last Fiscal Year The following table sets forth the information with respect to grants of stock options to purchase the Company's common stock, par value $0.01 per share (the "Common Stock"), pursuant to the Company's Amended and Restated 1996 Incentive and Non-Incentive Stock Option Plan (the "Plan") granted to the Named Executive Officers during the fiscal year ended July 31, 1997 and all options outstanding to the named Executive Officers as of July 31, 1997.
Individual Grants ----------------- Number of Percent of Potential Realizable Securities Total Options Value at Assumed Underlying Granted to Annual Rates of Stock Options Employees in Exercise Expiration Price Appreciation Granted Fiscal year Price Date For Option Term ------- ----------- ----- ---- --------------- Name (#) ($/sh) 5% 10% ---- ---- ------- ---- ----- Joseph Looney 50,000(1) 6.3% $10.00 2/03/2007 $29,000 $343,000 20,000(2) 2.5% $ 5.00 3/26/2007 - $20,000 William F. Scheibel, Jr. 50,000(1) 6.3% $10.00 2/03/2007 $29,000 $343,000 20,000(2) 2.5% $ 5.00 3/26/2007 - $20,000
No options outstanding were exercised or exercisable during the fiscal year ended July 31, 1997 or as of July 31, 1997. There were no in-the-money exercisable or unexercisable options at July 31, 1997. - -------------- (1) Exercisable cumulatively at the rate of 20% per annum commencing February 3, 1999. (2) Exercisable cumulatively at the rate of 25% per annum commencing May 5, 1999. 19 ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of October 21, 1997 (except as otherwise indicated) with respect to the number of shares of the Company's common stock beneficially owned by each person who is known to the Company to beneficially own more than 5% of the common stock, the number of shares of common stock beneficially owned by each director of the Company and each executive officer of the Company, and the number of shares of common stock beneficially owned by all executive officers and directors of the Company as a group. Except as otherwise indicated, each such shareholder has sole voting and investment power with respect to the shares beneficially owned by such shareholder. Shares Percent Beneficially of Shares Name and Address Owned Outstanding ---------------- ----- ----------- Barry R. Steinberg(1)(3) 4,630,101 54.3% Joel G. Stemple(1) 626,263 7.3 Joseph Looney(1) 4,700 * William F. Scheibel, Jr.(1) - Joel Rothlein(2) 16,500 * George Bagetakos(1)(4) 2,500 * Julian Sandler(1)(5) 3,500 * All executive officers and directors as a group (6 persons) 5,283,564 (1) Address is 160 Oser Avenue, Hauppauge, New York 11788. (2) Address is 684 Broadway, Massapequa, New York 11758; consists of 3,300 shares held by Kressel, Rothlein & Roth, Esqs., in which Mr. Rothlein is a partner, and 13,200 shares held by the Kressel, Rothlein & Roth Profit Sharing Plan. Mr. Rothlein disclaims beneficial ownership of the Common Stock owned by Kressel Rothlein & Roth, Esq., except to the extent of his equitable interest in the firm, and of the Common Stock owned by the Kressel Rothlein & Roth Profit Sharing Plan, except to the extent of his beneficial interest in such plan. (3) Excludes 29,000 shares owned by Ilene Steinberg and 29,000 shares owned by Sheryl Steinberg, daughters of Mr. Steinberg, which shares were purchased with the proceeds of a loan from Mr. Steinberg. As reported on Schedule 13D filed on March 24, 1997, as amended, Mr. Steinberg, Ilene Steinberg, and Sheryl Steinberg each disclaim beneficial ownership of the common stock owned by the others. (4) Consists of option exercisable on December 18, 1997. (5) Includes option to purchase 2,500 shares exercisable on December 18, 1997. * Represents less than one tenth of one percent of outstanding shares. ITEM 13. Certain Relationships and Related Transactions Until August 1994, the Company was affiliated with Electrograph Systems, Inc. ("Electrograph"). Barry R. Steinberg, the Company's President and Chief Executive Officer and its majority shareholder, served as Electrograph's Chairman of the Board and Chief Financial Officer and had beneficial ownership (directly and through shares held by his spouse and certain trusts, of which his children are beneficiaries) of 35.5% of the outstanding shares of common stock of Electrograph. During the fiscal years ended July 31, 1993 and 1994, the Company paid approximately $322,000 and $385,000, respectively, to Electrograph for the purchase of products. In August 1994, Bitwise Designs, Inc. ("Bitwise"), a publicly-traded company engaged in the manufacture and distribution of document imaging systems, personal and industrial computers and related peripherals, acquired Electrograph through a stock-for-stock merger; Mr. Steinberg acquired beneficial ownership of less than 1% of the outstanding capital stock of Bitwise for the common stock of Electrograph in which he had a direct or indirect beneficial interest. Mr. Steinberg served as a director of, and provided consulting services to, Bitwise from August 1994 through September 17, 1996. On April 25, 1997, the Company purchased substantially all of the assets of Electrograph Systems, Inc. See Item 1 - Business "Recent Acquisition". 20 Three of the Company's four Hauppauge, New York facilities are leased from entities affiliated with certain of the Company's executive officers, directors or principal shareholders. The property located at 40 Marcus Boulevard, Hauppauge, New York is leased from a limited liability company owned 70% by Mr. Steinberg and his relatives, 20% by Joel G. Stemple, Ph.D., the Company's Executive Vice President and a principal shareholder, and 10% by Michael Bivona, a principal shareholder of the Company. For the fiscal years ended July 31, 1997 and 1996, the Company made lease payments of $174,000 and $216,000, respectfully, to such entity. The Company's offices at 160 Oser Avenue, Hauppauge, New York are leased from a limited liability company owned 65% by Mr. Steinberg, 17.5% by Dr. Stemple and 17.5% by Mr. Bivona. For the fiscal years ended July 31, 1997, 1996 and 1995, the Company made lease payments of $259,000, $360,000 and $255,000, respectively, to such entity. The property located at 50 Marcus Boulevard, Hauppauge, New York is leased from Mr. Steinberg doing business in the name of Marcus Realty. For the fiscal years ended July 31, 1997, 1996 and 1995, the Company made lease payments of $329,000, $435,000 and $417,000, respectively, to such entity. The Company leases an additional office in Massapequa, New York at $300 per month ($881 per month through May 1997) on a month-to-month basis from an entity of which Messrs. Rothlein and Bivona own 25% and 50%, respectively. See "Business--Properties." Joel Rothlein, Esq., a director of the Company, is a partner of Kressel Rothlein & Roth, Esqs., which, with its predecessor firms, has acted as outside general counsel to the Company since the Company's inception. Kressel Rothlein & Roth, Esqs. was paid approximately $89,000 (exclusive of disbursements) from the Company for legal fees in the fiscal year ended July 31, 1996 and received fees of approximately $655,000 from the Company in the fiscal year ended July 31, 1997, which sum includes fees paid to special counsel ($286,000). During the year ended July 31, 1997, the Company recorded revenue of $130,000 in connection with the sale of computer equipment to a company controlled by Julian Sandler. 21 PART IV ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (a) (1) Financial Statements The financial statements included herein are filed as a part of this Report. Manchester Equipment Co., Inc. INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report 23 Consolidated Financial Statements: Balance Sheets as of July 31, 1997 and 1996 24 Statements of Income for the years ended July 31, 1997, 1996 and 1995 25 Statements of Shareholders' Equity for the years ended July 31, 1997, 1996 and 1995 26 Statements of Cash Flows for the years ended July 31, 1997, 1996 and 1995 27 Notes to Consolidated Financial Statements 28 22 Independent Auditors' Report The Board of Directors and Shareholders Manchester Equipment Co., Inc.: We have audited the accompanying consolidated balance sheets of Manchester Equipment Co., Inc. and subsidiaries as of July 31, 1997 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended July 31, 1997. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Manchester Equipment Co., Inc. and subsidiaries at July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Jericho, New York September 24, 1997 23 Manchester Equipment Company, Inc. and Subsidiaries Consolidated Balance Sheets July 31, 1997 and 1996
Assets 1997 1996 ------ ---- ---- (in thousands, except share amounts) Current assets: Cash and cash equivalents $15,049 $ 5,774 Investments 4,408 - Accounts receivable, net of allowance for doubtful accounts of $1,051 and $800, respectively 21,473 19,068 Inventory 10,127 8,957 Deferred income taxes 440 334 Prepaid expenses and other current assets 248 197 --- --- Total current assets 51,745 34,330 Property and equipment, net 4,073 2,244 Goodwill, net 1,524 - Deferred income taxes 379 395 Other assets 487 792 --- ------- $58,208 $37,761 ======= ====== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Current maturities of long-term debt $ 99 $ 99 Notes payable-bank 1,274 6,500 Notes payable-shareholder - 353 Notes payable - other 264 - Accounts payable and accrued expenses 19,283 17,113 Deferred service contract revenue 247 129 Income taxes payable - 295 ----- --- Total current liabilities 21,167 24,489 Long-term debt, less current maturities 77 175 Deferred compensation payable 87 183 Commitments and contingencies (note 8) Redeemable common stock - 4,739 Shareholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued - - Common stock, $.01 par value; 25,000,000 shares authorized, 8,525,000 and 6,200,000 shares issued and outstanding 85 62 Additional paid-in capital 20,403 - Retained earnings 16,389 8,113 ------ ----- Total shareholders' equity 36,877 8,175 ------ ----- $58,208 $37,761 ====== ======
See accompanying notes to consolidated financial statements. 24 Manchester Equipment Company, Inc. and Subsidiaries Consolidated Statements of Income Years ended July 31, 1997, 1996 and 1995
1997 1996 1995 (in thousands except share and per share amounts) Revenue $187,801 $189,659 $170,818 Cost of revenue 161,186 163,128 146,323 ------- ------- ------- Gross profit 26,615 26,531 24,495 Selling, general and administrative expenses 21,023 22,598 21,280 ------ ------ ------ Income from operations 5,592 3,933 3,215 Other income (expense): Interest expense (225) (399) (360) Interest income 560 25 14 Other 60 9 (46) ----- ------- --- Income before provision for income taxes 5,987 3,568 2,823 Provision for income taxes 2,450 1,430 1,160 ----- ----- ----- Net income $3,537 $2,138 $1,663 ====== ===== ===== Net income per share $0.45 $0.34 $0.27 ===== ===== ===== Weighted average shares of common stock outstanding 7,779,484 6,246,970 6,262,626 ========= ========= =========
See accompanying notes to consolidated financial statements. 25 Manchester Equipment Company, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended July 31, 1997, 1996 and 1995
Additional Common Par Paid-in Retained Shares Value Capital earnings Total (in thousands except share amounts) Balance July 31, 1994 6,262,626 $63 $ - $4,311 $4,374 Net income - - - 1,663 1,663 -------- --- - ----- ----- Balance July 31, 1995 6,262,626 63 - 5,974 6,037 Net income - - - 2,138 2,138 Purchase and retirement of stock (62,626) (1) - 1 - ------- ------- --- ------ ---- Balance July 31, 1996 6,200,000 62 - 8,113 8,175 Issuance of common stock 2,325,000 23 20,391 - 20,414 Stock option commission expense - - 12 - 12 Transfer of redeemable common stock - - - 4,739 4,739 Net income - - - 3,537 3,537 --------- --- ------ ----- ----- - - - Balance July 31, 1997 8,525,000 $85 $20,403 $16,389 $36,877 ========= == ====== ====== ======
See accompanying notes to consolidated financial statements. Manchester Equipment Company, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended July 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- (in thousands) Cash flows from operating activities: Net income $3,537 $2,138 $1,663 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 720 473 395 Allowance for doubtful accounts 210 132 161 Stock options commission expense 12 - - Deferred income taxes (90) (86) (71) (Gain) Loss on disposition of assets (37) (9) 71 Change in assets and liabilities; net of the effects of the purchase of Electrograph: Increase in accounts receivable (545) (1,700) (1,954) (Increase) decrease in inventory 515 548 (2,382) (Increase) decrease in prepaid expenses and other current assets (44) 41 (24) (Increase) decrease in other assets 342 (307) (113) Increase in accounts payable and accrued expenses 221 2,715 4,371 (Decrease) increase in deferred service contract revenue 118 27 (79) Increase (decrease) in income taxes payable (295) 205 (468) Decrease in deferred compensation payable (96) (15) - --- ---- ------ Net cash provided by operating activities 4,568 4,162 1,570 ----- ----- ----- Cash flows from investing activities: Capital expenditures (2,439) (1,028) (545) Proceeds from the sale of assets - 55 105 Purchase of marketable securities (4,408) - - Payment for purchase of Electrograph, net of cash acquired (1,886) - - ------- --- --- Net cash used in investing activities (8,733) (973) (440) ------ ---- ---- Cash flows from financing activities: Net repayments of borrowings (6,490) 900 200 Payments on note payable shareholder (353) (118) - Payments on capitalized lease obligation (98) (31) - Payments on note payable - other (33) - - Net proceeds from initial public offering 20,414 - - ------ ----- ----- Net cash provided by financing activities 13,440 751 200 ------ ---- --- Net increase in cash 9,275 3,940 1,330 Cash at beginning of year 5,774 1,834 504 ----- ----- --- Cash at end of year $15,049 $5,774 $1,834 ====== ===== ===== Cash paid during the year for: Interest $225 $399 $378 ==== === ==== Income taxes $2,868 $1,290 $1,729 ===== ===== ===== Other noncash transactions: Capitalized lease obligation $ - $305 $ - === ==== ===== Purchase of stock for notes payable-shareholder $ - $471 $ - === === =====
See accompanying notes to consolidated financial statements. 27 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) (1) Operations and Summary of Significant Accounting Policies (a) The Company Manchester Equipment Company, Inc. (the Company) is a systems integrator and reseller of computer hardware, software and networking products, primarily for commercial customers. The Company offers its customers single-source solutions customized to their information systems needs by combining value-added services with hardware, software, networking products and peripherals from leading vendors. Sales of hardware, software and networking products comprise most of the Company's revenues. Service revenues have not comprised a significant part of revenues to date. The Company has entered into agreements with certain suppliers and manufacturers which provide the Company favorable pricing and price protection in the event the vendor reduces its prices. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances are eliminated in consolidation. (c) Cash Equivalents The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. (d) Investments The Company classifies its marketable debt and equity securities in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Dividend and interest income are recognized when earned. Cost is maintained on a specific identification basis for purposes of determining realized gains and losses on sales of investments. (e) Revenue Recognition Revenue from product sales is recognized at the time of shipment to the customer. Revenue for services is recognized when the related services are performed. When product sales and services are bundled, revenue is recognized upon completion of the installation. Service contract fees are recognized as revenue ratably over the period of the applicable contract or as the services are provided. Deferred service contract 28 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) revenue represents the unearned portion of service contract fees. The Company generally does not develop or sell software products. However, certain computer hardware products sold by the Company are loaded with prepackaged software products. The net impact on the Company's financial statements of product returns, primarily for defective products has been insignificant. (f) Market Development Funds The Company receives various market development funds including cooperative advertising funds from certain vendors, principally based on volume purchases of products. The Company records such amounts related to volume purchases as purchase discounts which reduce cost of revenue and other incentives that require specific incremental action on the part of the Company, such as training, advertising or other pre-approved market development activities as an offset to the related costs included in selling general and administrative expenses. Total market development funds amounted to $521, $943 and $906 for the years ended July 31, 1997, 1996 and 1995, respectively. (g) Inventory Inventory, consisting of computer hardware, software and related supplies, is valued at the lower of cost (first-in first-out) or market value. (h) Property and Equipment Property and equipment are stated at cost. Depreciation is provided using the straight-line and accelerated methods over the economic lives of the assets, generally from five to seven years. Leasehold improvements are amortized over the shorter of the underlying lease term or asset life. (i) Goodwill Goodwill related to the acquisition of Electrograph Systems, Inc. represents the excess of cost over the fair value of net assets acquired. Goodwill is amortized on a straight-line basis over twenty years. The Company reviews the significant assumptions that underlie the twenty-year amortization period on a quarterly basis and will shorten the amortization period if considered necessary. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. Accumulated amortization was approximately $19 at July 31, 1997. Amortization expense of $19 for the year ended July 31, 1997 is included in selling general and administrative expenses in the consolidated statement of income. (j) Income Taxes Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Net Income Per Share Net income per share is based on the weighted average number of shares of Common Stock and dilutive common stock equivalents (stock options and warrants) outstanding during the period. Statement of Financial Accounting Standards No. 128, "Earnings Per Share", is required to be adopted for interim and annual periods ending after December 15, 1997. At that time, the Company will be required to change the 29 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) method currently used to compute earnings per share and restate all prior periods. Basic and diluted earnings per share will replace primary and fully diluted earnings per share. The dilutive effect of stock options and other common stock equivalents will be excluded from the calculation of basic earnings per share, but will be reflected in diluted earnings per share. The implementation of SFAS No. 128 would not have had an impact on fiscal 1997 net income per share. (l) Impairment of Long-Lived Assets In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 (Statement 121) that established accounting standards for the impairment of long-lived assets, certain intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. In conformity with Statement 121, it is the Company's policy to evaluate and recognize an impairment if it is probable that the recorded amounts are in excess of anticipated undiscounted future cash flows. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the assets, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds the fair value. (m) Accounting for Stock-Based Compensation The Company records compensation expense for employee stock options if the current market price of the underlying stock exceeds the exercise price on the date of the grant. On August 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose the pro forma net income per share for employee stock option grants made beginning in fiscal 1996 as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123. (n) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (o) Fair Value of Financial Instruments The fair values of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses, long-term debt and notes payable - other are estimated to be the carrying values at July 31, 1997 due to the short maturity of such instruments. The book value of notes payable - bank approximated fair value since those instruments carry prime or LIBOR based interest rates that are adjusted for market rate fluctuations. (p) Reclassifications Certain reclassifications were made to prior year amounts to conform with the fiscal 1997 presentation format. (2) Investments The Company classified all its investments at July 31, 1997 as trading securities. Fair value of U.S. government obligations and other securities are based on quoted market prices. The gross unrealized holding gains and fair values of investments by major type at July 31, 1997 were as follows: 30 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) Gross Unrealized Fair Value Holding Gain of Investment U.S. government obligation $ 2 $1,007 Corporate commercial instruments - 3,401 - ----- $ 2 $4,408 ==== ===== At July 31, 1997 all investments had maturities of less than one year. (3) Property and Equipment ---------------------- Property and equipment at July 31, consist of the following: 1997 1996 ---- ---- Furniture and fixtures $2,096 $1,824 Machinery and equipment 3,401 1,668 Transportation equipment 281 361 Leasehold improvements 2,168 1,656 ----- ----- 7,946 5,509 Less accumulated depreciation and amortization 3,873 3,265 ----- ----- $4,073 $2,244 ===== ===== Depreciation and amortization expense amounted to $701, $473, and $395 for the years ended July 31, 1997, 1996 and 1995, respectively. (4) Acquisition of Electrograph Systems, Inc. On April 25, 1997, the Company, through a newly formed wholly-owned subsidiary, acquired substantially all of the assets and assumed certain liabilities of Electrograph Systems, Inc., a wholly owned subsidiary of Bitwise Designs, Inc. Electrograph is a specialized distributor of microcomputer peripherals, primarily in the eastern United States. The purchase price and transaction costs aggregated approximately $2,600. Included in the liabilities assumed were notes payable-bank and notes payable-other with balances of $1,274 and $264, respectively, at July 31, 1997. The acquisition has been accounted for as a purchase and the operating results of Electrograph are included in the consolidated statements of income from the date of acquisition. The acquisition resulted in goodwill of $1,543 which is being amortized on the straight-line basis over 20 years. The following unaudited pro forma consolidated results of operations for the years ended July 31, 1997 and 1996 assume that the Electrograph acquisition occurred on August 1, 1995 and reflect the historical operations of the purchased business adjusted for lower interest on investments and increased amortization, net of applicable income taxes resulting from the acquisition: 1997 1996 ---- ---- Revenues $203,368 $205,786 Net income $ 3,557 $ 2,231 Net income per share $0.46 $0.36 The pro forma results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition been made at the beginning of the period, or of results which may occur in the future. 31 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) (5) Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following: July 31, 1997 1996 ------------------- Accounts payable, trade $15,783 $12,973 Accrued salaries and wages 1,630 2,552 Customer deposits 740 629 Other accrued expenses 1,130 959 ----- --- $19,283 $17,113 ------- ------- The Company has entered into financing agreements for the purchase of inventory. These agreements are secured by the related inventory and/or accounts receivables. In each of the years in the three-year period ended July 31, 1997, the Company has repaid all balances outstanding under these agreements within the 30 day non-interest bearing payment period. Accordingly, amounts outstanding under such agreements of $5,184 and $1,450 at July 31, 1997 and 1996, respectively, are included in accounts payable and accrued expenses. Prior to December 1996, pursuant to certain intercreditor agreements, these financing agreements were subordinated to the Company's line of credit agreement except as to specific inventory purchased under these financing agreements. In August 1997, the Company entered into a new financing agreement for the purchase of inventory. The agreement provides a maximum of $10,000 in credit for purchases of inventory from certain specified manufacturers. The new agreement is unsecured, allows for a 30 day non-interest bearing payment period and requires the Company to maintain, among other things, a certain minimum tangible net worth. As of July 31, 1997, retained earnings available for dividends amounts to approximately $14,500. (6) Long-Term Debt In January 1996, the Company entered into a capitalized lease obligation for certain computer equipment. Future minimum payments required under such lease are as follows: Year ending July 31, 1998 $109 1999 74 ----- Total minimum lease payments 183 Less: amounts representing interest 7 ----- Present value of minimum lease payments 176 Less: Current portion 99 --- $77 --- (7) Employee Benefit Plans The Company maintains a qualified defined contribution plan with a salary deferral provision, commonly referred to as a 401(k) plan. The Company matches 50% of employee contributions up to three percent of the employees' compensation. The Company's contribution amounted to $161, $124 and $125 for the years ended July 31, 1997, 1996 and 1995, respectively. The Company also has a deferred compensation plan which is available to certain eligible key employees. The plan consists of life insurance policies purchased by the Company for the participants. Upon vesting, which occurs at various times from three to ten years, the participant becomes entitled to have ownership of the policy transferred to him or her at termination of employment with the Company. As of July 31, 1997 and 1996, the Company has recorded an asset (included with other assets) of $87 and $183, respectively, representing the cash surrender value of policies owned by the Company and a liability of the same amount relating to the unvested 32 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) portion of benefits due under this plan. For the years ended July 31, 1997, 1996 and 1995, the Company recorded an expense of $110, $72 and $97 in connection with this plan. (8) Commitments and Contingencies Leases The Company leases most of its executive offices and warehouse facilities primarily from related parties (Note 11). In addition, the Company is obligated under lease agreements for sales offices and additional warehouse space. Aggregate rent expense under all these leases amounted to $1,073, $1,212 and $849 for the years ended July 31, 1997, 1996 and 1995. The following represents the Company's commitment under operating leases for the next five years ended July 31: 1998 $1,209 1999 1,184 2000 1,169 2001 900 2002 917 Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, based on advice from its legal counsel, the ultimate disposition of these matters will not have a material adverse effect. On March 28, 1997 a complaint was filed in the United States District Court for the Eastern District of New York against the Company, its President and Chief Executive Officer, its Executive Vice President and Secretary, and its Chief Financial Officer. The plaintiff claims to have purchased common shares in the Company's initial public offering and purports to sue on his own behalf and on behalf of a class of persons who purchased the Company's common stock either pursuant to the initial public offering or in the period from November 26, 1996 through February 13, 1997. The complaint asserts that the Company and the individual defendants made false or misleading statements and omissions in connection with the initial public offering in violation of Section 11, 12(a)(2) and 15 of the federal Securities Act of 1933, and seeks damages on behalf of the putative class in an unspecified amount and/or rescission, together with costs and expenses of litigation. The Company believes that the allegations in the complaint are entirely without merit and intends vigorously to defend this matter. (9) Line of Credit The Company has unsecured lines of credit agreements with a bank that provide for a maximum of $10,000 of borrowings and is due on demand. Interest on borrowings is computed at the Company's option based on the bank's prime rate (8.50% at July 31, 1997) or LIBOR plus 2%. (7.63% at July 31, 1997). At July 31, 1997 and 1996 amounts outstanding under the agreements totaled $1,274, and $6,500, respectively. The balance outstanding at July 31, 1997 was repaid in August 1997. 33 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) (10) Income Taxes The provision for income taxes for the years ended July 31, 1997, 1996 and 1995 consists of the following: 1997 1996 1995 ---- ---- ---- Current Federal $1,938 $1,166 $ 997 State 602 350 302 --- --- --- 2,540 1,516 $1,299 ----- ----- ----- Deferred Federal (68) (73) (113) State (22) (13) (26) ---- ---- ---- (90) (86) (139) --- ---- ----- $2,450 $1,430 $1,160 ====== ===== ===== The difference between the Company's effective income tax rate and the statutory rate is as follows, for the years ended July 31, 1997, 1996 and 1995: 1997 1996 1995 ---- ---- ---- Income taxes at statutory rate $2,036 $1,213 $ 960 State taxes, net of federal benefit 383 222 182 Other 31 (5) 18 -- --- -- $2,450 $1,430 $1,160 ===== ===== ===== The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset at July 31, 1997 and 1996 were as follows: 1997 1996 ---- ---- Deferred tax assets: Allowance for doubtful accounts $410 $321 Deferred compensation 270 317 Other 139 91 --- -- Deferred tax asset $819 $729 ==== === A valuation allowance has not been provided in connection with the deferred tax assets since the Company believes that it is more likely than not that such deferred tax assets will be recovered as an offset to taxes due on future taxable income. 34 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) (11) Related Party Transactions The Company leases its warehouse and distribution center as well as its corporate offices and certain sales facilities from entities owned or controlled by shareholders, officers, or directors of the Company. The leases generally cover a period of ten years and expire at various times from 1998 through 2005. Lease terms generally include annual increases of five percent. Rent expense for these facilities aggregated $771, $1,022, and $683 for the years ended July 31, 1997, 1996 and 1995, respectively. The Company paid legal fees to a law firm in which a director of the Company is a partner. Such fees amounted to $655, $383, and $66, including disbursements, in the fiscal years ended July 31, 1997, 1996, and 1995 respectively. During fiscal 1997, the Company received approximately $130 in revenue from a company controlled by a director of the Company. (12) Shareholders' Equity Initial Public Offering On December 2, 1996, the Company completed an initial public offering (IPO) of 2,325,000 shares of its common stock at an initial public offering price of $10 per share. Net proceeds to the Company were $20,414 after deducting the underwriting discounts and commissions and other costs associated with the IPO. In connection with the IPO, the Company issued to the underwriter warrants to purchase an aggregate of 250,000 shares of common stock. The warrants expire five years from the date of issuance and are exercisable commencing one year after issuance at a price of $12 per share. Redeemable Common Stock Prior to the IPO, the Company was a party to an agreement among its shareholders whereby each of the Company's two minority shareholders had the right to demand that upon termination, retirement, or death, the Company redeem his interest at differing values stated in the agreement. The Company maintains term life insurance with a face value of $1,500 to be used towards the purchase of the shares in the event of the death of each shareholder. One of the minority shareholders retired in fiscal 1996 and based upon the terms of the agreement and a subsequent agreement entered into in May 1996, payment was fixed at $4,710 for the shareholder's interest in the Company (626,263 shares at the time of the agreement). The shareholder had an annual option to redeem one-tenth of his shares commencing in fiscal 1996, at an annual price of $471 to be paid in equal quarterly installments over the following year. In connection with such agreements, in May 1996 the Company purchased 62,626 shares of common stock from the retired minority shareholder. The purchase price was $471, which was paid in four non-interest bearing equal quarterly installments beginning on May 1, 1996. At July 31, 1996 notes payable- shareholder of $353 related to this acquisition. Such shares were subsequently retired. The aggregate amounts payable by the Company to redeem outstanding shares of common stock under these agreements, $4,739 at July 31, 1996, was classified as redeemable common stock. In September 1996, among other provisions, the shareholder agreed to terminate his put options to sell his remaining shares to the Company upon the effective date of the Company's IPO. In addition, the shareholders' agreement terminated upon the effective date of the Company's IPO. As a result of the successful completion of the IPO, the amounts which would have been due under the agreements have been reclassified from redeemable common stock to retained earnings. 35 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) Stock Option Plan Under the Company's Amended and Restated 1996 Incentive and Non-Incentive Stock Option Plan (the "Plan"), which was approved by the Company's shareholders in October 1996, an aggregate of 1,100,000 shares of common stock are reserved for issuance upon exercise of options thereunder. Under the Plan, incentive stock options, as defined in section 422 of the Internal Revenue Code of 1986, as amended, may be granted to employees and non-incentive stock options may be granted to employees, directors and such other persons as the Board of Directors may determine, at exercise prices equal to at least 100% (with respect to incentive stock options) and at least 85% (with respect to non-incentive stock options ) of the fair market value of the Common Stock on the date of grant. In addition to selecting the optionees, the Board of Directors will determine the number of shares of Common Stock subject to each option, the term of each stock option up to a maximum of ten years (five years for certain employees for incentive stock options), the time or times when the stock option becomes exercisable, and otherwise administer the Plan. Incentive stock options expire three months from the date of the holder's termination of employment with the Co. other than by reason of death or disability. Options may be exercised with cash or common stock previously owned for in excess of six months. During fiscal 1997, 742,350 and 60,000 options have been granted at $10 and $5, respectively, per share. Such exercise prices were greater than or equal to the market value on the date of grant. Vesting commences one or two years from the date of grant and ranges from one to seven years. At July 31, 1997, no options were exercisable and all options granted expire ten years from the date of grant. The Company has adopted the pro forma disclosure provision of SFAS No. 123, "Accounting for Stock Based Compensation". Accordingly, the Company does not record compensation cost in the financial statements for its stock options which have an exercise price equal to or greater than the fair value of the stock on the date of grant. The Company has recognized $108 in deferred commission expense representing the value of stock options granted to non employee sales representatives. Such cost is expensed over the vesting period, amounting to $12 in fiscal 1997. Had compensation cost for the Company's stock option grants been determined based on the fair value at the grant date under SFAS No. 123, the Company's net income and net income per share for the year ended July 31, 1997 would approximate the pro forma amounts below: Net Income: As reported $3,537 Pro forma 3,464 Net income per share: As reported $0.45 Pro forma $0.45 The pro forma effects on net income and net income per share for 1997 may not be representative of the pro forma effect in future years. The fair value of options granted was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: Expected dividend yield 0% Expected stock volatility 29% Risk free interest rate 5% Expected option term until exercise (years) 4.27 The per share weighted average fair value of stock options granted during fiscal 1997 was $1.05. 36 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1997, 1996 and 1995 (in thousands, except share and per share data) (13) Major Customer and Vendor and Concentration of Credit Risk The Company sells and services customers that are located primarily in the eastern United States. One customer accounted for approximately 15%, 16% and 22% of total revenues for the years ended July 31, 1997, 1996 and 1995, respectively. The Company's top two vendors accounted for approximately 17%, and 15% of total purchases for the year ended July 31, 1997. The Company's top four vendors accounted for 20%, 12%, 11% and 10% of total product purchases for the year ended July 31, 1996. The Company's top two vendors accounted for 22% and 16% of total product purchases for the year ended July 31, 1995. One customer accounted for 10% of the Company's accounts receivable at July 31, 1997. 37 ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (Continued) (2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts and Reserves All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits: 3.1.a(1) Certificate of Incorporation of Registrant, filed August 21, 1973. 3.1.b(1) Certificate of Amendment of Certificate of Incorporation filed January 29, 1985. 3.1.c(1) Restated Certificate of Incorporation filed October 1, 1996. 3.2(1) Bylaws of Registrant. 4.2(1) Form of Representative's Warrants. 10.1(1) 1996 Incentive and Non-Incentive Stock Option Plan of Registrant. 10.2(1) Agreement dated September 24, 1996 between Registrant and Michael Bivona. 10.3(1)* Compensation Agreement dated November 6, 1996 between Registrant and. Joel G. Stemple. 10.4(1)* Agreement of Employment dated September 30, 1996 between Registrant and Barry Steinberg 10.4.a(1)* Amendment dated November 6, 1996 to Agreement of Employment dated September 30, 1996 between Registrant and Joel G. Stemple. 10.5.a(1) Lease dated October 1995 between Registrant and 40 Marcus Realty, LLC - f/k/a 40 Marcus Realty Associates, as amended. 10.5.b(1) Lease dated January 1988 between Registrant and Marcus Realty, as amended. 10.5.c(1) Lease dated June 1995 between Registrant and Facilities Management. 10.5.d(1) Lease dated July 31, 1995 between Registrant and Boatman's Equities, LLC - f/k/a 160 Oser Avenue Associates, as amended. 10.5.e(1) Lease dated January 15, 1992 between Registrant and 352 Seventh Avenue Associates. 10.5.f(1) Lease dated April 16, 1990 between Registrant and Regent Holding Corporation, as successor to Crow-Childress-Donner, Limited, as amended. 10.5.g(1) Business Lease dated December 4, 1992 between Registrant and TRA Limited, as amended. 10.5.h Lease dated June 23, 1997 between Registrant and First Willow, LLC 10.5.i Lease dated June 30, 1997 between Registrant and Angela C. Maffeo, Trustee Under the Will of John Capobianco. 10.6.(2) Promissory Note dated October 15, 1996 between Registrant and The Bank of New York 10.7.a(1) Letter Agreement Regarding Inventory Financing dated December 7, 1993 between ITT Commercial Finance Corp. and Registrant. 38 10.7.b(1) Agreement for Wholesale Financing dated November 11, 1993 between ITT Commercial Finance Corp. and Registrant. 10.7.c(1) Intercreditor Agreement dated May 18, 1994 between ITT Commercial Finance Corp. and The Bank of New York. 10.8.a(1) Letter Agreement Regarding Inventory Financing dated April 22, 1996 between AT&T Capital Corporation and Registrant. 10.8.b(1) Intercreditor Agreement dated May 18, 1994 between AT&T Commercial Finance Corporation and The Bank of New York. 10.9(1) Reseller Agreement dated May 1, 1990 between Toshiba America Information Systems, Inc. and Registrant. 10.10(1) Agreement for Authorized Resellers dated March 1, 1996 between Hewlett-Packard Company and Registrant. 10.11(3) Asset Purchase Agreement among Electrograph Systems, Inc., Bitwise Designs, Inc., Electrograph Acquisition, Inc. and Manchester Equipment Co., Inc., April 15, 1997. 27 Financial Data Schedule. (b) Reports on Form 8-K The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this report, and none were required. - ----------------------- * Denotes management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K. 1 Filed as the same numbered Exhibit to the Company's Registration Statement on Form S-1 (File No. 333- 13345) and incorporated herein by reference thereto. 2 Filed as the same numbered Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1996 (Commission File No. 0-21695) and incorporated herein by reference thereto. 3 Filed as the same numbered Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997 (Commission File No. 0-21695) and incorporated herein by reference thereto. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunder duly authorized. Manchester Equipment Co., Inc. Date: October 23, 1997 By: ss: Barry R. Steinberg ---------------------- Barry R. Steinberg President, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of this Registrant and in the capacities and on the dates indicated. ss: Barry Steinberg Date: October 23, 1997 - -------------------- Barry R. Steinberg President, Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer) ss: Joel G. Stemple Date: October 23, 1997 - ------------------- Joel G. Stemple Executive Vice President and Director ss: Joseph Looney Date: October 23, 1997 - ------------------ Joseph Looney Chief Financial Officer (Principal Accounting Officer) ss: Joel Rothlein Date: October 23, 1997 - ----------------- Joel Rothlein Director ss: Julian Sandler Date: October 23, 1997 - ------------------- Julian Sandler Director ss: George Bagetakos Date: October 25, 1997 - --------------------- George Bagetakos Director 40 Manchester Equipment Co., Inc. Schedule II - Valuation and Qualifying Accounts ----------------------------------------------- (dollars in thousands)
Column C-Additions ------------------ Column B- (1)- (2)- Column D- Column E- Column A - Balance at Charged to Charged to Deductions- Balance at Description beginning of costs and other (a) end of period - ----------- period expenses accounts (b) ----------- ------------- ------ -------- ------------ Allowance for doubtful accounts Year ended: July 31, 1995 $598 $161 $ 41 $718 July 31, 1996 $718 $132 $ 50 $800 July 31, 1997 $800 $339 $40 $128 $1,051
(a) Write-of amounts against allowance provided. (b) Recorded in connection with the acquisition of Electrograph Systems, Inc. 41 EX-10.5.H 2 6/23/97 LEASE BETWEEN REGISTRANT & FIRST WILLOW 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 - - - - - - - - - - - - - - - - - - LEASE - - - - - - - - - - - - - - - - - - FIRST WILLOW, LLC, Landlord, And MANCHESTER EQUIPMENT COMPANY, INC., Tenant Premises The Fifth (5th) Floor At 469 Seventh Avenue New York, New York 10018 - - - - - - - - - - - - - - - - - - I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 TABLE OF CONTENTS TO PRINTED PORTION STANDARD FORM OF OFFICE LEASE ARTICLE CAPTION PAGE 1. Rent..............................................1 2. Occupancy.........................................1 3. Tenant Alterations................................1 4. Maintenance and Repairs...........................1 5. Window Cleaning...................................1 6. Requirements of Law, Fire Insurance, Floor Loads.......................................1 7. Subordination.....................................2 8. Property Loss, Damage Reimbursement Indemnity.........................................2 9. Destruction, Fire and Other Casualty..............2 10. Eminent Domain....................................2 11. Assignment, Mortgage, Etc.........................2 12. Electric Current..................................2 13. Access to Premises................................2 14. Vault, Vault Space, Area..........................3 15. Occupancy.........................................3 16. Bankruptcy........................................3 17. Default...........................................3 18. Remedies of Owner and Waiver of Redemption........................................3 19. Fees and Expenses.................................3 20. Building Alterations and Management...............3 21. No Representations by Owner.......................3 -i- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 i 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 22. End of Term......................................4 23. Quiet Enjoyment..................................4 24. Failure to give Possession.......................4 25. No Waiver........................................4 26. Waiver of Trial by Jury..........................4 27. Inability to Perform.............................4 28. Bills and Notices................................4 29. Deleted prior to execution.......................4 30. Captions ................................4 31. Definitions......................................4 32. Adjacent Excavation-Shoring......................4 33. Rules and Regulations............................4 34. Deleted prior to execution.......................5 35. Estoppel Certificate.............................5 36. Successors and Assigns...........................5 Testimonium and Signatures................................5 Acknowledgments...........................................6 -ii- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 - - - - - - - - - - - - - - - - TABLE OF CONTENTS TO RIDER - - - - - - - - - - - - - - - - ARTICLE CAPTION PAGE 37. TERM; RENTAL.................................. 1 38. ADJUSTMENTS OF RENT........................... 4 39. USE........................................... 10 40. LANDLORD'S WORK............................... 10 41. CONSTRUCTION, GOVERNING LAW; CONSENTS......... 11 42. SUBORDINATION................................. 12 43. LEASE NOT BINDING UNLESS EXECUTED............. 14 44. CONFLICTS..................................... 15 45. ELECTRICITY................................... 15 46. FURTHER PROVISIONS AS TO DEFAULT.............. 17 47. HEAT AND AIR-CONDITIONING..................... 18 48. LANDLORD'S OTHER SERVICES..................... 19 49. SECURITY DEPOSIT.............................. 20 50. PARTIES BOUND................................. 23 51. BROKER........................................ 23 52. HAZARDOUS MATERIALS........................... 24 53. ARBITRATION................................... 24 54. ASSIGNMENT AND SUBLETTING..................... 25 55. INSURANCE..................................... 29 56. TENANT'S CHANGES.............................. 33 57. HOLDING OVER.................................. 36 58. CERTAIN DEFINITIONS AND CONSTRUCTION.......... 36 -iii- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 59. ADDENDUM TO ARTICLE 17.......................... 37 60. NOTICES......................................... 38 EXHIBIT A-FLOOR PLAN OF DEMISED PREMISES.......................... 39 EXHIBIT B-DEFINITIONS............................................. 40 EXHIBIT C-LANDLORD'S WORK......................................... 43 EXHIBIT D-CERTIFICATE OF OCCUPANCY................................ 47 I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 AGREEMENT OF LEASE made as of this 23rd day of June 1997, between FIRST WILLOW, LLC, a New York limited liability company, having an office at 1110 Second Avenue, New York, New York 10022, party of the first part, hereinafter referred to as "OWNER" or "LANDLORD" and MANCHESTER EQUIPMENT COMPANY, INC., a New York corporation having an address at 50 Marcus Boulevard, Hauppauge, New York, 11788, party of the second party, hereinafter referred to as "TENANT". WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner the fifth (5th) floor (hereinafter referred to as the "Demised Premises" or "demised premises" or "Premises"), as shown on the floor plan annexed hereto as Exhibit A annexed in the building known as 469 Seventh Avenue, New York, New York 10018 (hereinafter referred to as the "Building"), for the term at an annual rate as set forth in Article 37 hereof. In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: Rent: 1. Tenant shall pay the rent as above and as hereinafter provided. Occupancy: 2. Tenant shall use and occupy demised premises for the purposes set forth in Article 39 and for no other purpose. TENANT ALTERATION: 3. Tenant shall make no changes in or to the demised premises of any nature without Owner's prior written consent. Subject to the prior written consent of Owner, and to the provisions of this article, Tenant, at tenant's expense, may make alterations, installations, additions or improvements which are non-structural and which do not affect utility services or plumbing and electrical lines, in or to the interior of the demised premises by using contractors or mechanics first approved in each instance by Owner. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner and Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by payment or filing the bond required by law. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner on Tenant's behalf, shall upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises unless Owner by notice to Tenant no later than twenty days prior to the date fixed as the termination of this lease, elects to relinquish Owner's right thereto and to have them removed by Tenant, in which event the same shall be removed from the premises by Tenant prior to the expiration of the lease, at Tenant's expense. Nothing in this Article shall be construed to give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of such from the premises or upon removal of other installations as may be required by Owner, Tenant shall immediately and at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All property permitted or required to be removed, by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or may be removed from the premises by Owner, at tenant's expense. See Article 56. Maintenance and Repairs: 4. Tenant shall, throughout the term of this lease take good care of the demised premises and the fixtures and appurtenances therein. Tenant shall be responsible for all damage or injury to the demised premises or any other part of the building and the systems and equipment thereof, whether requiring structural or nonstructural repairs caused by or resulting from carelessness, omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents, employees, invitees or licensees, or which arise out of any work, labor, service or equipment done for or supplied to Tenant or any subtenant or arising out of the installation, use or operation of the property or equipment of Tenant or any subtenant. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's expense, all repairs in and to the demised premises for which Tenant is responsible, using only the contractor for the trade or trades in question, selected from a list of at least two contractors per trade submitted by Owner. Any other repairs in or to the building or the facilities and systems thereof for which Tenant is responsible shall be performed by Owner at the Tenant's expense. Owner shall maintain in good working order and repair the exterior and the structural portions of the building, including the structural portions of its demised premises, and the public portions of the building interior and the building plumbing, electrical, heating and ventilating systems (to the extent such systems presently exist) serving the demised premises. Tenant agrees to give prompt notice of any defective condition in the premises for which Owner may be responsible hereunder. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or others making repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. It is specifically agreed that Tenant shall not be entitled to any setoff or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this Lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of an action for damages for breach of contract. The provisions of this Article 4 shall not apply in the case of fire or other casualty which are dealt with in Article 9 hereof., Window Cleaning: 5. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. Requirements of Law, Fire Insurance, Floor Loads: 6. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant's sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof, (including Tenant's permitted use), or, with respect to the building if arising out of Tenant's use or manner of use of the premises or the building (including the use permitted under the lease). Nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Owner to Owner's satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorney's fees, by cash deposit or by surety bond in an amount and in a company satisfactory to owner, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal offense or constitute a default under any lease or mortgage under which Owner may be obligated, or cause the demised premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the demised premises or the building of which the demised premises form a part, or which shall or might subject Owner to any liability or responsibility to any person or for property damage. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire underwriters, Fire Insurance rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. Tenant shall pay all costs, expenses, fine, penalties, or damages, which may be imposed upon Owner by reason of tenant's failure to comply with the provisions of this article and if by reason of such failure the fire insurance rate shall, at the beginning of this lease or any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein owner and Tenant are parties, a schedule or "make-up" of rate for the building or demised premises issued by the New York Fire Insurance exchange or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient in Owner's judgment, to absorb and prevent vibration, noise and annoyance. See Article 55. Subordination: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall from time to time execute promptly any certificate that Owner may request. See Article 42. Property Loss, Damage Reimbursement Indemnity: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of tenant by theft or otherwise , nor for any injury or damage to persons or property resulting from any clause of whatsoever nature, unless caused by or due to the negligence of Owner, its agents, servants or employees. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said building or caused by operations in construction of any private, public or quasi public work. If any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to Owner's own acts, Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations damages, penalties, claims, costs and expenses for which owner shall not be reimbursed by insurance, including reasonable attorneys fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any subtenant, and any agent, contractor, employee, invitee or licensee of any subtenant. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld. Destruction, Fire and Other Casualty: 9. (a)If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent and other items of additional rent as hereinafter expressly provided shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner (or sooner reoccupied in part by Tenant then rent shall be apportioned as provided in subsection (b) above), subject to Owner's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casualty, or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Landlord's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and moveable equipment, furniture, and other property. Tenant's liability for rent shall resume five (5) days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, including Owner's obligation to restore under subparagraph (b) above, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting form fire or other casualty and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery with respect to subparagraphs (b), (d), and (e) above, against the other or any one claiming through or under each of them by way of subrogation or otherwise. The release and waiver herein referred to shall be deemed to include any loss or damage to the demised premises and/ or to any personal property, equipment, trade fixtures, goods and merchandise located therein. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent , that such waiver can be obtained only by the payment of additional premiums, then the party benefiting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligations under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. Eminent Domain: 10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease and assigns to Owner, Tenant's entire interest in any such award. Tenant shall have the right to make an independent claim to the condemning authority for the value of Tenant's moving expenses and personal property, trade fixtures and equipment, provided Tenant is entitled pursuant to the terms of the lease to remove such property, trade fixture and equipment at the end of the term and provided further such claim does not reduce Owner's award. Assignment, Mortgage, Etc.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representative, successor and assigns, expressly covenants that is shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant or the majority partnership interest of a partnership Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, undertenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. See Article 54. Electric Current: 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which in Owner's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain. Access to Premises: 13. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times, to examine the same to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided they are concealed within the walls, floor, or ceiling. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants. if Tenant is not present to open and permit an entry into the demised premises, Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected If during the last month of the term Tenant shall have removed all or substantially all of Tenant's property therefrom Owner may immediately enter, alter, renovate or redecorate the demised premises without limitation or abatement of rent , or incurring liability to Tenant for any compensation and such act shall have no effect on this lease or Tenant's obligations hereunder. Vault, Vault Space, Area: 14. No Vaults, vault space or area, whether or not enclosed or covered, not within the property line of the building is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. Occupancy: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. In any event, Owner makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations, whether or not of record. Bankruptcy: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be canceled by Owner by the sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of the Article 16 shall b e applicable only to the party then owning Tenant's interest in this lease. (b) it is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be re-let by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. Default: 17. (1) (Not used). (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; then and in any of such events Owner may without notice, re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention for re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. See Article 59. Remedies of Owner and Waiver of Redemption: 18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration. (b) Owner may re-let the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses a Owner may incur in connection with re-letting, such as legal expenses, reasonable attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises a Owner, in Owner's sole judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. owner hall in no event be liable in any way whatsoever for failure to re-let the demised premises or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the vent of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right o invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Owner obtaining possession of demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise. Fees and Expenses: 19. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, after notice if required and upon expiration of any applicable grace period if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. if Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorneys' fees, in instituting, prosecuting or defending any action or proceeding, and prevails in any such action or proceeding then Tenant will reimburse owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within ten(10) days of rendition of any bill or statement to Tenant therefor. if Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. Building Alterations and Management: 20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and/or location of public entrances, passageways, doors, doorways , corridors, elevators, stairs, toilets or other public parts of the building and to change the name, number or designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from owner or other Tenants making any repairs in the building or any such alterations, additions and improvements. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of such controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. No Representations by Owner: 21. Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the building, the land upon which it is erected or the demised premises, the rent, leases, expenses of operation or any other matter or thing affecting or related to the premises except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as is" and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the part against whom enforcement of the change, modification, discharge or abandonment is sought. End of Term: 22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. Quiet Enjoyment: 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants, and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but limited to, Article 31 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. Failure to Give Possession: 24. If Owner is unable to give possession of the demised premises on the date of the commencement of the term hereof, because of the holding-over or retention of possession of any tenant, undertenant, or occupants or if the demised premises are located in a building being constructed, because such building has not been sufficiently complete to make the premises ready for occupancy or because of the fact that a certificate of occupancy has not been procured, or for any other reason, Owner shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any wise to extend the term of this lease, but the rent payable hereunder shall be abated (provided Tenant is not responsible for Owner's inability to obtain possession or complete construction) until after Owner shall have given Tenant written notice that the Owner is able to deliver possession on condition required by this lease. If permission is given to Tenant to enter into the possession of the demises premises or to occupy premises other than the demised premises prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such possession and/or occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease except the obligation to pay the fixed annual rent set forth in the preamble to this lease. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. No Waiver: 25. The failure of Owner to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent and/or additional rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises, and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. Waiver of Trial by Jury: 26. It is mutually agreed by and between Owner and tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matter whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any proceeding or action for possession including a summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding including a counterclaim under Article 4 except for statutory mandatory counterclaims. Inability to Perform: 27. This Lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment, fixtures, or other materials if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but limited to, government preemption or restrictions or by reason of any rule, order or regulations of any department or subdivision thereof of any government agency or by reason of the conditions which have been or are affected, either directly or indirectly, by war or other emergency. Bills and Notices: 28. See Article 60 Services Provided by Owner: 29. See Articles 47 and 48. Captions: 30. The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof. Definitions: 31. The term "office", or "offices", wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes or for manufacturing. The term "Owner" means a landlord or lessor, and as used in this lease means only the owner, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building and of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall b e and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays, Sundays and all days as observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service. Wherever it is expressly provided in this lease that consent shall not be unreasonably withheld such consent shall not be unreasonably delayed. Adjacent Excavation-Shoring: 32. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against owner, or diminution or abatement of rent. Rules and Regulations: 33. Tenant and tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to time adopt. Notice of any additional rules or regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulations hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within fifteen (15) days after the giving of notice thereof, Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. Security: 34. See Article 49. Estoppel Certificate: 35. Tenant, at any time, and from time to time, upon at least 10 days' prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by owner under this Lease, and, if so, specifying each such default. Successors and Assigns: 36. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. Tenant shall look only in Owner's estate and interest in the land and building, for the satisfaction of tenant's remedies for the collection of a judgment (or other judicial process) against Owner in the event of any default by Owner hereunder, and no other property or assets of such Owner (or any partner, member, officer or director thereof, disclosed or undisclosed), shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this lease, the relationship of Owner and Tenant hereunder, or Tenant's use and occupancy of the demised premises. A Rider consisting of Articles 37 to 60 and Exhibits A-D is annexed hereto and made a part hereof. IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this lease as of the day and year first above written. LANDLORD: FIRST WILLOW, LLC By: Flatiron Property Corp. a member By: ss: Bruce McLean --------------------- TENANT: MANCHESTER EQUIPMENT COMPANY, INC. By: ss: Barry Steinberg ------------------------ Tenant's Employer Identification No. 11-2312854 ---------- 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK) ) On this 26th day of June, 1997, before me personally came Bruce McLean, to me known, and known to me to be a V.P. of FLATIRON PROPERTY CORP., a corporation, a managing member in the firm of First Willow, LLC, and the person described in and who executed the foregoing instrument on behalf of First Willow, LLC in the name of FLATIRON PROPERTY CORP. and he duly acknowledged to me that he executed the same on behalf of FLATIRON PROPERTY CORP. for and as the act and deed of First Willow LLC. ss: Lisa A. Ross ----------------- Notary Public (Notarized) STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) On this 20th day of June, 1997, before me personally came Barry R. Steinberg, to me known, who, being by me duly sworn, did depose and say that he resides in Suffolk County, State of New York; that he is the President of MANCHESTER EQUIPMENT COMPANY, INC., the corporation described in and which executed the foregoing instrument; as TENANT; and that he signed his name thereto by order of the board of directors of said corporation, by like order. ss: Joel Rothlein ----------------- Notary Public (Notarized) I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 - - - - - - - - - - - - - - - - TABLE OF CONTENTS TO RIDER - - - - - - - - - - - - - - - - ARTICLE CAPTION PAGE 37. TERM; RENTAL.................................. 1 38. ADJUSTMENTS OF RENT........................... 4 39. USE........................................... 10 40. LANDLORD'S WORK............................... 10 41. CONSTRUCTION, GOVERNING LAW; CONSENTS......... 11 42. SUBORDINATION................................. 12 43. LEASE NOT BINDING UNLESS EXECUTED............. 14 44. CONFLICTS..................................... 15 45. ELECTRICITY................................... 15 46. FURTHER PROVISIONS AS TO DEFAULT.............. 17 47. HEAT AND AIR-CONDITIONING..................... 18 48. LANDLORD'S OTHER SERVICES..................... 19 49. SECURITY DEPOSIT.............................. 20 50. PARTIES BOUND................................. 23 51. BROKER........................................ 23 52. HAZARDOUS MATERIALS........................... 24 53. ARBITRATION................................... 24 54. ASSIGNMENT AND SUBLETTING..................... 25 55. INSURANCE..................................... 29 56. TENANT'S CHANGES.............................. 33 57. HOLDING OVER.................................. 36 58. CERTAIN DEFINITIONS AND CONSTRUCTION.......... 36 -iii- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 iii 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 59. ADDENDUM TO ARTICLE 17.......................... 37 60. NOTICES......................................... 38 EXHIBIT A-FLOOR PLAN OF DEMISED PREMISES.......................... 39 EXHIBIT B-DEFINITIONS............................................. 40 EXHIBIT C-LANDLORD'S WORK......................................... 43 EXHIBIT D-CERTIFICATE OF OCCUPANCY................................ 47 I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 - - - - - - - - - - - - - - - - - - - - - - - - - - - RIDER ATTACHED LEASE DATED AS OF JUNE 23, 1997 BY AND BETWEEN FIRST WILLOW, LLC, AS LANDLORD AND MANCHESTER EQUIPMENT COMPANY, INC., AS TENANT - - - - - - - - - - - - - - - - - - - - - - - - - - - 37. TERM; RENTAL A. The term of this lease, for which the Demised Premises are hereby leased, shall commence on the date on which "Landlord's Work" (as defined in Article 40 hereof) has been substantially completed and Landlord has given Tenant notice thereof which notice, notwithstanding anything in this lease to the contrary, may be hand delivered to Tenant (herein referred to as the "Commencement Date"), and shall end at noon of the last day of the calendar month in which occurs the day preceding the tenth (10th) anniversary of the Commencement Date, which ending date is hereinafter referred to as the "Expiration Date", or shall end on such earlier date upon which said term may expire or be cancelled or terminated pursuant to any of the conditions or covenants of this lease or pursuant to law. Promptly following the Commencement Date the parties hereto (hereinafter sometimes referred to as the "parties") shall enter into a recordable supplementary agreement fixing the dates of the Commencement Date and the Expiration Date and if they cannot agree thereon within fifteen (15) days after Landlord's request therefor, such dates shall be determined by arbitration in the manner provided in Article 53. B. The "rents" reserved under this lease, for the term thereof, shall be and consist of: (i) "fixed rent" of: (a) $292,000.00 per annum ($24,333.33 per month) from the Commencement Date through the day next preceding the fifth (5th) anniversary of the Commencement Date, both dates inclusive; and -1- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 (b) $321,200.00 per annum ($26,766.67 per month) from the fifth (5th) anniversary of the Commencement Date and continuing thereafter throughout the remainder of the term of this lease, all of which shall be payable in equal monthly installments in advance on the first day of each and every calendar month during the term of this lease (except that Tenant shall pay, upon the execution and delivery of this lease by Tenant, the sum of $27,679.17, to be applied against the first rents becoming due under this lease), and (ii) "additional rent" con- sisting of all such other sums of money as shall become due from and payable by Tenant to Landlord hereunder (for default in payment of which Landlord shall have the same remedies as for a default in payment of fixed rent), all to be paid to Landlord at its office, or such other place, or to such agent and at such place, as Landlord may designate by notice to Tenant, in lawful money of the United States of America. C. Tenant shall pay the fixed rent and additional rent herein reserved promptly as and when the same shall become due and payable, without demand therefor and without any abatement, deduction or setoff whatsoever except as expressly provided in this lease. D. If the Commencement Date occurs on a day other than the first day of a calendar month or the Expiration Date occurs on a day other than the last day of a calendar month, the fixed rent for such calendar month shall be prorated and with respect to the first month, the balance of the first month's fixed rent theretofore paid shall be credited against the next monthly installment of fixed rent. E. Notwithstanding anything in this lease to the contrary, provided Tenant is not then in default under this lease which default continues after notice and the expiration of any applicable cure period, Tenant shall have no obligation to pay the first five (5) full monthly installments of the fixed rent due after the Commencement Date. F. If, at any time during the term of this lease, any requirement of public authority shall have the effect of limiting, for any period of time, the amount of the rents payable by Tenant, or receivable by Landlord, under this lease, and the maximum rents so permitted to be paid by Tenant, or received by Landlord, hereunder shall be less than the rents herein reserved, then: (i) throughout the period of limitation, Tenant shall remain liable for the maximum amount of rents that is lawfully payable; and -2- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 (ii) if and when the period of limitation ends, the requirement of public authority imposing such limitation is repealed, or such limitation is restrained or rendered unenforceable by any order or ruling of a court of appropriate jurisdiction: (a) to the extent that the same is not prohibited by any requirement of public authority, Tenant shall pay to Landlord, on demand, all amounts that would have been due from Tenant to Landlord during the period of limitation, but that were not paid because of the requirements of public authorities; and (b) thereafter, Tenant shall pay to Landlord all of the rents reserved under this lease, all of which shall be calculated as if there had been no intervening period of limitation. G. Tenant acknowledges that it has no rights to any development rights, "air rights" or comparable rights appurtenant to the Land and Building, and consents, without further consideration, to any utilization of such rights by Landlord and agrees to promptly execute and deliver any instruments which may be requested by Landlord, including instruments merging zoning lots, evidencing such acknowledgment and consent. The provisions of this Section G shall be deemed to be and shall be construed as an express waiver by Tenant of any interest Tenant may have as a "party in interest" (as such quoted term is defined in Section 12-10 Zoning Lot of the Zoning Resolution of the City of New York) in the Land and Building. H. Notwithstanding anything hereinabove or in this lease to the contrary, in the event Landlord fails to substantially complete Landlord's Work and notify Tenant thereof by the date that shall be six (6) months from the date of this lease (hereinafter referred to as the "Outside Date") for any reason other than (i) a "Tenant's Delay" (as defined in Exhibit C, Part D hereof) or (ii) one of the occurrences set forth in Article 27, Tenant shall be entitled to terminate this Lease by notice (hereinafter referred to as the "Termination Notice") to Landlord sent within five (5) business days after the Outside Date (hereinafter referred to as the "Termination Date"). In the event Tenant sends the Termination Notice as set forth above, this lease shall terminate and neither party shall have any further rights or obligations hereunder and said right of termination shall be Tenant's sole remedy for Landlord's failure to substantially complete Landlord's Work and notify Tenant thereof by the Outside Date. In the event of such termination, Landlord will return to Tenant the first months' rent paid to Landlord upon the execution and delivery of this lease together with the cash security or Letter of Credit delivered to Landlord pursuant to the provisions of Article 6. If the security is in the form of Letter of Credit, Landlord will cooperate with Tenant, at Tenant's expense, to have same cancelled. -3- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 38. ADJUSTMENTS OF RENT A. Tax Escalation. For the purpose of Sections A-F of this Article 38: (i) "Taxes" shall mean the real estate taxes and assessments and special assessments imposed upon the Building and the land upon which same is located (hereinafter referred to as the "Land" or "land") including, without limitation, any assessments for public improvement or benefit to the Building or Land or the locality in which the Building is situated, such as a Business Improvement District taxes and assessments. If at any time during the term of this lease the methods of taxation prevailing at the commencement of the term hereof shall be altered so that in lieu of or as an addition to or as a substitute for the whole or any part of the taxes, assessments, levies, impositions or charges now levied, assessed or imposed on real estate and the improvements thereon, there shall be levied, assessed or imposed (a) a tax, assessment, levy, imposition or charge wholly or partially as capital levy or otherwise on the rents received therefrom, or (b) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon the Demised Premises and imposed upon Landlord, or (c) a license fee measured by the rents payable by Tenant to Landlord, then all such taxes, assessments, levies, impositions or charges, or the part thereof so measured or based, shall be deemed to be included within the term "Taxes" for the purposes hereof. The term "Taxes" shall not include any income, franchise, excise, profit, transfer, inheritance, capital stock or other similar tax imposed on Landlord unless, due to a future change in the method of taxation, an income, franchise, excise, profit, transfer, inheritance, capital stock or other tax shall be levied against Landlord in substitution for any tax or increase therein which would otherwise constitute "Taxes", as defined in the first sentence of paragraph (i), in which event such income, franchise, excise, profit, transfer, inheritance, capital stock or other tax shall be deemed to be included in the term "Taxes" but any such income or similar tax shall be computed as if the Building and the Land were the only property of Landlord. (ii) "Base Tax Year" shall mean fiscal year July 1, 1997-June 30, 1998; (iii) "Base Tax Rate" shall mean the Taxes, as finally determined, for the Base Tax Year. (iv) "Tax Year" shall mean the fiscal year for which Taxes are levied by the governmental authority. (v) "Tenant's Proportionate Share" shall mean for purposes of this lease and all calculations in connection herewith, 6.37%, which has been computed on the basis of a fraction, the numerator of which is the agreed rentable square -4- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 foot area of the Demised Premises as set forth below (which rentable square foot area is hereinafter sometimes referred to as the "Multiplication Factor") and the denominator of which is the agreed rentable square foot area of the Building above grade level as set forth below. The parties agree that the rentable square foot area of the Demised Premises shall be deemed to be 14,600 square feet and that the agreed rentable square foot area of the Building shall be deemed to be 229,079 square feet (hereinafter referred to as the "Building Area"). (vi) "Tenant's Projected Share of Taxes" shall mean the Tax Payment (as hereinafter defined), if any, made by Tenant for the prior Tax Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent. B. If the Taxes for any Tax Year shall be more than the Base Tax Rate, Tenant shall pay, as additional rent for such Tax Year, an amount equal to Tenant's Proportionate Share of the amount by which the Taxes for such Tax Year are greater than the Base Tax Rate. (The amount payable by Tenant is hereinafter referred to as the "Tax Payment"). The Tax Payment and the Base Tax Rate shall be appropriately prorated, if necessary, to correspond with that portion of a Tax Year occurring within the Term of this lease. The Tax Payment shall be payable by Tenant within ten (10) days after receipt of a demand from Landlord therefor, which demand shall be accompanied by a copy of the tax bill together with Landlord's computation of the Tax Payment. If the Taxes for any Tax Year are payable to the taxing authority on an installment basis, Landlord may serve such demands upon, and the Tax Payment for such Tax Year shall be payable by Tenant, on a corresponding installment basis. C. Notwithstanding the fact that the increase in rent is measured by an increase in taxes, such increase is additional rent and shall be paid by Tenant as provided herein regardless of the fact that Tenant may be exempt, in whole or in part, from the payment of any taxes by reason of Tenant's diplomatic or other tax exempt status or for any other reason whatsoever. D. Only Landlord shall be eligible to institute tax reduction or other proceedings to reduce the assessed valuation of the Land and Building. Should Landlord be successful in any such reduction proceedings and obtain a rebate or a reduction in assessment for periods during which Tenant has paid or is obligated to pay Tenant's Proportionate Share of increases in Taxes then either (i) Landlord shall, in the event a rebate is obtained, return Tenant's Proportionate Share of such rebate to Tenant after deducting Landlord's expenses, including without limitation, attorneys' fees and disbursements in connection with such rebate (such expenses incurred with respect to a rebate or reduction in assessment being hereinafter referred to as "Tax Expenses"), or, (ii) if a reduction in assessment is obtained prior to the date Tenant would be required to pay Tenant's Proportionate Share of -5- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 such increase in Taxes, Tenant shall pay to Landlord, upon written request, Tenant's Proportionate Share of such Tax Expenses. E. Commencing with the first Tax Year after Landlord shall be entitled to receive a Tax Payment, at Landlord's election, Tenant shall pay to Landlord, as additional rent for the then Tax Year, Tenant's Projected Share of Taxes. Upon each date that a Tax Payment or an installment on account thereof shall be due from Tenant pursuant to the terms of Section B hereof, Landlord shall apply the aggregate of the installments of Tenant's Projected Share of Taxes then on account with Landlord against the Tax Payment or installment thereof then due from Tenant. In the event that such aggregate amount shall be insufficient to discharge such Tax Payment or installment, Landlord shall so notify Tenant in a demand served upon Tenant pursuant to the terms of Section B, and the amount of Tenant's payment obligation with respect to such Tax Payment or installment pursuant to Section B shall be equal to the amount of the insufficiency. If, however, such aggregate amount shall be greater than the Tax Payment or installment, Landlord shall forthwith either (i) pay the amount of excess directly to Tenant concurrently with the notice or (ii) permit Tenant to credit the amount of such excess against the next payment of Tenant's Projected Share of Taxes due hereunder and, if the credit of such payment is not sufficient to liquidate the entire amount of such excess, Landlord shall then pay the amount of any difference to Tenant. F. (i) Anything in this Article 38 to the contrary notwithstanding, in the event that the holder of any mortgage or the lessor of any superior lease (as such terms are defined in Section A. of Article 42) shall require advance payments from the Landlord on account of Taxes, then Tenant will pay Tenant's Proportionate Share of any amounts required to be paid in advance (but not more often than monthly) by Landlord with the holder of the superior mortgage or the lessor of the superior lease to the extent that such payments made by Landlord exceed the Base Tax Rate. Any payments to be made by Tenant under this Section 38 F(i) shall be made ten (l0) days prior to the date Landlord is required to make such payments to the holder of the superior mortgage or the lessor of the superior lease; (ii) Anything in Sections A through F to the contrary notwithstanding, in no event whatsoever shall the fixed rent be reduced below the fixed rent initially set forth in Article 37 hereof as same may be increased by provisions of this lease other than Sections 38A-F. G. Expense Escalation. For purposes of Sections G-L of this Article 38: (i) "Operating Expenses" shall mean any or all expenses incurred by Landlord in connection with the operation of the Building including all expenses incurred as a result of Landlord's compliance with any of its obligations hereunder and such expenses shall include: (a) salaries, wages, -6- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 medical, surgical and general welfare benefits (including group life insurance), pension payments and other fringe benefits of employees of Landlord engaged in the operation and maintenance of the Building (The salaries and other benefits aforesaid of such employees servicing the Building shall be comparable to those of employees servicing buildings similar to the Building, located in the Borough of Manhattan.); (b) payroll taxes, worker's compensation, uniforms and dry cleaning for the employees referred to in subdivision (a); (c) the cost of all charges for steam, heat, ventilation, air conditioning and water (including sewer rental) furnished to the Building and/or used in the operation of all of the service facilities of the Building and the cost of all charges for electricity furnished to the public and service areas of the Building and/or used in the operation of all of the service facilities of the Building including any taxes on any of such utilities; (d) the cost of all charges for rent, casualty, war risk insurance (if obtainable from the United States government) and of liability insurance for the Building to the extent that such insurance is required to be carried by Landlord under any superior lease or superior mortgage or if not required under any superior lease or superior mortgage then to the extent such insurance is carried by owners of Buildings comparable to the Building; (e) the cost of all building and cleaning supplies for the common areas of the Building and charges for telephone for the Building; (f) the cost of all charges for management, security, cleaning and service contracts for the Building (if no managing agent is employed by Landlord, there shall be included in Operating Expenses a sum equal to 2.5% of all rents and other charges collected from tenants or other permitted occupants of the Building); (g) the cost of rentals of capital equipment designed to result in savings or reductions in Operating Expenses; and (h) the cost incurred in connection with the maintenance and repair of the Building. Operating Expenses shall not include (1) administrative wages and salaries; (2) renting commissions; (3) franchise or income taxes of Landlord; (4) Taxes on the Land and Building; (5) costs of painting and decorating for any occupant's space; (6) interest and amortization under mortgages; and (7) expenditures for capital improvements except (A) those which under generally applied real estate practice are expensed or regarded as deferred expenses, (B) capital improvements required by law or (C) capital improvements that are designed to result in a saving in the amount of Operating Expenses, in any of such cases the cost thereof shall be included in Operating Expenses for the Operational Year in which the costs are incurred and subsequent Operational Years, amortized on a straight line basis over the useful life thereof as determined by generally accepted accounting principles consistently applied (except that, with respect to a capital improvement which is of the type specified in clause (C), such cost shall be amortized over such period of time as Landlord reasonably estimates such savings in Operating Expenses will equal Landlord's cost for such capital improvement), with an interest factor in any of such cases equal to two (2%) percent above the prime rate (hereinafter referred to as the "Base Rate") of The Chase Manhattan Bank (or Citibank, N.A. if The Chase Manhattan Bank shall not then have an established prime rate; or the prime rate of any major banking institution doing -7- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 business in New York City, as selected by Landlord, if none of the aforementioned banks shall be in existence or have an established prime rate) at the time of Landlord's having incurred said expenditure; (ii) "Operational Year" shall mean each calendar year during the Term hereof. (iii) "Base Operational Year" shall be calendar year 1998; (iv) "Operating Expense Base" shall mean Operating Expenses for the Base Operational Year; (v) "Tenant's Projected Share of Operating Expenses" shall mean Tenant's Operating Expense Payment, if any, for the prior Operational Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent. If during all or part of the Base Operational Year or any other Operational Year, Landlord shall not furnish any particular item(s) of work or service (which would otherwise constitute an Operating Expense hereunder) to office portions of the Building due to the fact that (A) such portions are not occupied or leased, (B) such item of work or service is not required or desired by the tenant of such portion, or (C) such tenant is itself obtaining and providing such item of work or service, then, for the purposes of computing Operating Expenses, the amount for such item and for such period shall be deemed to be increased by an amount equal to the additional costs and expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such item of work or services to such portion of the Building or to such tenant. H. After the expiration of the Base Operational Year, Landlord shall furnish Tenant a statement setting forth the aggregate amount of the Operating Expenses for the Base Operational Year. After the expiration of each Operational Year, after the Base Operational Year, Landlord shall furnish Tenant a statement setting forth the aggregate amount of the Operating Expenses for such Operational Year. The statement furnished under this Section H is hereinafter referred to as an "Operating Statement". I. If the Operating Expenses for any Operational Year, including the Operational Year in effect on the Commencement Date, shall be more than the Operating Expense Base, Tenant shall pay, as additional rent for such Operational Year, an amount equal to Tenant's Proportionate Share of the amount by which the Operating Expenses for such Operational Year are greater than the Operating Expense Base. (The amount payable by Tenant is hereinafter referred to as the "Operating Expense Payment".) The Operating Expense Payment shall be prorated, if necessary, to correspond with that portion of an Operational Year occurring within the Term of this lease. The Operating Expense Payment shall -8- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 be payable by Tenant within ten (10) days after receipt of the Operating Statement. J. Commencing with the first Operational Year after Landlord shall be entitled to receive an Operating Expense Payment, Tenant shall pay to Landlord as additional rent for the then Operational Year, Tenant's Projected Share of Operating Expenses. If the Operating Statement furnished by Landlord to Tenant at the end of then Operational Year shall indicate that Tenant's Projected Share of Operating Expenses exceeded the Operating Expense Payment, Landlord shall forthwith either (i) pay the amount of excess directly to Tenant concurrently with the notice or (ii) permit Tenant to credit the amount of such excess against the subsequent payment of rent due hereunder; if such Operating Statement furnished by Landlord to Tenant hereunder shall indicate that the Operating Expense Payment exceeded Tenant's Projected Share of Operating Expenses for the then Operational Year, Tenant shall forthwith pay the amount of such excess to Landlord. K. Every Operating Statement given by Landlord pursuant to Section H shall be conclusive and binding upon Tenant unless (i) within 30 days after the receipt of such Operating Statement Tenant shall notify Landlord that it disputes the correctness of the Operating Statement, specifying the particular respects in which the Operating Statement is claimed to be incorrect, and (ii) if such dispute shall not have been settled by agreement, shall submit the dispute to arbitration within 90 days after receipt of the Operating Statement. Pending the determination of such dispute by agreement or arbitration as aforesaid, Tenant shall within thirty (30) days after receipt of such Operating Statement, pay additional rent, if due, in accordance with the Operating Statement and such payment shall be without prejudice to Tenant's position. If the dispute shall be determined in Tenant's favor, Landlord shall, on demand, pay Tenant the amount of Tenant's overpayment of rents, if any, resulting from compliance with the Operating Statement. Landlord agrees to grant Tenant reasonable access to Landlord's books and records for the purpose of verifying Operating Expenses incurred by Landlord and to have and make copies of any and all bills and vouchers relating thereto and subject to reimbursement by Tenant as herein provided. L. Landlord's failure during the lease term to prepare and deliver any of the tax bills, statements, notice or bills set forth in this Article 38, or Landlord's failure to make a demand, shall not in any way cause Landlord to forfeit or surrender its rights to collect any of the foregoing items of additional rent which may have become due during the term of this lease. Tenant's liability for the amounts due under this Article 38 and Landlord's obligation to make any payments due to Tenant under this Article 38 shall survive the expiration of the Term. -9- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 39. USE A. Tenant shall use and occupy the demised premises for executive and general offices, and for no other purpose. Notwithstanding the foregoing and subject to the provisions of Sections B and C of this Article 39, the demised premises may be used for the following additional uses: a conference facility, sales, training facility, computer related service and maintenance facility, showroom and demonstration room facility. B. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business in the demised premises, or any part thereof, Tenant, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same for inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit. C. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the demised premises, or do or permit anything to be done in the demised premises, in violation of the Certificate of Occupancy for the demised premises or for the Building or in violation of any superior mortgage or superior lease. A copy of the current Certificate of Occupancy for the Building is annexed hereto as Exhibit D. D. Landlord hereby represents to Tenant that the existing leases for the fourth (4th) and sixth (6th) floors of the Building do not permit such spaces to be used as a factory and Landlord agrees that during the term of this lease, it will not permit such floors to be used as a factory. 40. LANDLORD'S WORK A. Landlord agrees to perform, at Landlord's sole cost and expense, the work (hereinafter referred to as "Landlord's Work") set forth on, and in accordance with, the provisions of Exhibit C. B. Tenant has fully inspected the demised premises, is fully familiar with the condition thereof and (except for the performance of the Landlord's Work) agrees to take possession of the demised premises in their present "as-is" condition. Tenant shall perform all other necessary or desirable work in connection with preparing the demised premises for its initial occupancy (hereinafter referred to as "Tenant's Work") at its sole cost and expense pursuant to the terms of Articles 3 and 56 hereof, as a Tenant's Change (as defined in Article 56 below). C. Except as set forth on Exhibit C, Tenant may not perform any Tenant's Work (or any other work) until after the Commencement Date has occurred, unless Landlord, in its sole judgment, determines that the performance of the Tenant's Work will -10- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 not interfere with or delay the completion of the Landlord's Work, and so notifies Tenant. D. Landlord's Work shall be deemed substantially complete notwithstanding the fact that minor or insubstantial details of construction, mechanical adjustment, or decoration remain to the performed, the noncompletion of which does not materially interfere with the performance of Tenant's Work or with Tenant's use of the Demised Premises after the completion of Tenant's Work. Landlord's Work shall be performed in a workmanlike manner and, subject to the provisions of Exhibit C, in accordance with laws and/or requirements of governmental authorities having jurisdiction. 41. CONSTRUCTION, GOVERNING LAW; CONSENTS A. If any of the provisions of this lease, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this lease shall be valid and enforceable to the fullest extent permitted by law. B. This lease shall be governed in all respects by the laws of the State of New York. C. If Tenant shall request Landlord's consent or approval pursuant to any of the provisions of this lease or otherwise, and Landlord shall fail or refuse to give, or shall delay in giving, such consent or approval, Tenant shall in no event make, or be entitled to make, any claim for damages (nor shall Tenant assert, or be entitled to assert, any such claim by way of defense, set-off, or counterclaim) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or delayed its consent or approval, and Tenant hereby waives any and all rights that it may have, from whatever source derived, to make or assert any such claim. Tenant's sole remedy for any such failure, refusal, or delay shall be an action for a declaratory judgment, specific performance, or injunction, or for a determination as to whether Landlord reasonably withheld its consent pursuant to either (i) the Simplified Procedure For Court Determination of Disputes as set forth in the CPLR ss.3031 et seq. (or any successor thereto), or (ii) arbitration under the Expedited Procedures provisions (presently Rules 53 through 57, as same may be amended from time to time) of the American Arbitration Association (or successor thereto) in the City of New York (and the fees and expenses of such arbitration shall be borne by the unsuccessful party), and, if Tenant elects either (i) or (ii) above, the decision shall be final and conclusive on the parties. Such remedies shall be available only in those instances where Landlord has expressly agreed in writing not to unreasonably withhold or delay its consent or -11- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 approval or where, as a matter of law, Landlord may not unreasonably withhold or delay the same. 42. SUBORDINATION A. For the purposes of this lease, the mortgages referred to in Article 7 of this lease are herein defined as "superior mortgages" and the leases referred to in said Article 7 are herein defined as "superior leases." In the event of any act or omission of Landlord that would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this lease, or to claim a partial or total eviction, Tenant shall not exercise such right (i) until it has given written notice of such act or omission to the holder of each superior mortgage and the lessor of each superior lease whose name and address shall previously have been furnished to Tenant in writing and (ii) unless such act or omission shall be one that is not capable of being remedied by Landlord or such holder or lessor within a reasonable period of time, until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such holder or lessor shall have become entitled under such superior mortgage or superior lease, as the case may be, to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this lease or otherwise, after similar notice, to effect such remedy), provided that such holder or lessor shall give Tenant written notice of its intention to remedy such act or omission and shall, with due diligence, commence and continue to do so. B. If the lessor of a superior lease or the holder of a superior mortgage shall succeed to the rights of Landlord under this lease, whether through possession or foreclosure action or delivery of a new lease or deed, then, at the request of the party so succeeding to Landlord's rights (herein sometimes referred to as the "successor landlord") and upon such successor landlord's written agreement to accept Tenant's attornment, Tenant shall attorn to and recognize such successor landlord as Tenant's landlord under this lease, and shall promptly execute and deliver any instrument that such successor landlord may reasonably request to evidence such attornment. Upon such attornment, this lease shall continue in full force and effect as, or as if it were, a direct lease between the successor landlord and Tenant, upon all of the terms, conditions and covenants as are set forth in this lease and shall be applicable after such attornment, except that the successor landlord shall not be: (i) liable for any previous act or omission of Landlord (or its predecessor in interest) under this lease but should such act or omission continue after such successor landlord shall acquire title to the Building, successor landlord shall be liable for such act or omission from and after the date it acquires title to the Building; -12- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 (ii) bound by any previous modification of this lease, not expressly provided for in this lease, or by any previous prepayment of more than one month's fixed rent, unless such modification or prepayment shall have been expressly approved in writing by the lessor of the superior lease or the holder of the superior mortgage through or by reason of which the successor landlord shall have succeeded to the rights of Landlord under this lease; (iii) responsible for any monies owing by Landlord to the credit of Tenant; (iv) subject to any credits, offsets, claims, counterclaims, demands or defenses which Tenant may have against Landlord (or its predecessors in interest); (v) bound by any covenant to undertake or complete any construction of the Demised Premises or any portion thereof or pay for or reimburse Tenant for any costs incurred in connection with such construction; (vi) required to account for any security deposit other than any security deposit actually delivered to the successor landlord; (vii) bound by any obligation to make any payment to Tenant or grant or be subject to any credits (except pursuant to Section 37E), except for services, repairs, maintenance and restoration provided for under this lease to be performed after the date of attornment, it being expressly understood, however, that the successor landlord shall not be bound by an obligation to make payment to Tenant with respect to construction performed by or on behalf of Tenant at the Demised Premises. C. If, in connection with obtaining financing or refinancing for the Building of which the Demised Premises form a part, or Landlord's estate and interest therein, a lender shall request reasonable modifications to this lease as a condition to such financing or refinancing, Tenant will not withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder (except, perhaps, to the extent that Tenant may be required to give notices of any defaults by Landlord to such lender and/or permit the curing of such defaults by such lender together with the granting of such additional time for such curing as may be required for such lender to get possession of the Building or Landlord's interest therein) or materially adversely affect the leasehold interest hereby created. In no event shall a requirement that the consent of any such lender be given for any modification of this lease or, subject to the provisions of this lease for any assignment or sublease, be deemed to materially adversely affect the leasehold interest hereby created. -13- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 D. Notwithstanding anything to the contrary set forth in Article 7 or this Article 42,, this lease shall be subject and subordinate to (i) any superior mortgages now existing or made by Landlord subsequent to the date hereof and (ii) any superior leases now existing or entered into by Landlord subsequent to the date hereof provided that Landlord shall obtain a Subordination, Non-Disturbance and Attornment Agreement (hereinafter referred to as an "SNDA") for the benefit of Tenant from the holder of such superior mortgage or from the lessor under such superior lease which SNDA shall be in form and content then utilized by such holder or lessor, shall not increase Tenant's obligations or reduce Tenant's rights under this lease, and which shall contain, in substance, the provisions set forth in the subsections (a) and (b) below: (a) From the lessor under a superior lease:An agreement, for the benefit of Tenant, to the effect, inter alia, that as long as Tenant is not in default in the payment of fixed rent or additional rent or any other term, covenant or condition of this lease and provided Tenant attorns to such lessor under the terms and provisions of this lease, (1) its rights as Tenant hereunder shall not be affected or terminated, (2) its possession of the Demised Premises shall not be disturbed, (3) no action or proceeding shall be commenced to remove or evict Tenant, and (4) this lease shall at all times continue in full force and effect notwithstanding the termination or expiration of the superior lease, prior to the expiration or termination of this lease. (b) From the holders of superior mortgages:An agreement, for the benefit of Tenant, to the effect, inter alia, that as long as Tenant is not in default in the payment of fixed rent or additional rent or any other term, covenant or condition of this lease, (1) its rights as Tenant hereunder shall not be terminated and (2) the possession of Tenant shall not be disturbed by the mortgagee or by any proceedings on the debt which any such superior mortgage secures or by virtue of a right or power contained in any such superior mortgage or the bond or note secured thereby and (3) that any sale at foreclosure will be subject to this lease. E. Landlord represents that as of the date of execution hereof, (i) there are no existing superior mortgages other than a mortgage held by Credit Suisse First Boston Mortgage Capital LLC and (ii) there are no existing superior leases. 43. LEASE NOT BINDING UNLESS EXECUTED Submission by Landlord of this lease for execution by Tenant shall confer no rights nor impose any obligations on either party unless and until both Landlord and Tenant shall have executed this lease and duplicate originals thereof shall have been delivered to the respective parties. -14- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 44. CONFLICTS In the event of any conflict between the provisions of this Rider and the printed portion of this lease, the provisions of this Rider shall control. 45. ELECTRICITY A. (i) The Building is equipped with risers, feeders and wiring to furnish electric service to the Demised Premises. Additionally a meter system will be furnished and installed by Landlord, as part of Landlord's Work, to measure the amount of "Usage" (as defined in Section B(i)) solely to the Demised Premises. Where more than one meter measures the amount of Usage, Usage through each meter shall be computed and billed separately in accordance with the provisions of this Article 45; (ii) Any additional risers, feeders or other equipment or service proper or necessary to supply Tenant's electrical requirements, will, upon written request of Tenant, be installed by Landlord, at the sole cost and expense of Tenant, if in Landlord's sole judgment, the same are necessary and will not cause permanent damage or injury to the Building or the Demised Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other tenants or occupants. Rigid conduit only will be allowed. B. For purposes of Sections B and C: (i) "Usage" shall mean Tenant's actual usage of electricity in the Demised Premises as measured by the aforesaid metering system for each calendar month or such other period as Landlord shall determine during the term of this lease and shall include the quantity and peak demand (kilowatt hours and kilowatts) and all applicable taxes, surcharges, demand charges, energy charges, fuel adjustment charges, time of day charges and other adjustments made from time to time by the public utility company supplying electric current to the Building or any governmental authority having jurisdiction; (ii) "Landlord's Rate" shall mean the service classification (including all applicable taxes, surcharges, demand charges, energy charges, fuel adjustment charges, time of day charges and other sums payable in respect thereof) pursuant to which Landlord purchases electric current for the Building from the public utility company supplying electric current to the Building; (iii) "Basic Cost" shall mean the product of (a) Usage multiplied by (b) Landlord's Rate. (iv) "Tenant's Cost" shall mean an amount equal to the sum of (a) the Basic Cost plus (b) ten (10%)percent -15- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 of the Basic Cost for Landlord's overhead and expenses in connection with submetering. C. Landlord shall, from time to time but not more often than monthly, furnish Tenant with an invoice indicating the period during which the Usage was measured and the amount of Tenant's Cost payable by Tenant to Landlord for such period. Within five (5) days after receipt of each such invoice, Tenant shall pay the amount of Tenant's Cost set forth thereon to Landlord as additional rent. In addition, if any tax is imposed upon Landlord by any municipal, state or federal agency or subdivision with respect to the purchase or sale of electrical energy supplied to Tenant hereunder, Tenant covenants and agrees that, where permitted by law, Tenant's Proportionate Share of such taxes shall be passed on to, included in the bill to and paid by, Tenant to Landlord, as additional rent. D. Landlord shall not in anywise be liable or responsible to Tenant for any loss or damage or expense which Tenant may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for Tenant's requirements. E. In no event shall Tenant use or install any fixtures, equipment or machines the use of which in conjunction with other fixtures, equipment and machines in the Demised Premises would result in an overload of the electrical circuits servicing the Demised Premises. F. Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of the then existing feeders to the Building or the risers or wiring installation. After the original installation thereof by Landlord, Tenant shall furnish, install and replace, as required, all lighting tubes, lamps, bulbs and ballasts required in the Demised Premises, at Tenant's sole cost and expense. All lighting tubes, lamps, bulbs and ballasts so installed shall become Landlord's property upon the expiration or sooner termination of this lease. G. In the event the metering system installed in the Demised Premises for the measurement of electricity consumption in the Demised Premises or any alternative submetering system installed by Landlord at a later date, becomes prohibited from use, then Landlord, at its expense, may cause an independent electrical engineer chosen by Landlord or an electrical consulting firm selected by Landlord (hereinafter referred to as the "Electrical Consultant") to survey and determine Usage in, and Basic Cost for, the Demised Premises from time to time, at least once per twelve (12) month period, and the Electrical Consultant shall make such determination using criteria generally accepted in the Metropolitan New York City area and Landlord's Rate in effect at the time, and shall include the quantity and peak demand, for all electricity consumed by Tenant, plus ten (l0%) percent of the Basic Cost for Landlord's expenses and administration fees. Subject to the provisions of Section H below, the determination -16- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 made by the Electrical Consultant shall be binding on both Landlord and Tenant and such amount shall be deemed Tenant's Cost. H. Notwithstanding anything in Section G to the contrary, Tenant shall have the right as hereinafter provided, to contest any amounts determined by the Electrical Consultant pursuant to Section G as shall be due to Landlord as a result of any such survey. In the event that Tenant fails to send a written notice (hereinafter referred to as an "Objection Notice") to Landlord within thirty (30) days after the date of the Electrical Consultant's notice containing said Usage and Basic Cost, such notice shall become conclusive and binding upon Tenant. If Tenant disputes any such notice by sending an Objection Notice within the time and in the manner hereinbefore provided, then Tenant shall, at its sole cost and expense, have the right to engage an electrical engineer or electrical consulting firm (hereinafter referred to as "Tenant's Consultant") who shall promptly make a survey (hereinafter referred to as the "Disputing Survey") indicating Tenant's electrical usage in the Demised Premises. In the event that Landlord and Tenant are unable to agree on the amount of Usage and Basic Cost within thirty (30) days after the date Tenant furnishes Landlord with a copy of the Disputing Survey, then the Electrical Consultant and Tenant's Consultant shall select a mutually acceptable electrical engineer or electrical consulting firm (hereinafter referred to as the "Third Consultant") within ten (l0) days after the expiration of such thirty (30) day period. The Electrical Consultant and Tenant's Consultant shall submit the dispute to the Third Consultant and the determination by the Third Consultant shall be conclusive and binding upon Landlord and Tenant. During the pendency of any such dispute, Tenant shall pay to Landlord the amount set forth in the Electrical Consultant's notice until the dispute is finally determined in accordance with the provisions of this Section and, in the event that such final determination is less than the amount set forth in the Electrical Consultant's notice, Landlord shall, at Tenant's election, refund to Tenant the amount of such excess payment or credit any such excess against any amounts then due or becoming due to Landlord under this lease. The cost of the Third Consultant shall be borne equally by Landlord and Tenant. 46. FURTHER PROVISIONS AS TO DEFAULT A. If Tenant is late in making any payment due to Landlord from Tenant under this lease for ten (10) or more days, then interest shall become due and owing to Landlord on such payment from the date upon which it was due, which interest shall be computed at the following rates: (i) for an individual or partnership tenant, computed at the maximum lawful rate of interest; (ii) for a corporate tenant, computed at the greater of (a) one and 25/100 (1.25%) percent per month or (b) two (2%) percent per annum over the Base -17- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 Rate as defined in Section 38(G)(i) but in no event in excess of the maximum lawful rate of interest chargeable to corporations in the State of New York. B. Bills for any expenses incurred by Landlord in connection with any performance by it for the account of Tenant, and bills for all costs, expenses and disbursements of every kind and nature whatsoever, including reasonable counsel fees, involved in collecting or endeavoring to collect the fixed rent or additional rent or any part thereof or enforcing or endeavoring to enforce any rights against Tenant, under or in connection with this lease, or pursuant to law, including any such cost, expense and disbursement involved in instituting and prosecuting summary proceedings, as well as bills for any property, material, labor, or services provided, furnished, or rendered, by Landlord to Tenant at Tenant's request, may be sent by Landlord to Tenant monthly, or immediately, at Landlord's option, and shall be due and payable in accordance with the terms of such bills. 47. HEAT AND AIR-CONDITIONING A. Any use of the demised premises, or any part thereof, or rearrangement of partitioning in a manner that interferes with normal operation of the heat, ventilation or air-conditioning systems (hereinafter referred to as the "systems") servicing the same, may require changes in such systems. Such changes, so occasioned, shall be made by Tenant, at its expense, subject to Landlord's prior written approval of such changes, which approval may be withheld for any reason. Tenant shall not make any change, alteration, addition or substitution to the system providing heating, ventilating and air-conditioning without Landlord's prior written approval, which may be withheld for any reason. B. Landlord, at its expense, shall maintain and operate the systems (inclusive of the package air-conditioning unit serving the Demised Premises) and subject to energy conservation requirements of governmental authorities, shall furnish heat and ventilating (hereinafter collectively referred to as the "service") in the demised premises during "regular hours" (that is between the hours of 8:00 A.M. and 6:00 P.M.) of "business days" (which term is used herein to mean all days except Saturdays, Sundays and days now or hereafter observed by the Federal or New York State government as legal holidays and those now or hereafter designated by the applicable building service union employees service contract or by the applicable Operating Engineers contract) as may be required for comfortable occupancy of the demised premises. If Tenant shall require heating or ventilating service at any other time (hereinafter referred to as "after hours"), Landlord shall furnish such after hours service upon reasonable advance notice from Tenant, and Tenant shall pay on demand Landlord's cost. Air-conditioning shall be provided to the Demised Premises by means of the packaged air-conditioning units servicing the Demised Premises which may be operated by Tenant, at Tenant's option, at any time, seven (7) days per week, twenty-four (24) hours per day. All -18- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 electricity used in connection with such packaged air-conditioning units shall be supplied in accordance with, and shall be subject to, all of the terms, covenants and conditions in Article 45 hereof. 48. LANDLORD'S OTHER SERVICES A. Landlord, at its expense, shall provide public elevator service by elevators serving the floor on which the demised premises are situated during regular hours of business days, and shall have at least one passenger elevator operating at all other times. B. Notwithstanding anything in this lease to the contrary, Tenant shall, at its sole cost and expense, cause the Demised Premises to be cleaned in a manner reasonably satisfactory to Landlord, utilizing a cleaning contractor approved by Landlord, which approval shall not be unreasonably withheld or delayed. Tenant shall, at its sole cost and expense, store, receive and transport all refuse and rubbish from the Demised Premises in compliance with all present and future laws, orders, rules and regulations of any governmental or quasi-governmental authority having jurisdiction thereof and shall deposit such refuse and rubbish on a daily basis in a location in the Building designated by Landlord. C. Landlord, at its expense, and on Tenant's request, shall maintain the original listings on the Building directory of the names of Tenant, Tenant's subsidiaries and the names of any of their officers and employees, provided that the names so listed shall not take up more than six (6) lines on the Building directory. In the event Tenant shall require additional or substitute listings on the Building directory, Landlord shall, to the extent space for such additional or substitute listing is available, maintain such listings and Tenant shall pay to Landlord an amount equal to Landlord's reasonable charge for such listings. D. Landlord reserves the right, without any liability to Tenant (except as otherwise expressly provided in this lease), to stop operating any of the heating, ventilating, air conditioning, electric, sanitary, elevator, or other building systems serving the demised premises, and to stop the rendition of any of the other services required of Landlord under this lease, whenever and for so long as may be necessary by reason of accidents, emergencies, strikes, or the making of repairs or changes that Landlord is required by this lease or by law to make or in good faith deems necessary, by reason of difficulty in securing proper supplies of fuel, steam, water, electricity, labor, or supplies, or by reason of any other cause beyond Landlord's reasonable control. E. Landlord shall furnish hot and cold water to the Demised Premises through the presently existing facilities. -19- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 F. Except as provided in Articles 47 and 48, Landlord shall have no responsibility or obligation for the rendition of any services or utilities to Tenant or to the Demised Premises. G. Landlord agrees that the Building will be maintained in its present condition, normal wear and tear excepted. Landlord further agrees that it shall continue to provide the services it is responsible to provide to Tenant pursuant to the provisions of this lease at the same level as presently provided. 49. SECURITY DEPOSIT A. Tenant has deposited with Landlord the sum of $140.000.0, either in cash or by Letter of Credit as provided in Section C hereof, as security for the faithful performance, observance and compliance with all of the terms, covenants and conditions of this lease on Tenant's part to perform, observe or comply with. Tenant agrees that, in the event that Tenant defaults in respect of any of such terms, covenants or conditions of this lease (including, without limitation, the payment of any installment of fixed rent or any amount of additional rent), Landlord may use, apply, or retain the whole or any part of the cash security so deposited or may notify the Issuing Bank (as such term is defined in Section C hereof) and thereupon receive all of the monies represented by the said Letter of Credit and use, apply, or retain the whole or any part of such proceeds, or both, as the case may be, to the extent required for the payment of any fixed rent, additional rent, or any other sums as to which Tenant is in default, or for any sum that Landlord may expend or may be required to expend by reason of any such default (including any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord). In the event that Landlord applies or retains any portion or all of such cash security or proceeds of such Letter of Credit, or both, as the case may be, the amount not so used, applied or retained shall continue to be treated as Tenant's security deposit, and Tenant shall restore the amount so applied or retained within five (5) days after Landlord's demand therefor, so that, subject to the provisions of Section F, at all times, the amount deposited shall be $140,000.00. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, that portion, if any, of the cash security or Letter of Credit, or both, as the case may be, not used, applied or retained shall be returned to Tenant after the Expiration Date and after delivery of possession of the entire demised premises to Landlord, in accordance with, and subject to, the applicable provisions of this lease. B. To the extent Tenant has deposited with Landlord a cash security, Landlord agrees to deposit same into an interest bearing account in a bank or savings and loan association to be selected, from time to time, by Landlord in its sole discretion. Landlord agrees, further to hold said security in such an account for the entire term of this lease, subject, however, to the terms of Section A above with respect to the use, application -20- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 or retention of such security. To the extent permitted by law, Tenant agrees that Landlord shall be entitled to receive and retain, as an administrative expense, a sum equal to one (1%) percent per annum upon such security, and Landlord shall have the right to withdraw such sum from time to time as Landlord shall determine in is sole discretion. The balance of the interest earned on such security shall, provided Tenant is not then in default under this lease, and to the extent that same shall not be used, applied or retained pursuant to the terms of Section A above, be paid to Tenant upon the request of Tenant, but not more than once during any calendar year of the term of this lease. Unless and until such interest shall be paid to Landlord and Tenant as herein provided, the same shall be held as a part of the security deposited by Tenant, subject to, and in accordance with, the terms of Section A above. Landlord shall not be required to credit any security with the interest for any period during which Landlord does not receive interest thereon. C. In lieu of a cash deposit, Tenant may deliver to Landlord as such security, a clean, irrevocable, transferable (without cost to Landlord) and unconditional Letter of Credit issued by and drawn upon any commercial bank reasonably acceptable to Landlord (hereinafter referred to as the "Issuing Bank") with offices for banking purposes in the City of New York and having a net worth of not less than One Hundred Million and 00/100 ($100,000,000.00) Dollars, which Letter of Credit shall have a term of not less than one year, be in form and content satisfactory to Landlord, be for the account of Landlord and, subject to the provisions of Section F, be in the amount of $140,000.00. The Letter of Credit shall provide that: (a) The Issuing Bank shall pay to Landlord or its duly authorized representative an amount up to the face amount of the Letter of Credit upon presentation of only the Letter of Credit and a sight draft in the amount to be drawn; (b) The Letter of Credit shall be deemed to be automatically renewed, without amendment, for consecutive periods of one year each, unless the Issuing Bank sends written notice (hereinafter referred to as the "Non-Renewal Notice") to Landlord by certified or registered mail, return receipt requested, not less than thirty (30) days next preceding the then expiration date of the Letter of Credit, that it elects not to have such Letter of Credit renewed; (c) Landlord, after its receipt of the Non-Renewal Notice, shall have the right, exercisable by a sight draft only, to receive the moneys represented by the Letter of Credit (which moneys shall be held by Landlord as a cash deposit pursuant to the terms of this Article pending the replacement of such Letter of Credit) (and Landlord shall have such right regardless of whether the Letter of Credit expressly gives Landlord such right); and -21- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 (d) In the event of a sale or the transfer of the Land or the Building, or Landlord's interest in any of the foregoing, or a leasing by Landlord or any of the foregoing or Landlord's interest therein, the Letter of Credit shall be transferable by Landlord as provided in Section D below, at no cost or expense to Landlord and Tenant shall be notified of any such transfer. . In the event of a sale or transfer of the land or the Building, or the then Landlord's interest in the land or the Building, or a leasing by the then Landlord of the land or the Building or of Landlord's interest therein, Landlord shall have the right, at no cost or expense to Landlord, to transfer or assign such cash security or Letter of Credit, or both, as the case may be, to the vendee, transferee or lessee, and Landlord shall notify Tenant, by certified mail, return receipt requested, of such sale, transfer or lease, together with the name and address of such vendee, transferee or lessee who shall acknowledge, in writing, receipt of such security, and Landlord shall thereupon be released by Tenant from all liability for the return of such cash security or Letter of Credit. In such event, Tenant agrees to look solely to the new landlord for the return of said cash security or Letter of Credit. It is agreed that the provisions hereof shall apply to every transfer or assignment made of said cash security or Letter of Credit to a new Landlord. E. Tenant covenants that it will not assign or encumber, or attempt to assign or encumber, such cash security or Letter of Credit, and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment, or attempted encumbrance. F. (i) Notwithstanding anything in this Article 49 to the contrary, if, on the fifth (5th) anniversary of the Commencement Date, Tenant is not in default under this lease, which default continues after notice and the expiration of any applicable cure period, Tenant may upon notice to Landlord (hereinafter referred to as the "Security Reduction Notice") request that Landlord return to Tenant $40,000.00 of the cash security deposited by Tenant pursuant to Section 49A or, if Tenant has provided a letter of credit, exchange the then existing Letter of Credit for a new Letter of Credit in the amount of $100,000.00 and otherwise meeting the requirements of Section 49B. (ii) Provided Tenant is not in default under the lease, which default continues after notice and the expiration of any applicable cure period, on the date Landlord receives the Security Reduction Notice and on the date payment is to be made to Tenant or the existing Letter of Credit is to be exchanged, Landlord will return to Tenant the sum of $40,000.00 out of the cash security or exchange the then existing Letter of Credit for the new Letter of Credit as set forth in Section 49F(i). G. Notwithstanding anything in this Article 49 to the contrary, the security required to be deposited hereunder -22- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 may be a combination of cash security and Letter of Credit provided that the total amount thereof aggregates the total security to be maintained hereunder and such components of the combined security otherwise comply with the requirements of this Article 49. 50. PARTIES BOUND A. If Landlord shall be an individual, joint venture, tenancy in common, partnership, unincorporated association, or other unincorporated aggregate of individuals and/or entities or a corporation, Tenant shall look only to such Landlord's estate and property in the building (or the proceeds thereof) and, where expressly so provided in this lease, to offset against the rents payable under this lease, for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default by Landlord hereunder, and no other property or assets of such Landlord or any partner, member, officer, or director thereof, disclosed or undisclosed, shall be subject to levy, execution, or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this lease, the relationship of Landlord and Tenant hereunder, or Tenant's use or occupancy of the demised premises. B. If there shall be more than one person named as tenant herein, then all such persons shall be deemed to be joint tenants in the leasehold estate demised hereby, with joint and several liability hereunder. C. Landlord hereby represents that it is the fee owner of the Land and Building. 51. BROKER A. Tenant covenants, warrants and represents that there were no brokers or finders except Edward S. Gordon Company, Inc. (hereinafter referred to as "Broker") instrumental in consummating this lease, and that no conversations or negotiations were had by Tenant with any brokers or finders except the Broker concerning the renting of the demised premises. Tenant agrees to hold Landlord harmless against any claims for a brokerage commission or consultation fees arising out of any conversations or negotiations had by Tenant with any brokers or finders except for the Broker. B. Based upon the foregoing representation, Landlord has agreed to pay, pursuant to separate agreements, a brokerage commission to the Broker. C. Landlord covenants, warrants and represents that there were no brokers or finders except the Broker instrumental in consummating this lease, and that no conversations or negotiations were had by Landlord with any brokers or finders except the Broker concerning the renting of the demised premises. Landlord agrees to hold Tenant harmless against any claims for a -23- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 brokerage commission or consultation fees arising out of any conversations or negotiations had by Landlord with any brokers or finders including the Broker. 52. HAZARDOUS MATERIALS Tenant shall not cause or permit "Hazardous Materials" (as defined below) to be used, transported, stored, released, handled, produced or installed in, on or from the Demised Premises or the Building. The term "Hazardous Materials" shall, for the purposes hereof, mean any flammable, explosive or radioactive materials, hazardous wastes, hazardous and toxic substances or related materials, asbestos or any material containing asbestos, or any other substance or material, as now or hereafter defined as a hazardous material or a hazardous substance by any federal, state or local law, ordinance, rule or regulation, now or at any time hereafter in effect, including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, and in the regulations adopted and publications promulgated pursuant to each of the foregoing. In the event of a breach of the provisions of this Article, Landlord shall, in addition to all of its rights and remedies under this lease and pursuant to law, require Tenant to remove any or all of such Hazardous Materials from the Demised Premises or the Building in the manner prescribed for such removal by all requirements of law. Tenant acknowledges that Landlord has made no representation, warranty, covenant or agreement with respect to the existence, removal, encapsulation or other treatment or remediation of Hazardous Materials, and that Landlord shall not in any way be liable for the existence of any Hazardous Materials or be obligated to remove, encapsulate or otherwise treat or remediate same. The provisions of this Article shall survive the expiration or sooner termination of this lease. 53. ARBITRATION A. Either party may request arbitration of any matter in dispute with respect to which arbitration is expressly provided in this lease as the appropriate remedy. The party requesting arbitration shall do so by giving notice to that effect to the other party, and both parties shall promptly thereafter jointly apply to the American Arbitration Association (or any organization successor thereto) in the City and County of New York for the appointment of a single arbitrator. B. The arbitration shall be conducted in accordance with the then prevailing rules of the American Arbitration Association (or any organization successor thereto) in the City and County of New York and, subject to the terms of the immediately succeeding sentence, judgment on the award rendered by the arbitrator may entered in any court having jurisdiction thereof. In rendering such decision and award, the arbitrator shall not add to, subtract from, or otherwise modify the provisions of this lease. -24- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 C. If, for any reason whatsoever, a written decision and award of the arbitrator shall not be rendered within sixty (60) days after the appointment of such arbitrator, then, at any time thereafter before such decision and award shall have been rendered, either party may apply to the Supreme Court of the State of New York or to any other court having jurisdiction and exercising the functions similar to those now exercised by such court, by action, proceeding, or otherwise (but not by a new arbitration proceeding) as may be proper to determine the question in dispute consistently with the provisions of this lease. D. All the expenses of the arbitration shall be borne by the parties equally. 54. ASSIGNMENT AND SUBLETTING A. If Tenant shall, at any time or times during the term of this lease, desire to assign this lease or sublet all or part of the demised premises, Tenant shall give notice thereof to Landlord, which notice shall be accompanied by: (i) a conformed or photostatic copy of the proposed assignment or sublease, the effective or commencement date of which shall be not less than sixty (60) nor more than ninety (90) days after the giving of such notice; (ii) a statement setting forth, in reasonable detail, the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the demised premises; and (iii) current financial information with respect to the proposed assignee or subtenant, including its most recent financial report. B. In the event that Tenant complies with the provisions of Section A of this Article 54 and provided that Tenant is not in default of any of Tenant's obligations under this lease after notice and the expiration of any applicable grace period, Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed provided that Tenant has complied with the following conditions: (i) in Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in such a business, and the demised premises, or the relevant part thereof, will be used in such a manner, that: (x) is limited to the use expressly permitted under this lease or a similar use; and (y) such similar use will not violate any negative covenant as to use contained in any other lease of space in the Building about which Tenant has been informed following its request to Landlord for such information. Landlord represents that the use of the demised Premises by Tenant for the purposes set forth in Section 39A does not violate any negative covenant as to use contained in any other lease for space in the Building; (ii) the proposed assignee or subtenant is a reputable person of good character and with sufficient financial worth considering the responsibility involved, and Landlord has been furnished with reasonable proof thereof; -25- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 (iii) neither (i) the proposed assignee or sublessee nor (ii) any person that, directly or indirectly, controls, is controlled by, or is under common control with, the proposed assignee or sublessee or any person who controls the proposed assignee or sublessee, is then an occupant or tenant of any part of the building; (iv) the proposed assignee or sublessee is not a person with whom Landlord is then, or shall have been during the previous six (6) month period, negotiating to lease space in the building; (v) the proposed sublease shall be in form reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article; (vi) there shall not be more than three (3) entities (excluding entities controlled by Tenant), including Tenant, occupying the demised premises; (vii) the rental and other terms and conditions of the sublease are the same as those contained in the proposed sublease furnished to Landlord pursuant to Section A; (viii) Tenant shall reimburse Landlord on demand for any reasonable costs that may be incurred by Landlord in connection with said assignment or sublease, including, without limitation, the reasonable costs of making investigations as to the acceptability of the proposed assignee or subtenant and reasonable legal costs incurred in connection with the review of any term sheet, proposed assignment or sublease or any documentation in connection therewith and in the preparation of any documentation in connection with any request for consent, whether or not granted; (ix) Tenant shall not have: (a) advertised or publicized in any way the availability of the demised premises without prior notice to, and approval by, Landlord, which approval Landlord agrees not to unreasonably withhold, nor shall any listing or advertisement advertise the demised premises for subletting at a proposed rental less than the fixed rent and additional rent at which Landlord is then offering to lease other space in the building; (x) the sublease shall not allow use of the demised premises or any part thereof: (a) as a restaurant, luncheonette, or otherwise for the preparation and/or sale of food for on or off premises consumption; (b) as a discount store; (c) as a multiple tenancy store; (d) by a foreign or domestic governmental agency; (e) as a betting parlor or gambling casino; or (f) by a utility company; and (xi) the sublease shall not provide for an option on behalf of the subtenant thereunder to extend or renew the term of such sublease. -26- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 C. Each subletting pursuant to this Article 54 shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this lease. Notwithstanding any such subletting and/or acceptance of rent or additional rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment of the fixed rent and additional rent due, and to become due, hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this lease on the part of Tenant to be performed and for all acts and omissions of any licensee, subtenant, or any other person claiming under or through any subtenant that shall be in violation of any of the obligations of this lease, and any such violation shall be deemed to be a violation by Tenant. Tenant further agrees that, notwithstanding any such subletting, no other and further subletting of the demised premises by Tenant, or any person claiming through or under Tenant (except as provided in Section K of this Article 54), shall, or will be, made, except upon compliance with, and subject to, the provisions of this Article. If Landlord shall decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise any of its options under Section B, Tenant shall indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, damages, costs and expenses (including reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. D. With respect to each and every sublease or subletting, it is agreed that: (i) no subletting shall be for a term ending later than one day prior to the expiration date of this lease; (ii) no sublease shall be valid, and no subtenant shall take possession of the demised premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord; and (iii) each sublease shall provide that it is subject and subordinate to this lease and to the matters to which this lease is or shall be subordinate, and that, in the event of termination, re-entry, or dispossess by Landlord under this lease, Landlord may, at its option, take over all of the right, title and interest of Tenant as sublandlord under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not (x) be liable for any previous act or omission of Tenant under such sublease, (y) be subject to any offset, not expressly provided in such sublease, that theretofore accrued to such subtenant against Tenant or (z) be bound by any previous modification of such sublease or by any previous prepayment of more than one month's fixed rent or any additional rent then due. -27- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 E. Any assignment or transfer shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, whereby the assignee shall assume all of the obligations of this lease on the part of Tenant to be performed or observed and whereby the assignee shall agree that the provisions contained in Section A shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect of all future assignments and transfers. The original named Tenant covenants that, notwithstanding any assignment or transfer, whether or not in violation of the provisions of this lease, and notwithstanding the acceptance of fixed rent and/or additional rent by Landlord from an assignee, transferee, or any other party, the original named Tenant shall remain fully liable for the payment of the fixed rent and additional rent and for the other obligations of this lease on the part of Tenant to be performed or observed. F. If Landlord shall give its consent to any assignment of this lease or to any sublease, Tenant shall, in consideration therefor, pay to Landlord, as additional rent: (i) in the case of an assignment, an amount equal to 50% of all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment (excluding any equipment intended for sale to the general public in Tenant's business), furniture, furnishings or other personal property, less, in the case of a sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax returns) and less the reasonable costs (hereinafter referred to as the "Assignment Expenses") paid by Tenant for alteration costs (or contributions in lieu thereof), advertising, brokerage or consulting fees or commissions and legal fees in connection with such assignment; and (ii) in the case of a sublease, an amount equal to 50% of any rents, additional charge or other consideration payable under the sublease to Tenant by the subtenant which is in excess of the fixed rent and additional rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof (including, but not limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, equipment (excluding any equipment intended for sale to the general public in Tenant's business), furniture or other personal property, less, in the case of the sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax returns) and less the reasonable costs (hereinafter referred to as the "Subletting Expenses") paid by Tenant for alteration costs (or contributions in lieu thereof), advertising, brokerage or consulting fees or commissions and legal fees in connection with such subletting. The sums payable under Sections 54(F)(i) and (ii) shall be paid to Landlord as and when -28- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 paid by the assignee or subtenant, as the case may be, to Tenant and upon the execution and delivery of such assignment or sublease, as the case may be, Tenant shall provide to Landlord a statement of the Assignment Expenses or Subletting Expenses, as the case may be, certified as correct by an officer or principal of Tenant. G. If Tenant is a corporation, the provisions of Article 11 shall apply to a transfer (by one or more transfers) of a majority of the stock of Tenant, as if such transfer of a majority of the stock of Tenant were an assignment of this lease; but said provisions and the provisions of Section F above shall not apply to, and Landlord's consent shall not be required in connection with, transactions with a corporation (i) into, or with which, Tenant is merged or consolidated, (ii) to which substantially all of Tenant's assets are transferred; or (iii) that controls, is controlled by, or is under common control with Tenant ("control" having the meaning set forth in Paragraph (p) of Exhibit B), provided that, in the events of a transaction set forth in (i) or (ii): (x) the successor to Tenant has a net worth, computed in accordance with generally accepted accounting principles, at least equal to the greater of (1) the net worth of Tenant immediately prior to such merger, consolidation, or transfer or (2) the net worth of Tenant herein named on the date of this lease; and (y) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (l0) days prior to the effective date of any such transaction. H. The joint and several liability of Tenant and any immediate or remote successor in interest to Tenant, and the due performance of the obligations of this lease on Tenant's part to be performed or observed, shall not be discharged, released, or impaired in any respect by any agreement or stipulation made by Landlord extending the time of, or modifying any of the obligations of, this lease, or by any waiver or failure of Landlord to enforce any of the obligations of this lease. I. The listing of any name other than that of Tenant, whether on the doors of the demised premises, on the building directory, if any, or otherwise, shall not operate to vest any right or interest in this lease or in the demised premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this lease, to any sublease of the demised premises, or to the use or occupancy thereof by others. 55. INSURANCE A. Tenant shall not violate, or permit the violation of, any condition imposed by the standard fire insurance policy then issued for office buildings in the Borough of Manhattan, City of New York, and shall not do, permit anything to be done, keep, or permit anything to be kept, in the demised premises that would: (i) subject Landlord to any liability or responsibility for personal injury, death, or property damage; (ii) increase the fire or other casualty insurance rate on the building or the property therein over the rate that would otherwise then be -29- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 in effect (unless Tenant pays the resulting premium as provided in Section F of this Article 55); or (iii) result in insurance companies of good standing refusing to insure the building or any of such property in amounts reasonably satisfactory to Landlord. B. Tenant covenants to provide on or before the Commencement Date and to keep in force during the term hereof the following insurance coverage: (i) A comprehensive policy of liability insurance containing an omnibus named insured provision naming Landlord as an additional insured protecting Landlord and Tenant against any liability whatsoever occasioned by accident on or about the Demised Premises or any appurtenances thereto. The limits of liability of such policy shall not be less than Five Million ($5,000,000.00) Dollars combined single limit coverage on a per occurrence basis, including property damage. Such policy shall contain a contractual liability coverage endorsement with respect to Tenant's indemnification obligations under this lease. Such insurance may be carried under a blanket policy covering the Demised Premises and other locations of Tenant, if any, provided such policy contains an endorsement (a) naming Landlord as an additional insured, (b) specifically referencing the Demised Premises and (c) guaranteeing a minimum limit available for the Demised Premises equal to the limits of liability required under this lease. (ii) Fire and Extended coverage in an amount adequate to cover the cost of replacement of all personal property, fixtures, furnishing and equipment, including Tenant's Work located in the Demised Premises. All such policies shall be issued by companies of recognized responsibility licensed to do business in New York State and rated by Best's Insurance Reports or any successor publication of comparable standing and carrying a rating of A+ VIII or better or the then equivalent of such rating, and all such policies shall contain a provision whereby the same cannot be cancelled or modified unless Landlord and any additional insureds are given at least thirty (30) days prior written notice of such cancellation or modification. Prior to the time such insurance is first required to be carried by Tenant and thereafter, at least fifteen (15) days prior to the expiration of any such policies, Tenant shall deliver to Landlord either duplicate originals of the aforesaid policies or certificates evidencing such insurance together with a certified copy of the endorsement naming Landlord as an additional insured, together with evidence of payment for the policy. If Tenant delivers certificates as aforesaid, Tenant, upon reasonable prior notice from Landlord, shall make available to Landlord at the Demised Premises duplicate originals of such policies from which Landlord may make copies thereof, at Landlord's cost. Tenant's failure to provide and keep in force the aforementioned insurance -30- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 shall be regarded as a material default hereunder, entitling Landlord to exercise any or all of the remedies as provided in this lease in the event of Tenant's default. In addition, in the event Tenant fails to provide and keep in force the insurance required by this lease, at the times and for the durations specified in this lease, Landlord shall have the right, but not the obligation, at any time and from time to time, and without notice, to procure such insurance and or pay the premiums for such insurance in which event Tenant shall repay Landlord within five (5) days after demand by Landlord, as additional rent, all sums so paid by Landlord together with any costs or expenses incurred by Landlord in connection therewith without prejudice to any other rights and remedies of Landlord under this lease. C. Landlord and Tenant shall each endeavor to secure an appropriate clause in, or an endorsement upon, each fire or extended coverage policy obtained by it and covering the Building, the Demised Premises or the personal property, fixtures and equipment located therein or thereon, pursuant to which the respective insurance companies waive subrogation or permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party. The waiver of subrogation or permission for waiver of any claim hereinbefore referred to shall extend to the agents of each party and its employees and, in the case of Tenant, shall also extend to all other persons and entities occupying or using the Demised Premises in accordance with the terms of this lease. If and to the extent that such waiver or permission can be obtained only upon payment of an additional charge then, except as provided in the following two paragraphs, the party benefiting from the waiver or permission shall pay such charge upon demand, or shall be deemed to have agreed that the party obtaining the insurance coverage in question shall be free of any further obligations under the provisions hereof relating to such waiver or permission. In the event that Landlord shall be unable at any time to obtain one of the provisions referred to above in any of its insurance policies, at Tenant's option Landlord shall cause Tenant to be named in such policy or policies as one of the assureds, but if any additional premium shall be imposed for the inclusion of Tenant as such as assured, Tenant shall pay such additional premium upon demand. In the event that Tenant shall have been named as one of the assureds in any of Landlord's policies in accordance with the foregoing, Tenant shall endorse promptly to the order of Landlord, without recourse, any check, draft or order for the payment of money representing the proceeds of any such policy or any other payment growing out of or connected with said policy and Tenant hereby irrevocably waives any and all rights in and to such proceeds and payments. In the event that Tenant shall be unable at any time to obtain one of the provisions referred to above in any of its insurance policies, Tenant shall cause Landlord to be named in such policy or policies as one of the assureds, but if any additional premium shall be imposed for the inclusion of Landlord as such an -31- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 assured, Landlord shall pay such additional premium upon demand or Tenant shall be excused from its obligations under this paragraph with respect to the insurance policy or policies for which such additional premiums would be imposed. In the event that Landlord shall have been named as one of the assureds in any of Tenant's policies in accordance with the foregoing, Landlord shall endorse promptly to the order of Tenant, without recourse, any check, draft or order for the payment of money representing the proceeds of any such policy or any other payment growing out of or connected with said policy and Landlord hereby irrevocably waives any and all rights in and to such proceeds and payments. Subject to the foregoing provisions of this Section C of Article 55, and insofar as may be permitted by the terms of the insurance policies carried by it, each party hereby releases the other with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damages or destruction with respect to its property by fire or other casualty (including rental value or business interruption, as the case may be) occurring during the term of this lease. D. If, by reason of a failure of Tenant to comply with the provisions of Article 6 or Section A of Article 55, the rate of fire insurance with extended coverage on the Building or equipment or other property of Landlord shall be higher than it otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of the premiums for fire insurance and extended coverage paid by Landlord because of such failure on the part of Tenant. E. Landlord may, from time to time, require that the amount of the insurance to be provided and maintained by Tenant under Section B of Article 55 hereof be increased so that the amount thereof adequately protects Landlord's interest but in no event in excess of the amount that would be required by other tenants conducting similar business in similar sized space in first-class office buildings in the borough of Manhattan. F. If any dispute shall arise between Landlord and Tenant with respect to the incurrence or amount of any additional insurance premium referred to in Section C of Article 55, the dispute shall be determined by arbitration. G. A schedule or make up of rates for the Building or the Demised Premises, as the case may be, issued by the New York Fire Insurance Rating Organization or other similar body making rates for fire insurance and extended coverage for the premises concerned, shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rate with extended coverage then applicable to such premises. H. Each policy evidencing the liability insurance to be carried by Tenant under this lease shall contain a clause that such policy and the coverage evidenced thereby shall be -32- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 primary with respect to any policies carried by Landlord, and that any coverage carried by Landlord shall be excess insurance. (I) It is acknowledged that solely for purposes of insurance required to be procured by Tenant under this lease, that Landlord and Tenant each have insurable interests in and to betterments and improvements, including Landlord's Work as defined in Exhibit C. Moreover, Landlord has agreed and undertaken to perform the improvements referred to in Exhibit C as Landlord's Work at Landlord's expense and Landlord's costs will, in effect, be recouped through the rents to be paid by Tenant hereunder. As such, Tenant's interest in the betterments and improvements shall be a leasehold interest only and shall be insurable as such, and Landlord's interests in the betterments and improvements shall be a fee interest and insurable as such. Landlord and Tenant agree to cooperate with each other in adjusting any claim made by the other under any policy of insurance providing insurance for betterments and improvements including, but not limited to, acknowledging the interest of the other and providing access to the Demised Premises for claims adjusting purposes. In addition, Tenant shall retain an insurable leasehold interest in any additional betterments an improvements directly purchased by Tenant and not provided as part of Landlord's Work. Notwithstanding anything herein to the contrary, nothing herein shall be construed to give Tenant the right to any abatement, setoff, or other reduction in rent or additional rent, of any kind whatsoever, as a result of any change, modification, destruction, damage, deterioration, wear and tear or obsolescence of such betterments and improvements. 56. TENANT'S CHANGES A. (a) Tenant may, from time to time during the term of this lease and at its sole expense, make such alterations, additions, installations, substitutions, improvements and decorations (hereinafter collectively referred to as "changes" and, as applied to changes provided for in this Article 56, "Tenant's Changes" in and to the demised premises (excluding structural changes and changes that affect any of the Building's systems or services, for which Landlord's prior written approval shall be required in all instances, which approval may be withheld by Landlord in its sole and absolute discretion), as Tenant may reasonably consider necessary for the conduct of its business therein, on the following conditions: (i) the outside appearance or strength of the Building, or of any of its structural parts, shall not be affected; (ii) no part of the Building outside of the demised premises shall be physically affected; i) the proper functioning of any of the mechanical, electrical, sanitary and other -33- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 service systems of the Building shall not be adversely affected, and the usage of such systems by Tenant shall not be increased; (iv) in performing the work involved in making such changes, Tenant shall observe, and be bound by, all of the conditions and covenants contained in this Article 56; (v) before proceeding with any change (except for decorations that do not affect the mechanical, electrical, sanitary and/or other service systems), Tenant shall submit to Landlord, for Landlord's approval, not to be unreasonably withheld or delayed, plans and specifications for the work to be done and the name of the contractor or major sub-contractors performing such work. Landlord may, as a condition of its consent, require Tenant to make revisions in and to the plans and specifications and to post a bond or other security reasonably satisfactory to Landlord to insure the completion of such change; and (vi) Tenant shall not make any change, alteration, addition or substitution to the air-conditioning system without Landlord's prior written approval, which may be withheld for any reason. B. Tenant shall, at its expense, obtain all necessary governmental permits and certificates for the commencement and prosecution of Tenant's Changes, and, upon completion, for final approval thereof, and shall cause Tenant's Changes to be performed in compliance therewith, as well as with all applicable laws and requirements of public authorities and all applicable requirements of insurance bodies, in a good and workmanlike manner, using new materials and equipment of a quality and class at least equal to the original installations in the Building. Tenant's Changes shall be performed in such a manner as not to unreasonably interfere with or delay, and (unless Tenant shall indemnify Landlord therefor to the latter's reasonable satisfaction) as not to impose any additional expense upon Landlord in, the maintenance or operation of the Building. Throughout the performance of Tenant's Changes, Tenant shall, at its expense, carry, or cause to be carried by Tenant's contractor, worker's compensation insurance in statutory limits and general liability insurance for any occurrence in or about the Building as set forth in Article 55 hereof. All such insurance policies shall name Landlord and its agents as parties insured, be in such limits as Landlord may reasonably prescribe and be placed with insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with satisfactory evidence that such insurance is in effect at or before the commencement of Tenant's Changes and, on request, at reasonable intervals thereafter during the continuance of Tenant's Changes. If any of Tenant's Changes shall involve the removal of any fixtures, equipment, or other property in the demised premises, such fixtures, equipment, or other property shall be promptly replaced, at Tenant's expense, with new fixtures, equipment, or other property (as the case may be) of like utility and at least -34- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 equal value unless Landlord shall otherwise expressly consent in writing, and Tenant shall, upon Landlord's request, store and preserve, at Tenant's sole cost and expense, any such fixtures, equipment, or property so removed and shall return same to Landlord upon the expiration or sooner termination of this lease. All Tenant's Changes shall be performed by contractors approved by Landlord, which approval shall not be unreasonably withheld or delayed. Landlord will upon request of Tenant furnish to Tenant a list of approved contractors containing not less than four (4) approved contractors. C. Tenant shall, at its expense and with diligence and dispatch, procure the cancellation or discharge of all notices of violation arising from, or otherwise connected with, Tenant's Changes that shall be issued by the Department of Buildings or any other public or quasi-public authority having or asserting jurisdiction. Tenant shall defend, indemnify and save Landlord harmless from and against any and all mechanic's and other liens filed in connection with Tenant's Changes, including the liens of any security interest in, conditional sales of, or chattel mortgages upon, any materials, fixtures, or articles so installed in and constituting part of the demised premises, and against all costs, expense and liabilities incurred in connection with any such lien, security interest, conditional sale, or chattel mortgage or any action or proceeding brought thereon. Tenant, at its expense, shall procure the satisfaction or discharge of all such liens within fifteen (15) days after Landlord makes written demand therefor. However, nothing herein contained shall prevent Tenant from contesting, in good faith and at its own expense, any such notice of violation, provided that Tenant shall comply with the provisions of Article 6 hereof. D. Tenant agrees that the exercise of its rights pursuant to the provisions of this Article 56 shall not be done in a manner that would: (i) create any work stoppage, picketing, labor disruption, or dispute; (ii) violate Landlord's union contracts affecting the land and/or Building; or (iii) interfere with the business of Landlord or any Tenant or occupant of the Building. In the event of the occurrence of any condition described above arising from Tenant's exercise of any of its rights pursuant to the provisions of this Article 56, Tenant shall, immediately upon notice from Landlord, cease the manner of exercise of such right giving rise to such condition. In the event that Tenant fails to cease such manner of exercise of its rights as aforesaid, Landlord, in addition to any rights available to it under this lease and pursuant to law, shall have the right to injunction without notice. With respect to Tenant's Changes, Tenant shall make all arrangements for, and pay all expenses incurred in connection with, use of the freight elevators servicing the demised premises which use shall be on an after hours basis. Tenant shall be charged for use of the freight elevators for after hours use of the freight elevator at the then standard Building charge therefor which presently is $75.00 per hour (with a minimum of four (4) hours if requested on other than business days or for a period commencing after 6:00 p.m. on business days) which amount -35- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 shall be increased as Landlord's actual out-of-pocket costs for such after hours freight elevator service increase. All amounts due from Tenant hereunder shall be paid as additional rent within fifteen (15) days from receipt of bills therefor. E. Notwithstanding anything in Article 3 to the contrary, Landlord will not unreasonably withhold its consent to (a) alterations, installations, additions or improvements to the interior of the Demised Premises by Tenant which are non-structural and which do not affect any of the Building systems or plumbing or electrical lines. 57. HOLDING OVER Tenant acknowledges that possession of the demised premises must be surrendered to Landlord at the expiration or sooner termination of the term of this lease. Tenant agrees to indemnify and save Landlord harmless against all liabilities, costs, suits, demands, charges, and expenses of any kind or nature, including attorneys' fees and disbursements, resulting from a delay by Tenant in so surrendering the demised premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. The parties recognize and agree that the damage to Landlord resulting from any failure by Tenant to timely surrender possession of the demised premises as aforesaid will be extremely substantial, will exceed the amount of fixed rent and additional rent theretofore payable hereunder and will be impossible of accurate measurement. Tenant, therefore, agrees that if possession of the demised premises is not surrendered to Landlord within twenty-four (24) hours after the date of the expiration or sooner termination of the term of this lease, then Tenant shall pay to Landlord, as liquidated damages, a sum equal to two (2) times the per diem fixed rent and additional rent which was payable during the calendar month preceding the calendar month in which the term ended for each day Tenant holds over and fails to deliver possession of the demised premises. Nothing herein contained shall be deemed to permit Tenant to retain possession of the demised premises after the expiration or sooner termination of the term of this lease. Landlord, by availing itself of the rights and privileges granted by this provision and the acceptance of the liquidated damages, shall not be deemed to have waived any of its rights and privileges granted in other provisions of this lease, and the rights granted in this Article shall be considered in any event as in addition to and not in exclusion of such other rights and privileges. The aforesaid provisions of this Article shall survive the expiration or sooner termination of the term of this lease. 58. CERTAIN DEFINITIONS AND CONSTRUCTION A. For the purposes of this lease and all agreements supplemental to this lease, unless the context otherwise requires the definitions set forth in Exhibit B annexed hereto shall be utilized. -36- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 B. The various terms which are italicized and defined in other Articles of this lease or are defined in Exhibits annexed hereto, shall have the meanings specified in such other Articles and such Exhibits for all purposes of this lease and all agreements supplemental thereto, unless the context shall otherwise require. 59. ADDENDUM TO ARTICLE 17 The following is added to the Lease as Section 17.1: "This lease and the term and estate hereby granted are subject to the limitation that: (a) whenever Tenant shall default in the payment of any installment of fixed rent, or in the payment of any additional rent or any other charge payable by Tenant to Landlord, on any day upon which the same ought to be paid, and such default shall continue for ten (10) days after Landlord shall have given Tenant a notice in accordance with Article 60 specifying such default; or (b) whenever Tenant shall do or permit anything to be done, whether by action or inaction, contrary to any of Tenant's obligations hereunder, and if such situation shall continue and shall not be remedied by Tenant within thirty (30) days after Landlord shall have given to Tenant a notice in accordance with Article 60 specifying the same, or, in the case of a happening or default which cannot with due diligence be cured within a period of thirty (30) days and the continuance of which for the period required for cure will not subject Landlord to the risk of criminal liability or termination of any superior lease or foreclosure of any superior mortgage, if Tenant shall not, (i) within said thirty (30) day period advise Landlord of Tenant's intention to duly institute all steps necessary to remedy such situation, (ii) duly institute within said thirty (30) day period, and thereafter diligently prosecute to completion all steps necessary to remedy the same and (iii) complete such remedy within such time after the date of the giving of said notice of Landlord as shall reasonably be necessary; or (c) whenever any event shall occur or any contingency shall arise whereby this lease or the estate hereby granted or the unexpired balance of the term hereof would, by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Articles 11 and 54; or (d) whenever Tenant shall abandon the Demised Premises (unless as a result of a casualty), then in any of said cases set forth in the foregoing Subsections (a), (b), (c) and (d), Landlord may give to Tenant a notice of intention to end the term of this lease at the expiration of five (5) days from the date of the service of such notice of intention, -37- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 and upon the expiration of said five (5) days this lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 18." 60. NOTICES A. Except for rent bills and emergency repair notices (which may be hand-delivered or sent via facsimile machine and shall be deemed given upon receipt) any notice, statement, demand or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this lease or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this lease) and shall be deemed to have been properly given, rendered or made, if sent by registered or certified mail, return receipt requested, addressed to the other party at the address hereinabove set forth (except that after the Commencement Date, Tenant's address, unless Tenant shall give notice to the contrary, shall be the Building), or sent via nationally recognized overnight courier providing for receipted delivery and shall be deemed to have been given, rendered or made (a) if so mailed, on the day so mailed, unless mailed outside of the State of New York, in which case it shall be deemed to have been given, rendered or made on the expiration of the normal period of time for delivery of mail from the post-office of origin to the post-office of destination and (b) if sent via nationally recognized overnight courier, on the date of receipt. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demands or other communications intended for it. -38- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 - - - - - - - - - - - - - - - - - - - - - - - EXHIBIT A FLOOR PLAN OF DEMISED PREMISES - - - - - - - - - - - - - - - - - - - - - - - Follows Immediately (Floor plan attached) -39- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 - - - - - - - - - - - - - - - - - - - - - - - EXHIBIT B DEFINITIONS - - - - - - - - - - - - - - - - - - - - - - - (a) The term "mortgage" shall include an indenture of mortgage and deed of trust to a trustee to secure an issue of bonds, and the term "mortgagee" shall include such a trustee. (b) The terms "include", "including" and "such as" shall each be construed as if followed by the phrase "without being limited to". (c) The term "obligations of this lease", and words of like import, shall mean the covenants to pay rent and additional rent under this lease and all of the other covenants and conditions contained in this lease. Any provision in this lease that one party or the other or both shall do or not do or shall cause or permit or not cause or permit a particular act, condition, or circumstance shall be deemed to mean that such party so covenants or both parties so covenant, as the case may be. (d) The term "Tenant's obligations hereunder", and words of like import, and the term Landlord's obligations hereunder, and words of like import, shall mean the obligations of this lease which are to be performed or observed by Tenant, or by Landlord, as the case may be. Reference to performance of either party's obligations under this lease shall be construed as "performance and observance". (e) Reference to Tenant being or not being "in default hereunder", or words of like import, shall mean that Tenant is in default in the performance of one or more of Tenant's obligations hereunder, or that Tenant is not in default in the performance of any of Tenant's obligations hereunder, or that a condition of the character described in Section 25.01 has occurred and continues or has not occurred or does not continue, as the case may be. (f) References to Landlord as having "no liability to Tenant" or "being without liability to Tenant", shall mean that Tenant is not entitled to terminate this lease, or to claim actual or constructive eviction, partial or total, or to receive any abatement or diminution of rent, or to be relieved in any manner of any of its other obligations hereunder, or to be compensated for loss or injury suffered or to enforce any other kind of liability whatsoever against Landlord under or with respect to this lease or with respect to Tenant's use or occupancy of the Demised Premises. (g) The term laws and/or requirements of public authorities and words of like import shall mean laws and -40- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 ordinances of any or all of the Federal, state, city, county and borough governments and rules, regulations, orders and/or directives of any or all departments, subdivisions, bureaus, agencies or offices thereof, or of any other governmental, public or quasi-public authorities, having jurisdiction in the premises, and/or the direction of any public officer pursuant to law. (h) The term "requirements of insurance" bodies and words of like import shall mean rules, regulations, orders and other requirements of the New York Board of Fire Underwriters and/or the New York Fire Insurance Rating Organization and/or any other similar body performing the same or similar functions and having jurisdiction or cognizance of the Building and/or the Demised Premises. (i) The term "repair" shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition. (j) Reference to "termination of this lease" includes expiration or earlier termination of the term of this lease or cancellation of this lease pursuant to any of the provisions of this lease or to law. Upon a termination of this lease, the term and estate granted by this lease shall end at noon of the date of termination as if such date were the date of expiration of the term of this lease and neither party shall have any further obligation or liability to the other after such termination (i) except as shall be expressly provided for in this lease, or (ii) except for such obligation as by its nature or under the circumstances can only be, or by the provisions of this lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this lease. (k) The term "in full force and effect" when herein used in reference to this lease as a condition to the existence or exercise of a right on the part of Tenant shall be construed in each instance as including the further condition that at the time in question no default on the part of Tenant exists, and no event has occurred which has continued to exist for such period of time (after the notice, if any, required by this lease), as would entitle Landlord to terminate this lease or to dispossess Tenant. (l) The term "Tenant" shall mean Tenant herein named or any assignee or other successor in interest (immediate or remote) of Tenant herein named, while such Tenant or such assignee or other successor in interest, as the case may be, is in possession of the Demised Premises as owner of the Tenant's estate and interest granted by this lease and also, if Tenant is not an individual or a corporation, all of the persons, firms and corporations then comprising Tenant. -41- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 (m) Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. (n) The rule of "ejusdem generis" shall not be applicable to limit a general statement following or referable to an enumeration of specific matters to matters similar to the matters specifically mentioned. (o) All references in this lease to numbered Articles, numbered Sections and lettered Exhibits are references to Articles and Sections of this lease, and Exhibits annexed to (and thereby made part of) this lease, as the case may be, unless expressly otherwise designated in the context. (p) The terms "control" shall mean (i) ownership of more than fifty (50%) percent of all the voting stock of a non-publically traded corporation or more than fifty (50%) percent of all the legal and equitable interest in any other non-publically traded entity and (ii) with respect to a publically traded corporation or entity, the possession of the power to direct or cause the direction of the management and policies of such corporation or entity through the ownership of voting securities or interests or by contract or otherwise. -42- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 - - - - - - - - - - - - - - - - - - - - - - - EXHIBIT C LANDLORD'S WORK - - - - - - - - - - - - - - - - - - - - - - - PART A: 1. Tenant has submitted to Landlord and Landlord hereby approves the detailed architectural working drawings and specifications for Landlord's Work sealed by Tenant's licensed architect, and the electrical, mechanical, plumbing, sprinkler and engineering plans based upon such detailed architectural working drawings and specifications set forth in Part E hereof(such drawings, specifications and plans are hereinafter collectively referred to as the "Work Plans"). 2. The Work Plans shall comply with and conform to the plans of the Building filed with the Department of Buildings of the City of New York, and with all rules, regulations and/or other requirements of any governmental department having jurisdiction over the preparation of the Demised Premises. Landlord shall file all necessary architectural plans, together with any mechanical plans and specifications, in such form (building notice, alteration, or other form) as may be necessary, with the appropriate governmental agencies. Any changes required by any governmental department affecting the completion of the Demised Premises shall be described in detail to Tenant (prior to their implementation) and provided (i) Tenant agrees in writing to their implementation (which agreement shall not be unreasonably withheld or delayed), or (ii) such governmental department requires such changes be implemented in a particular manner designated by such governmental department, Landlord shall notify Tenant thereof and the same shall be complied with by Landlord in the completion of the Demised Premises and shall not be deemed to be a violation of the Work Plans or any provisions of this Exhibit C. In the event Tenant does not agree to the implementation of any such change (which agreement shall not be unreasonably withheld or delayed) where such governmental department has not required that such change be implemented in a particular manner designated by such governmental department, Landlord and Tenant shall cooperate in revising the Work Plans in a manner acceptable to both parties and the applicable governmental agency. The granting by Landlord of its approval to the Work Plans shall in no manner constitute or be deemed to constitute a judgment or acknowledgment by Landlord as to their legality or compliance with governmental, quasi-governmental or other requirements. 3. Tenant shall have the right to make changes from time to time in the Work Plans subsequent to the approval thereof by submitting to Landlord revised plans and specifications (herein referred to as the "Revisions"). All Revisions shall be subject to Landlord's prior written approval, which shall not be unreasonably withheld or delayed. In the event any Revisions increase the cost of the Landlord's Work above the cost of performing same in -43- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 accordance with the approved Work Plans, provided Landlord gave written notice of the estimated amount of such increase to Tenant prior to implementing such Revisions and Tenant gave written approval of such amount to Landlord within four (4) business days of receipt of such notice, or failed to respond within such period, Tenant shall be deemed to have approved such amount and such increase shall be paid by Tenant. If Tenant disapproves the estimated cost of any Revision within four (4) days of receipt of such estimated cost from Landlord, Landlord shall have no obligation to perform such Revision. Additionally, in the event any Revisions delay the substantial completion of Landlord's Work, (provided Landlord notified Tenant in writing prior to the implementation of such Revisions as to the estimated delay to be caused thereby) Landlord's Work shall be deemed substantially completed as the date it would otherwise have been completed but for such Revisions. 4. All amounts payable by Tenant pursuant to this Exhibit C shall be paid by Tenant within ten (10) business days after the submission to Tenant of statements, bills or invoices and reasonable back-up materials with respect thereto. Such statements, bills or invoices shall be conclusive and binding on Tenant unless Tenant shall notify Landlord within such ten (10) business day period that it disputes the correctness thereof, specifying the particular respects in which the statement, bill or invoice is claimed to be incorrect. Pending the resolution of such dispute by agreement between the parties or otherwise, Tenant shall pay all amounts due in accordance with the statement, bill or invoice, but such payment shall be without prejudice to Tenant's right to dispute same. If the dispute shall be resolved in Tenant's favor, Landlord shall, within ten (10) business days, pay Tenant the amount of the overpayment, if any, resulting from Tenant's compliance with such statement, bill or invoice. PART B: 1. Landlord shall provide the materials and install and complete same and prepare the Demised Premises for Tenant's occupancy (hereinafter referred to as "Landlord's Work") in accordance with the approved Work Plans at Landlord's sole cost and expense except as set forth in Part A, Paragraph 3 above. Tenant shall be entitled to the benefit of any warranties and guaranties given to Landlord in connection with Landlord's Work. Notwithstanding anything herein to the contrary, as part of Landlord's Work, Landlord shall, to the extent required, make all repairs to the air-conditioning system servicing the Demised Premises so that same is in good working order on the Commencement Date. PART C: Tenant's Performance of Items of Tenant's Work: - ------- ----------------------------------------------- 1. Landlord shall permit Tenant and its agents to enter upon the Demised Premises prior to the Commencement Date so that Tenant or its agents or architect may examine Landlord's Work and may perform Tenant's Work (as defined in Article 40) utilizing its own contractors, (to be first approved in writing by Landlord which approval shall not be unreasonably withheld or delayed) and in -44- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 accordance with plans and specifications as approved in writing by Landlord (which approval shall not be unreasonably withheld or delayed). The approved contractors performing Tenant's Work may perform Tenant's Work at the same time that Landlord's contractors are working in the Demised Premises, provided, however, that (a) Landlord's Work shall have reached a point at which, in Landlord's reasonable judgment, the performance of Tenant's Work will not delay or hamper Landlord in the completion of the same and (b) Tenant and its contractors shall work in harmony and shall not interfere with Landlord or Landlord's contractors. Landlord may, at any time, deny access to the Demised Premises to Tenant and/or to any of its contractors in the event that Landlord shall, in its reasonable discretion, determine that the performance or manner of performance of Tenant's Work interferes with, delays, hampers, or prevents Landlord from proceeding with the completion of Landlord's Work at the earliest possible time. In connection with the foregoing sentence, within twenty-four (24) hours after Landlord's direction (which need not be given in writing and may be given by Landlord or its agents or contractors to Tenant or its agents or contractors), Tenant shall, and cause its contractors to, withdraw from the Building and the Demised Premises and cease all work being performed by it or on its behalf by any person, firm, or corporation (other than Landlord). Tenant shall pay to Landlord, as additional rent, within ten (10) days after submission to Tenant of a statement therefor, an amount equal to all costs incurred by Landlord in connection with such early entry by Tenant. 2. In the event that Tenant or its contractor shall be permitted to enter upon the Demised Premises prior to the Commencement Date pursuant to the terms of paragraph 1 above, such entry shall be deemed to be upon all of the terms, provisions and conditions of the Lease, except as to the covenant to pay fixed rent and additional rent. In connection therewith, Tenant and/or its contractors shall provide to Landlord, and shall maintain at all times during the performance of any Tenant's Work, Builder's Risk, worker's compensation, public liability and property damage insurance policies, all of which shall contain limits, be with companies and be in form as required pursuant to Article 55 of the Lease. Certificates of the same shall be furnished to Landlord before Tenant or its contractors commence to perform Tenant's Work. Landlord shall not be liable in any way for any injury, loss or damage that may occur to any of Tenant's or Tenant's contractors' decorations, fixtures, installations, supplies, materials, or equipment prior to the Commencement Date unless due to the negligence or wilful misconduct of Landlord or its agents or contractors (it being understood and agreed that Landlord has no obligation to secure same or take any action with respect thereto). Except as set forth in the preceding sentence, any such entry by Tenant and/or its contractors being at their sole risk. PART D: Delays Caused By Tenant; Additional Expenses: - ------- --------------------------------------------- Tenant has been advised of the importance to Landlord of completing Landlord's Work in an expeditious manner and of the financial loss to Landlord that would result from a delay in such -45- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 completion. If Tenant, or persons within Tenant's control, cause an actual delay in the progress or completion of Landlord's Work by (i) submitting one or more Revisions to Landlord (provided Landlord gives Tenant notice as to the delay such Revisions would cause pursuant to Part A Paragraph 5 above); or (ii) otherwise interfering with, or delaying, Landlord's completion of Landlord's Work (any such delay set forth in (i) or (ii) above being herein referred to as a "Tenant's Delay"), then the date of substantial completion of Landlord's Work shall be deemed to be the date upon which Landlord's Work would have been substantially completed but for Tenant's Delay. PART E: Work Plans: - ------- ----------- Follows immediately. (Site plans and project plans attached) -46- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 1525500015 BES:PAL FIRST WILLOW, LLC OFFICE LEASE MANCHESTER 040297 052197 060497 061697 - - - - - - - - - - - - - - - - - - - - - - - EXHIBIT D CERTIFICATE OF OCCUPANCY - - - - - - - - - - - - - - - - - - - - - - - (Follows immediately) (Certificate attached) -47- I:\DATA\WPDOCS\15255_00.015\RES_LEAL\97021622 EX-10.5.I 3 6/30/97 MASSACHUSETTS OFFICE LEASE BOS2: 63298_2.28256.3 LEASE BETWEEN ANGELA C. MAFFEO, TRUSTEE UNDER THE WILL OF JOHN CAPOBIANCO, as Landlord AND MANCHESTER EQUIPMENT CO., INC., as Tenant Dated: as of June 30, 1997 -i- LEASE INDEX Page SCHEDULE..................................................................1 1. DEMISE AND TERM........................................................1 2. RENT...................................................................1 3. USE....................................................................1 4. CONDITION OF PREMISES..................................................1 5. BUILDING SERVICES......................................................1 6. RULES AND REGULATIONS..................................................1 7. CERTAIN RIGHTS RESERVED TO LANDLORD....................................1 8. MAINTENANCE AND REPAIRS................................................1 9. ALTERATIONS.............................................................1 10. INSURANCE..............................................................1 11. WAIVER AND INDEMNITY...................................................1 12. FIRE AND CASUALTY......................................................1 13. CONDEMNATION...........................................................1 14. ASSIGNMENT AND SUBLETTING..............................................1 15. SURRENDER..............................................................1 16. DEFAULTS AND REMEDIES..................................................1 17. HOLDING OVER...........................................................1 18. SECURITY DEPOSIT.......................................................1 19. [INTENTIONALLY OMITTED]................................................1 20. ESTOPPEL CERTIFICATES..................................................1 21. SUBORDINATION..........................................................1 22. QUIET ENJOYMENT........................................................1 23. BROKER.................................................................1 24. NOTICES................................................................1 25. DIRECTORY; SIGNS.......................................................1 26. PARKING................................................................1 27. MISCELLANEOUS..........................................................1 EXHIBIT "A" - FLOOR PLAN...................................................1 EXHIBIT "A-1" - LEGAL DESCRIPTION OF LAND..................................1 EXHIBIT "B" - RULES AND REGULATIONS........................................1 EXHIBIT "C" - TENANT IMPROVEMENT WORK......................................1 -18- LEASE THIS LEASE (this "Lease") is made as of the ______ day of June, 1997 by and between Angela C. Maffeo, Trustee under the Will of John Capobianco, having an address at 801 Three Islands Boulevard, No. 206, Hallendale, Florida 33009 ("Landlord"), and Manchester Equipment Co., Inc., a New York corporation having an address at 161 Highland Avenue, Needham, Massachusetts 02194 ("Tenant"), for space in the building known as or located at 25-27 Christina Street, Newton, Massachusetts (such building, together with the land (the "Land") upon which it is situated, being herein referred to as the "Building"). The Land is more particularly described in Exhibit "A-1" attached hereto and incorporated herein by this reference. The following schedule (the "Schedule") sets forth certain basic terms of this Lease: SCHEDULE 1. Premises: A portion of the first floor of the Building consisting of approximately 3,008 rentable square feet of floor area as shown cross-hatched on the floor plan (the "Floor Plan") attached hereto as Exhibit "A" and incorporated herein by this reference. 2. Annual Minimum Rent: $48,128.00 per year for the first Lease Year (as defined below); $48,128.00 per year for the second Lease Year; $48,128.00 per year for the third Lease Year; $51,136.00 per year for the fourth Lease Year; and $51,136.00 per year for the fifth Lease Year. 3. Monthly Minimum Rent: $4,010.67 per month for each month during the first Lease Year; $4,010.67 per month for each month during the second Lease Year; $4,010.67 per month for each month during the third Lease Year; $4,261.33 per month for each month during the fourth Lease Year; and $4,261.33 per month for each month during the fifth Lease Year. 4. Tenant's Operating Expenses Proportionate Share: Eleven and 38/100 percent (11.38%). 5. Tenant's Taxes Proportionate Share: Five and 69/100 percent (5.69%). 6. Base Expense Year: Calendar Year 1996 (i.e., January 1, 1996 - December 31, 1996). 7. Base Tax Year:Fiscal Year 1997 (i.e., July 1, 1996 - June 30, 1997). 8. Security Deposit: $8,522.66. 9. Brokers: Rose Associates, Inc., Casler & Company and Nealon Company. 10. Commencement Date: The earlier of (i) the date on which Tenant, pursuant to permission therefor duly given by Landlord, commences use of the Premises or any portion thereof, or (ii) the Substantial Completion Date (as defined in Exhibit "C" attached hereto and incorporated herein by this reference). 11. Expiration Date: The day prior to the fifth anniversary of the Commencement Date. 12. Notice Address of Landlord: Angela C. Maffeo, Trustee under the Will of John Capobianco 801 Three Islands Boulevard, No. 206 Hallendale, Florida 33009 with a copy in like manner to: Rose Associates, Inc. One Financial Center Boston, Massachusetts 02111 Attention: Philip Rogers 13. Notice Address of Tenant: Manchester Equipment Co., Inc. 161 Highland Avenue Needham, Massachusetts 02194 Attention: Steven Reibstein with a copy in like manner to: David Roth, Esquire Kressel Rothtein & Roth 684 Broadway Massapequa, New York 11758 with a copy in like manner to: Manchester Equipment Co., Inc. 50 Marcus Boulevard Hauppauge, New York 11788 Attention: Joseph Looney 1. DEMISE AND TERM. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises (the "Premises") described in Item 1 of the Schedule and shown on the Floor Plan, subject to the covenants and conditions set forth in this Lease, for a term (the "Term") commencing on the date (the "Commencement Date") described in Item 10 of the Schedule and expiring on the date (the "Expiration Date") described in Item 11 of the Schedule, unless terminated earlier as otherwise provided in this Lease. Upon the determination of the Commencement Date, Landlord and Tenant shall memorialize the Commencement Date and the Expiration Date in a written instrument. 2. RENT. (a) Definitions. For purposes of this Lease, the following terms shall have the following meanings: (i) "Base Expense Year" shall mean the year set forth in Item 6 of the Schedule. (ii) "Base Tax Year" shall mean the year set forth in Item 7 of the Schedule. (iii) "Base Expenses" shall mean the amount of Expenses (as defined below) for the Base Expense Year. (iv) "Base Taxes" shall mean the amount of Taxes (as defined below) for the Base Tax Year. (v) "Expenses" shall mean all expenses, costs and disbursements (other than Taxes) paid or incurred by Landlord in connection with the ownership, management, maintenance, operation, replacement and repair of the Building. Expenses shall not include: (a) costs of tenant alterations; (b) costs of capital improvements (except for costs of any capital improvements made or installed for the purpose of reducing Expenses or made or installed pursuant to governmental requirement or insurance requirement, which costs shall be amortized by Landlord in accordance with sound accounting and management principles); (c) interest and principal payments on mortgages (except interest on the cost of any capital improvements for which amortization may be included in the definition of Expenses) or any rental payments on any ground leases (except for rental payments which constitute reimbursement for Taxes and Expenses); (d) advertising expenses and leasing commissions; (e) any cost or expenditure for which Landlord is reimbursed, whether by insurance proceeds or otherwise, except through Adjustment Rent (as defined below); (f) the cost of any kind of service furnished to any other tenant in the Building which Landlord does not generally make available to all tenants in the Building; and (g) legal expenses of negotiating leases. Expenses shall be determined on a cash or accrual basis, as Landlord may elect. (vi) "Lease Year" shall mean a one (1) year period commencing on the Commencement Date or any anniversary thereof and expiring at midnight on the day prior to the next anniversary thereof. (vii) "Rent" shall mean Minimum Rent (as defined below), Adjustment Rent and any other sums or charges due by Tenant hereunder. (viii) "Taxes" shall mean all taxes, assessments and fees levied upon the Building, the property of Landlord located therein or the rents collected therefrom, by any governmental entity based upon the ownership, leasing, renting or operation of the Building, including all costs and expenses of protesting any such taxes, assessments or fees. Taxes shall not include any net income, capital stock, succession, transfer, franchise, gift, estate or inheritance taxes; provided, however, if at any time during the Term, a tax or excise on income is levied or assessed by any governmental entity, in lieu of or as a substitute for, in whole or in part, real estate taxes or other ad valorem taxes, such tax shall constitute and be included in Taxes. For the purposes of determining Taxes for any given year, the amount to be included for such year (a) from special assessments payable in installments shall be the amount of the installments (and any interest) due and payable during such year, and (b) from all other Taxes shall at Landlord's election either be the amount accrued, assessed or otherwise imposed for such year or the amount due and payable in such year. (ix) "Tenant's Operating Expenses Proportionate Share" shall mean the percentage set forth in Item 4 of the Schedule. (x) Tenant's Taxes Proportionate Share" shall mean the percentage set forth in Item 5 of the Schedule. (b) Components of Rent. Tenant agrees to pay the following amounts to Landlord at the office of the Building or at such other place as Landlord designates: (i) Minimum rent ("Minimum Rent") to be paid in monthly installments in the amount set forth in Item 3 of the Schedule in advance on or before the first day of each month of the Term, except that Tenant shall pay the first month's Minimum Rent upon execution of this Lease. (ii) Adjustment rent ("Adjustment Rent") in an amount equal to Tenant's Proportionate Share of (a) the increase in Expenses for any calendar year over the Base Expenses and (b) the increase in Taxes for any calendar year over the Base Taxes. Prior to each calendar year, Landlord shall estimate the amount of Adjustment Rent due for such year, and Tenant shall pay Landlord one-twelfth of such estimate on the first day of each month during such year. Such estimate may be revised by Landlord whenever it obtains information relevant to making such estimate more accurate. After the end of each calendar year, Landlord shall deliver to Tenant a report setting forth the actual Expenses and Taxes for such calendar year and a statement of the amount of Adjustment Rent that Tenant has paid and is payable for such year. Within thirty (30) days after receipt of such report and statement, Tenant shall pay to Landlord the amount of Adjustment Rent due for such calendar year minus any payments of Adjustment Rent made by Tenant for such year. If Tenant's estimated payments of Adjustment Rent exceed the amount due Landlord for such calendar year, Landlord shall apply such excess as a credit against Tenant's other obligations under this Lease or promptly refund such excess to Tenant if the Term has already expired, provided Tenant is not then in default hereunder, in either case without interest to Tenant. (c) Payment of Rent. The following provisions shall govern the payment of Rent: (i) if this Lease commences or ends on a day other than the first day or last day of a calendar year, respectively, the Rent for the year in which this Lease so begins or ends shall be prorated and the monthly installments shall be adjusted accordingly; (ii) all Rent shall be paid to Landlord without offset or deduction, and the covenant to pay Rent shall be independent of every other covenant in this Lease; (iii) if during all or any portion of any year the Building is not fully rented and occupied, Landlord may elect to make an appropriate adjustment of Expenses for such year to determine the Expenses that would have been paid or incurred by Landlord had the Building been fully rented and occupied for the entire year and the amount so determined shall be deemed to have been the Expenses Taxes for such year; (iv) any sum due from Tenant to Landlord which is not paid within ten (10) days after the due date for such payment shall bear interest from the date due until the date paid at the annual rate of eighteen percent (18%) per annum, but in no event higher than the maximum rate permitted by law (the "Default Rate"); and, in addition, Tenant shall pay Landlord a late charge for any Rent payment which is not paid within ten (10) days after its due date equal to five percent (5%) of such payment; (v) if changes are made to this Lease or the Building changing the number of square feet contained in the Premises or in the Building, Landlord shall make an appropriate adjustment to Tenant's Proportionate Share; (vi) Tenant shall have the right to inspect Landlord's accounting records relative to Expenses and Taxes during normal business hours at any time within thirty (30) days following the furnishing to Tenant of the annual statement of Adjustment Rent; and, unless Tenant shall take written exception to any item in any such statement within such thirty (30) day period, such statement shall be considered as final and accepted by Tenant; (vii) in the event of the termination of this Lease prior to the determination of any Adjustment Rent, Tenant's agreement to pay any such sums and Landlord's obligation to refund any such sums (provided Tenant is not in default hereunder) shall survive the termination of this Lease; (viii) no adjustment to the Rent by virtue of the operation of the rent adjustment provisions in this Lease shall result in the payment by Tenant in any year of less than the Minimum Rent shown on the Schedule; (ix) Landlord may at any time change the fiscal year of the Building; (x) each amount owed to Landlord under this Lease for which the date of payment is not expressly fixed shall be due on the same date as the Rent listed on the statement showing such amount is due; (xi) if Landlord fails to give Tenant an estimate of Adjustment Rent prior to the beginning of any calendar year, Tenant shall continue to pay Adjustment Rent at the rate for the previous calendar year until Landlord delivers such estimate; and (xii) if, after Tenant shall have made any payment of Adjustment Rent to Landlord pursuant to Section 2(b), Landlord shall receive a refund of any portion of Taxes paid by Tenant with respect to any tax period during the Term of this Lease as a result of abatement of such Taxes by legal proceedings, settlement or otherwise, Landlord shall credit to Tenant Tenant's Proportionate Share of such refund (less the proportional pro rata reasonable expenses, including reasonable attorneys' fees and appraisers' fees incurred by Landlord in connection with obtaining such refund), as it relates to Taxes paid by Tenant to Landlord with respect to any such period for which a refund is obtained. 3. USE. Tenant agrees that it shall occupy and use the Premises only as business offices and for no other purposes. Tenant shall comply with all federal, state and municipal laws, ordinances and regulations and all covenants, conditions and restrictions of record applicable to Tenant's use or occupancy of the Premises. Without limiting the foregoing, Tenant shall not cause, nor permit, any hazardous or toxic substances to be brought upon, produced, stored, used, discharged or disposed of in, on or about the Premises without the prior written consent of Landlord and then only in compliance with all applicable environmental laws. 4. CONDITION OF PREMISES. Tenant's taking possession of the Premises shall be conclusive evidence that the Premises were in good order and satisfactory condition when Tenant took possession. No agreement of Landlord to alter, remodel, decorate, clean or improve the Premises or the Building (or to provide Tenant with any credit or allowance for the same), and no representation regarding the condition of the Premises or the Building or the suitability of the Premises for Tenant's proposed use thereof, have been made by or on behalf of Landlord or relied upon by Tenant, except as provided in Exhibit "C" attached hereto and incorporated herein by this reference. 5. BUILDING SERVICES. (a) Basic Services. Landlord shall furnish the following services: (i) heating and air conditioning to provide a temperature condition required, in Landlord's reasonable judgment, for comfortable occupancy of the Premises under normal business operations, daily from 8:00 A.M. to 6:00 P.M. (Saturday from 8:00 A.M. to 12:00 P.M.), Sundays and holidays excepted; (ii) water for drinking, and, subject to Landlord's approval, water at Tenant's expense for any private restrooms and office kitchen requested by Tenant; (iii) men's and women's restrooms at locations designated by Landlord and in common with other tenants of the Building; (iv) daily janitorial service in the Premises and common areas of the Building, weekends and holidays excepted; and (v) electrical current other than for special lighting, equipment that requires more than 110 volts or other equipment whose electrical energy consumption exceeds normal office usage. (b) Telephones. Tenant shall arrange for telephone service directly with one (1) or more of the public telephone companies servicing the Building and shall be solely responsible for paying for such telephone service. If Landlord acquires ownership of the telephone cables in the Building at any time, Landlord shall permit Tenant to connect to such cables on such terms and conditions as Landlord may prescribe. In no event does Landlord make any representation or warranty with respect to telephone service in the Building, and Landlord shall have no liability with respect thereto. (c) Additional Services. Landlord shall not be obligated to furnish any services other than those stated above. If Landlord elects to furnish services requested by Tenant in addition to those stated above (including services at times other than those stated above), Tenant shall pay Landlord's then prevailing charges for such additional services. If Tenant shall fail to make any such payment, Landlord may, without notice to Tenant and in addition to all other remedies available to Landlord, discontinue any such additional services. No discontinuance of any such additional service shall result in any liability of Landlord to Tenant or be considered as an eviction or a disturbance of Tenant's use of the Premises. In addition, if Tenant's concentration of personnel or equipment adversely affects the temperature or humidity in the Premises or the Building, Landlord may install supplementary air conditioning units in the Premises; and Tenant shall pay for the cost of installation and maintenance thereof. (d) Failure or Delay in Furnishing Services. Tenant agrees that Landlord shall not be liable for damages for failure or delay in furnishing any service stated above if such failure or delay is caused, in whole or in part, by any one or more of the events stated in Section 27(j) below, nor shall any such failure or delay be considered to be an eviction or disturbance of Tenant's use of the Premises, or relieve Tenant from its obligation to pay any Rent when due, or from any other obligations of Tenant under this Lease. 6. RULES AND REGULATIONS. Tenant shall observe and comply and shall cause its subtenants, assignees, invitees, employees, contractors and agents to observe and comply, with the rules and regulations listed on Exhibit "B" attached hereto and incorporated herein by this reference and with such reasonable modifications and additions thereto as Landlord may make from time to time. Landlord shall not be liable for failure of any person to obey such rules and regulations. Landlord shall not be obligated to enforce such rules and regulations against any person, and the failure of Landlord to enforce any such rules and regulations shall not constitute a waiver thereof or relieve Tenant from compliance therewith. 7. CERTAIN RIGHTS RESERVED TO LANDLORD. Landlord reserves the following rights, each of which Landlord may exercise without notice to Tenant and without liability to Tenant, and the exercise of any such rights shall not be deemed to constitute an eviction or disturbance of Tenant's use or possession of the Premises and shall not give rise to any claim for set-off or abatement of rent or any other claim: (a) to change the name or street address of the Building or the suite number of the Premises; (b) to install, affix and maintain any and all signs on the exterior or interior of the Building; (c) to make repairs, decorations, alterations, additions, or improvements, whether structural or otherwise, in and about the Building, and for such purposes to enter upon the Premises, temporarily close doors, corridors and other areas in the Building and interrupt or temporarily suspend services or use of common areas, and Tenant agrees to pay Landlord for overtime and similar expenses incurred if such work is done other than during ordinary business hours at Tenant's request; (d) to retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises; (e) to grant to any person or to reserve unto itself the exclusive right to conduct any business or render any service in the Building; (f) to show or inspect the Premises at reasonable times and, if vacated or abandoned, to prepare the Premises for reoccupancy; (g) to install, use and maintain in and through the Premises, pipes, conduits, wires and ducts serving the Building, provided that such installation, use and maintenance does not unreasonably interfere with Tenant's use of the Premises; and (h) to take any other action which Landlord deems reasonable in connection with the operation, maintenance or preservation of the Building. 8. MAINTENANCE AND REPAIRS. Tenant, at its expense, shall maintain and keep the Premises in good order and repair at all times during the Term. In addition, Tenant shall reimburse Landlord for the cost of any repairs to the Building necessitated by the acts or omissions of Tenant, its subtenants, assignees, invitees, employees, contractors and agents, to the extent Landlord is not reimbursed for such costs under its insurance policies. Subject to the preceding sentence, Landlord shall perform any maintenance or make any repairs to the Building as Landlord shall desire or deem necessary for the safety, operation or preservation of the Building, or as Landlord may be required or requested to do by any governmental authority or by the order or decree of any court or by any other proper authority. Landlord, throughout the Term, shall keep and maintain or cause to be kept and maintained in good order and repair the structural components of the Building (including, without limitation, the roof and the roof membranes, the exterior walls and the windows), all common areas of the Building, and all Building systems (excluding only those non-standard portions of the Building systems which are (a) located within the Premises and (b) service only the Premises, which systems shall be maintained by Tenant in good order and repair at all times during the Term). 9. ALTERATIONS. (a) Requirements. Tenant shall not make any replacement, alteration, improvement or addition to or removal from the Premises (collectively an "alteration") without the prior written consent of Landlord, which consent shall not be unreasonably withheld. In the event Tenant proposes to make any alteration, Tenant shall, prior to commencing such alteration, submit to Landlord for prior written approval: (i) detailed plans and specifications; (ii) sworn statements, including the names, addresses and copies of contracts for all contractors; (iii) all necessary permits evidencing compliance with all applicable governmental rules, regulations and requirements; (iv) certificates of insurance in form and amounts required by Landlord, naming Landlord and any other parties designated by Landlord as additional insureds; and (v) all other documents and information as Landlord may reasonably request in connection with such alteration. Tenant agrees to pay Landlord's reasonable charges for review of all such items and supervision of any alteration. Neither approval of the plans and specifications nor supervision of the alteration by Landlord shall constitute a representation or warranty by Landlord as to the accuracy, adequacy, sufficiency or propriety of such plans and specifications or the quality of workmanship or the compliance of such alteration with applicable law. Tenant shall pay the entire cost of the alteration and, if requested by Landlord, shall deposit with Landlord prior to the commencement of the alteration, security for the payment and completion of the alteration in form and amount required by Landlord. Each alteration shall be performed in a good and workmanlike manner, in accordance with the plans and specifications approved by Landlord, and shall meet or exceed the standards for construction and quality of materials established by Landlord for the Building. In addition, each alteration shall be performed in compliance with all applicable governmental and insurance company laws, regulations and requirements. Each alteration shall be performed by union contractors if required by Landlord and in harmony with Landlord's employees, contractors and other tenants. Each alteration, whether temporary or permanent in character, made by Landlord or Tenant in or upon the Premises (excepting only Tenant's furniture, equipment and trade fixtures) shall become Landlord's property and shall remain upon the Premises at the expiration or termination of this Lease without compensation to Tenant; provided, however, that Landlord shall have the right to require Tenant to remove such alteration at Tenant's sole cost and expense in accordance with the provisions of Section 15 of this Lease. (b) Liens. Upon completion of any alteration, Tenant shall promptly furnish Landlord with sworn owner's and contractors statements and full and final waivers of lien covering all labor and materials included in such alteration. Tenant shall not permit any mechanic's lien to be filed against the Building, or any part thereof, arising out of any alteration performed, or alleged to have been performed, by or on behalf of Tenant. If any such lien is filed, Tenant shall within ten (10) days thereafter have such lien released of record or deliver to Landlord a bond in form, amount, and issued by a surety satisfactory to Landlord, indemnifying Landlord against all costs and liabilities resulting from such lien and the foreclosure or attempted foreclosure thereof. If Tenant fails to have such lien so released or to deliver such bond to Landlord, Landlord, without investigating the validity of such lien, may pay or discharge the same; and Tenant shall reimburse Landlord upon demand for the amount so paid by Landlord, including Landlord's expenses and attorneys' fees. 10. INSURANCE. Tenant, at its expense, shall maintain at all times during the Term the following insurance policies: (a) fire insurance, including extended coverage, vandalism, malicious mischief, sprinkler leakage and water damage coverage and demolition and debris removal, insuring the full replacement cost of all improvements, alterations or additions to the Premises made at Tenant's expense, and all other property owned or used by Tenant and located in the Premises; (b) Commercial General Liability insurance, contractual liability insurance and property damage insurance with respect to the Building and the Premises, with limits to be set by Landlord from time to time but in any event not less than $3,000,000.00 combined single limit for personal injury, sickness or death or for damage to or destruction of property for any one occurrence; and (c) insurance against such other risks and in such other amounts as Landlord may from time to time reasonably require. The form of all such policies and deductibles thereunder shall be subject to Landlord's reasonable prior approval. All such policies shall be issued by insurers acceptable to Landlord and licensed to do business in the State in which the Premises are located and shall contain a waiver of any rights of subrogation thereunder. In addition, the policies shall name Landlord and any other parties designated by Landlord as additional insureds, shall require at least thirty (30) days' prior written notice to Landlord of termination or modification and shall be primary and not contributory. Tenant shall, at least ten (10) days prior to the Commencement Date, and within ten (10) days prior to the expiration of each such policy, deliver to Landlord certificates evidencing the foregoing insurance or renewal thereof, as the case may be. 11. WAIVER AND INDEMNITY. (a) Waiver. Tenant releases Landlord, its property manager and their respective agents and employees from, and waives all claims for, damage or injury to person or property and loss of business sustained by Tenant and resulting from the Building or the Premises or any part thereof or any equipment therein becoming in disrepair, or resulting from any accident in or about the Building. This paragraph shall apply particularly, but not exclusively, to flooding, damage caused by Building equipment and apparatus, water, snow, frost, steam, excessive heat or cold, broken glass, sewage, gas, odors, excessive noise or vibration or the bursting or leaking of pipes, plumbing fixtures or sprinkler devices. Without limiting the generality of the foregoing, Tenant waives all claims and rights of recovery against Landlord, its property manager and their respective agents and employees for any loss or damage to any property of Tenant, which loss or damage is insured against, or required to be insured against, by Tenant pursuant to Section 10 above, whether or not such loss or damage is due to the fault or negligence of Landlord, its property manager or their respective agents or employees, and regardless of the amount of insurance proceeds collected or collectible under any insurance policies in effect. (b) Indemnity. Tenant agrees to indemnify, defend and hold harmless Landlord, its property manager and their respective agents and employees, from and against any and all claims, demands, actions, liabilities, damages, costs and expenses (including attorneys' fees), for injuries to any persons and damage to or theft or misappropriation or loss of property occurring in or about the Building and arising from the use and occupancy of the Premises or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises (including, without limitation, any alteration by Tenant) or from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed under this Lease or due to any other act or omission of Tenant, its subtenants, assignees, invitees, employees, contractors and agents. Without limiting the foregoing, Tenant shall indemnify, defend and hold Landlord harmless from any claims, liabilities, damages, costs and expenses arising out of the use or storage of hazardous or toxic materials in the Building by Tenant. If any such proceeding is filed against Landlord or any such indemnified party, Tenant agrees to defend Landlord or such party in such proceeding at Tenant's sole cost by legal counsel reasonably satisfactory to Landlord, if requested by Landlord. 12. FIRE AND CASUALTY. If all or a substantial part of the Premises or the Building is rendered untenantable by reason of fire or other casualty, Landlord may, at its option, either restore the Premises and the Building, or terminate this Lease effective as of the date of such fire or other casualty. Landlord agrees to give Tenant written notice within sixty (60) days after the occurrence of any such fire or other casualty designating whether Landlord elects to so restore or terminate this Lease. If Landlord elects to terminate this Lease, Rent shall be paid through and apportioned as of the date of such fire or other casualty. If Landlord elects to restore, Landlord's obligation to restore the Premises shall be limited to restoring those improvements in the Premises existing as of the date of such fire or other casualty which were made at Landlord's expense and shall exclude any furniture, equipment, fixtures, additions, alterations or improvements in or to the Premises which were made at Tenant's expense. If Landlord elects to restore, Rent shall abate for that part of the Premises which is untenantable on a per diem basis from the date of such fire or other casualty until Landlord has substantially completed its repair and restoration work, provided that Tenant does not occupy such part of the Premises during said period. 13. CONDEMNATION. If the Premises or the Building is rendered untenantable by reason of a condemnation (or by a deed given in lieu thereof), then either party may terminate this Lease by giving written notice of termination to the other party within thirty (30) days after such condemnation, in which event this Lease shall terminate effective as of the date of such condemnation. If this Lease so terminates, Rent shall be paid through and apportioned as of the date of such condemnation. If such condemnation does not render the Premises or the Building untenantable, this Lease shall continue in effect and Landlord shall promptly restore the portion not condemned to the extent reasonably possible to the condition existing prior to the condemnation. In such event, however, Landlord shall not be required to expend an amount in excess of the proceeds received by Landlord from the condemning authority. Landlord reserves all rights to compensation for any condemnation. Tenant hereby assigns to Landlord any right Tenant may have to such compensation, and Tenant shall make no claim against Landlord or the condemning authority for compensation for termination of Tenant's leasehold interest under this Lease or interference with Tenant's business. 14. ASSIGNMENT AND SUBLETTING. (a) Landlord's Consent. Tenant shall not, without the prior written consent of Landlord: (i) assign, convey, mortgage or otherwise transfer this Lease or any interest hereunder, or sublease the Premises, or any part thereof, whether voluntarily or by operation of law; or (ii) permit the use of the Premises by any person other than Tenant and its employees or any subsidiary of Tenant and its employees. Any such transfer, sublease or use described in the preceding sentence (a "Transfer") occurring without the prior written consent of Landlord shall be void and of no effect. Landlord's consent to any Transfer shall not constitute a waiver of Landlord's right to withhold its consent to any future Transfer. Landlord's consent to any Transfer or acceptance of rent from any party other than Tenant shall not release Tenant from any covenant or obligation under this Lease. Landlord may require as a condition to its consent to any assignment of this Lease that the assignee execute an instrument in which such assignee assumes the obligations of Tenant hereunder. For the purposes of this paragraph, the transfer (whether direct or indirect) of all or a majority of the capital stock in a corporate Tenant (other than the shares of the capital stock of a corporate Tenant whose stock is publicly traded) or the merger, consolidation or reorganization of such Tenant and the transfer of all or any general partnership interest in any partnership Tenant shall be considered a Transfer. As used herein, the phrase "any subsidiary of Tenant" shall mean any corporation or partnership that is wholly owned by Tenant. (b) Standards for Consent. If Tenant desires the consent of Landlord to a Transfer, Tenant shall submit to Landlord, at least sixty (60) days prior to the proposed effective date of the Transfer, a written notice which includes such information as Landlord may require about the proposed Transfer and the transferee. If Landlord does not terminate this Lease, in whole or in part, pursuant to Section 14.C below, Landlord shall not unreasonably withhold its consent to any assignment or sublease. Landlord shall not be deemed to have unreasonably withheld its consent if, in the judgment of Landlord: (i) the transferee is of a character or engaged in a business which is not in keeping with the standards or criteria used by Landlord in leasing the Building; (ii) the financial condition of the transferee is such that it may not be able to perform its obligations in connection with this Lease; (iii) the purpose for which the transferee intends to use the Premises or portion thereof is in violation of the terms of this Lease or the lease of any other tenant in the Building; (iv) the transferee is a tenant of the Building; or (v) any other bases which Landlord reasonably deems appropriate. If Landlord wrongfully withholds its consent to any Transfer, Tenant's sole and exclusive remedy therefor, shall be to seek specific performance of Landlord's obligation to consent to such Transfer. If Landlord consents to any Transfer, Tenant shall pay to Landlord all rent and other consideration received by Tenant in excess of the Rent paid by Tenant hereunder for the portion of the Premises so transferred. Such rent shall be paid as and when received by Tenant. In addition, Tenant shall pay to Landlord any reasonable attorneys' fees and expenses incurred by Landlord in connection with any proposed Transfer, whether or not Landlord consents to such Transfer. (c) Recapture. Landlord shall have the right to terminate this Lease as to that portion of the Premises covered by a Transfer, except for a Transfer to an Affiliate or to a Successor Entity, for which Landlord shall have no such right to terminate. Landlord may exercise such right to terminate by giving notice to Tenant at any time within thirty (30) days after the date on which Tenant has furnished to Landlord all of the items required under Section 14.B above. If Landlord exercises such right to terminate, Landlord shall be entitled to recover possession of, and Tenant shall surrender such portion of, the Premises (with appropriate demising partitions erected at the expense of Tenant) on the later of (i) the effective date of the proposed Transfer, or (ii) sixty (60) days after the date of Landlord's notice of termination. In the event Landlord exercises such right to terminate, Landlord shall have the right to enter into a lease with the proposed transferee without incurring any liability to Tenant on account thereof. As used herein, the term "Affiliate shall mean any entity which controls, is controlled by or is under common control with Tenant and the phrase "Successor Entity" shall mean any entity which purchases all or substantially all of the assets of Tenant or any entity which succeeds to Tenant's business by merger, consolidation or other form of corporate reorganization. 15. SURRENDER. Upon the expiration or earlier termination of the Term or Tenant's right to possession of the Premises, Tenant shall return the Premises to Landlord in good order and condition, ordinary wear and damage by fire or other casualty excepted. If Landlord requires Tenant to remove any alterations pursuant to Section 9, then such removal shall be done in a good and workmanlike manner; and upon such removal Tenant shall restore the Premises to its condition prior to the installation of such alterations. If Tenant does not remove such alterations after request to do so by Landlord, Landlord may remove the same and restore the Premises; and Tenant shall pay the cost of such removal and restoration to Landlord upon demand. Tenant shall also remove its furniture, equipment, trade fixtures and all other items of personal property from the Premises prior to the termination of the Term or Tenant's right to possession of the Premises. If Tenant does not remove such items, Tenant shall be conclusively presumed to have conveyed the same to Landlord without further payment or credit by Landlord to Tenant; or at Landlord's sole option such items shall be deemed abandoned, in which event Landlord may cause such items to be removed and disposed of at Tenant's expense, without notice to Tenant and without obligation to compensate Tenant. 16. DEFAULTS AND REMEDIES. (a) Default. The occurrence of any of the following shall constitute a default (a "Default") by Tenant under this Lease: (i) Tenant fails to pay any Rent when due and such failure is not cured within five (5) business days after notice from Landlord; (ii) Tenant fails to perform any other provision of this Lease and such failure is not cured within thirty (30) days (or immediately if the failure involves a hazardous condition) after notice from Landlord; (iii) the leasehold interest of Tenant is levied upon or attached under process of law; (iv) Tenant or any guarantor of this Lease dissolves; (v) any voluntary or involuntary proceedings are filed by or against Tenant or any guarantor of this Lease under any bankruptcy, insolvency or similar laws and, in the case of any involuntary proceedings, are not dismissed within thirty (30) days after filing. (b) Right of Re-Entry. Upon the occurrence of a Default, Landlord may elect to terminate this Lease, or, without terminating this Lease, terminate Tenant's right to possession of the Premises, in either case by written notice thereof to Tenant. Upon any such termination, Tenant shall immediately surrender and vacate the Premises and deliver possession thereof to Landlord. Tenant grants to Landlord the right, without notice to Tenant, to enter and repossess the Premises and to expel Tenant and any others who may be occupying the Premises and to remove any and all property therefrom, without being deemed in any manner guilty of trespass and without relinquishing Landlord's rights to Rent or any other right given to Landlord hereunder or by operation of law. (c) Reletting. If Landlord terminates Tenant's right to possession of the Premises without terminating this Lease, Landlord may relet the Premises or any part thereof. In such case, Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord shall reasonably deem appropriate; provided, however, Landlord may first lease Landlord's other available space and shall not be required to accept any tenant offered by Tenant or to observe any instructions given by Tenant about such reletting. Tenant shall reimburse Landlord for the costs and expenses of reletting the Premises including, but not limited to, all brokerage, advertising, legal, alteration and other expenses incurred to secure a new tenant for the Premises. In addition, if the consideration collected by Landlord upon any such reletting, after payment of the expenses of reletting the Premises which have not been reimbursed by Tenant, is insufficient to pay monthly the full amount of the Rent, Tenant shall pay to Landlord the amount of each monthly deficiency as it becomes due. If such consideration is greater than the amount necessary to pay the full amount of the Rent, the full amount of such excess shall be retained by Landlord and shall in no event be payable to Tenant. (d) Termination of Lease. If Landlord terminates this Lease pursuant to Section 16.B above, Landlord may recover from Tenant and Tenant shall pay to Landlord, on demand, as and for liquidated and final damages, an accelerated lump sum amount equal to the amount by which Landlord's estimate of the aggregate amount of Rent owing from the date of such termination through the Expiration Date plus Landlord's reasonable estimate of the aggregate expenses of reletting the Premises, exceeds Landlord's reasonable estimate of the fair rental value of the Premises for the same period (after deducting from such fair rental value the time needed to relet the Premises and the amount of concessions which would normally be given to a new tenant), both discounted to present value at the rate of five percent (5%) per annum. (e) Other Remedies. Landlord may but shall not be obligated to perform any obligation of Tenant under this Lease; and, if Landlord so elects, all costs and expenses paid by Landlord in performing such obligation, together with interest at the Default Rate, shall be reimbursed by Tenant to Landlord on demand. Any and all remedies set forth in this Lease: (i) shall be in addition to any and all other remedies Landlord may have at law or in equity, (ii) shall be cumulative, and (iii) may be pursued successively or concurrently as Landlord may elect. The exercise of any remedy by Landlord shall not be deemed an election of remedies or preclude Landlord from exercising any other remedies in the future. (f) Bankruptcy. If Tenant becomes bankrupt, the bankruptcy trustee shall not have the right to assume or assign this Lease unless the trustee complies with all requirements of the United States Bankruptcy Code; and Landlord expressly reserves all of its rights, claims, and remedies thereunder. (g) Waiver of Trial by Jury. Landlord and Tenant waive trial by jury in the event of any action, proceeding or counterclaim brought by either Landlord or Tenant against the other in connection with this Lease. 17. HOLDING OVER. If Tenant retains possession of the Premises after the expiration or earlier termination of the Term or Tenant's right to possession of the Premises, Tenant shall pay Rent during such holding over at double the rate in effect immediately preceding such holding over computed on a monthly basis for each month or partial month that Tenant remains in possession. Tenant shall also pay, indemnify and defend Landlord from and against all claims and damages, consequential as well as direct, sustained by reason of Tenant's holding over. The provisions of this Section do not waive Landlord's right of re-entry or right to regain possession by actions at law or in equity or any other rights hereunder, and any receipt of payment by Landlord shall not be deemed a consent by Landlord to Tenant's remaining in possession or be construed as creating or renewing any lease or right of tenancy between Landlord and Tenant. 18. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit the security deposit set forth in Item 8 of the Schedule (the "Security Deposit") with Landlord as security for the performance of Tenant's obligations under this Lease. Landlord may use all or any part of the Security Deposit (i) for the payment of any Rent not paid when due if such failure to pay is not cured within five (5) business days after notice from Landlord, or (ii) for the payment of any amount which Landlord may pay or become obligated to pay by reason of a Default, or (iii) to compensate Landlord for any loss or damage which Landlord may suffer by reason of a Default, or (iv) to compensate Landlord for any loss or damage which Landlord may suffer or cost or expense Landlord may incur by reason of Tenant's failure to perform its obligations under Section 15 of this Lease upon the expiration or earlier termination of the Term of this Lease. If any portion of the Security Deposit is used, Tenant shall within five (5) business days after written demand therefor deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. In no event shall the Security Deposit be considered an advanced payment of Rent, and in no event shall Tenant be entitled to use the Security Deposit for the payment of Rent. If no default by Tenant exists hereunder, the Security Deposit or any balance thereof shall be returned to Tenant within thirty (30) days after the expiration of the Term and vacation of the Premises by Tenant. Landlord shall have the right to transfer the Security Deposit to any purchaser of the Building. Upon such transfer of the Security Deposit, Tenant shall look solely to such purchaser for return of the Security Deposit; and Landlord shall be relieved of any liability with respect to the Security Deposit. 19. [INTENTIONALLY OMITTED]. 20. ESTOPPEL CERTIFICATES. Tenant agrees that, from time to time upon not less than ten (10) days' prior request by Landlord, Tenant shall execute and deliver to Landlord a written certificate certifying: (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, a description of such modifications and that this Lease as modified is in full force and effect); (ii) the dates to which Rent has been paid; (iii) that Tenant is in possession of the Premises, if that is the case; (iv) that Landlord is not in default under this Lease, or, if Tenant believes Landlord is in default, the nature thereof in detail; (v) that Tenant has no off-sets or defenses to the performance of its obligations under this Lease (or if Tenant believes there are any off-sets or defenses, a full and complete explanation thereof); and (vi) such additional matters as may be requested by Landlord, it being agreed that such certificate may be relied upon by any prospective purchaser, mortgagee or other person having or acquiring an interest in the Building. If Tenant fails to execute and deliver any such certificate within ten (10) days after request, Tenant shall be deemed to have irrevocably appointed Landlord as Tenant's attorney-in-fact to execute and deliver such certificate in Tenant's name. 21. SUBORDINATION. This Lease is and shall be expressly subject and subordinate at all times to (a) any present or future ground, underlying or operating lease of the Building, and all amendments, renewals and modifications to any such lease, and (b) the lien of any present or future mortgage or deed of trust encumbering fee title to the Building and/or the leasehold estate under any such lease. If any such mortgage or deed of trust be foreclosed, or if any such lease be terminated, upon request of the mortgagee, beneficiary or lessor, as the case may be, Tenant will attorn to the purchaser at the foreclosure sale or to the lessor under such lease, as the case may be. The foregoing provisions are declared to be self-operative and no further instruments shall be required to effect such subordination and/or attornment; provided, however, that Tenant agrees upon request by any such mortgagee, beneficiary, lessor or purchaser at foreclosure, as the case may be, to execute such subordination and/or attornment instruments as may be required by such person to confirm such subordination and/or attornment on the form customarily used by such party. Notwithstanding the foregoing to the contrary, any such mortgagee, beneficiary or lessor may elect to give the rights and interests of Tenant under this Lease (excluding rights in and to insurance proceeds and condemnation awards) priority over the lien of its mortgage or deed of trust or the estate of its lease, as the case may be. In the event of such election and upon the mortgagee, beneficiary or lessor notifying Tenant of such election, the rights and interests of Tenant shall be deemed superior to and to have priority over the lien of said mortgage or deed of trust or the estate of such lease, as the case may be, whether this Lease is dated prior to or subsequent to the date of such mortgage, deed of trust or lease. In such event, Tenant shall execute and deliver whatever instruments may be required by such mortgagee, beneficiary or lessor to confirm such superiority on the form customarily used by such party. If Tenant fails to execute any instrument required to be executed by Tenant under this Section 21 within ten (10) days after request, Tenant irrevocably appoints Landlord as its attorney-in-fact, in Tenant's name, to execute such instrument. 22. QUIET ENJOYMENT. As long as no Default exists, Tenant shall peacefully and quietly have and enjoy the Premises for the Term, free from interference by Landlord, subject, however, to the provisions of this Lease. The loss or reduction of Tenant's light, air or view will not be deemed a disturbance of Tenant's occupancy of the Premises nor will it affect Tenant's obligations under this Lease or create any liability of Landlord to Tenant. 23. BROKER. Tenant represents to Landlord that Tenant has dealt only with the brokers set forth in Item 9 of the Schedule (the "Brokers") in connection with this Lease and that, insofar as Tenant knows, no other broker negotiated this Lease or is entitled to any commission in connection herewith. Tenant agrees to indemnify, defend and hold Landlord, its property manager and their respective employees harmless from and against any claims for a fee or commission made by any broker, other than the Brokers, claiming to have acted by or on behalf of Tenant in connection with this Lease. 24. NOTICES. All notices and demands to be given by one party to the other party under this Lease shall be given in writing, mailed or delivered to Landlord or Tenant, as the case may be, at the address or addresses set forth above or at such other address as either party may hereafter designate. Notices shall be delivered by hand or by United States certified or registered mail, postage prepaid, return receipt requested, or by a nationally recognized overnight air courier service. Notices shall be considered to have been given upon the earlier to occur of actual receipt or two (2) business days after posting in the United States mail. 25. DIRECTORY; SIGNS. Landlord will place Tenant's name on the Building standard directory. Except for signs which are located wholly within the interior of the Premises and which are not visible from the exterior of the Premises, and except for signs on office doors, no sign shall be placed, erected, maintained or painted by Tenant at any place upon the Premises or the Building. 26. PARKING. Tenant shall have the right to use, in common with others entitled thereto, the parking area associated with the Building, subject to such terms, conditions and regulations as are from time to time applicable to users of such parking area. Notwithstanding any of the foregoing to the contrary, Tenant may not use any parking spaces in such parking area which have been designated for exclusive use by other Building tenants. Tenant's right to use the parking spaces in such parking area shall be on an unassigned, non-reserved basis. 27. MISCELLANEOUS. (a) Successors and Assigns. Subject to Section 14 of this Lease, each provision of this Lease shall extend to, bind and inure to the benefit of Landlord and Tenant and their respective legal representatives, successors and assigns; and all references herein to Landlord and Tenant shall be deemed to include all such parties. (b) Entire Agreement. This Lease, and the riders and exhibits, if any, attached hereto which are hereby made a part of this Lease, represent the complete agreement between Landlord and Tenant; and Landlord has made no representations or warranties except as expressly set forth in this Lease. No modification or amendment of or waiver under this Lease shall be binding upon Landlord or Tenant unless in writing signed by Landlord and Tenant. (c) Time of Essence. Time is of the essence of this Lease and each and all of its provisions. (d) Execution and Delivery. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of space or an option for lease, and it is not effective until execution and delivery by both Landlord and Tenant. Execution and delivery of this Lease by Tenant to Landlord shall constitute an irrevocable offer by Tenant to lease the Premises on the terms and conditions set forth herein, which offer may not be revoked for fifteen (15) days after such delivery. (e) Severability. The invalidity or unenforceability of any provision of this Lease shall not affect or impair any other provisions. (f) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State in which the Premises are located. (g) Attorneys' Fees. Tenant shall pay to Landlord all costs and expenses, including reasonable attorneys fees, incurred by Landlord in enforcing this Lease or incurred by Landlord as a result of any litigation to which Landlord becomes a party as a result of this Lease. (h) Delay in Possession. In no event shall Landlord be liable to Tenant if Landlord is unable to deliver possession of the Premises to Tenant on the Commencement Date for causes outside Landlord's reasonable control. If Landlord is unable to deliver possession of the Premises to Tenant by the Commencement Date, the Commencement Date shall be deferred until Landlord can deliver possession to Tenant, and the Expiration Date shall be deferred for an equal number of days. (i) Joint and Several Liability. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease. (j) Force Majeure. Landlord shall not be in default hereunder and Tenant shall not be excused from performing any of its obligations hereunder if Landlord is prevented from performing any of its obligations hereunder due to any accident, breakage, strike, shortage of materials, acts of God or other causes beyond Landlord's reasonable control. (k) [Intentionally Omitted] (l) Captions. The headings and titles in this Lease are for convenience only and shall have no effect upon the construction or interpretation of this Lease. (m) No Waiver. No receipt of money by Landlord from Tenant after termination of this Lease or after the service of any notice or after the commencing of any suit or after final judgment for possession of the Premises shall renew, reinstate, continue or extend the Term or affect any such notice or suit. No waiver of any default of Tenant shall be implied from any omission by Landlord to take any action on account of such default if such default persists or be repeated, and no express waiver shall affect any default other than the default specified in the express waiver and then only for the time and to the extent therein stated. (n) No Recording. Tenant shall not record this Lease in any official records. Landlord and Tenant shall, upon request of either, execute and deliver a notice of this Lease in such recordable form as may be permitted by applicable law. (o) Definition of Landlord; Landlord's Liability. The term "Landlord" is used herein to include the Landlord named above as well as its successors and assigns, each of whom shall have the same rights, remedies, powers, authorities and privileges as it would have had if it originally signed this Lease as Landlord. Any such person, whether or not named herein, shall have no liability hereunder after it ceases to hold title to the Premises except for obligations which may have theretofore accrued. Neither Landlord, nor any trustee, beneficiary, principal, employee or partner of Landlord, nor any owner of the Building, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of this Lease or the Premises, and neither Landlord, nor any trustee, beneficiary, principal, employee or partner of Landlord shall have any personal liability to Tenant for any liability of or claim against Landlord under this Lease beyond the equity of Landlord in the Building nor shall any recourse be had to any other property or assets of Landlord. (p) No Presumption Against Preparer; Freely Negotiated. Landlord and Tenant hereby understand, agree and acknowledge that (i) this Lease has been freely negotiated by both parties hereto and (ii) that, in any controversy, dispute or contest with regard to the meaning, interpretation, validity or enforceability of this Lease or any of the terms and provisions hereof, there shall be no inference, presumption or conclusion drawn whatsoever against either party hereto by virtue of that party (or its professional advisers) having drafted this Lease or any portion thereof. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as a sealed instrument as of the day and year first above written. LANDLORD: ss: Angela C. Maffeo -------------------- Angela C. Maffeo, Trustee under the Wil of John Capobianco and not individually TENANT: MANCHESTER EQUIPMENT CO., INC., a New York corporation By:_ss: Barry Steinberg ----------------- Barry Steinberg President EXHIBIT "A" FLOOR PLAN (Floor plan attached) EXHIBIT "A-1" LEGAL DESCRIPTION OF LAND A certain parcel of land together with the buildings thereon situated in that part of Newton, Massachusetts, called Newton Upper Falls and being shown as Lot B on a plan entitled "Plan of Land in Newton, Mass.", prepared by Henry F. Bryant and Son, Inc., dated May 29, 1962 duly recorded with the Middlesex South District Registry of Deeds and bounded and described as follows: NORTHEASTERLY by Christina Street by five lines, one hundred and 88/100 (100.88) feet, one hundred eighty-two and 58/100 (182.58) feet, two hundred ninety and 57/100 (290.57) feet, one hundred forty and 20/100 (140.20) feet, and sixty-seven and 95/100 (67.95) feet, respectively; NORTHWESTERLY by Lot A on said plan, two hundred and sixty-four (264) feet; ------------- SOUTHERLY by the thread of the Charles River, eight --------- hundred forty-three (843) feet more or less; and EASTERLY by land of Patrick and Eileen Mulhern, as indicated on said plan, by three lines, sixty and 82/100 (60.82) feet, eighty-eight and 20/100 (88.20) feet and seven and 3/10 (7.3) feet, respectively. EXHIBIT "B" RULES AND REGULATIONS 1. Tenant shall not make any room-to-room canvas to solicit business from other tenants in the Building and shall not exhibit, sell or offer to sell, use, rent or exchange any item or services in or from the Premises unless ordinarily included within Tenant's use of the Premises as specified in the Lease. 2. Tenant shall not make any use of the Premises which may be dangerous to person or property or which shall increase the cost of insurance or require additional insurance coverage. 3. Tenant shall not paint, display, inscribe or affix any sign, picture, advertisement, notice, lettering or direction or install any lights on any part of the outside or inside of the Building, other than the Premises, and then not on any part of the inside of the Premises which can be seen from outside the Premises, except as approved by Landlord in writing. 4. Tenant shall not use the name of the Building in advertising or other publicity, except as the address of its business, and, without Landlord's prior written approval, which approval shall not be unreasonably withheld, shall not use pictures of the Building in advertising or publicity. 5. Tenant shall not obstruct or place objects on or in sidewalks, entrances, passages, courts, corridors, vestibules, halls, elevators and stairways in and about the Building. Tenant shall not place objects against glass partitions or doors or windows or adjacent to any open common space which would be unsightly from the Building corridors or from the exterior of the Building. 6. Bicycles shall not be permitted in the Building other than in locations designated by Landlord. 7. Tenant shall not allow any animals, other than seeing eye dogs, in the Premises or the Building. 8. Tenant shall not disturb other tenants or make excessive noises, cause disturbances, create excessive vibrations, odors or noxious fumes or use or operate any electrical or electronic devices or other devices that emit excessive sound waves or are dangerous to other tenants of the Building or that would interfere with the operation of any device or equipment or radio or television broadcasting or reception from or within the Building or elsewhere, and shall not place or install any projections, antennae, aerials or similar devices outside of the Building or the Premises. 9. Tenant shall not waste electricity or water and shall cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning, and shall refrain from attempting to adjust any controls except for the thermostats within the Premises. Tenant shall keep all doors to the Premises closed. 10. Unless Tenant installs new doors to the Premises, Landlord shall furnish two (2) sets of keys for all doors to the Premises at the commencement of the Term. Tenant shall furnish Landlord with duplicate keys for any new or additional locks on doors installed by Tenant. When the Lease is terminated, Tenant shall deliver all keys to Landlord and will provide to Landlord the means of opening any safes, cabinets or vaults left in the Premises. 11. Except as otherwise provided in the Lease, Tenant shall not install in the Premises or Building any signal, communication, alarm or other utility or service system or equipment without the prior written consent of Landlord, which consent shall not be unreasonably withheld. 12. Tenant shall not use any draperies or other window coverings instead of or in addition to the Building standard window coverings designated and approved by Landlord for exclusive use throughout the Building. 13. Landlord may require that all persons who enter or leave the Building identify themselves to watchmen, by registration or otherwise. Landlord, however, shall have no responsibility or liability for any theft, robbery or other crime in the Building. Tenant shall assume full responsibility for protecting the Premises, including keeping all doors to the Premises locked after the close of business. 14. Tenant shall not overload floors; and Tenant shall obtain Landlord's prior written approval as to size, maximum weight, routing and location of business machines, safes, and heavy objects. Tenant shall not install or operate machinery or any mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises. 15. In no event shall Tenant bring into the Building inflammables such as gasoline, kerosene, naphtha and benzene, or explosives or firearms or any other articles of an intrinsically dangerous nature. 16. Furniture, equipment and other large articles may be brought into the Building only at the time and in the manner designated by Landlord. Tenant shall furnish Landlord with a list of furniture, equipment and other large articles which are to be removed from the Building, and Landlord may require permits before allowing anything to be moved in or out of the Building. Movements of Tenant's property into or out of the Building and within the Building are entirely at the risk and responsibility of Tenant. 17. No person or contractor, unless approved in advance by Landlord (which appraisal shall not be unreasonably withheld), shall be employed to do janitorial work, interior window washing, cleaning, decorating or similar services in the Premises. 18. Tenant shall not use the Premises for lodging, cooking (except for microwave reheating and coffee makers) or manufacturing or selling any alcoholic beverages or for any illegal purposes. 19. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 20. Tenant shall cooperate and participate in all reasonable security programs affecting the Building. 21. Tenant shall not loiter, eat, drink, sit or lie in the lobby or other public areas in the Building. Tenant shall not go onto the roof of the Building or any other non-public areas of the Building (except the Premises), and Landlord reserves all rights to control the public and non-public areas of the Building. In no event shall Tenant have access to any electrical, telephone, plumbing or other mechanical closets without Landlord's prior written consent. 22. Tenant shall not use the freight or passenger elevators, loading docks or receiving areas of the Building except in accordance with regulations for their use established by Landlord. 23. Tenant shall not dispose of any foreign substances in the toilets, urinals, sinks or other washroom facilities, nor shall Tenant permit such items to be used other than for their intended purposes; and Tenant shall be liable for all damage as a result of a violation of this rule. 24. If Tenant designates non-smoking areas in the Premises, Tenant shall also designate sufficient smoking areas in the Premises for its employees, and in no event shall Tenant allow its employees to use the public areas of the Building as smoking areas. EXHIBIT "C" TENANT IMPROVEMENT WORK 1. On or before June 13, 1997, Tenant shall provide to Landlord for its approval final working drawings ("final working drawings" shall mean the plans prepared by David Saltzman, dated 6/9/97, subject to the agreed to revisions evidenced by the diagram annexed hereto.) prepared by David Saltzman (the "Architect") of all improvements that Tenant proposes to have installed in the Premises; such working drawings shall include the partition layout, ceiling plan, electrical outlets and switches, telephone outlets, drawings for any modifications to the mechanical and plumbing systems of the Building, and detailed plans and specifications for the construction of the improvements called for in this Exhibit "C", in accordance with all applicable governmental laws, codes, rules and regulations. Landlord shall reasonably approve or disapprove such working drawings within ten (10) days after their receipt by Landlord. If Landlord disapproves such working drawings, Landlord shall specify the reasons for such disapproval in reasonable particularity, and Tenant shall cause the Architect to make conforming revisions thereto and resubmit such working drawings to Landlord for re-review in accordance with the same procedure set forth above, except that Landlord must complete its review and notify Tenant of its approval or disapproval of such revised working drawings within seven (7) days after their receipt by Landlord. Landlord and Tenant shall initial the working drawings after the same have been finally approved by Landlord. Landlord's approval of Tenant's working drawings shall not be unreasonably withheld, provided that (a) they comply with all applicable governmental laws, codes, rules and regulations, and (b) such working drawings are sufficiently detailed to allow construction of the improvements specified therein in a good and workmanlike manner. As used herein, the phrase "Tenant's Plans" shall mean the final working drawings approved by Landlord pursuant to this Paragraph 1, as amended from time to time by any changes thereto approved by Landlord, and the phrase "Landlord's Work" shall mean the work specified in Tenant's Plans. All changes in Tenant's Plans must receive the prior written approval of Landlord. The total cost of preparation of Tenant's Plans shall be paid by Landlord within thirty (30) days after receipt by Landlord of a detailed itemization of such costs. 2. Promptly after Landlord's approval of Tenant's Plans, Landlord shall in good faith solicit bids for the performance of Landlord's Work. Based upon such bids, Landlord and Tenant shall select a contractor to construct Landlord's Work. Promptly after the selection of such contractor, Landlord shall cause such contractor to commence construction of Landlord's Work and to diligently prosecute to completion the construction of Landlord's Work so as to prepare the Premises for Tenant's occupancy on or prior to August 15, 1997, but Tenant shall have no claim against Landlord for failure so to complete Landlord's Work by such date, nor shall such failure affect the validity of this Lease. Landlord's Work shall be performed in a good and workmanlike manner. 3. The "Substantial Completion Date" shall be the first business day as of which Landlord's Work has been completed except for minor items of work (and, if applicable, adjustment of equipment and fixtures) which do not materially interfere with Tenant's use of the Premises for the purposes set forth in Section 3 of the Lease and can be completed after occupancy has been taken without causing undue interference with Tenant's use of the Premises (i.e., so-called "punch-list" items). Landlord shall complete as conditions permit all "punch-list" items, and Tenant shall afford Landlord access to the Premises for such purposes. 4. Except to the extent to which Tenant shall have given Landlord notice not later than three (3) months from the Commencement Date of respects in which Landlord has not performed Landlord's Work, Tenant shall have no claim that Landlord has failed to perform any of Landlord's Work. 5. The total cost of construction of Landlord's Work shall be paid by Landlord. Upon final completion of Landlord's Work, Landlord shall certify to Tenant the total cost of construction of Landlord's Work and the total cost of preparation of Tenant's Plans (such total cost of construction and preparation being hereinafter referred to as the "Total Cost"). Landlord shall provide to Tenant an allowance in the amount of $39,300.00 (the "Allowance") for the construction of Landlord's Work, for the preparation of Tenant's Plans, and for the preparation of the preliminary plan that was prepared by or on behalf of Landlord with respect to the initial improvements to the Premises. If the Total Cost exceeds the Allowance, Tenant shall reimburse Landlord for the amount of such excess within ten (10) days after receipt by Tenant of the certification referred to in the second sentence of this Paragraph 5, and such excess shall be deemed to be additional Rent under this Lease. 6. Tenant shall pay to Landlord a construction management fee in the amount of the lesser of (i) $3,000.00 and (ii) five percent (5%) of the total cost of construction of Landlord's Work. Such construction management fee shall be due and payable within thirty (30) days after the Substantial Completion Date and shall be deemed to be additional Rent under the Lease. 7. With the prior consent of Landlord, Tenant may enter the Premises prior to the Substantial Completion Date to undertake such work as Tenant may choose to perform (subject to the provisions of Section 9 of this Lease) in order to prepare the Premises for Tenant's occupancy. Such entry shall be at the sole risk of Tenant. In no event shall Tenant use any contractor if Landlord reasonably determines that such contractor will cause a labor dispute at the Building, or otherwise materially interfere with any construction work being performed by or on behalf of Landlord in or around the Building. Without limiting the generality of the foregoing, Tenant shall comply with all reasonable instructions issued by Landlord's contractors relative to the moving of Tenant's equipment and other property into the Premises and shall pay any actual fees or costs incurred by Landlord in connection therewith. If noncompliance by Tenant with any instructions issued by Landlord's contractors results in a work stoppage or other job action by any employees of such contractors or subcontractors thereof performing work at the Building, Tenant and its contractors shall cease performance of such work. EX-27. 4 ART. 5 FDS FOR FORM 10-K
5 1,000 YEAR JUL-31-1997 JUL-31-1997 15,049 4,408 22,524 1,051 10,127 51,745 7,946 3,873 58,208 21,167 0 0 0 85 36,792 58,208 187,801 187,801 161,186 161,186 21,023 0 225 5,987 2,450 3,537 0 0 0 3,537 .45 .45
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