-----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, NzVvGzOZuqNcCEhLQ1pPq36adfigonDVH3V650HSm1am5/iwiaan64y82H938K7H JVxcfGkQbacbUda5fkrcWg== 0001023876-98-000020.txt : 19981028 0001023876-98-000020.hdr.sgml : 19981028 ACCESSION NUMBER: 0001023876-98-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981027 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: 98731399 BUSINESS ADDRESS: STREET 1: 160 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11787 BUSINESS PHONE: 5164351199 MAIL ADDRESS: STREET 1: 160 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 10-K 7/31/98 ================================================================================ 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, 1998 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 2, 1998 was $8,621,988 (2,759,036 shares at a closing sale price of $3.125). As of October 2, 1998, 8,096,600 shares of Common Stock ($.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, 1998 TABLE OF CONTENTS Part I Page 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 11 Stockholder Matters Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial 13 Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 17 Item 9. Change In and Disagreements with Accountants on 17 Accounting and Financial Disclosures Part III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 21 Item 13. Certain Relationships and Related Transactions 22 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports 23 on Form 8-K Signatures Chief Executive Officer, Chief Financial Officer, 42 and Directors 2 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 acquisitions of Electrograph Systems, Inc. and Coastal Office Products, Inc. will continue to add to the Company's profitability, that the Company will be successful in its efforts to focus on value-added services, that the Company will be successful in attracting and retaining highly skilled technical personnel and sales representatives necessary to implement the Company's growth strategies, that the Company will not be adversely affected by continued intense competition in the computer industry, continued decreases in average selling prices of personal computers, 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 network 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 25 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 71% 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 four 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; Electrograph Systems, Inc. a New York corporation, which distributes microcomputer peripherals throughout the United States; and Coastal Office Products, Inc. a Maryland corporation that was acquired by the Company on January 2, 1998, which is a network integrator and reseller of computer products in the Baltimore, Maryland area. 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, coupled with widespread acceptance of Internet technologies, have led companies 3 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 revenue 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 recruited 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 routers and switches), database design and management. 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 those 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. 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 are also 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 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 that allows the Company's sales representatives to obtain immediate 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. 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 dedicated training facilities in one of its Long Island offices and in its New York City office. 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 through its enlarged New York City office and increased sales and service capabilities. The Company believes that these steps will enable it to capture a 4 greater percentage of the New York Metropolitan area market. In fiscal 1998, the Company relocated its New York City office to space that is approximately double the size of the previous space. 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, 1998. During fiscal 1998, the Company expanded into Baltimore, Maryland through the acquisition on January 2, 1998 of Coastal Office Products, Inc. (see "Acquisitions"). 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. 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. 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 5 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: Desktop Computers Servers Internet Access Products Software Modems Storage Subsystems Monitors Switches Network Equipment Supplies and Accessories Notebook Computers Teleconferencing Equipment Printers Terminals Routers Wireless Products Scanners Workstations The Company has long-standing relationships with many manufacturers, which the Company believes assist it in procuring desired products on a timely basis and on desirable financial terms. The Company sells products from most major manufacturers, including: Bay Networks, Inc. NEC Technologies, Inc. Cisco Systems, Inc. Novell, Inc. Compaq Computer Corporation Philips Electronics N.V. Computer Associates International, Inc. Seagate Technology, Inc. Epson America, Inc. 3Com Corp. Hewlett-Packard Company Toshiba America Information Intel Corporation Systems, Inc Microsoft Corporation Viking Components, Inc. For the fiscal year ended July 31, 1998, sales by the Company of products manufactured by Compaq, Toshiba, and Hewlett-Packard collectively comprised approximately 49% of the Company's revenues. For the fiscal years ended July 31, 1997 and 1996, sales by the Company of products manufactured by Compaq, Toshiba, Hewlett-Packard and NEC collectively comprised approximately 56% and 53%, respectively, of the Company's revenue. In fiscal years ended July 31, 1998, 1997 and 1996, sales of products manufactured by Toshiba accounted for approximately 18%, 26%, and 23%, respectively, of the Company's revenue, substantially all of which were sales of notebook computers and related accessories. Also in these fiscal years, sales of products manufactured by Compaq accounted for 21%, 13% and 13%, respectively, of the Company's revenue. The total dollar volume of products purchased directly from manufacturers, as opposed to distributors or resellers, was approximately $92 million, $103 million, and $117 million for the fiscal years ended July 31, 1998, 1997 and 1996, respectively, and as a percentage of total cost of products sold was approximately 55%, 64%, and 72%, respectively. 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 products that render them unavailable or necessitate product allocations among resellers. Each fiscal year, the Company has experienced product shortages, particularly related to newer models. 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 1999, 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. Most of the Company's major product manufacturers provide price protection for a limited time period as well as stock balancing rights, by way of credits or refunds, against price reductions by the supplier between the time of the initial sale to the Company and the subsequent sale by the Company to its customers. During fiscal 1998 certain manufacturers reduced the period for which they provide price protection and stock balancing rights. There can be no assurance that manufacturers will not further limit or eliminate price protection and stock balancing rights in the future. 6 Customers 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. 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, 1998, 1997 and 1996, approximately 7%, 15% and 16% 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 Bysis Fund Services, Inc., Cabletron Systems Inc., National Broadcasting Company Inc., Sterling Doubleday Enterprises (New York Mets), Reuters America Inc., Vytra Choice Care, 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 is generally able to return defective merchandise returned from customers to the vendor. Sales and Marketing The Company's sales are generated primarily by its 75 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. Manchester recently adopted a new logo that appears on all of the Company's marketing materials and other corporate literature. The logo includes the phrase "Manchester, the Answer" to emphasize our position as a knowledgeable resource for networking and computer solutions for our customers. 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 to partially fund many of its advertising and promotional campaigns. 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, 17 and 18 times for the fiscal years ended July 31, 1998, 1997 and 1996, respectively, and Manchester experienced bad debt expense of less than .3% of revenues in each of these years. 7 During the fiscal year ended July 31, 1998, 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., Dell Computer Corporation, EnPointe Technologies, Inc., 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, possible alliances between existing competitors, as well as competition from certain manufacturers who do not currently market through direct sales forces. 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. Acquisitions 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. ("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. Electrograph provides technical assistance to customers through its Hauppauge, New York office. Electrograph ships returns of defective products to the manufacturer or to an authorized repair center. Returns have historically been approximately 3% of Electrograph's 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 suppliers through credits or replacements. 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. 8 Most of Electrograph's major suppliers provide price protection for a limited time period, 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 1998. While Electrograph distributes products of more than 15 suppliers, approximately 40% and 30% of Electrograph's revenue in fiscal 1998 was derived from products manufactured by Fujitsu and Mitsubishi, Electrograph's largest suppliers. 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. Coastal Office Products, Inc. On January 2, 1998, the Company acquired all of the outstanding shares of Coastal Office Products, Inc. ("Coastal"), a reseller and provider of microcomputer servers and peripherals in the greater Baltimore, Maryland area. The acquisition, which has been accounted for as a purchase, consisted of a cash payment of approximately $3.1 million plus future contingent payments. Employees At August 31, 1998, the Company had 322 full-time employees consisting of 44 sales representatives, 38 management personnel, 84 technical personnel and 156 distribution and clerical personnel. In addition, at August 31, 1998, the Company had 31 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 currently has ten 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 2008 (50) New York City 469 Seventh Avenue Sales office New York, NY 13,000 - October 2007 Boca Raton 185 N.W. Spanish River Blvd. Sales Office Boca Raton, FL 6,000 - November 2002 Boston 25-27 Christina Street 3,000 - October 2002 Sales office Newton, MA Tampa 6304 Benjamin Road Sales office Tampa, FL 1,200 - December 1998 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 Coastal 3832 Falls Rd. 8,000 2,000 January 2002 Corporate HQ Baltimore, 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. 10 ITEM 3. Legal Proceedings On January 12, 1998, the Company announced that it had reached an agreement in principle settling the Shareholder Securities Class Action ("Lawsuit") filed against the Company and certain of its officers in March 1997. The settlement, which was approved by the Court on June 15, 1998, resulted in the distribution of $1,350,000 minus approved attorney's fees and related expenses, to purchasers of the Company's common stock in the Company's initial public offering, and during the period of November 26, 1996 to February 13, 1997. The entire $1,350,000 cash settlement was paid by the Company's insurance carrier. The settlement included a release of all claims that were asserted or that could have been asserted in the Lawsuit against the Company and its officers and directors. The Company agreed to the settlement solely to avoid the expense, burdens and uncertainties of further litigation and continues to deny that it has any liability on account of the matters asserted in the litigation or that the Plaintiffs' claims have merit. 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, 1998. 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 Fiscal Year 1998 First Quarter 5-1/4 4-1/8 Second Quarter 4-7/16 3-1/2 Third Quarter 4-1/8 3-1/4 Fourth Quarter 4-1/4 3-1/8 On October 2, 1998 the closing sale price for the Company's Common Stock was $3-1/8 per share. As of October 2, 1998 there were 38 shareholders of record of the Company's Common Stock. The Company believes that here are in excess of 500 beneficial holders of its 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. 11 ITEM 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except 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, 1998 and 1997 and for each of the years in the three-year period ended July 31, 1998 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, 1998 1997 1996 1995 1994 Income Statement Data: Revenue $202,530 $187,801 $ 189,659 $ 170,818 $ 137,361 Cost of revenue 171,930 161,186 163,128 146,323 117,377 Gross profit 30,600 26,615 26,531 24,495 19,984 Selling, general and administrative expenses 27,414 21,023 22,598 21,280 17,380 Income from operations 3,186 5,592 3,933 3,215 2,604 Interest and other income (expenses), net 546 395 (365) (392) (172) Provision for income taxes 1,560 2,450 1,430(1) 1,160 1,042 Cumulative effect of change in accounting for income taxes - - - - 386 Net income $2,172 $3,537 $ 2,138(1) $ 1,663 $ 1,776 Net income per share: Basic $0.26 $0.45 $ 0 .34(1) $ 0.27 $ 0.28 Diluted $0.26 $0.45 $ 0 .34(1) $ 0.27 $ 0.28 Weighted average shares of common stock outstanding: Basic 8,494 7,779 6,247 6,263 6,263 Diluted 8,499 7,779 6,247 6,263 6,263
July 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital $26,112 $30,578 $ 9,841 $ 9,189 $ 7,701 Total assets 56,894 58,208 37,761 31,635 25,879 Short-term debt, including current maturities of capital lease obligation 82 1,637 6,952 5,600 5,400 Capital lease obligation, excluding current maturities - 77 175 - - Redeemable common stock(2) - - 4,739 5,210 5,210 Shareholders' equity 37,345 36,877 8,175 6,037 4,374
---------------- (1) Pro forma provision for income taxes, pro forma net income and pro forma basic and diluted 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 adjustments commencing in fiscal 1997 to (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 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 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 other filings from time to time with the Securities and Exchange Commission. General Manchester is a network 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 has experienced a significant increase in selling, general and administrative expenses, primarily in the form of increased personnel costs, in connection with the implementation of this strategy. 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 7%, 15% and 16% of the Company's revenues for the fiscal years ended July 31, 1998, 1997 and 1996, 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, 1998, 1997 and 1996, inventories represented 16%, 17% and 24% of total assets, respectively. During these same fiscal years, the Company's average inventory turnover was 17, 17 and 18 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%, .2% and .1% of total revenues for the fiscal years ended July 31, 1998, 1997 and 1996, respectively. 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. 13 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. Recently, the computer industry has experienced rapid declines in average selling prices of personal computers. In some instances, the Company has been able to offset these price declines with increases in units shipped. There can be no assurance that average selling prices will not continue to decline or that the Company will be able to offset declines in average selling prices with increases in units shipped. Most of the personal computers shipped by the Company utilize operating systems developed by Microsoft Corporation. The United States Department of Justice has brought an antitrust action against Microsoft, which could delay the introduction and distribution of Microsoft products. The potential unavailability of Microsoft products could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's Chief Executive Officer entered into an employment agreement with the Company under which he received $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 received base compensation, exclusive of fringe benefits, of $450,000 for the fiscal years ending July 31, 1997 and 1998. These officers agreed that they would not be entitled to any bonuses for fiscal 1997 and that any bonus payable to either of these officers in fiscal 1998 would require the approval of a majority of the independent directors of the Company. No bonuses were paid to these officers in fiscal 1997 or 1998. 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 in December 1996 to reduce the rent payable under that lease to then current market rates. Year 2000 Issue Many existing computer systems, including certain of the Company's internal systems as well as those that the Company sells to customers, use only the last two digits to identify years in the date field. As a result, those systems may not accurately distinguish years in the 21st century from years in the 20th century, or may not function properly when faced with years later than 1999. This problem is generally referred to as the "Year 2000 Issue." Computer systems that are able to deal correctly with dates after 1999 are referred to as "Year-2000-Compliant." The Company has undertaken a complete and thorough review of all of its operations to determine those aspects which involve or are dependent upon a computer application. The Company is reviewing the software and operating systems for each such application to determine if it is Year-2000-Compliant. Any such system or application which is not Year-2000-Compliant is being modified or upgraded to assure our continued ability to operate without interruption. This process has been underway since before January 1, 1998 and is currently on schedule for completion before January 1, 1999. The Company is in the process of obtaining assurances regarding Year 2000 compliance from other companies upon which we may rely for products or services. The Company expects to implement successfully the systems and programming changes necessary to address the Year 2000 Issue. Moreover, the Company does not expect the costs associated with that implementation to be material to the Company's financial position or results of operations. With respect to products sold to customers, the Company does not warrant any products sold as Year-2000-Compliant. Instead, the Company refers customers to warrantees provided by the product's manufacturers. The statements above describing the Company's plans and objectives for handling the Year 2000 Issue and the expected impact of the Year 2000 Issue on the Company are forward-looking statements. Those statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed above. Factors that might cause such a difference include, but are not limited to, delays in executing the plan outlined above and increased or unforeseen costs associated with the implementation of the plan and any necessary changes to the Company's systems. Any inability on the part of the Company to implement necessary changes in a timely fashion could have an adverse effect on future results of operations. Moreover, even if the Company successfully implements the changes necessary to address the Year 2000 Issue, there can be no assurance that the Company will not be adversely affected by the failure of others to become Year-2000-Compliant. Recent Acquisition On January 2, 1998, the Company acquired all of the outstanding shares of Coastal Office Products, Inc. ("Coastal"), a Maryland corporation and a reseller and provider of microcomputer services and peripherals to companies in 14 the greater Baltimore, Maryland area. The acquisition, which has been accounted for as a purchase, consisted of a cash payment of approximately $3.1 million plus potential future contingent payments. The cash payment was made from the Company's cash balances. Contingent payments of up to $1,050,000 in each of calendar 1998 and 1999 will be determined based upon achieving certain agreed upon increases in revenues and pretax income for calendar 1998 and 1999 over calendar 1997 amounts. Contingent payments, if any, would be paid in cash (or, under certain conditions, in Company common stock) on March 15, 1999 and March 15, 2000. Operating results of Coastal are included in the Consolidated Statements of Income from the date of acquisition. The acquisition resulted in goodwill of $2,965,000 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 related revenue or total revenue.
Percentage of Revenue the Year Ended July 31, ----------------------- 1998 1997 1996 ---- ---- ---- Revenue Products 97.4% 98.7% 100.0 Services 2.6 1.3 - --- --- ----- 100.0% 100.0% 100.0% ----- ----- ----- Cost of revenue Products 85.2 86.2 86.0 Services 72.1 54.4 - ---- ---- ---- 84.9 85.8 86.0 ---- ---- ---- Product gross profit 14.8 13.8 14.0 Services gross profit 27.9 45.6 - ---- ---- ---- Gross profit 15.1 14.2 14.0 Selling, general and administrative expenses 13.5 11.2 11.9 ---- ---- ---- Income from operations 1.6 3.0 2.1 Interest and other income (expenses), net 0.3 0.2 (0.2) --- --- ---- Income before income taxes 1.9 3.2 1.9 --- --- --- Provision for income taxes 0.8 1.3 0.8 Net income 1.1% 1.9% 1.1% === === ===
Year Ended July 31, 1998 Compared to Year Ended July 31, 1997 Revenue. The Company's revenue increased $14.7 million or 7.8% from $187.8 million in fiscal 1997 to $202.5 million for fiscal 1998. Revenue from product sales increased by $11.8 million (6.4%) primarily due to revenue generated from the Company's new wholly-owned subsidiaries, Electrograph Systems, Inc. ("Electrograph") which was acquired on April 25, 1997 and Coastal Office Products, Inc., which was acquired on January 2, 1998 as well as increases in the number of personal computers shipped. These increases were partially offset by lower revenue from the Company's major customer and lower average selling prices for personal computers. Services revenue increased by $2.9 million, or 122.0%, reflecting the Company's continued emphasis on providing value-added services. Gross Profit. Cost of revenue includes the direct costs of products sold, freight and the personnel costs associated with providing technical services, offset in part by certain market development funds provided by manufacturers. All other operating costs are included in selling, general and administrative expenses. Gross profit increased by $4.0 million or 15.0% from $26.6 million for fiscal 1997 to $30.6 million for fiscal 1998. Gross profit from the sale of products increased by $3.6 million or 14.1% due primarily to increases in revenue as well as favorable changes in the mix of products sold. Gross profit generated through service offerings increased by $394,000 or 36.0% reflecting improved service revenue, as discussed above, partially offset by greater expenditures in salaries and other personnel costs associated with providing technical services. Fiscal 1998 costs of services reflect the costs of technical and engineering personnel added during the year as a part of the Company's strategy to grow higher margin service related business. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $6.4 million or 30.4% from $21.0 million in fiscal 1997 to $27.4 million in fiscal 1998. This increase is principally a result of higher salaries and personnel costs related to the Company's increased emphasis on providing value added services as well as additional operating costs associated with the Company's new subsidiaries, Electrograph and Coastal. In addition, the Company incurred higher commission, depreciation and amortization, training and professional costs. Other Income (Expense). Interest expense decreased due to lower borrowings by the Company. Interest income is generated by the investment of the Company's excess cash balances. Provision for Income Taxes. The Company's effective income tax rate increased from 40.9% in fiscal 1997 to 41.8% in fiscal 1998 due to higher state and local taxes in new and existing jurisdictions as well as non-deductible amortization of goodwill associated with the Coastal acquisition. 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. 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 fiscal 1997. 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, 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. Liquidity and Capital Resources The Company's primary sources of financing in fiscal 1998 have been internally generated working capital from profitable operations and a line of credit from a financial institution. For the year ended July 31, 1998, cash provided by operating activities was $2,340,000 consisting primarily of net income, decreased inventory and sales of trading investments partially offset by increases in accounts receivable and a decrease 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, 1998, the Company used approximately $3.0 million for capital expenditures, $2.9 million (net of cash acquired) for the purchase of Coastal, $1.8 million for the purchase of treasury stock and $1.9 million for the repayment of debt. The Company and a subsidiary have available lines of credit with financial institutions in the aggregate amount of $15.0 million. At July 31, 1998, no amounts are outstanding under this line. 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. The Company believes that its current balances in cash and cash equivalents and investments, 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 1999. 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 first quarter of the next fiscal year. The aggregate commitment for these projects is approximately $500,000 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, the purchase of equipment and expansion of facilities, potential contingent acquisition payments of $2,100,000, as well as the possible opening of new offices and potential acquisitions. 16 New Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting information about operating segments, and related disclosures about products and services, geographic areas and major customers. The Company has not determined the impact that the adoption of this new accounting standard will have on its consolidated financial statement disclosures. The Company will adopt this statement effective August 1, 1998, as required. Interim information is not required until the second year of application, at which time comparative information is required. Inflation The Company does not believe that inflation has had a material effect on the Company's operations. ITEM 8. Financial Statements and Supplementary Data See Item 14. ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 17 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 56 Chairman of the Board, President, Chief Executive Officer and Director Joel G. Stemple, Ph.D 56 Executive Vice President, Secretary and Director Joseph Looney 41 Chief Financial Officer Joel Rothlein, Esq. 69 Director Bert Rudofsky 64 Director Michael E. Russell 51 Director Julian Sandler 54 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. From 1984 until joining the Company, 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. 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. Bert Rudofsky became a director on July 15, 1998. Mr. Rudofsky is the founder and president of Bert Rudofsky and Associates, a management consulting firm specializing in the computer industry. Mr. Rudofsky was a founder of MTI Systems Corp., a leading edge, technical, value-added distribution company specializing in computer and data communications products. Mr. Rudofsky was CEO of MTI from 1968 until MTI was sold in 1990. Michael E. Russell became a director on July 15, 1998. Mr. Russell is presently a senior vice president at Prudential Securities Incorporated and has held several distinguished positions as a member of the business community, as a member of the New York State Metropolitan Transportation Authority (1997-1989), as commissioner of the New York State Commission on Cable Television (1989-1991) and as Special Assistant to the New York State Senate Majority Leader (1991-1994). 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. 18 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 fiscal year ended July 31, 1998, (a) Bert Rudofsky and Michael E. Russell, each Reporting Persons, filed Form 3 approximately one and one-half months late; and (b) Barry R. Steinberg, a Reporting Person, filed his Form 4 reporting the acquisition of additional shares of the Common Stock approximately three 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, 1998, 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 ------------------- Long Term Compensation ------------ Common Stock Name and Other Annual Underlying All Other Principal Position Year Salary Bonus Compensation(5) Options(4) Compensation - ------------------ ---- ------ ----- --------------- ---------- ------------ Barry R. Steinberg, 1998 $550,000 - $37,031(1) - - President and Chief 1997 $550,000 - $59,252(1) - - Executive Officer 1996 $271,800 $1,816,439 $59,210(1) - - Joel G. Stemple, Executive 1998 $450,000 - $22,194(2) - - Vice President and 1997 $450,000 - $33,050(2) - - Secretary 1996 $251,800 $1,669,193 $29,000(2) - - Joseph Looney, Chief 1998 $140,394 $40,000 $13,677 - - Financial Officer(3) 1997 $125,489 $47,500 $7,610 70,000 - 1996 $ 31,250 $10,000 $1,275 - -
Other than set forth above, 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, 1998. - ------------------ (1) Includes $32,081 in 1998 and $50,000 in each of 1997 and 1996 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 $17,394 of premiums in 1998 and $25,000 in each of 1997 and 1996 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) See Option Grant Table below for the exercise price and vesting of Mr. Looney's options. (5) Includes in fiscal 1998 employer matching contributions to the Company's defined contribution plan of $4,950, $4,800 and $3,577 for Messrs. Steinberg, Stemple, and Looney, respectively, and fiscal 1997 employer matching contributions to the Company's defined contribution plan of $6,252, $6,675 and $2,510 for Messrs. Steinberg, Stemple and Looney, respectively. 19 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. No bonus was paid for fiscal 1997 or 1998. 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. No bonus was paid for fiscal 1997 or 1998. 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. The Compensation Committee of the Company's Board of Directors determines compensation for the Company's executive officers. The Company's objective is to provide a competitive compensation program that reflects both the Company and individual performance. Effective August 1, 1998, based upon the recommendation of the Compensation Committee, the annual base salaries of Mr. Steinberg, Mr. Stemple and Mr. Looney were set at $650,000, $450,000 and $200,000, respectively. In addition, an incentive compensation program for fiscal 1999 has been adopted by the Company whereby the executive officers would share in a predetermined bonus pool in the event that the Company's operating earnings exceed fiscal 1998 amounts by 25% or more. 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 $0.01 per share (the "Common Stock"), pursuant to the Company's Amended and Restated 1996 Incentive and Non-Incentive Stock Option Plan (the "Plan") granted to the Named Executive Officers during the fiscal year ended July 31, 1998 and all options outstanding to the named Executive Officers as of July 31, 1998.
Individual Grants ----------------- Number of Percent of Potential Realizable Securities Total Options Value at Assumed Underlying Granted to Annual Rates of Stock Options Employees in Exercise Expiration Price Appreciation Granted Fiscal year Price Date For Option Term(1) ------- ----------- ----- ---- ------------------ Name (#) ($/sh) 5% 10% ---- --- ------ -- --- Joseph Looney 50,000(2) 6.3% $3.8125 2/03/2007 $105,000 $259,000 20,000(3) 2.5% $3.8125 3/26/2007 $42,000 $104,000
No options outstanding for all executive officers were exercised or exercisable during the fiscal year ended July 31, 1998 or as of July 31, 1998. There were no in-the-money exercisable or unexercisable options at July 31, 1998. - -------------- (1) Amounts reported in this column represent hypothetical values that may be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation of the Common Stock over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission. Actual gains, if any, in option exercises are dependent on the time of such exercise and the future performance of the Common Stock. (2) Exercisable cumulatively at the rate of 20% per annum commencing February 3, 1999. (3) Exercisable cumulatively at the rate of 25% per annum commencing May 5, 1999. 20 Compensation Committee Interlocks and Insider Participation The members of the Company's Compensation Committee are Joel Rothlein, Esq. and Julian Sandler, and, effective July 15, 1998, Bert Rudofsky. George Bagetakos was a member of the Compensation Committee until he resigned from the Board of Directors in July, 1998. Mr. Rothlein 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 $217,000, $655,000 and $383,000 from the Company for legal fees in the fiscal years ended July 31, 1998, 1997 and 1996, respectively. Fiscal 1997 fees to Kressel Rothlein & Roth, Esqs. included fees paid to special counsel of $286,000. In addition, during the years ended July 31, 1998 and 1997, the Company recorded revenue of approximately $177,000 and $130,000, respectively, in connection with the sale of computer equipment to a company controlled by Mr. Sandler. The Company's Stock Option Plan is administered by the Board of Directors. Barry R. Steinberg is President and Chief Executive Officer and Joel G. Stemple is Executive Vice President of the Company and each of them is a member of the Board. As members of the Board, they could vote on executive compensation issues before the Board pertaining to the granting of stock options. Although the issue has not arisen to date, each of Messrs. Steinberg and Stemple has agreed to abstain from voting on the grant of stock options to himself or to the other of them. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of October 2, 1998 (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 Beneficially Percent of Shares Name and Address Owned Outstanding ---------------- ----- ----------- Barry R. Steinberg(1)(3) 4,674,101 57.7% Joel G. Stemple(1) 626,263 7.7 Joseph Looney(1) 4,700 * Joel Rothlein(2) 31,500 * Bert Rudofsky(1) - - Michael E. Russell(1) - - Julian Sandler(1)(4) 3,500 * Heartland Advisors 595,600 7.4 790 N. Milwaukee St., Milwaukee, WI 53202 Franklin Advisors, Inc. 417,100 5.2 777 Mariners Island Blvd., San Mateo, CA 94404 Capital Technology, Inc. 415,900 5.1 8314 Pineville-Mathews Rd., Suite 295, Charlotte, NC 28226 All executive officers and directors as a group (5 persons) 5,340,064 65.9%
(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, Esqs., 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) Includes option to purchase 2,500 shares that became exercisable on December 18, 1997. * Represents less than one tenth of one percent of outstanding shares. 21 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 "Acquisitions". 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 shareholder of the Company. For the fiscal years ended July 31, 1998, 1997 and 1996, the Company made lease payments of $179,000, $174,000 and $216,000, respectively, 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, 1998, 1997, and 1996, the Company made lease payments of $263,000, $259,000 and $360,000, 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, 1998, 1997 and 1996, the Company made lease payments of $340,000, $329,000, and $435,000, respectively, to such entity. 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 fiscal 1998, $217,000 was paid to such firm for legal fees. During the year ended July 31, 1998 and 1997, the Company recorded revenue of $177,000 and $130,000 in connection with the sale of computer equipment to a company controlled by Julian Sandler, a director of the Company. 22 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 24 Consolidated Financial Statements: Balance Sheets as of July 31, 1998 and 1997 25 Statements of Income for the years ended July 31, 1998, 1997 and 1996 26 Statements of Shareholders' Equity for the years ended July 31, 1998, 1997 and 1996 27 Statements of Cash Flows for the years ended July 31, 1998, 1997 and 1996 28 Notes to Consolidated Financial Statements 29 23 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, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1998, 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 Melville, New York September 18, 1998 24 Manchester Equipment Company, Inc. and Subsidiaries Consolidated Balance Sheets July 31, 1998 and 1997
Assets 1998 1997 ------ ---- ---- (in thousands) Current assets: Cash and cash equivalents $7,816 $15,049 Investments 1,501 4,408 Accounts receivable, net of allowance for doubtful accounts of $1,150 and $1,051, respectively 26,296 21,473 Inventory 9,167 10,127 Deferred income taxes 482 440 Prepaid expenses and other current assets 290 248 --- --- Total current assets 45,552 51,745 Property and equipment, net 5,975 4,073 Goodwill, net 4,325 1,524 Deferred income taxes 475 379 Other assets 567 487 --- --- $56,894 $58,208 ======= ======= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Current maturities of long-term debt $ 82 $ 99 Notes payable-bank - 1,274 Notes payable - other - 264 Accounts payable and accrued expenses 18,358 19,283 Deferred service contract revenue 775 247 Income taxes payable 225 - --- ------ Total current liabilities 19,440 21,167 Long-term debt, less current maturities - 77 Deferred compensation payable 109 87 Commitments and contingencies (note 8) Shareholders' equity: Preferred stock, $.01 par value, 5,000 shares authorized, none issued - - Common stock, $.01 par value; 25,000 shares authorized, 8,097 and 8,525 shares issued and outstanding 81 85 Additional paid-in capital 18,767 20,403 Deferred compensation (64) - Retained earnings 18,561 16,389 ------ ------ Total shareholders' equity 37,345 36,877 ------ ------ $56,894 $58,208 ======= =======
See accompanying notes to consolidated financial statements. 25 Manchester Equipment Company, Inc. and Subsidiaries Consolidated Statements of Income Years ended July 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- (in thousands except per share amounts) Revenue Products $197,194 $185,397 $189,659 Services 5,336 2,404 - ----- ----- ------ 202,530 187,801 189,659 ------- ------- ------- Cost of revenue Products 168,083 159,877 163,128 Services 3,847 1,309 - ----- ----- ------ 171,930 161,186 163,128 ------- ------- ------- Gross profit 30,600 26,615 26,531 Selling, general and administrative expenses 27,414 21,023 22,598 ------ ------ ------ Income from operations 3,186 5,592 3,933 Other income (expense): Interest expense (41) (225) (399) Investment income 587 560 25 Other - 60 9 ---- -- - Income before provision for income taxes 3,732 5,987 3,568 Provision for income taxes 1,560 2,450 1,430 ----- ----- ----- Net income $2,172 $3,537 $2,138 ====== ====== ====== Net income per share Basic $0.26 $0.45 $0.34 ===== ===== ===== Diluted $0.26 $0.45 $0.34 ===== ===== ===== Weighted average shares of common stock and equivalents outstanding Basic 8,494 7,779 6,247 ===== ===== ===== Diluted 8,499 7,779 6,247 ===== ===== =====
See accompanying notes to consolidated financial statements. 26 Manchester Equipment Company, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended July 31, 1998, 1997 and 1996
Additional Common Par Paid-in Deferred Retained Shares Value Capital Compensation Earnings Total ------ ----- ------- ------------ -------- ----- (in thousands) Balance July 31, 1995 6,263 $63 $ - $ - $5,974 $6,037 Purchase and retirement of stock (63) (1) - - 1 - Net income - - - - 2,138 2,138 -- -- -- -- ----- ----- Balance July 31, 1996 6,200 62 - - 8,113 8,175 Issuance of common stock 2,325 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 85 20,403 - 16,389 36,877 Deferred compensation 20 - 80 (80) - - Purchase and retirement of stock (448) (4) (1,781) - - (1,785) Stock option commission expense - - 65 - - 65 Stock award compensation expense - - - 16 - 16 Net income - - - - 2,172 2,172 -- -- -- -- ----- ----- Balance July 31, 1998 8,097 $81 $18,767 $(64) $18,561 $37,345 ===== === ======= ==== ======= =======
See accompanying notes to consolidated financial statements. 27 Manchester Equipment Company, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended July 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- (in thousands) Cash flows from operating activities: Net income $2,172 $3,537 $2,138 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,340 720 473 Allowance for doubtful accounts 75 210 132 Non-cash compensation and commission expense 81 12 - Deferred income taxes (138) (90) (86) Gain on disposition of assets - (37) (9) Change in assets and liabilities; net of the effects of acquisitions: Increase in accounts receivable (4,430) (545) (1,700) Decrease in inventory 1,882 515 548 (Increase) decrease in prepaid expenses and other current assets (12) (44) 41 (Increase) decrease in other assets - 342 (307) (Decrease) increase in accounts payable and accrued expenses (1,997) 221 2,715 Increase in deferred service contract revenue 213 118 27 Increase (decrease) in income taxes payable 225 (295) 205 Increase (decrease) in deferred compensation payable 22 (96) (15) (Purchase) sale of investments 2,907 (4,408) - ----- ------ Net cash provided by operating activities 2,340 160 4,162 ----- --- ----- Cash flows from investing activities: Capital expenditures (2,972) (2,439) (1,028) Proceeds from the sale of assets - - 55 Payment for acquisitions, net of cash acquired (2,921) (1,886) __- ------ ------ Net cash used in investing activities (5,893) (4,325) (973) ------ ------ ---- Cash flows from financing activities: Net repayments or borrowings from bank (1,274) (6,490) 900 Payments on note payable shareholder - (353) (118) Payments on capitalized lease obligations (140) (98) (31) Payments on notes payable - other (481) (33) - Net proceeds from initial public offering - 20,414 - Purchase and retirement of common stock (1,785) - - ------ ---- --- Net cash provided by (used in) financing activities (3,680) 13,440 751 ------ ------ --- Net increase (decrease) in cash and cash equivalents (7,233) 9,275 3,940 Cash and cash equivalents at beginning of year 15,049 5,774 1,834 ------ ----- ----- Cash and cash equivalents at end of year $7,816 $15,049 $5,774 ====== ======= ====== Cash paid during the year for: Interest $41 $225 $399 === ==== ==== Income taxes $1,428 $2,868 $1,290 ====== ====== ====== Other noncash transactions: Capitalized lease obligation $ - $ - $305 === == ==== Purchase of stock for notes payable-shareholder $ - $ - $471 === === ====
See accompanying notes to consolidated financial statements. 28 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (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 network 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 the majority of the Company's revenues. 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 securities in one of three categories: trading, available for sale, or held to maturity and its marketable equity securities as trading, or available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt 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 delivery of the product and completion of the services. Service contract fees are recognized as revenue ratably over the period of the applicable contract. Deferred service contract revenue represents 29 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) 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 $623, $521 and $943 for the years ended July 31, 1998, 1997 and 1996, 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 acquisitions 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 $183 and $19 at July 31, 1998 and 1997, respectively. Amortization expense of $164 and $19 for the years ended July 31, 1998 and 1997 is included in selling general and administrative expenses in the consolidated statements 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 -------------------- In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("EPS"). It replaces the presentation of primary EPS with the presentation of basic EPS and replaces fully diluted EPS with diluted EPS. It also requires a dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerators and denominators of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Prior periods' EPS data have been restated to conform with Statement No. 128. 30 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) Basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the weighted average number of common shares outstanding, plus the assumed exercise of dilutive stock options and warrants, less the number of treasury shares assumed to be purchased from the proceeds of such exercises using the average market price of the Company's common stock during each respective period. Options and warrants representing 380 and 1,052 shares for the years ended July 31, 1998 and 1997, respectively, were not included in the computation of diluted EPS because to do so would have been antidilutive. The following table reconciles the denominators of the basic and diluted per share computations. For each year, the numerator is the net income as reported.
1998 1997 1996 ---- ---- ---- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ Basic EPS 8,494,000 $0.26 7,779,000 $0.45 6,247,000 $0.34 ===== ===== ===== Effect of dilutive options 5,000 - - ----- ---- ---- Diluted EPS 8,499,000 $0.26 7,779,000 $0.45 6,247,000 $0.34 ========= ===== ========= ===== ========= =====
(l) Impairment of Long-Lived Assets ------------------------------- The Company evaluates its long-lived assets, certain intangibles, and goodwill related to those assets to be held and used, and long-lived assets and certain identifiable intangibles to be disposed of and recognizes 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 and 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 equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses, and long-term debt are estimated to be the carrying values at July 31, 1998 due to the short maturity of such instruments. 31 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) (p) Reclassifications ----------------- Certain prior year information has been reclassified to conform with the 1998 presentation format. (2) Investments ----------- The Company classified all its investments at July 31, 1998 and 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, 1998 and 1997 were as follows: Gross Unrealized Fair Value Holding Gain of Investment ------------ ------------- At July 31, 1998 U.S. government obligation $ 1 $ 501 Corporate commercial instruments - 1,000 -- ----- $ 1 $1,501 === ====== At July 31, 1997 U.S. government obligation $ 2 $1,007 Corporate commercial instruments - 3,401 -- ----- $ 2 $4,408 === ====== At July 31, 1998 and 1997 all investments had maturities of less than one year. (3) Property and Equipment ---------------------- Property and equipment at July 31, consist of the following: 1998 1997 ---- ---- Furniture and fixtures $2,327 $2,096 Machinery and equipment 4,289 3,401 Transportation equipment 426 281 Leasehold improvements 2,284 2,168 ----- ----- 9,326 7,946 Less accumulated depreciation and amortization 3,351 3,873 ----- ----- $5,975 $4,073 ====== ====== Depreciation and amortization expense amounted to $1,176, $701, and $473 for the years ended July 31, 1998, 1997 and 1996, respectively. (4) Acquisitions ------------ 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. ("Electrograph"). Electrograph is a specialized distributor of microcomputer peripherals, primarily in the eastern United States. The purchase price and transaction costs aggregated approximately $2,600, plus liabilities assumed. 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 which were repaid in fiscal 1998. 32 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) 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. Coastal Office Products, Inc. - ----------------------------- On January 2, 1998, the Company acquired all of the outstanding shares of Coastal Office Products, Inc. ("Coastal"), a value added reseller and provider of microcomputer services and peripherals to companies in the greater Baltimore, Maryland area. The acquisition, which has been accounted for as a purchase, consisted of a cash payment of approximately $3,100 plus potential future contingent payments. Contingent payments of up to $1,050 in each of calendar 1998 and 1999 will be determined based upon achieving certain agreed upon increases in revenues and pretax income for calendar 1998 and 1999 over calendar 1997 amounts. The cash payment was made from the Company's cash balances. Contingent payments, if any, would be paid in cash (or, under certain conditions, in Company common stock) on March 15, 1999 and March 15, 2000. The selling shareholders received employment agreements that also provided for the issuance of 20,000 shares of common stock. The fair value of the common stock, amounting to $80 was recorded as deferred compensation and is being expensed over the three year vesting period. Operating results of Coastal are included in the consolidated statements of income from the date of acquisition. The acquisition resulted in goodwill of $2,965, 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, 1998 and 1997 assume that the Coastal and Electrograph acquisitions occurred on August 1, 1996 and reflect the historical operations of the purchased businesses adjusted for lower interest on invested funds, contractually revised officer compensation and rent (for Coastal) and increased amortization, net of applicable income taxes, resulting from the acquisitions: Year ended July 31, 1998 1997 ---- ---- Revenue $206,105 $216,118 Net income $2,186 $3,749 Diluted net income per share $0.26 $0.48 The pro forma results of operations are not necessarily indicative of the actual results that would have occurred had the acquisitions been made at the beginning of the period, or of results which may occur in the future. (5) Accounts Payable and Accrued Expenses ------------------------------------- Accounts payable and accrued expenses consist of the following: July 31, -------- 1998 1997 ---- ---- Accounts payable, trade $14,659 $15,783 Accrued salaries and wages 2,462 1,630 Customer deposits 494 740 Other accrued expenses 743 1,130 --- ----- $18,358 $19,283 ======= ======= 33 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) 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, 1998, 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 $2,372 and $5,184 at July 31, 1998 and 1997, 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, 1998, retained earnings available for dividends amounts to approximately $8,400. (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 $85 (including interest of $3) in fiscal 1999. (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 $205, $161 and $124 for the years ended July 31, 1998, 1997 and 1996, 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, 1998 and 1997 the Company has recorded an asset (included with other assets) of $109 and $87, respectively, representing the cash surrender value of policies owned by the Company and a liability of the same amount relating to the unvested portion of benefits due under this plan. For the years ended July 31, 1998, 1997 and 1996, the Company recorded an expense of $105, $110 and $72 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 $1,255, $1,073 and $1,212 for the years ended July 31, 1998, 1997 and 1996. The following represents the Company's commitment under operating leases for the next five years ended July 31: 1999 $1,460 2000 $1,489 2001 $1,221 2002 $1,272 2003 $975 34 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) 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 January 12, 1998, the Company announced that it had reached an agreement in principle settling the Shareholder Securities Class Action ("Lawsuit") filed against the Company and certain of its officers in March 1997. The settlement resulted in the distribution of $1,350 minus approved attorney's fees and related expenses, to purchasers of the Company's common stock in the Company's initial public offering, and during the period of November 26, 1996 to February 13, 1997. The entire $1,350 cash settlement was paid by the Company's insurance carrier. The settlement included a release of all claims that were asserted or that could have been asserted in the Lawsuit against the Company and its officers and directors. The Company agreed to the settlement solely to avoid the expense, burdens and uncertainties of further litigation and continues to deny that it has any liability on account of the matters asserted in the litigation or that the Plaintiffs' claims had merit. (9) Line of Credit -------------- In July 1998, the Company entered into a revolving credit facility with its banks. Under the terms of the facility, the Company may borrow up to a maximum of $15,000. The maximum borrowings are reduced to $12,500 at April 1, 2000 and $10,000 on April 1, 2001. Borrowings under the facility bear interest at variable interest rates based upon several options available to the Company. The facility requires the Company to maintain certain financial ratios and covenants. As of July 31, 1998, there was no balance outstanding under this agreement, which expires on March 31, 2002. 35 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) (10) Income Taxes ------------ The provision for income taxes for the years ended July 31, 1998, 1997 and 1996 consists of the following: 1998 1997 1996 ---- ---- ---- Current Federal $1,300 $1,938 $1,166 State 398 602 350 --- --- --- 1,698 2,540 1,516 ----- ----- ----- Deferred Federal (105) (68) (73) State (33) (22) (13) --- --- --- (138) (90) (86) ---- --- --- $1,560 $2,450 $1,430 ====== ====== ====== The difference between the Company's effective income tax rate and the statutory rate is as follows, for the years ended July 31, 1998, 1997 and 1996: 1998 1997 1996 ---- ---- ---- Income taxes at statutory rate $1,269 $2,036 $1,213 State taxes, net of federal benefit 241 383 222 Other 50 31 (5) -- -- -- $1,560 $2,450 $1,430 ====== ====== ====== The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset at July 31, 1998 and 1997 were as follows: 1998 1997 ---- ---- Deferred tax assets: Allowance for doubtful accounts $450 $410 Deferred compensation 315 270 Other 192 139 --- --- Deferred tax asset $957 $819 ==== ==== 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 realized. 36 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (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 $782, $771, and $1,022 for the years ended July 31, 1998, 1997 and 1996, respectively. The Company paid legal fees to a law firm in which a director of the Company is a partner. Such fees amounted to $217, $655, and $383, including disbursements, in the fiscal years ended July 31, 1998, 1997, and 1996 respectively. During fiscal year ended July 31, 1998 and 1997 the Company received approximately $177 and $130, respectively, 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 are exercisable at a price of $12 per share and expire in December, 2001. 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. Such shares were subsequently retired. In September 1996, among other provisions, the retired minority 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 were reclassified from redeemable common stock to retained earnings. 37 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (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 Company 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 were 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. On December 22, 1997, the exercise price of all then outstanding options was reduced to $3.8125 per share, which was the closing market price of the Company's common stock on that date. The following table summarizes stock option activity to date: Average Exercise Balance Price ------- ----- Balance August 1, 1996 - - Granted 802,350 $9.63 ------- ----- Balance July 31, 1997 802,350 $9.63 Granted 220,000 $4.24 Cancelled (172,750) $3.8125 -------- ------- Balance July 31, 1998 849,600 $3.92 ======= ===== At July 31, 1998, 2,500 options exercisable at $3.8125 per share were exercisable and all options granted expire ten years from the date of grant. The range of exercise prices for options outstanding at July 31, 1998 was $3,8125 - $5.00 with a remaining life of approximately nine years. 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 underlying 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 $65 and $12 in fiscal 1998 and 1997, respectively. 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 years ended July 31, 1998 and 1997 would approximate the pro forma amounts below: 1998 1997 ---- ---- Net Income: As reported $2,172 $3,537 Pro forma 1,992 $3,464 Diluted net income per share: As reported $0.26 $0.45 Pro forma $0.23 $0.45 38 Manchester Equipment Company, Inc. and Subsidiaries Notes to Financial Statements July 31, 1998, 1997 and 1996 (in thousands, except share and per share data) The pro forma effects on net income and diluted net income per share for 1998 and 1997 may not be representative of the pro forma effects in future years. The fair value of options granted was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: 1998 1997 ---- ---- Expected dividend yield 0% 0% Expected stock volatility 27% 29% Risk free interest rate 5% 5% Expected option term until exercise (years) 4.70 4.27 The per share weighted average fair value of stock options granted during fiscal 1998 and 1997 was $1.09 and $1.05, respectively. Repurchase of Common Stock - -------------------------- During the year ended July 31, 1998, the Company repurchased 448,400 shares of its common stock at an aggregate purchase price of $1,785. Such shares were subsequently retired. (13) Major Customer and Vendors 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 7%, 15% and 16% of total revenues for the years ended July 31, 1998, 1997 and 1996, respectively. The Company's top three vendors accounted for approximately 24%, 13% and 11% of total product purchases for the year ended July 31, 1998. The Company's top two vendors accounted for approximately 17% and 15% of total product 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. One customer accounted for 5% of the Company's accounts receivable at July 31, 1998. 39 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(5) Lease dated June 23, 1997 between Registrant and First Willow, LLC. 10.5.i(5) Lease dated June 30, 1997 between Registrant and Angela C. Maffeo, Trustee Under the Will of John Capobianco. 10.5.j(6) Lease dated October 1, 1997 between Registrant and Spanish River Executive Plaza, Ltd. A/k/a Century Financial Plaza. 40 10.5.k(4) Lease dated January 2, 1998 between Coastal Office Products, Inc. and BC & HC Properties, LLC 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. 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.(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 dated April 15, 1997 among Electrograph Systems, Inc., Bitwise Designs, Inc., Electrograph Acquisition, Inc. and Registrant. 10.12(4) Definitive Purchase Agreement and Indemnity Agreement dated January 2, 1998 between Registrant and Coastal Office Products, Inc. 10.13 $15,000,000 Revolving Credit Facility Agreement dated July 21, 1998 between Registrant and Bank of New York, as Agent. 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. 4 Filed as the same numbered Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1998 (Commission File No. 0-21695) and incorporated herein by reference thereto. 5 Filed as the same numbered Exhibit to the Company's Annual Report on Form 10-K for the year ended July 31, 1997. 6 Filed as the same numbered Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1997 (Commission File No. 0-21695) and incorporated herein by reference thereto. 41 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 27, 1998 By: ss: Barry 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 R. Steinberg Date: October 27, 1998 ------------------ Barry R. Steinberg President, Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer) ss: Joel G. Stemple Date: October 27, 1998 --------------- Joel G. Stemple Executive Vice President and Director ss: Joseph Looney Date: October 27, 1998 ------------- Joseph Looney Chief Financial Officer (Principal Accounting Officer) ss: Joel Rothlein Date: October 27, 1998 ------------- Joel Rothlein Director ss: Julian Sandler Date: October 27, 1998 -------------- Julian Sandler Director ss: Michael Russell Date: October 27, 1998 --------------- Michael Russell Director ss: Bert Rudofsky Date: October 27, 1998 ------------- Bert Rudofsky Director 42 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, 1996 $718 $132 $ 50 $800 July 31, 1997 $800 $339 $40 $128 $1,051 July 31, 1998 $1,051 $351 $25 $277 $1,150
(a) Write-off amounts against allowance provided. (b) Recorded in connection with the acquisitions. EX-10.13 2 REVOLVING CREDIT FACILITY LOAN AGREEMENT Dated as of July 21, 1998 MANCHESTER EQUIPMENT CO., INC., a New York corporation having its principal place of business at 160 Oser Avenue, Hauppauge, New York 11788 (the "Borrower"), MANCHESTER INTERNATIONAL LTD., a New York corporation having its principal place of business at 160 Oser Avenue, Hauppauge, New York 11788 ("International" or a "Guarantor"), MANTECH COMPUTER SERVICES, INC., a New York corporation having its principal place of business at 160 Oser Avenue, Hauppauge, New York 11788 ("ManTech" or a "Guarantor"), MEC LEASING GROUP, LTD., a New York corporation having its principal place of business at 160 Oser Avenue, Hauppauge, New York 11788 ("MEC" or a "Guarantor"), MANCHESTER SOLUTIONS, INC., a New York corporation having its principal place of business at 160 Oser Avenue, Hauppauge, New York 11788 ("Solutions" or a "Guarantor"), ELECTROGRAPH SYSTEMS, INC., a New York corporation having its principal place of business at 160 Oser Avenue, Hauppauge, New York 11788 ("Electrograph" or a "Guarantor") and COASTAL OFFICE PRODUCTS, INC., a Maryland corporation having its principal place of business at 4812 Frankford Avenue, Baltimore, MD 21206 ("Coastal" or a "Guarantor"), THE BANK OF NEW YORK, a New York banking organization, having an office at 604 Broad Hollow Road, Melville, New York 11747 ("BNY" or a "Bank"), EUROPEAN AMERICAN BANK, a New York banking organization, having an office at EAB Plaza, Uniondale, New York 11555 ("EAB" or a "Bank") and THE BANK OF NEW YORK, having an office at One Wall Street, New York, New York 10286, as agent for the Banks (the "Agent"), hereby agree as follows: ARTICLE I SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ABR Applicable Margin" has the meaning set forth in Section 2.04 of this Agreement. "Adjusted LIBOR Rate" means, with respect to any Eurodollar Loan for any Interest Period, an interest rate per annum (rounded, - 1 - if not already a whole multiple of 1/100th of one (.01%) percent to the nearest 1/100th of one (.01%) percent) determined by the Agent to be equal to the quotient of (a) the LIBOR Rate divided by (b) a percentage equal to 100% minus the Eurocurrency Reserve Requirement as determined by the Agent on the date the Adjusted LIBOR Rate is determined. "Affiliate" means, as to any Person, (i) a Person which directly or indirectly controls, or is controlled by, or is under common control with, such Person; (ii) a Person which directly or indirectly beneficially owns or holds five (5%) percent or more of any class of voting stock of, or five (5%) percent or more of the equity interest in, such Person; or (iii) a Person five (5%) percent or more of the voting stock of which, or five (5%) or more of the equity interest in which, is directly or indirectly beneficially owned or held by such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Agent" means The Bank of New York, or any bank which succeeds to the position of Agent, as provided in this Agreement. "Aggregate Outstandings" means, at any time, the aggregate of (i) the principal amount of outstanding Revolving Credit Loans and (ii) the L/C Exposure. "Agreement" means this Loan Agreement, as amended, supplemented or modified from time to time. "Alternate Base Rate" means, for any day, an interest rate per annum equal to the higher of (i) the Prime Rate in effect on such day (computed on the basis of the actual number of days elapsed over a year of 365/366 days) or (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% (computed on the basis of the actual number of days elapsed over a year of 360 days). For purposes of this Agreement any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including, without limitation, the inability or failure of the Agent to obtain sufficient bids or publications in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (ii) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist. - 2 - "Alternate Base Rate Loan" means a Loan bearing interest at the Alternate Base Rate. "Arranger" means BNY Capital Markets, Inc. "Bank" or "Banks" means one or more, as the context requires, of BNY and each other lender which is, or becomes, a party to this Agreement. "Board of Governors" means the Board of Governors of the Federal Reserve System of the United States of America. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City, provided that, if the relevant day relates to a Eurodollar Loan, an Interest Period, or notice with respect to a Eurodollar Loan, the term "Business Day" shall mean a day on which dealings in Dollar deposits are also carried on in the London interbank market and banks are open for business in London. "Capital Lease" means a lease which has been or should be, in accordance with GAAP, capitalized on the books of the lessee. "Commitment" means, with respect to each Bank, the aggregate obligations of such Bank to (i) make Revolving Credit Loans to the Borrower pursuant to the terms and conditions of this Agreement and (ii) participate in Letters of Credit issued pursuant to the terms and conditions of this Agreement, in each case in the aggregate Dollar amount and Pro Rata Share set forth in Schedule 1.01-A annexed hereto, as modified by any reductions in the Total Commitment or by any assignments of all or any part of such Bank's Commitment. "Commitment Letter" means the letter from BNY to the Borrower, dated January 23, 1998, pursuant to which BNY agreed to extend seventy (70%) percent of a credit facility as described therein to the Borrower and the Arranger agreed to use its best efforts to arrange, structure and syndicate such credit facility. "Consolidated Affiliates" means, as to any Person, those Affiliates of such Person which are consolidated with such Person in the financial statements delivered pursuant to Section 5.01(b) of this Agreement. "Consolidated Capital Expenditures" means, as to any Person, the aggregate amount of any expenditures (including purchase money Debt or purchase money Liens) by such Person and its Consolidated Affiliates for assets (including fixed assets acquired under Capital Leases) which it is contemplated will be used or usable in - 3 - fiscal years subsequent to the year of acquisition, computed and consolidated in accordance with GAAP. "Consolidated Current Liabilities" means, as to any Person, the aggregate amount of all liabilities of such Person and its Consolidated Affiliates (including tax and other proper accruals) which would be properly classified as current liabilities, computed and consolidated in accordance with GAAP. "Consolidated Funded Debt" means, as to any Person, the aggregate of the Funded Debt of such Person and its Consolidated Affiliates, computed and consolidated in accordance with GAAP. "Consolidated Tangible Net Worth" means, as to any Person, the excess of (i) such Person's Consolidated Total Assets, less all intangible assets properly classified as such in accordance with GAAP, including, but without limitation, patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, permits and goodwill (whether representing the excess of cost of tangible assets acquired over book value or otherwise), over (ii) such Person's Consolidated Total Liabilities. "Consolidated Total Assets" means, as to any Person, the aggregate net book value of the assets of such Person and its Consolidated Affiliates after all appropriate adjustments in accordance with GAAP (including, without limitation, reserves for doubtful receivables, obsolescence, depreciation and amortization and excluding the amount of any write-up or revaluation of any asset), computed and consolidated in accordance with GAAP. "Consolidated Total Liabilities" means, as to any Person, all of the liabilities of such Person and its Consolidated Affiliates, including all items which, in accordance with GAAP, would be included on the liability side of a balance sheet (other than capital stock, capital surplus and retained earnings), computed and consolidated in accordance with GAAP. "Debt" means, as to any Person, all (i) indebtedness or liability of such Person for borrowed money; (ii) indebtedness of such Person for the deferred purchase price of property or services (including trade obligations); (iii) obligations of such Person as a lessee under Capital Leases; (iv) current liabilities of such Person in respect of unfunded vested benefits under any Plan; (v) obligations of such Person in respect of letters of credit issued for the account of or upon the application of such Person; (vi) obligations of such Person arising under acceptance facilities; (vii) guaranties, endorsements (other than for collection or deposit in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any other Person, or otherwise to assure a - 4 - creditor against loss; (viii) obligations secured by any Lien on property owned by such Person whether or not the obligations have been assumed; (ix) liabilities of such Person under any preferred stock or other preferred equity instrument which, at the option of the holder or upon the occurrence of one or more events, is redeemable by such holder, or which, at the option of such holder is convertible into Debt; (x) indebtedness of any partnership of which such Person is a general partner; and (xi) all other liabilities recorded as such, or which should be recorded as such, on such Person's financial statements in accordance with GAAP. "Default" means any of the events specified in Section 6.01 of this Agreement, whether or not any requirement for notice or lapse of time or any other condition has been satisfied. "Deutsche" means Deutsche Financial Services Corporation. "Deutsche Agreement" means the Agreement for Wholesale Financing dated as of August 25, 1997, between the Borrower and Deutsche, as it may be amended or modified from time to time and shall include the Terms Letter, as defined therein. "Dollars" and the sign "$" mean lawful money of the United States of America. "EBIT" means, as to the Borrower and its Consolidated Affiliates for any period, the sum of (i) net income (excluding extraordinary gains and including extraordinary losses), plus (ii) interest expense, plus (iii) federal, state and local income taxes accrued, in each case measured for the Borrower and its Consolidated Affiliates on a consolidated basis for such period, computed and consolidated in accordance with GAAP. "EBITDA" means, as to the Borrower and its Consolidated Affiliates for any period, the sum of (i) net income (excluding extraordinary gains and including extraordinary losses), plus (ii) interest expense, plus (iii) depreciation expense, plus (iv) amortization of intangible assets plus (v) federal, state and local income taxes accrued, in each case measured for the Borrower and its Consolidated Affiliates on a consolidated basis for such period, computed and consolidated in accordance with GAAP. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, the regulations promulgated thereunder and the published interpretations thereof as in effect from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) which together with any other Person would be - 5 - treated, with such Person, as a single employer under Section 4001 of ERISA. "Eurocurrency Reserve Requirement" means, with respect to the Adjusted LIBOR Rate for an Interest Period, the daily average of the stated maximum rate (expressed as a decimal) at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained at the beginning of such Interest Period under any regulation (including, but without limitation, Regulation D) promulgated by the Board of Governors (or any successor thereto or other governmental authority having jurisdiction over the Agent) by the Person which is the Agent against "Eurocurrency liabilities" (as such term is used in Regulation D), but without benefit or credit for proration, exemptions or offsets that might otherwise be available to the Person which is the Agent from time to time under Regulation D. Without limiting the effect of the foregoing, the Eurocurrency Reserve Requirement shall reflect any other reserves required to be maintained by the Person which is the Agent against (1) any category of liabilities that includes deposits by reference to which the Adjusted LIBOR Rate is to be determined; or (2) any category of extension of credit or other assets that include loans bearing interest at an Adjusted LIBOR Rate. "Eurodollar Loan" means a Loan bearing interest at a rate based on the Adjusted LIBOR Rate in accordance with the provisions of Article II hereof. "Event of Default" means any of the events specified in Section 6.01 of this Agreement, provided that any requirement for notice or lapse of time or any other condition has been satisfied. "Federal Funds Effective Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three (3) federal funds brokers of recognized standing selected by it. "Funded Debt" means, as to any Person, such Debt of such Person which is (i) all indebtedness or liability for borrowed money; (ii) all indebtedness or liability for the deferred purchase price of property (excluding trade obligations); (iii) all obligations as a lessee under Capital Leases; (iv) all obligations to reimburse the Issuing Bank for the amount of all unmatured drafts accepted or deferred payment obligations incurred under - 6 - Letters of Credit, and (v) all liabilities of such Person under any preferred stock which, at the option of the holder or upon the occurrence of one or more certain events, is redeemable by such holder, or which, at the option of such holder is convertible into Debt. "Funded Debt to EBITDA Ratio" means, as to the Borrower and its Consolidated Affiliates for any period, the ratio of (i) Consolidated Funded Debt (as of the last day of such period) to (ii) EBITDA for such period. The Funded Debt to EBITDA Ratio shall be measured and tested at the end of each fiscal quarter and, in the case of EBITDA, for a period covering the four (4) fiscal quarters then ended. "GAAP" means Generally Accepted Accounting Principles. "Generally Accepted Accounting Principles" means those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through the Financial Accounting Standards Board ("FASB") or through other appropriate boards or committees thereof and which are consistently applied for all periods so as to properly reflect the financial condition, operations and cash flows of a Person, except that any accounting principle or practice required to be changed by the FASB (or other appropriate board or committee of the FASB) in order to continue as a generally accepted accounting principle or practice may be so changed. Any dispute or disagreement between the Borrower and the Agent relating to the determination of Generally Accepted Accounting Principles shall, in the absence of manifest error, be conclusively resolved for all purposes hereof by the written opinion with respect thereto, delivered to the Agent, of the independent accountants selected by the Borrower and approved by the Agent for the purpose of auditing the periodic financial statements of the Borrower. "Guarantor" or Guarantors" means one or more of those Persons identified as Guarantors in the preamble to this Agreement, and any other Person required to guarantee the obligations of the Borrower in accordance with Section 5.01(k) of this Agreement. "Guaranty" or "Guaranties" means the guaranty or guaranties executed and delivered by the Guarantors pursuant to Section 3.01(h) or Section 5.01(k) of this Agreement. "Hazardous Materials" includes, without limitation, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or related materials defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation - 7 - Act, as amended (49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 9601 et seq.), and in the regulations adopted and publications promulgated pursuant thereto, or any other federal, state or local environmental law, ordinance, rule or regulation. "Intercreditor Agreement" means an agreement between Deutsche and the Agent pursuant to which they agree that if any security interest in the assets of the Borrower is obtained by Deutsche and the Agent (for the benefit of the Banks), notwithstanding the priority of such security interests, as between Deutsche and the Agent (i) Deutsche shall have a first priority security interest in the Borrower's inventory financed through the Deutsche Agreement (but not in the proceeds of such inventory) and (ii) the Agent (for the benefit of the Banks) shall have a first priority security interest in all other personal property of the Borrower. "Interest Coverage Ratio" means, as to the Borrower and its Consolidated Affiliates for any period, the ratio of (i) EBIT for such period to (ii) interest expense for such period. The Interest Coverage Ratio shall be measured and tested at the end of each fiscal quarter for a period covering the four (4) fiscal quarters then ended. "Interest Determination Date" means the date on which an Alternate Base Rate Loan is converted to a Eurodollar Loan and, in the case of a Eurodollar Loan, the last day of the applicable Interest Period. "Interest Payment Date" means (i) as to each Eurodollar Loan, (a) in the case of Eurodollar Loans with Interest Periods of less than three (3) months, the last day of such Interest Period and (b) in the case of Eurodollar Loans with Interest Periods of three (3) months or more, the last Business Day of each calendar quarter during the applicable Interest Period and the last day of the applicable Interest Period and (ii) as to each Alternate Base Rate Loan, the last Business Day of each month. "Interest Period" means as to any Eurodollar Loan, the period commencing on the date of such Eurodollar Loan and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect (or, if there is no numerically corresponding day, on the last Business Day of such month); provided, however, (i) that no Interest Period shall end later than the Maturity Date, (ii) if any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (iii) no Interest Period representing a portion of the principal required to be paid in accordance with the - 8 - scheduled reduction in the Total Commitment may be selected unless the outstanding Alternate Base Rate Loans and Eurodollar Loans for which the relevant Interest Periods end on or prior to the date of such payment are in an aggregate amount which will be sufficient to make such payment, (iv) interest shall accrue from and including the first day of such Interest Period to but excluding the date of payment of such interest, (v) no Interest Period may have a duration of less than one month and (vi) no Interest Period of particular duration may be selected by the Borrower if the Agent determines, in its sole discretion, that Eurodollar Loans with such maturities are not generally available. "Investment" means any stock, evidence of Debt or other security of any Person, any loan, advance, contribution of capital, extension of credit or commitment therefor, including without limitation the guaranty of loans made to others (except for current trade and customer accounts receivable for services rendered in the ordinary course of business and payable in accordance with customary trade terms in the ordinary course of business) and any purchase of (i) any security of another Person or (ii) any business or undertaking of any Person or any commitment or option to make any such purchase, or any other investment. "Issuing Bank" means BNY. "Letters of Credit" means standby letters of credit issued by the Issuing Bank for the account of the Borrower pursuant to the terms and conditions of this Agreement. "L/C Documents" means all documents required to be executed and delivered by the Borrower in connection with the issuance of Letters of Credit in accordance with the usual and customary practices of the Issuing Bank. "L/C Exposure" means, at any time, the aggregate of (i) the amount available to be drawn on all outstanding Letters of Credit and (ii) the amount of any payments made by the Issuing Bank under any Letters of Credit that have not been reimbursed by the Borrower. "L/C Sublimit" means One Million ($1,000,000.00) Dollars. "LIBOR Applicable Margin" has the meaning set forth in Section 2.04 of this Agreement. "LIBOR Rate" means the rate, as reported by BNY to the Agent, quoted by BNY to leading banks in the interbank eurodollar market as the rate at which BNY is offering Dollar deposits in an amount equal approximately to the Eurodollar Loan of BNY to which an Interest Period shall apply for a period equal to such Interest - 9 - Period, as quoted at approximately 11:00 a.m. (New York City time) two Business Days prior to the first day of such Interest Period. "Lien" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, or other security agreement or preferential arrangement, charge, or encumbrance of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any of the foregoing. "Loan" or "Loans" means one or more Revolving Credit Loans and may refer to one or more Alternate Base Rate Loans and/or one or more Eurodollar Loans, as the context requires. "Loan Documents" means this Agreement, the Note, the Guaranties, the L/C Documents, the Commitment Letter and any other document executed or delivered pursuant to this Agreement. "Material Adverse Change" means, as to any Person, (i) a material adverse change in the financial condition, business, operations, properties, prospects or results of operations of such Person or (ii) any event or occurrence which is reasonably likely to have a material adverse effect on the ability of such Person to perform its obligations under the Loan Documents. "Maturity Date" means March 31, 2002. "Multiemployer Plan" means a Plan described in Section 4001(a)(3) of ERISA which covers employees of the Borrower or any ERISA Affiliate. "Note" or "Notes" means one or more of the Revolving Credit Notes as the context requires. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Acquisition" means an acquisition by the Borrower or any Subsidiary of the Borrower by merger, consolidation or purchase of a voting majority of the stock of another Person or the purchase of all or substantially all of the assets of another Person (or of a division or other operating component of another Person) (an "Acquisition") if all of the following conditions are met: - 10 - (i) Such Acquisition is identified as a "Permitted Acquisition" by the Borrower in writing to the Agent; (ii) The Person to be acquired is domiciled in, has the majority of its assets located in, and generates the majority of its revenues from sources within, the United States; (iii) The majority of such Person's revenue is derived from a line or lines of business similar to the line or lines of business engaged in by the Borrower as of the date of this Agreement, as are set forth and described in the Borrower's Form 10-K for its fiscal year ended July 31, 1997; (iv) If the aggregate consideration paid for the subject Acquisition and all other Permitted Acquisitions since the date of this Agreement exceeds $1,500,000.00, the Agent and the Banks shall have received, at least ten (10) Business Days prior to the closing of such Acquisition, a certificate signed by the president or the chief financial officer of the Borrower to the effect that (and including calculations indicating that) on a pro forma basis after giving effect to such Acquisition: (a) all representations and warranties contained in the Loan Documents will remain true and correct, (b) the Borrower will remain in compliance with all covenants contained in the Loan Documents, and (c) no Default or Event of Default has occurred and is continuing or will occur as a result of the consummation of such Acquisition; and (v) If the aggregate consideration paid for the subject Acquisition and all other Permitted Acquisitions since the date of this Agreement exceeds $1,500,000.00, the Agent and the Banks shall have received, at least ten (10) Business Days prior to the closing of such Acquisition, (i) at least two (2) years of historical financial statements of such Person, and (ii) a set of projections (prepared on a consolidated and consolidating basis), setting forth in reasonable detail the pro forma effect of such Acquisition and showing compliance by the Borrower with all covenants set forth in Section 5.03 of this Agreement for the remainder of the term of this Agreement. The projections to be delivered hereunder shall include and specify the assumptions used to prepare such projections. "Permitted Acquisition Loans" means Revolving Credit Loans, the proceeds of which are used to fund Permitted Acquisitions. "Permitted Acquisition Sublimit" means Ten Million ($10,000,000.00) Dollars. "Permitted Investments" means, (i) direct obligations of the United States of America or any governmental agency thereof, or - 11 - obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (ii) time certificates of deposit having a maturity of one year or less issued by any commercial bank organized and existing under the laws of the United States or any state thereof and having aggregate capital and surplus in excess of $1,000,000,000.00; (iii) money market mutual funds having assets in excess of $2,500,000,000; (iv) commercial paper rated not less than P-1 or A-1 or their equivalent by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"), respectively; (v) tax exempt securities rated Prime 2 or better by Moody's or A-1 or better by S&P; (vi) loans or advances to Guarantors permitted by Section 5.02(g) of this Agreement; (vii) Investments in connection with Permitted Acquisitions (subject to the limitations of Section 5.02(d) hereof) and (viii) any Investment in a Person which thereupon becomes a Guarantor pursuant to Section 5.01(k) of this Agreement. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity or a federal, state or local government, or a political subdivision thereof or any agency of such government or subdivision. "Plan" means any employee benefit plan established, maintained, or to which contributions have been made by the Borrower or any ERISA Affiliate. "Prime Rate" means the prime commercial lending rate of the Person which is the Agent as publicly announced to be in effect from time to time, each change in the Prime Rate to be effective on the date such change is announced to be effective. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time. "Pro Rata Share" means, with respect to each Bank, its pro rata share of the initial Total Commitment, as set forth in Schedule 1.01 annexed hereto as the same may be modified by any assignment of all or any part of such Bank's Commitment. "Quick Asset Ratio" means, as to the Borrower and its Consolidated Affiliates, as of any date, the ratio of (i) the sum of (a) cash on hand or on deposit in banks, (b) readily marketable securities issued by the United States, (c) readily marketable commercial paper rated "A-2" or better by S&P (or having a similar rating by any similar organization which rates commercial paper), (d) certificates of deposit or banker's acceptances issued by - 12 - commercial banks of recognized standing operating in the United States, and (e) accounts receivable to (ii) the sum of (a) Consolidated Current Liabilities and (b) to the extent not included in Consolidated Current Liabilities, the outstanding Revolving Credit Loans. "Regulation D" means Regulation D of the Board of Governors, as the same may be amended and in effect from time to time. "Regulation G" means Regulation G of the Board of Governors, as the same may be amended and in effect from time to time. "Regulation T" means Regulation T of the Board of Governors, as the same may be amended and in effect from time to time. "Regulation U" means Regulation U of the Board of Governors, as the same may be amended and in effect from time to time. "Regulation X" means Regulation X of the Board of Governors, as the same may be amended and in effect from time to time. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Required Banks" means, (i) at any time while there are Revolving Credit Loans outstanding, those Banks having, in the aggregate, seventy-five (75%) percent of such Revolving Credit Loans or (ii) at any time while there are no Revolving Credit Loans outstanding but the Total Commitment is available, those Banks having, in the aggregate, seventy-five (75%) percent of the Total Commitment. "Revolving Credit Loan" or "Revolving Credit Loans" means one or more, as the context requires of the revolving credit loans made by the Banks to the Borrower pursuant to the terms and conditions of this Agreement. "Revolving Credit Note" or "Revolving Credit Notes" means one or more, as the context requires, of the promissory notes of the Borrower payable to the order of each of the Banks, in substantially the form of Exhibit A annexed hereto, evidencing the indebtedness of the Borrower to each such Bank resulting from Revolving Credit Loans made by such Bank to the Borrower pursuant to this Agreement. "S&P" shall have the meaning given such term in the definition of "Permitted Investments". - 13 - "Subsidiary" means, as to any Person, any corporation, partnership, limited liability company, joint venture or other Person whether now existing or hereafter organized or acquired: (i) in the case of a corporation, of which a majority of the securities having ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) are at the time owned by such Person and/or one or more Subsidiaries of such Person or (ii) in the case of a partnership, limited liability company, joint venture or similar entity, of which a majority of the partnership, membership or other ownership interests are at the time owned by such Person and/or one or more of its Subsidiaries. "Total Commitment" means the aggregate of the Commitments of each of the Banks, which (i) from the date of this Agreement until March 31, 2000 will be $15,000,000.00; (ii) from April 1, 2000 until March 31, 2001 will be $12,500,000.00; and (iii) from April 1, 2001 until the Maturity Date will be $10,000,000.00. "Unused Facility Fee" means the fee payable pursuant to Section 2.06 of this Agreement. "Year 2000 Issue" means the failure of computer software, hardware and firmware systems and equipment containing embedded computer chips to properly receive, transmit, process, manipulate, store, retrieve, re-transmit or in any other way utilize data and information due to the occurrence of the year 2000 or the inclusion of dates on or after January 1, 2000. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to and including". SECTION 1.03. Accounting Terms. Except as otherwise herein specifically provided, each accounting term used herein shall have the meaning given to it under GAAP. - 14 - ARTICLE II SECTION 2.01. The Revolving Credit Loans. (a) The Banks agree, severally but not jointly, on the terms and subject to the conditions of this Agreement, and in reliance upon the representations and warranties of the Borrower and the Guarantors set forth in this Agreement, that the Banks will, until the Maturity Date, lend to the Borrower such Revolving Credit Loans as the Borrower may request from time to time, which Loans may be borrowed, repaid and reborrowed, provided, however, that (x) the Aggregate Outstandings at any one time shall not exceed the Total Commitment as it reduces from time to time in accordance with the definition of "Total Commitment" and as it may be further reduced pursuant to Section 2.07 hereof and (y) each Bank's Pro Rata Share of Revolving Credit Loans and L/C Exposure shall not exceed its Pro Rata Share of the Total Commitment. (b) Each Revolving Credit Loan shall be an Alternate Base Rate Loan or a Eurodollar Loan (or a combination thereof) as the Borrower may request subject to and in accordance with Section 2.02 hereof. Any Bank may at its option make any Eurodollar Loan by causing a foreign branch or affiliate to make such Loan, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of such Bank's Revolving Credit Note. Subject to the other provisions of this Agreement, Revolving Credit Loans of more than one type may be outstanding at the same time provided, however, that not more than five (5) Eurodollar Loans may be outstanding at the same time. SECTION 2.02. Notice of Revolving Credit Loans. (a) The Borrower shall give the Agent irrevocable written, telex, telephonic (immediately confirmed in writing) or facsimile notice (i) at least three (3) Business Days prior to each Revolving Credit Loan comprised in whole or in part of one or more Eurodollar Loans (subject to availability) and (ii) prior to 11:00 a.m. on the day of each Revolving Credit Loan consisting solely of an Alternate Base Rate Loan. Upon receipt of such notice, the Agent shall promptly notify each Bank of the contents thereof and of the amount, type and other relevant information regarding the Loan requested. Thereupon, each Bank shall, not later than 2:00 p.m. (New York time), transfer immediately available funds equal to such Bank's share of the requested borrowing to the Agent, which, provided the conditions of Sections 3.01 and 3.02 of this Agreement have been met, and provided the Banks have made such transfers, shall thereupon transfer immediately available funds equal to the requested borrowing to the Borrower's account with the Agent. If - 15 - a notice of borrowing is received by the Agent after 11:00 a.m. on a Business Day, such notice shall be deemed to have been given on the next succeeding Business Day. Any Bank's failure to make any requested Loan shall not relieve any other Bank of its obligation to make such Loan, but such other Bank shall not be liable for such failure of the first Bank. (b) Each notice given pursuant to this Section 2.02 shall specify the date of such borrowing, the amount thereof and whether such Loan is to be (or what portion or portions thereof are to be) an Alternate Base Rate Loan or a Eurodollar Loan and, if such Loan or any portion thereof is to consist of one or more Eurodollar Loans, the principal amounts thereof and Interest Period or Interest Periods with respect thereto. If no election as to a type of Loan is specified in such notice, such Loan (or portion thereof as to which no election is specified) shall be an Alternate Base Rate Loan. If no election as to the Interest Period is specified in such notice with respect to any Eurodollar Loan, the Borrower shall be deemed to have selected an Interest Period of one month's duration and if a Eurodollar Loan is requested when such Loans are not available, the Borrower shall be deemed to have requested an Alternate Base Rate Loan. (c) The Borrower shall have the right, on such notice to the Agent as is required pursuant to (a) above, (x) to continue any Eurodollar Loan or a portion thereof into a subsequent Interest Period (subject to availability) and (y) to convert an Alternate Base Rate Loan into a Eurodollar Loan (subject to availability) subject to the following: (i) if a Default or an Event of Default shall have occurred and be continuing at the time of any proposed conversion or continuation only Alternate Base Rate Loans shall be available; (ii) in the case of a continuation or conversion of fewer than all Loans, the aggregate principal amount of each Eurodollar Loan continued or into which a Loan is converted shall be in the minimum principal amount of $250,000.00 and in increased integral multiples of $100,000.00; (iii) each continuation or conversion shall be effected by each Bank applying the proceeds of the new Loan to the Loan (or portion thereof) being continued or converted; (iv) if the new Loan made as a result of a continuation or conversion shall be a Eurodollar Loan, the first Interest Period with respect thereto shall commence on the date of continuation or conversion; (v) each request for a Eurodollar Loan which shall fail to state an applicable Interest Period shall be deemed to be a request for an Interest Period of one month and each request for a - 16 - Eurodollar Loan made when such Loans are not available shall be deemed to be a request for an Alternate Base Rate Loan; (vi) in the event that the Borrower shall not give notice to continue a Eurodollar Loan as provided above, such Loan shall automatically be converted into an Alternate Base Rate Loan at the expiration of the then current Interest Period. (d) Unless the Agent shall have received notice from a Bank prior to 2:00 p.m. (New York time) on the requested date, that such Bank will not make available to the Agent the Loan requested to be made on such date, the Agent may assume that such Bank has made such Loan available to the Agent on such date in accordance with Section 2.02(a) hereof and the Agent in its sole discretion may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount on behalf of such Bank. If and to the extent such Bank shall not have so made available to the Agent the Loan requested to be made on such date and the Agent shall have so made available to the Borrower a corresponding amount on behalf of such Bank, such Bank shall, on demand, pay to the Agent such corresponding amount together with interest thereon, at the Federal Funds Effective Rate plus two (2%) percent, for each day from the date such amount shall have been so made available by the Agent to the Borrower until the date such amount shall have been repaid to the Agent. If such Bank does not pay such corresponding amount promptly upon the Agent's demand therefor, the Agent shall promptly notify the Borrower and the Borrower shall, not later than one (1) Business Day following such notice, repay such corresponding amount to the Agent together with accrued interest thereon at the applicable rate or rates provided (i) in Section 2.04 hereof or (ii) if the Borrower fails to repay such corresponding amount within three (3) Business Days after such notice, in Section 2.16 hereof. SECTION 2.03. Revolving Credit Notes. (a) Each Revolving Credit Loan shall be (i) in the case of each Alternate Base Rate Loan in the minimum principal amount of $100,000.00, and in increased integral multiples of $100,000.00 and (ii) in the case of each Eurodollar Loan in the minimum principal amount of $250,000.00 and in increased integral multiples of $100,000.00 (except that, if any such Alternate Base Rate Loan so requested shall exhaust the remaining available Total Commitment, such Alternate Base Rate Loan may be in an amount equal to the amount of the remaining available Total Commitment). Each Revolving Credit Loan shall be evidenced by the Revolving Credit Notes. Each Revolving Credit Note shall be dated the date hereof and be in the principal amount set forth next to the applicable Bank's name on Schedule 1.01 annexed hereto, as modified by any assignment of all or any part of such Bank's Commitment, and shall mature on the Maturity Date, at which time the entire outstanding principal balance and all interest thereon shall be due and payable. Each Revolving Credit Note shall be - 17 - entitled to the benefits and subject to the provisions of this Agreement. (b) At the time of the making of each Revolving Credit Loan and at the time of each payment of principal thereon, each Bank is hereby authorized by the Borrower to make a notation on the schedule annexed to its Revolving Credit Note of the date and amount, and the type and Interest Period, if applicable, of the Revolving Credit Loan or payment, as the case may be. Failure to make a notation with respect to any Revolving Credit Loan shall not limit or otherwise affect the obligation of the Borrower hereunder or under the applicable Revolving Credit Note, and any payment of principal by the Borrower shall not be affected by the failure to make a notation thereof on said schedule. SECTION 2.04. Payment of Interest on the Revolving Credit Notes. (a) In the case of an Alternate Base Rate Loan, interest shall be payable at a rate per annum (computed as provided in the definition of "Alternate Base Rate") equal to the Alternate Base Rate plus the ABR Applicable Margin as in effect from time to time. Such interest shall be payable on each Interest Payment Date, commencing with the first Interest Payment Date after the date of such Alternate Base Rate Loan, on each Interest Determination Date and on the Maturity Date. Any change in the rate of interest on the Revolving Credit Notes due to a change in the Alternate Base Rate or a change in the ABR Applicable Margin shall take effect as of the date of such change in the Alternate Base Rate or ABR Applicable Margin, as applicable. (b) In the case of a Eurodollar Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Adjusted LIBOR Rate plus the LIBOR Applicable Margin as in effect on the first day of the Interest Period for such Eurodollar Loan. Such interest shall be payable on each Interest Payment Date, commencing with the first Interest Payment Date after the date of such Eurodollar Loan and on the Maturity Date. In the event Eurodollar Loans are available, the Agent shall determine the rate of interest applicable to each requested Eurodollar Loan for each Interest Period at 11:00 a.m., New York City time, or as soon as practicable thereafter, two (2) Business Days prior to the commencement of such Interest Period and shall use its best efforts to notify the Borrower and the Banks of the rate of interest so determined. Such determination shall be conclusive absent manifest error. (c) The ABR Applicable Margin and the LIBOR Applicable Margin shall each be determined on the basis of the Borrower's Funded Debt to EBITDA Ratio, as calculated based on the Borrower's consolidated - 18 - financial statements for its most recent fiscal year or quarter. The ABR Applicable Margin and the LIBOR Applicable Margin shall be determined as follows: (i) The initial ABR Applicable Margin shall be -0- basis points and the initial LIBOR Applicable Margin shall be 75 basis points, and shall be applicable until delivery of the Borrower's consolidated financial statements for its fiscal quarter ending April 30, 1998 pursuant to Section 5.01(b) hereof (subject to increase in the event that the Borrower fails to deliver such statements as required below). Beginning with delivery of the Borrower's consolidated financial statements for the fiscal quarter ending April 30, 1998, and for each fiscal year or quarter thereafter: (ii) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such fiscal year or quarter is less than 0.50 to 1.00, the ABR Applicable Margin shall be -0- basis points and the LIBOR Applicable Margin shall be 75 basis points. (iii) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such fiscal year or quarter is equal to or greater than 0.50 to 1.00 but less than 1.50 to 1.00, the ABR Applicable Margin shall be -0- basis points and the LIBOR Applicable Margin shall be 100 basis points. (iv) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such fiscal year or quarter is equal to or greater than 1.50 to 1.00 but less than 2.00 to 1.00, the ABR Applicable Margin shall be -0- basis points and the LIBOR Applicable Margin shall be 125 basis points. (v) If the Borrower's Funded Debt to EBITDA Ratio as of the end of such fiscal year or quarter is equal to or greater than 2.00 to 1.00, the ABR Applicable Margin shall be -0- basis points and the LIBOR Applicable Margin shall be 150 basis points. The Applicable Margin for any Eurodollar Loan shall remain in effect for the term of the Interest Period for such Eurodollar Loan and shall not change during such term as a result of this Section 2.04. In the event that the Borrower fails to deliver any financial statements and the related certificate within five (5) days of the due date therefor set forth in Section 5.01(b)(i), (ii), (iv) or (v) hereof, unless an Event of Default is declared as a result of such failure, the ABR Applicable Margin shall be -0- basis points and the LIBOR Applicable Margin shall be 150 basis points until the Borrower delivers all required financial statements and certificates at which time the ABR Applicable Margin and the LIBOR - 19 - Applicable Margin shall be redetermined as provided for in this Section 2.04. Upon the occurrence and during the continuance of a Default or an Event of Default the ABR Applicable Margin and the LIBOR Applicable Margin may, as a result of changes in the Borrower's Funded Debt to EBITDA Ratio, increase but will not decrease. (d) All interest shall be paid to the Agent for pro rata distribution to the Banks. SECTION 2.05. Use of Proceeds. (a) The proceeds of the Revolving Credit Loans shall be used by the Borrower (i) to finance working capital, (ii) subject to the Permitted Acquisition Sublimit, to finance Permitted Acquisitions and (iii) for general corporate purposes. No part of the proceeds of any Loan may be used for any purpose that directly or indirectly violates or is inconsistent with the provisions of Regulation G, T, U or X. (b) Letters of Credit shall, subject to the L/C Sublimit, be issued exclusively to finance trade transactions and other commercial transactions related to the working capital needs of the Borrower. SECTION 2.06. Fees. (a) The Borrower agrees to pay to the Agent, for pro rata distribution to the Banks, from the date of this Agreement and for so long as the Total Commitment remains in effect, on the last Business Day of each calendar quarter, and on any day that the Total Commitment is reduced or terminated, an Unused Facility Fee computed at a rate per annum equal to 0.25% (computed on the basis of the actual number of days elapsed over 360 days) on the average daily unused amount of the Total Commitment, such Unused Facility Fee being payable for the calendar quarter, or part thereof, preceding the payment date. (b) The Borrower agrees to pay to the Agent, for its services as Agent hereunder, those fees, charges and expenses as the Borrower and the Agent may mutually agree. SECTION 2.07. Reduction of Commitment. Upon at least three (3) Business Days' prior written notice to the Agent, the Borrower may irrevocably elect to have the unused Total Commitment terminated in whole or reduced in part provided, however, that any such partial reduction shall be in a minimum amount of $1,000,000.00, or whole multiples thereof. The Total Commitment, once terminated or reduced, shall not be reinstated without the express written approval of the Agent and the Banks. Any reduction to the Total Commitment shall be applied pro rata to the respective Commitments of each Bank. - 20 - SECTION 2.08. Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Alternate Base Rate Loan, in whole or in part, without premium or penalty on one (1) Business Day's prior irrevocable written notice to the Agent provided, however, that each such prepayment shall be on a Business Day and shall be in an aggregate principal amount which is in the minimum amount of $100,000.00 and in increased integral multiples of $100,000.00. (b) The Borrower shall have the right at any time and from time to time, subject to the provisions of this Agreement, including but without limitation Section 2.13 hereof, to prepay any Eurodollar Loan, in whole or in part, on three (3) Business Days' prior irrevocable written notice to the Agent, provided, however, that each such prepayment shall be on a Business Day and shall be in an aggregate principal amount which is in the minimum amount of $250,000.00 and in increased integral multiples of $100,000.00. (c) The notice of prepayment under this Section 2.08 shall set forth the prepayment date and the principal amount of the Loan being prepaid and shall be irrevocable and shall commit the Borrower to prepay such Loan by the amount and on the date stated therein. All prepayments shall be accompanied by accrued interest on the principal amount being prepaid to the date of prepayment. Each prepayment under this Section 2.08 shall be applied first towards unpaid interest on the amount being prepaid and then towards the principal in whole or partial prepayment of Loans as specified by the Borrower. In the absence of such specification, amounts being prepaid shall be applied first to any Alternate Base Rate Loan then outstanding and then to Eurodollar Loans in the order of the nearest expiration of their Interest Periods. SECTION 2.09. Eurocurrency Reserve Requirement. It is understood that the cost to the Banks of making or maintaining Eurodollar Loans may fluctuate as a result of the applicability of, or change in, the Eurocurrency Reserve Requirement. The Borrower agrees to pay to the Agent on behalf of the Banks from time to time, as provided in Section 2.10 below, such amounts as shall be necessary to compensate each Bank for the portion of the cost of making or maintaining any Eurodollar Loans made by it resulting from any change in the Eurocurrency Reserve Requirement, it being understood that the rates of interest applicable to Eurodollar Loans hereunder have been determined on the basis of the Eurocurrency Reserve Requirement in effect at the time of determination of the Adjusted LIBOR Rate and that such rates do not reflect costs imposed on each Bank in connection with any change to the Eurocurrency Reserve Requirement. It is agreed that for purposes of this paragraph the Eurodollar Loans made hereunder shall be deemed to constitute Eurocurrency Liabilities as defined in Regulation D and to be subject to the reserve requirements of Regulation D without benefit or credit of proration, exemptions or - 21 - offsets which might otherwise be available to each Bank from time to time under Regulation D. SECTION 2.10. Increased Costs. If, after the date of this Agreement, the adoption of, or any change in, any applicable law, regulation, rule or directive, or any interpretation thereof by any authority charged with the administration or interpretation thereof: (i) subjects any Bank or the Issuing Bank to any tax with respect to its Commitment, the Loans, its Note, the Letters of Credit or on any amount paid or to be paid under or pursuant to this Agreement, the Loans, the Notes or the Letters of Credit (other than any tax measured by or based upon the overall net income of such Bank or the Issuing Bank); (ii) changes the basis of taxation of payments to any Bank or the Issuing Bank of any amounts payable hereunder (other than any tax measured by or based upon the overall net income of such Bank or the Issuing Bank); (iii) imposes, modifies or deems applicable any reserve, capital adequacy or deposit requirements against any assets held by, deposits with or for the account of, or loans made by, any Bank or the Issuing Bank; or (iv) imposes on the Agent, any Bank or the Issuing Bank any other condition affecting its Commitment, the Loans, its Note, the Letters of Credit or this Agreement; and the result of any of the foregoing is to increase the cost to the Agent, a Bank or the Issuing Bank of maintaining this Agreement or its Commitment, making the Loans or issuing or participating in the Letters of Credit, or to reduce the amount of any payment (whether of principal, interest or otherwise) receivable by the Agent, any Bank or the Issuing Bank or to require the Agent, any Bank or the Issuing Bank to make any payment on or calculated by reference to the gross amount of any sum received by them, in each case by an amount which the Agent, such Bank or the Issuing Bank, as the case may be, in its sole, reasonable judgment deems material, then and in any such case: (a) the Agent, the Bank or the Issuing Bank which is affected by any of the conditions described in (i), (ii), (iii) or (iv) above shall notify the Borrower, and any such affected Bank or the Issuing Bank shall notify the Agent of such event, together with the date thereof, the amount of such increased cost or reduction or payment and the way in which such amount has been calculated; and - 22 - (b) the Borrower shall pay to the Agent, such affected Bank or the Issuing Bank, as the case may be, within ten (10) days after the advice referred to in subsection (a) hereinabove, such an amount or amounts as will compensate the Agent, such affected Bank or the Issuing Bank for such additional cost, reduction or payment for so long as the same shall remain in effect. The determination of the Agent, any affected Bank or the Issuing Bank as to additional amounts payable pursuant to this Section 2.10 shall be conclusive evidence of such amounts absent manifest error. The provisions of this Section 2.10 shall survive the termination of this Agreement and the payment of the Loans, any unreimbursed draws on any Letter of Credit and all other amounts due hereunder. SECTION 2.11. Capital Adequacy. If the Agent, any Bank or the Issuing Bank shall have reasonably determined that, subsequent to the date hereof, any change in the applicability of any law, rule, regulation or guideline, or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Bank or the Issuing Bank (or any lending office of such Bank or the Issuing Bank) or such Bank's or the Issuing Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's or the Issuing Bank's capital or on the capital of such Bank's or the Issuing Bank's holding company, if any, as a consequence of its obligations hereunder to a level below that which such Bank or the Issuing Bank or such Bank's or the Issuing Bank's holding company could have achieved but for such adoption, change or compliance (taking into consideration such Bank's or the Issuing Bank's policies and the policies of such Bank's or the Issuing Bank's holding company with respect to capital adequacy) by an amount deemed by such Bank or the Issuing Bank to be material, then from time to time: (a) the Agent, the Bank or the Issuing Bank which is affected by any of the conditions described above shall notify the Borrower, and any such affected Bank or the Issuing Bank shall notify the Agent of such event, together with the date thereof, the amount of such reduced rate of return and the way in which such amount has been calculated; and (b) the Borrower shall pay to the Agent, the affected Bank or the Issuing Bank, as the case may be, within ten (10) days after the advice referred to in subsection (a) hereinabove, such an - 23 - amount or amounts as will compensate the Agent, such affected Bank or the Issuing Bank for such reduced rate of return for so long as such reduction shall remain in effect. SECTION 2.12. Change in Legality. (a) Notwithstanding anything to the contrary contained elsewhere in this Agreement, if any change after the date hereof in law, rule, regulation, guideline or order, or in the interpretation thereof by any governmental authority charged with the administration thereof, shall make it unlawful for any of the Banks to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to a Eurodollar Loan, then, any such affected Bank shall notify the Agent of same and, by written notice to the Borrower, the Agent, on behalf of such Bank shall: (i) declare that Eurodollar Loans will not thereafter be made by such Bank hereunder, whereupon the Borrower shall be prohibited from requesting Eurodollar Loans from such Bank hereunder unless such declaration is subsequently withdrawn; and (ii) require that, subject to the provisions of Section 2.13 hereof, all outstanding Eurodollar Loans made by such Bank be converted to an Alternate Base Rate Loan, whereupon all of such Eurodollar Loans shall be automatically converted to an Alternate Base Rate Loan as of the effective date of such notice as provided in paragraph (b) below. (b) For purposes of this Section 2.12, a notice to the Borrower by the Agent pursuant to paragraph (a) above shall be effective, for the purposes of paragraph (a) above, if lawful, and if any Eurodollar Loans shall then be outstanding, on the last day of the then current Interest Period; otherwise, such notice shall be effective on the date of receipt by the Borrower. SECTION 2.13. Funding Losses. (a) The Borrower agrees to compensate each Bank for any loss or expense which such Bank may sustain or incur as a consequence of (a) default by the Borrower in payment or prepayment when due of the principal amount of or interest on any Eurodollar Loan, (b) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (c) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (d) the making of a prepayment or conversion of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, in each case, any such loss (including, without limitation, loss of margin) or expense arising from the reemployment of funds obtained by it or from amounts payable by such Bank to lenders of funds obtained by - 24 - it in order to make or maintain such Loans. Such compensation may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid or converted, or not so borrowed, converted or continued, for the period from the date of such prepayment or conversion or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein, including the LIBOR Applicable Margin included therein, over (ii) the amount of interest (as reasonably determined by such Bank) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. When claiming under this Section 2.13, the claiming Bank shall provide to the Borrower a statement, signed by an officer of such Bank, explaining the amount of any such loss or expense (including the calculation of such amount), which statement shall, in the absence of manifest error, be conclusive with respect to the parties hereto. SECTION 2.14. Change in LIBOR; Availability of Rates. In the event, and on each occasion, that, on the day the interest rate for any Eurodollar Loan is to be determined, the Agent shall have determined (which determination, absent manifest error, shall be conclusive and binding upon the Borrower) that Dollar deposits in the amount of the principal amount of the requested Eurodollar Loan are not generally available in the interbank eurodollar market, or that the rate at which such Dollar deposits are being offered will not adequately and fairly reflect the cost to the Banks of making or maintaining the principal amount of such Eurodollar Loan during such Interest Period, such Eurodollar Loan shall be unavailable. The Agent shall, as soon as practicable thereafter, give written, telex or telephonic notice of such determination of unavailability to the Borrower and the Banks. Any request by the Borrower for an unavailable Eurodollar Loan shall be deemed to have been a request for an Alternate Base Rate Loan. After such notice shall have been given and until the Agent shall have notified the Borrower that the circumstances giving rise to such unavailability no longer exist, each subsequent request for an unavailable Eurodollar Loan shall be deemed to be a request for an Alternate Base Rate Loan. SECTION 2.15. Authorization to Debit Borrower's Account. The Agent is hereby authorized to debit the Borrower's account maintained with the Agent for (i) all scheduled payments due from the Borrower of principal and/or interest and/or commissions or fees under the Notes or this Agreement or in respect of the Letters of Credit, (ii) the Agent's fees, (iii) the Unused Facility Fee and - 25 - (iv) all other amounts due hereunder; all such debits to be made on the days such payments are due in accordance with the terms hereof. SECTION 2.16. Late Charges, Default Interest. (a) If the Borrower shall default in the payment of any principal installment of or interest on any Loan, or any amount due in respect of any Letter of Credit, or any other amount becoming due hereunder, the Borrower shall pay to the Agent for pro rata distribution to the Banks or the Issuing Bank, as applicable, interest, to the extent permitted by law, on such defaulted amount up to the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to two (2%) percent plus the interest rate which would then be in effect with respect to an Alternate Base Rate Loan made hereunder at the time such required payments were not made. (b) Upon the occurrence and during the continuation of an Event of Default, the Borrower shall pay to the Agent, for pro rata distribution to the Banks, interest on all Revolving Credit Loans and on all amounts described in clauses (ii) and (iii) of the definition of L/C Exposure (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to two (2%) percent plus the interest rate which would then be in effect with respect to Alternate Base Rate Loans. SECTION 2.17. Payments. All payments by the Borrower hereunder, under the Notes or in respect of the Letters of Credit shall be made in Dollars in immediately available funds at the office of the Agent by 12:00 noon, New York City time, on the date on which such payment shall be due. The Agent shall promptly pay to each of the Banks such amount of such payment to which such Bank is entitled, as determined by the Agent, subject to manifest error. SECTION 2.18. Interest Adjustments. (a) If the provisions of this Agreement, the Notes or the L/C Documents would at any time otherwise require payment by the Borrower to any Bank or the Issuing Bank of any amount of interest in excess of the maximum amount then permitted by applicable law the interest payments shall be reduced to the extent necessary so that such Bank or the Issuing Bank shall not receive interest in excess of such maximum amount. To the extent that, pursuant to the foregoing sentence, the Agent shall receive interest payments on behalf of the Banks or the Issuing Bank hereunder, under the Notes or under the L/C Documents in an amount less than the amount otherwise provided, such deficit (hereinafter called the "Interest Deficit") will cumulate and will be carried forward (without interest) until the termination of this Agreement. Interest otherwise payable by the Borrower to any Bank or the Issuing Bank hereunder, under the Notes or under the L/C Documents for any subsequent period shall be increased by such - 26 - maximum amount of the Interest Deficit that may be so added without causing such Bank or the Issuing Bank to receive interest in excess of the maximum amount then permitted by applicable law. (b) The amount of the Interest Deficit at the Maturity Date shall be cancelled and not paid. - 27 - ARTICLE IIA THE LETTERS OF CREDIT SECTION 2A.01. Letters of Credit. (a) On the terms and conditions set forth herein, (i) the Issuing Bank agrees, from time to time on any Business Day during the period from the date of this Agreement to the day which is five (5) days prior to the Maturity Date to issue Letters of Credit for the account of the Borrower and (ii) the Banks severally agree to participate in Letters of Credit issued for the account of the Borrower. Within the foregoing limits, and subject to the other terms and conditions hereof, the Borrower's ability to obtain Letters of Credit shall be fully revolving, and, accordingly, the Borrower may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit which have expired or which have been drawn upon and reimbursed. (b) The Issuing Bank has no obligation to issue any Letter of Credit if: (i) any order, judgment or decree of any governmental authority or arbitrator purports by its terms to enjoin or restrain the Issuing Bank from issuing such Letter of Credit or any requirement of law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuing Bank prohibits, or requests that the Issuing Bank refrain from, the issuance of standby letters of credit generally or such Letter of Credit in particular or imposes upon the Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) not in effect on the date of this Agreement, or imposes upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the date of this Agreement and which the Issuing Bank in good faith deems material to it; (ii) the Issuing Bank has received written notice from any Bank, the Agent or the Borrower, on or prior to the Business Day prior to the requested date of issuance of such Letter of Credit, that one or more of the applicable conditions contained in Article III hereof is not then satisfied; (iii) the expiry date of any requested Letter of Credit is (x) more than one (1) year from its date of issuance or (y) later than five (5) Business Days prior to the Maturity Date; (iv) the Aggregate Outstandings, after giving effect to the requested Letter of Credit, shall exceed the Total Commitment; - 28 - (v) the aggregate L/C Exposure, after giving effect to such Letter of Credit, shall exceed the L/C Sublimit; or (vi) such Letter of Credit is not in form and substance acceptable to the Issuing Bank, or the issuance of such Letter of Credit violates any applicable policies of the Issuing Bank. SECTION 2A.02. Issuance of Letters of Credit. Each Letter of Credit shall be issued upon the request of the Borrower (which request may be revoked only at such time and in sufficient time as will enable the Issuing Bank to prevent the issuance of such Letter of Credit), received by the Issuing Bank in accordance with arrangements between the Issuing Bank and the Borrower to provide the Issuing Bank electronically or otherwise with the information necessary to issue, amend or renew Letters of Credit. The arrangements between the Borrower and the Issuing Bank are set forth in the L/C Documents (other than the Letters of Credit) between the Issuing Bank and the Borrower. To the extent any term in any such L/C Documents (other than a Letter of Credit) conflicts with or is inconsistent with the terms of this Agreement, the term most favorable to the Issuing Bank shall apply, and the Issuing Bank may exercise its rights under either such L/C Document or this Agreement, but subject in any event to the provisions herein with respect to sharing and notification. If any such inconsistency exists, the Agent and the Banks shall not be deemed to have waived any rights hereunder, nor shall the Issuing Bank be deemed to have waived any rights under such L/C Document, by reason of such inconsistency. SECTION 2A.03. Participations of Banks. (a) Immediately upon the issuance of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably unconditionally agrees to, purchase from the Issuing Bank a participation in such Letter of Credit and each drawing thereunder in any amount equal in each case to the product of (i) the Pro Rata Share of such Bank, times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. Each issuance of a Letter of Credit shall be deemed to utilize the Commitment of each Bank by an amount equal to the amount of such Pro Rata Share. (b) The Issuing Bank will promptly notify the Borrower of any drawing under a Letter of Credit. The Borrower shall reimburse the Issuing Bank on each date that any amount is paid by the Issuing Bank under any Letter of Credit (each such date, an "Honor Date") at such time(s) as are agreed upon by the Borrower and the Issuing Bank, in an amount equal to the amount so paid by the Issuing Bank. If the Borrower fails to reimburse the Issuing Bank for the full amount of any drawing under any Letter of Credit at such agreed upon time on the Honor Date, the Issuing Bank will promptly notify the Agent and the Agent will promptly notify each Bank thereof. - 29 - The Honor Date shall, in every case, be not later than five (5) Business Days prior to the Maturity Date. (c) Upon receipt of any notice from the Agent of any failure by the Borrower to reimburse the Issuing Bank, each Bank shall make available to the Agent for the account of the Issuing Bank such Bank's Pro Rata Share of the amount of such reimbursement. If, after receipt of such notice, any Bank fails to transfer its Pro Rata Share of the amount of such reimbursement to the Agent, interest shall accrue on such Bank's obligation to make such payment from the Honor Date to the date such Bank makes such payment, at a rate per annum equal to the Federal Funds Effective Rate in effect from time to time during such period. Any failure of the Agent to give notice to the Banks on an Honor Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligations under this subsection (c). (d) Each Bank's payment to the Issuing Bank pursuant to Section 2A.03(c) hereof shall be deemed payment in respect of and in satisfaction of its participation in such Letter of Credit. (e) Each Bank's obligation to make payment in respect of its participation in Letters of Credit shall be absolute and unconditional and without recourse to the Issuing Bank and shall not be affected by any circumstance, including (i) any setoff, counterclaim, recoupment, defense or other right which such Bank may have against the Issuing Bank, the Borrower or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or any Event of Default; or (iii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided, however, that the provisions of this Section 2A.03(e) shall not be read to cause any Bank to waive any defense to such payment if such defense is the result of the Issuing Bank's gross negligence or willful misconduct. SECTION 2A.04. Repayment of Participations. (a) Upon receipt by the Issuing Bank of (i) reimbursement from the Borrower for any payment made by the Issuing Bank under a Letter of Credit with respect to which any Bank has paid for its participation in such Letter of Credit or (ii) payment of interest thereon, the Issuing Bank will pay such amounts to the Agent in the same funds as those received by the Issuing Bank. The Agent shall promptly distribute to each Bank its Pro Rata Share thereof. (b) If the Agent or the Issuing Bank is required at any time to return to the Borrower, or to a trustee, receiver, liquidator, custodian, or any official in any insolvency proceeding, any portion of the payments made by the Borrower to the Agent or to the Issuing Bank pursuant to Section 2A.03(a) hereof in reimbursement of a payment made under a Letter of Credit or interest thereon or - 30 - fees relating thereto or as a result of a setoff, each Bank shall, on demand of the Agent or the Issuing Bank, as the case may be, forthwith return to the Agent or the Issuing Bank, as the case may be, the amount of its Pro Rata Share of any amounts so returned by the Agent or the Issuing Bank plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent or the Issuing Bank, at a rate per annum equal to the Federal Funds Effective Rate in effect from time to time. (c) If any event described in subsection (b) above occurs, the obligation of the Borrower in respect of the payment or setoff required to be returned shall be revived and continued in full force and effect as if such payment had not been make or such setoff had not been effected. SECTION 2A.05 Role of the Issuing Bank. (a) The Issuing Bank shall not have any responsibility to obtain any document in connection with paying any draw under a Letter of Credit (other than any required sight or time draft, certificate and other documents expressly required by such Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. (b) Neither the Issuing Bank nor any of its correspondents or assignees shall be liable to any Bank for: (i) any action taken or omitted in connection herewith at the request or with the approval of the Banks (including the Required Banks, as applicable); (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any L/C Document. (c) The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Borrower's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. Neither the Agent, nor the Issuing Bank or any Bank, nor any of their respective officers, directors or employees, nor any of the respective correspondents, participants or assignees of the Issuing Bank, shall be liable or responsible for any of the matters described in clauses (i) through (vii) of Section 2A.06 hereof; provided, however, that the Borrower may have a claim against the Issuing Bank, and the Issuing Bank may be liable to the Borrower, to the extent of any direct, as opposed to consequential or exemplary, damages suffered by the Borrower which the Borrower proves were caused by the Issuing Bank's willful misconduct or gross negligence or the Issuing Bank's willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a required sight or time draft and certificate(s) strictly complying - 31 - with the terms and conditions of a Letter of Credit, unless such failure is due to compliance by the Issuing Bank with an order of a court or other legal process. In furtherance and not in limitation of the foregoing: (i) the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; and (ii) the Issuing Bank shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reasons. SECTION 2A.06. Obligations Absolute. The obligations of the Borrower under this Agreement and any L/C Documents to reimburse the Issuing Bank for a drawing under a Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and the L/C Documents under all circumstances, including the following: (i) any lack of validity or enforceability of this Agreement or any L/C Document; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of any Letter of Credit or any other amendment or waiver of or any consent to departure from all or any of the L/C Documents; (iii) the existence of any claim, setoff, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C Documents or any unrelated transaction; (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit; (v) any payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of any Letter of Credit; or any payment made by the Issuing Bank under any Letter of Credit to any Person purporting to be a trustee in - 32 - bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any insolvency proceeding; (vi) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the obligations of the Borrower in respect of any Letter of Credit; or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower. SECTION 2A.07. Uniform Customs and Practices. The Uniform Customs and Practice for Documentary Credits as most recently published by the International Chamber of Commerce at the time of issuance of any Letter of Credit shall (unless otherwise expressly provided in such Letter of Credit) apply to such Letter of Credit. SECTION 2A.08. Fees and Commissions. (a) The Borrower shall pay to the Agent, for pro rata distribution to the Banks, a per annum fee equal to the LIBOR Applicable Margin, as in effect from time to time, on the average amount available to be drawn on Letters of Credit (computed on the basis of a year of 360 days for actual days elapsed), payable quarterly in arrears. The Agent shall promptly pay to each Bank its Pro Rata Share of such fee. (b) The Borrower shall pay to the Issuing Bank its usual and customary letter of credit fees as established from time to time, including without limitation, fees, commissions and charges for issuance, payment, processing amendment and expiration and a fronting fee on the average outstanding amount available to be drawn on Letters of Credit calculated at an annual rate per annum of 0.125%. - 33 - ARTICLE III SECTION 3.01. Conditions Precedent to the Making of the Initial Revolving Credit Loan and the Issuing of the Initial Letter of Credit. The obligation of the Banks to make the initial Revolving Credit Loans contemplated by this Agreement and the obligation of the Issuing Bank to issue the initial Letter of Credit issued on or after the date of this Agreement, all as contemplated by this Agreement, are each subject to the condition precedent that the Agent, the Banks and the Issuing Bank shall have received from the Borrower and the Guarantors on or before the date of this Agreement the following, each dated such day, in form and substance satisfactory to the Agent and its counsel: (a) Revolving Credit Notes, each duly executed by the Borrower and payable to the order of each of the Banks. (b) Certified (as of the date of this Agreement) copies of the resolutions of the Board of Directors of the Borrower authorizing the Loans and the Letters of Credit and authorizing and approving this Agreement and the other Loan Documents to which the Borrower is a party and the execution, delivery and performance thereof and certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the other Loan Documents. (c) Certified (as of the date of this Agreement) copies of the resolutions of the Boards of Directors and the shareholders of each of the Guarantors, authorizing and approving this Agreement, their Guaranties and any other Loan Document applicable to the Guarantors, and the execution, delivery and performance thereof and certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, their Guaranties and the other Loan Documents. (d) A certificate of the Secretary or an Assistant Secretary (attested to by another officer) of the Borrower certifying: (i) the names and true signatures of the officer or officers of the Borrower authorized to sign this Agreement, the Notes and the other Loan Documents to be delivered hereunder on behalf of the Borrower; and (ii) a copy of the Borrower's by-laws as complete and correct on the date of this Agreement. (e) A Certificate of the Secretary or an Assistant Secretary (attested to by another officer) of each of the Guarantors certifying (i) the names and true signatures of the officer or officers of the Guarantors authorized to sign this Agreement, their Guaranties and any other Loan Documents to be delivered hereunder - 34 - on behalf of the Guarantors; (ii) a copy of each of the Guarantors' by-laws as complete and correct on the date of this Agreement; and (iii) the stock ownership of each Guarantor. (f) Copies of the certificate of incorporation and all amendments thereto of the Borrower and the Guarantors certified in each case by the Secretary of State (or equivalent officer) of the state of incorporation of each of the Borrower and the Guarantors and a certificate of existence and good standing with respect to the Borrower and the Guarantors from the Secretary of State (or equivalent officer) of the state of incorporation of the Borrower and the Guarantors and from the Secretary of State (or equivalent officer) of any state in which the Borrower or the Guarantors are authorized to do business. (g) An opinion of Kressel, Rothlein and Roth, counsel for the Borrower and the Guarantors as to certain matters referred to in Article IV hereof and as to such other matters as the Agent or its counsel may reasonably request. (h) From each of the Guarantors, an executed Guaranty. (i) From the Borrower, a true and correct copy of the Deutsche Agreement, which shall be satisfactory to the Agent and its counsel in all material respects. (j) From the Borrower, evidence that AT&T Commercial Finance Corporation and Deutsche have each released any security interest it may have in the assets of the Borrower, and that corresponding Uniform Commercial Code termination statements have been filed in the appropriate filing offices. (k) From Deutsche, the Intercreditor Agreement. (l) From the Borrower and each Guarantor, copies of all of the Borrower's and such Guarantor's credit agreements, loan agreements, indentures, mortgages and other documents relating to the extension of credit. (m) From the Borrower, (x) the fees and expenses to be paid pursuant to this Agreement, and (y) those other fees, charges and expenses as the Borrower, the Banks and the Agent may mutually agree. (n) Evidence that the Agent and the Banks shall, prior to the date of this Agreement, have completed their due diligence reviews of the Borrower, the results of which shall be satisfactory to the Agent and the Banks in their sole discretion. (o) Evidence that the following statements shall be true and the Agent shall have received a certificate signed by the President - 35 - or Chief Financial Officer of the Borrower dated the date hereof, stating that: (i) The representations and warranties contained in Article IV of this Agreement and in the other Loan Documents are true and correct on and as of such date; and (ii) No Default or Event of Default has occurred and is continuing, or would result from the making of the initial Revolving Credit Loans or the issuance of the initial Letter of Credit, as applicable. (p) Evidence that all schedules, documents, exhibits, certificates and other information provided to the Agent or the Banks pursuant to or in connection with this Agreement shall be satisfactory to the Agent and its counsel in all respects. (q) Evidence that all legal matters incident to this Agreement and the transactions contemplated hereby shall be satisfactory to Cullen and Dykman, counsel to the Agent. (r) Such other approvals, opinions or documents as the Agent or its counsel may reasonably request. SECTION 3.02. Conditions Precedent to All Revolving Credit Loans and all Letters of Credit. The obligation of the Banks to make each Revolving Credit Loan (including the initial Revolving Credit Loan) and the obligation of the Issuing Bank to issue each Letter of Credit (including the initial Letter of Credit), shall each be subject to the further condition precedent that on the date of such Revolving Credit Loan or Letter of Credit: (a) The following statements shall be true and each request for a Revolving Credit Loan or Letter of Credit shall be deemed to be a certification by the Borrower that: (i) The representations and warranties contained in Article IV of this Agreement and in the other Loan Documents shall be true and correct in all material respects on and as of such date as though made on and as such date; and (ii) No Default or Event of Default shall have occurred and be continuing, or would result from such Revolving Credit Loan or Letter of Credit. (b) The Agent shall have received such other approvals, opinions or documents as the Agent or its counsel may reasonably request. SECTION 3.03. Conditions Precedent to the Making of Permitted Acquisition Loans. The obligation of the Banks to make each - 36 - Revolving Credit Loan which is a Permitted Acquisition Loan shall be subject to the further conditions precedent that on the date of such Revolving Credit Loan: (a) The Agent and the Banks shall have received, at least ten (10) Business Days prior to such request, (i) the certificate and information required under the definition of "Permitted Acquisition or (ii) if the consideration for the Permitted Acquisition is such that the Borrower is not required to provide the information described in clauses (iv) and (v) of the definition of "Permitted Acquisition", the Borrower shall have delivered to the Agent and the Banks a certificate evidencing pro forma compliance (with supporting documentation) by the Borrower with Section 5.03 hereof for the remainder of the term of this Agreement. (b) The Agent and the Banks shall have received (i) if requested by the Agent, copies of all contracts, documents and agreements relating to the pending Permitted Acquisition (the "Acquisition Documents"), and (ii) in all cases, evidence that except for the payment of that portion of the purchase price to be funded by the proceeds of such Permitted Acquisition Loan, the pending Permitted Acquisition has been completed in accordance with the terms of the Acquisition Documents and that no material condition or material obligation on the part of the acquired Person or any Affiliate of the acquired Person has been waived. - 37 - ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties. On the date of this Agreement and on each date that the Borrower requests a Revolving Credit Loan or a Letter of Credit, the Borrower and each of the Guarantors represent and warrant as follows: (a) Subsidiaries. On the date hereof, the only Subsidiaries of the Borrower or a Guarantor are those set forth on Schedule 4.01(a) annexed hereto, which Schedule accurately sets forth with respect to each such Subsidiary, its name and address, any other addresses at which it conducts business, its state of incorporation and each other jurisdiction in which it is qualified to do business and the identity and share holdings of its stockholders. Except as set forth on said Schedule 4.01(a), all of the issued and outstanding shares of each Subsidiary which are owned by the Borrower or a Guarantor are owned by the Borrower or such Guarantor free and clear of any mortgage, pledge, lien or encumbrance. Except as set forth on said Schedule 4.01(a), there are not outstanding any warrants, options, contracts or commitments of any kind entitling any Person to purchase or otherwise acquire any shares of common or capital stock or other equity interest of the Borrower or any Guarantor or any Subsidiary of the Borrower or a Guarantor, nor are there outstanding any securities which are convertible into or exchangeable for any shares of the common or capital stock of the Borrower or any Guarantor or any Subsidiary of the Borrower or a Guarantor. (b) Good Standing. The Borrower and the Guarantors, and each Subsidiary of the Borrower or any Guarantor, are each corporations duly incorporated, validly existing and in good standing under the laws of the States of their respective incorporation and each has the corporate power to own or lease its assets and to transact the business in which it is presently engaged and is duly qualified and is in good standing in such other jurisdictions where the nature or extent of its business requires such qualification. (c) Due Execution, Etc. The execution, delivery and performance by the Borrower and each Guarantor of the Loan Documents to which they are a party are within the Borrower's and the Guarantors' corporate power and have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the stockholders of the Borrower or Guarantors; (ii) contravene the Borrower's or any of the Guarantors' certificates of incorporation, charters or by-laws; (iii) violate any provision of any law, rule, regulation, contractual restriction, order, writ, judgment, injunction, or decree, determination or award binding on or affecting the Borrower or any Guarantor; (iv) result in a breach of or constitute a - 38 - default under any indenture or loan or credit agreement, or any other agreement, lease or instrument to which the Borrower or any Guarantor is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than the Lien of the Loan Documents) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower or any Guarantor. (d) No Consents Required. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower or any Guarantor of any Loan Document to which it is a party, except authorizations, approvals, actions, notices or filings which have been obtained, taken or made, as the case may be. (e) Validity and Enforceability. The Loan Documents when delivered hereunder will have been duly executed and delivered on behalf of the Borrower and each Guarantor, as the case may be, and will be legal, valid and binding obligations of the Borrower and each Guarantor, as the case may be, enforceable against the Borrower or such Guarantor in accordance with their respective terms. (f) Financial Statements. The consolidated financial statements of the Borrower and its Consolidated Affiliates for the fiscal year ended July 31, 1997, and for the fiscal quarter ended January 31, 1998 copies of which have been furnished to the Agent and the Banks, fairly present the consolidated financial condition of the Borrower and its Consolidated Affiliates as at such dates and the results of operations of the Borrower and its Consolidated Affiliates for the periods ended on such dates, all in accordance with GAAP, and since such dates there has been (i) no material increase in the consolidated liabilities of the Borrower and its Consolidated Affiliates and (ii) no Material Adverse Change in the Borrower, any of its Consolidated Affiliates or any of the Guarantors. (g) No Litigation. Except as set forth on Schedule 4.01(g) annexed hereto, there is no pending or, to the Borrower's or any Guarantor's knowledge, threatened action, proceeding or investigation affecting the Borrower, any Guarantor or any Subsidiary of the Borrower or a Guarantor, before any court, governmental agency or arbitrator, which may either in one case or in the aggregate, result in the Material Adverse Change in the Borrower, any Guarantor or any such Subsidiary or which relates to any Loan Document. (h) Taxes. The Borrower, each Guarantor and each Subsidiary of the Borrower or a Guarantor have filed all federal, state and local tax returns required to be filed and have paid all taxes, - 39 - assessments and governmental charges and levies thereon to be due, including interest and penalties. The federal income tax liability of the Borrower, each Guarantor and each such Subsidiary has been finally determined and satisfied for all taxable years up to and including the taxable year ended July 31, 1994. (i) Licenses, etc. The Borrower, each Guarantor and each Subsidiary of the Borrower or a Guarantor possess all licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted, no Person, to the best knowledge of the Borrower and each Guarantor, is infringing on any patent, trademark or copyright owned or used by the Borrower, any Guarantor or any such Subsidiary, and neither the Borrower, any Guarantor nor any such Subsidiary are in violation of any similar rights of others. (j) Burdensome Agreements. Neither the Borrower nor any of the Guarantors nor any Subsidiary of the Borrower or a Guarantor is a party to any indenture, loan or credit agreement or any other agreement, lease or instrument or subject to any charter, corporate or partnership restriction which could result in a Material Adverse Change in the Borrower, any of the Guarantors or any such Subsidiary. Neither the Borrower nor any Guarantor nor any such Subsidiary is in default in any respect in the performance, observance, or fulfillment of any of the obligations or covenants contained in any agreement or instrument material to its business. (k) Margin Stock. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G, T, U or X), and no proceeds of any Loan, and no Letter of Credit, will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or in any other way which will cause the Borrower to violate the provisions of Regulation G, T, U or X. (l) Compliance With Laws. The Borrower, each Guarantor and each Subsidiary of the Borrower or a Guarantor are in all material respects in compliance with all federal and state laws and regulations in all jurisdictions where the failure to comply with such laws or regulations could result in a Material Adverse Change in the Borrower, any of the Guarantors or any such Subsidiary. (m) ERISA. The Borrower, each Guarantor, each Subsidiary of the Borrower or a Guarantor and each ERISA Affiliate are in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan; no notice of intent to terminate a Plan has been filed nor has any Plan been terminated; no circumstances exist which constitute grounds under Section 4042 of ERISA entitling the PBGC to institute proceedings - 40 - to terminate, or appoint a trustee to administrate, a Plan, nor has the PBGC instituted any such proceedings; neither the Borrower, any Guarantor, any Subsidiary of the Borrower or a Guarantor, nor any ERISA Affiliate has completely or partially withdrawn under Section 4201 or 4204 of ERISA from a Multiemployer Plan; the Borrower, each Guarantor, each Subsidiary of the Borrower or a Guarantor and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their Plans and the present fair market value of all Plan assets exceeds the present value of all vested benefits under each Plan, as determined on the most recent valuation date of such Plan in accordance with the provisions of ERISA for calculating the potential liability of the Borrower, any Guarantor, any such Subsidiary or any ERISA Affiliate to PBGC or such Plan under Title IV of ERISA; and neither the Borrower, any Guarantor, any such Subsidiary nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. (n) Hazardous Materials. The Borrower, each Guarantor and each Subsidiary of the Borrower or a Guarantor are in compliance with all federal, state or local laws, ordinances, rules, regulations or policies governing Hazardous Materials and neither the Borrower, any Guarantor nor any such Subsidiary has used Hazardous Materials on, from, or affecting any property now owned or occupied or hereafter owned or occupied by the Borrower, any Guarantor or any such Subsidiary in any manner which violates federal, state or local laws, ordinances, rules, regulations or policies governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials, and to the best of the Borrower's, the Guarantors' and such Subsidiaries' knowledge, no prior owner of any such property or any tenant, subtenant, prior tenant or prior subtenant have used Hazardous Materials on, from or affecting such property in any manner which violates federal, state or local laws, ordinances, rules, regulations, or policies governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials. (o) Use of Proceeds. The proceeds of the Revolving Credit Loans shall be used exclusively for the purposes set forth in Section 2.05 of this Agreement. Letters of Credit shall be used exclusively for the purposes set forth in Section 2.05 of this Agreement. (p) Title to Property; No Liens. Each of the Borrower and each Guarantor has good and marketable title to all of its properties and assets. The properties and assets of the Borrower, the Guarantors and each Subsidiary of the Borrower or a Guarantor are not subject to any Lien other than those described in Section 5.02(a) hereof. (q) Casualties. Neither the business nor the properties of the Borrower, any Guarantor or any Subsidiary of the Borrower or a - 41 - Guarantor are affected by any fire, explosion, accident, strike, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), which could result in a Material Adverse Change in the Borrower or any of the Guarantors. (r) Advantage to Guarantors. The Guarantors acknowledge they have derived or expect to derive a financial or other advantage from the Loans and other extensions of credit obtained by the Borrower from the Banks hereunder. (s) Credit Agreements. Schedule 4.01(s) annexed hereto is a complete and correct list of all credit agreements, indentures, purchase agreements (other than purchase orders for the purchase of goods issued in the ordinary cause of business), guaranties, Capital Leases, and other investments, agreements and arrangements presently in effect providing for or relating to extensions of credit (including agreements and arrangements for the issuance of letters of credit or for acceptance financing) in respect of which the Borrower or any Guarantor is in any manner directly or contingently obligated, and the maximum principal or face amounts of the credit in question, outstanding or to be outstanding, are correctly stated, and all Liens of any nature given or agreed to be given as security therefor are correctly described or indicated in such Schedule and neither the Borrower nor any Guarantor is in default with respect to its obligations thereunder. (t) Vendor Finance Agreements. The Deutsche Agreement is the only agreement to which the Borrower is a party which provides for the financing of the Borrower's purchase of inventory and (i) the Borrower is not in default of the Deutsche Agreement and (ii) the Borrower's obligations under the Deutsche Agreement are unsecured. (u) Year 2000 Issue. The Borrower, the Guarantors and each Subsidiary of the Borrower or a Guarantor have reviewed the effect of the Year 2000 Issue on the computer software, hardware and firmware systems and equipment containing embedded microchips owned or operated by or for the Borrower, the Guarantors or such Subsidiaries or used or relied upon in the conduct of their business (including systems and equipment supplied by others or with which such computer systems of the Borrower, the Guarantors or such Subsidiaries interface). The costs to the Borrower, the Guarantors and such Subsidiaries of any reprogramming required as a result of the Year 2000 Issue to permit the proper functioning of such systems and equipment and the proper processing of data, and the testing of such reprogramming, and of the reasonably foreseeable consequences of the Year 2000 Issue to the Borrower, the Guarantors or such Subsidiaries (including reprogramming errors and the failure of systems or equipment supplied by others) are not reasonably expected to result in a Default or Event of Default or to result in a Material Adverse Change in the Borrower, any Guarantors or any such Subsidiaries. - 42 - ARTICLE V SECTION 5.01. Affirmative Covenants. So long as (i) any part of the Total Commitment shall be in effect, (ii) any amount shall remain outstanding under any of the Notes, or (iii) any Letter of Credit or L/C Exposure is outstanding, the Borrower and each of the Guarantors will, unless the Agent and the Required Banks shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply, and cause each Subsidiary of the Borrower or a Guarantor to comply, in all material respects with all applicable laws, rules, regulations and orders, where the failure to so comply could result in a Material Adverse Change in the Borrower, a Guarantor or any such Subsidiary. (b) Reporting Requirements. Furnish to the Agent and each of the Banks: (i) Annual Financial Statements. As soon as available and in any event within ninety (90) days after the end of each fiscal year of the Borrower, (1) a copy of the audited consolidated financial statements of the Borrower and its Consolidated Affiliates for such year, including a balance sheet with a related statement of income and retained earnings and statement of cash flows, all in reasonable detail and setting forth in comparative form the figures as of the end of and for the previous fiscal year, together with an unqualified opinion, prepared by KMPG Peat Marwick LLP or such other independent certified public accountants selected by the Borrower and reasonably satisfactory to the Agent, all such financial statements to be prepared in accordance with GAAP; and (2) copies of the consolidating schedules to such consolidated financial statements. (ii) Quarterly Financial Statements. As soon as available and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, a copy of the consolidated and consolidating financial statements of the Borrower and its Consolidated Affiliates for such quarter and for the year to date, including balance sheets with related statements of income and retained earnings and statements of cash flows, all in reasonable detail and setting forth in comparative form the figures for the comparable quarter and comparable year to date period for the previous fiscal year, all such financial statements to be prepared by management of the Borrower in accordance with GAAP. (iii) Management Letters. Promptly upon receipt thereof, copies of any reports submitted to the Borrower or any Guarantor by independent certified public accountants in connection with any - 43 - examination of the financial statements of the Borrower and each Guarantor made by such accountants. (iv) Certificate of No Default. Simultaneously with the delivery of the financial statements referred to in Section 5.01(b)(i) and (ii) hereof, a certificate of the President or the Chief Financial Officer of the Borrower, (1) certifying that no Default or Event of Default has occurred and is continuing, or if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto and (2) with computations demonstrating compliance with the covenants contained in Section 5.03 hereof. (v) Accountant's Certificate. Simultaneously with the delivery of the annual consolidated financial statements referred to in Section 5.01(b)(i) hereof, a certificate of the independent certified public accountants who audited such statements to the effect that, in making the examination necessary for the audit of such statements, they have obtained no knowledge of any condition or event which constitutes a Default or Event of Default, or if such accountants shall have obtained knowledge of any such condition or event, specifying in such certificate each such condition or event of which they have knowledge and the nature and status thereof. (vi) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting the Borrower, any Guarantor or any Subsidiary of the Borrower or a Guarantor which (1) relates to any Loan Document or (2) if determined adversely to the Borrower, any Guarantor or any such Subsidiary could result in a Material Adverse Change in the Borrower, any Guarantor or any such Subsidiary. (vii) Notice of Defaults and Events of Default. As soon as possible and in any event within ten (10) days after the occurrence of each Default or Event of Default, a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken with respect thereto. (viii) ERISA Reports. Promptly after the filing or receiving thereof, copies of all reports, including annual reports, and notices which the Borrower, any Guarantor or any Subsidiary of the Borrower or a Guarantor, files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible after the Borrower, any Guarantor or any such Subsidiary knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or the Borrower, any Guarantor or any such Subsidiary has instituted or will institute proceedings under Title IV of ERISA to - 44 - terminate any Plan, the Borrower or such Guarantor will deliver to the Agent and the Banks a certificate of the president or the chief financial officer of the Borrower or such Guarantor setting forth details as to such Reportable Event or Prohibited Transaction or Plan termination and the action the Borrower or such Guarantor proposes to take with respect thereto. (ix) Reports to Other Creditors. Promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to the Agent pursuant to any other clause of this Section 5.01(b). (x) Proxy Statements, Etc. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which the Borrower, any Guarantor or any Subsidiary of the Borrower or any Guarantor sends to its public stockholders, and copies of all regular, periodic, and special reports, and all registration statements which the Borrower, any Guarantor or any such Subsidiary files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange. (xi) Notice of Affiliates. Promptly after any Person becomes an Affiliate of the Borrower or any Guarantor, notice to the Agent and the Banks of such Affiliate. (xii) General Information. Such other information respecting the condition or operations, financial or otherwise, of the Borrower, any Guarantor or any Subsidiary of the Borrower or a Guarantor as the Agent may from time to time reasonably request. (c) Taxes. Pay and discharge, and cause its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges upon it or them, its or their income or its or their properties prior to the dates on which penalties are attached thereto, unless and only to the extent that (i) such taxes shall be contested in good faith and by appropriate proceedings by the Borrower, any Guarantor or any such Subsidiary, as the case may be, (ii) there shall be adequate reserves therefor in accordance with GAAP entered on the books of the Borrower, any Guarantor or any such Subsidiary and (iii) no enforcement proceedings against the Borrower, such Guarantor or such Subsidiary shall have been commenced. (d) Corporate Existence. Except as permitted by clause (i) of Section 5.02(d) hereof, preserve and maintain, and cause its Subsidiaries to preserve and maintain, their corporate existence and good standing in the jurisdiction of their incorporation and the rights, privileges and franchises of the Borrower, each Guarantor and each such Subsidiary in each case where failure to so - 45 - preserve or maintain could result in a Material Adverse Change in the Borrower, any of the Guarantors or any such Subsidiary. (e) Maintenance of Properties and Insurance. (i) Keep, and cause any Subsidiaries to keep, their respective properties and assets (tangible or intangible) that are useful and necessary in its business, in good working order and condition, reasonable wear and tear excepted; and (ii) maintain, and cause any Subsidiaries to maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning properties doing business in the same general areas in which the Borrower, any Guarantors and any such Subsidiaries operate. The policies shall provide for thirty (30) days notice to the Agent of cancellation or change. (f) Books of Record and Account. Keep, and cause any Subsidiaries to keep, adequate records and proper books of record and account in which complete entries will be made in a manner to enable the preparation of financial statements in accordance with GAAP, reflecting all financial transactions of the Borrower, the Guarantors, and any such Subsidiaries. (g) Visitation. At any reasonable time and upon reasonable notice, and from time to time, permit the Agent or any of the Banks or any agents or representatives thereof, to examine and make copies of and abstracts from the books and records of, and visit the properties of, the Borrower, any Guarantor or any Subsidiary of the Borrower or any Guarantor and to discuss the affairs, finances and accounts of the Borrower, any Guarantor or any such Subsidiary with any of the respective officers or directors of the Borrower, such Guarantor, such Subsidiary or the Borrower's, such Guarantor's or such Subsidiary's independent accountants. (h) Performance and Compliance with Other Agreements. Perform and comply and cause each Subsidiary of the Borrower or any Guarantor to perform and comply, with each of the provisions of each and every agreement the failure to perform or comply with which could result in a Material Adverse Change in the Borrower, any Guarantor or any such Subsidiary. (i) Pension Funding. Comply with the following and cause each ERISA Affiliate of the Borrower, any Guarantor or any Subsidiary of the Borrower or a Guarantor to comply with the following: (i) engage solely in transactions which would not subject any of such entities to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code of 1986, as amended, in either case in an amount in excess of $100,000.00; - 46 - (ii) make full payment when due of all amounts which, under the provisions of any Plan or ERISA, the Borrower, any Guarantor, any such Subsidiary or any ERISA Affiliate of any of same is required to pay as contributions thereto; (iii) all applicable provisions of the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder, including but not limited to Section 412 thereof, and all applicable rules, regulations and interpretations of the Accounting Principles Board and the Financial Accounting Standards Board; (iv) not fail to make any payments in an aggregate amount greater than $100,000.00 to any Multiemployer Plan that the Borrower, any Guarantor, any such Subsidiary or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; or (v) not take any action regarding any Plan which could result in the occurrence of a Prohibited Transaction. (j) Licenses. Maintain at all times, and cause each Subsidiary of the Borrower or any Guarantor to maintain at all times, all licenses or permits necessary to the conduct of its business or as may be required by any governmental agency or instrumentality thereof. (k) New Affiliates. Cause any Affiliate of the Borrower or any Guarantor which is (i) formed after the date of this Agreement and (ii) engaged or is to be engaged in the same, a similar or related line of business as the Borrower or any Guarantor, to (x) become a guarantor of all obligations of the Borrower under this Agreement and the other Loan Documents and (y) become a party to this Agreement. (l) Agent's Administrative Fee. Pay to the Agent the annual administrative fees as mutually agreed between the Borrower and the Agent. (m) Vendor Finance Agreement. Notify the Agent and each of the Banks (i) of any default by the Borrower under the terms of the Deutsche Agreement, (ii) not less than ten (10) days prior to the execution of any amendment or modification to the Deutsche Agreement, or any replacement thereof, and provide copies to the Agent and the Banks of any such proposed amendment, modification or replacement, and (iii) of any event which would cause, or result in, the Borrower's obligations to Deutsche (or any successor to Deutsche under the Deutsche Agreement or any replacement agreement) becoming secured. In the event that the Borrower's obligations to Deutsche (or such successor) become secured, Borrower shall (i) grant to the Agent for the benefit of the Banks, a security interest in all personal property of the Borrower and (ii) enter - 47 - into such security agreements, Uniform Commercial Code financing statements and such other documents as the Agent may request. (n) Year 2000 Issue. The Borrower and each Guarantor shall take, and shall cause each of their Subsidiaries to take, all necessary action to complete in all material respects by September 30, 1999, the reprogramming of computer software, hardware and firmware systems and equipment containing embedded microchips owned or operated by or for the Borrower, each of the Guarantors and their Subsidiaries or used or relied upon in the conduct of their business (including systems and equipment supplied by others or with which such systems of the Borrower, each of the Guarantors and their Subsidiaries interface) required as a result of the Year 2000 Issue to permit the proper functioning of such computer systems and other equipment and testing of such systems and equipment, as so reprogrammed. At the request of the Agent, the Borrower shall provide to the Agent reasonable assurance of its compliance with the preceding sentence. SECTION 5.02. Negative Covenants. So long as (i) any part of the Total Commitment shall be in effect, (ii) any amount shall remain outstanding under any of the Notes, or (iii) any Letter of Credit or L/C Exposure is outstanding, neither the Borrower nor any of the Guarantors nor any Subsidiary of the Borrower or a Guarantor will, without the written consent of the Agent and the Required Banks: (a) Liens, Etc. Create, incur, assume or suffer to exist any Lien upon or with respect to any of its properties, now owned or hereafter acquired, except: (i) Liens in favor of the Banks securing Debt permitted by Section 5.02(b)(i) hereof; (ii) Liens for taxes or assessments or other government charges or levies if not yet due and payable or if due and payable if they are being contested in good faith by appropriate proceedings and for which appropriate reserves in accordance with GAAP are maintained; (iii) Liens imposed by law, such as mechanics', materialmen's, landlords', warehousemen's, and carriers' Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due more than forty five (45) days or which are being contested in good faith by appropriate proceedings and for which appropriate reserves in accordance with GAAP have been established; (iv) Liens under workers' compensation, unemployment insurance, Social Security, or similar legislation; - 48 - (v) Liens, deposits, or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (vi) Liens described in Schedule 5.02(a) hereto, provided that no such Liens shall be renewed, extended or refinanced; (vii) Judgment and other similar Liens arising in connection with court proceedings (other than those described in Section 6.01(f) hereof), provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (viii) Easements, rights-of-way, restrictions, and other similar encumbrances which, in the aggregate, do not materially interfere with the Borrower's or a Guarantor's occupation, use and enjoyment of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; and (ix) Purchase money Liens on any property hereafter acquired or the assumption of any Lien on property existing at the time of such acquisition, or a Lien incurred in connection with any conditional sale or other title retention agreement or a Capital Lease, provided that: (1) Any property subject to any of the foregoing is acquired by the Borrower or any Guarantor in the ordinary course of its respective business and the Lien on any such property is created contemporaneously with such acquisition; (2) The obligation secured by any Lien so created, assumed, or existing shall not exceed 100% of lesser of the cost or fair market value of the property acquired as of the time of the Borrower or any Guarantor acquiring the same; (3) Each such Lien shall attach only to the property so acquired and fixed improvements thereon; (4) The Borrower and the Guarantors shall not incur, in the aggregate, more than $2,000,000.00 of Debt secured by Liens described in this clause (ix) during any fiscal year; and (5) The obligation secured by such Lien is permitted by the provisions of Section 5.02(b) hereof and the related expenditure is permitted by the provisions of Section 5.03(b) hereof; - 49 - (b) Debt. Create, incur, assume, or suffer to exist any Debt, except: (i) Debt of the Borrower under this Agreement, the Notes or in respect of the Letters of Credit; (ii) Debt described in Schedule 5.02(b) hereto, provided that no such Debt shall be renewed, extended or refinanced; (iii) Accounts payable to trade creditors for goods or services and current operating liabilities (other than for borrowed money), in each case incurred in the ordinary course of business and paid within the specified time; and (iv) Debt secured by Liens permitted under Section 5.02(a)(ix) hereof. (c) Lease Obligations. Create, incur, assume, or suffer to exist any obligation as lessee for the rental or hire of any real or personal property, except (i) Capital Leases permitted by Section 5.02(a) hereof; (ii) leases existing on the date of this Agreement and any extensions or renewals thereof; and (iii) leases (other than Capital Leases) which do not in the aggregate require the Borrower or any Guarantor to make payments (including taxes, insurance, maintenance, and similar expenses which the Borrower or any Guarantor is required to pay under the terms of any lease) in any fiscal year in excess of $750,000.00. (d) Merger. Merge into, or consolidate with or into, or have merged into it, any Person (for the purpose of this subsection (d), the acquisition or sale by the Borrower or any Guarantor by lease, purchase or otherwise of all, or substantially all, of the common stock or the assets of any Person or of it shall be deemed a merger of such Person with the Borrower or any Guarantor) other than (i) a merger of a Subsidiary into its parent corporation, or (ii) Permitted Acquisitions, provided that the total aggregate consideration for all Permitted Acquisitions (including all Permitted Acquisition Loans) shall not exceed $10,000,000.00 in the aggregate during the term of this Agreement. (e) Sale of Assets, Etc. Sell, assign, transfer, lease or otherwise dispose of any of its assets (including a sale/leaseback transaction) with or without recourse, except for (i) inventory disposed of in the ordinary course of business and (ii) the sale or other disposition of assets no longer used or useful in the conduct of its business. (f) Investments, Etc. Make any Investment other than Permitted Investments. (g) Transactions With Affiliates. (i) Except in the ordinary course of business and pursuant to the reasonable requirements of - 50 - the business of the Borrower, a Guarantor or a Subsidiary of the Borrower or a Guarantor and upon fair and reasonable terms no less favorable to the Borrower, or such Guarantor or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person not an Affiliate, enter into any transaction, other than loans or advances of money, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate; or (ii) enter into any transaction involving the lending or advancing of money to any Affiliate, provided, however, that the Borrower may lend up to $4,000,000.00 in the aggregate to the Guarantors provided further that any such loans or advances shall be evidenced by one or more notes or other evidence of such Debt which shall be, pursuant to a pledge agreement satisfactory to the Agent, pledged to the Agent, for the benefit of the Banks, as collateral security for the Aggregate Outstandings and all other amounts due under this Agreement or any other Loan Documents. (h) Prepayment of Outstanding Debt. Pay, in whole or in part, any outstanding Debt (other than the Loans) of the Borrower or any Guarantor or any Subsidiary of the Borrower or any Guarantor which by its terms is not then due and payable (other than the Loans). (i) Guarantees. Guaranty, or in any other way become directly or contingently obligated for any Debt of any other Person (including any agreements relating to working capital maintenance, take or pay contracts or similar arrangements) other than (i) the Guaranties; (ii) the endorsement of negotiable instruments for deposit in the ordinary course of business; (iii) guarantees existing on the date hereof and set forth in Schedule 5.02(i) annexed hereto; and (iv) guarantees of Debt permitted hereunder. (j) Change of Business. Materially alter the nature of its business. (k) Fiscal Year. Change the ending date of its fiscal year from July 31. (l) Losses. Incur a net loss for any fiscal year. (m) Accounting Policies. Change any accounting policies, except as permitted by GAAP. (n) Change of Tax Status. Change its tax reporting status as a C corporation. (o) Dividends, Etc. Declare or pay any dividends, purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, or make any distribution of assets to its stockholders as such, whether in cash, assets, or in obligations of the Borrower or any Guarantor; or allocate or otherwise set apart any sum for the payment of any dividend or - 51 - distribution on, or for the purchase, redemption or retirement of any shares of its capital stock; or make any other distribution by reduction of capital or otherwise in respect of any share of its capital stock; provided, however, that as long as no Default or Event of Default then exists or would result therefrom, the Borrower may repurchase, during the term of this Agreement, not more than $1,800,000.00 of its outstanding common stock in open market transactions. (p) Hazardous Material. Cause or permit any property owned or occupied by the Borrower, any Guarantor or any Subsidiary of the Borrower or any Guarantor to be used to generate, manufacture, refine, transport, treat, store, handle, dispose of, transfer, produce or process Hazardous Materials, except in compliance with all applicable federal, state and local laws or regulations; or cause or permit, as a result of any intentional or unintentional act or omission on the part of the Borrower, any Guarantor or any such Subsidiary or any tenant or subtenant, a release of Hazardous Materials onto any property owned or occupied by the Borrower, any Guarantor or any such Subsidiary or onto any other property; or fail in all material respects to comply with all applicable federal, state and local laws, ordinances, rules and regulations governing Hazardous Materials, whenever and by whomever triggered; or fail to obtain and comply with any and all approvals, registrations or permits required thereunder. The Borrower and the Guarantors shall execute any documentation reasonably required by the Agent in connection with the representations, warranties and covenants contained in this paragraph and Section 4.01 of this Agreement. SECTION 5.03. Financial Requirements. So long as (i) any part of the Total Commitment shall be in effect, (ii) any amount shall remain outstanding under any of the Notes, or (iii) any Letter of Credit or L/C Exposure is outstanding: (a) Minimum Consolidated Tangible Net Worth. The Borrower and its Consolidated Affiliates will maintain at all times a Consolidated Tangible Net Worth of not less than $22,000,000.00, to be tested at the end of each fiscal quarter. (b) Consolidated Capital Expenditures. The Borrower, the Guarantors and their respective Subsidiaries will not make Consolidated Capital Expenditures (exclusive of amounts allocated to capital assets acquired pursuant to a Permitted Acquisition) in excess of (i) $3,000,000.00 in the aggregate during the fiscal year ending July 31, 1998 and (ii) $2,500,000.00 in the aggregate during any fiscal year thereafter. (c) Quick Asset Ratio. The Borrower and the Guarantors will maintain at all times, on a consolidated basis, a Quick Asset Ratio - 52 - of not less than 1.00 to 1.00, such ratio to be tested at the end of each fiscal quarter. (d) Funded Debt to EBITDA Ratio. The Borrower and Guarantors will maintain at all times on a consolidated basis, a Funded Debt to EBITDA Ratio, of not greater than 3.00 to 1.00, to be tested at the end of each fiscal quarter. (e) Interest Coverage Ratio. The Borrower and Guarantors will maintain at all times, on a consolidated basis, an Interest Coverage Ratio of not less than 2.50 to 1.00, such ratio to be tested at the end of each fiscal quarter. - 53 - ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any installment of principal of, or interest on, any of the Notes when due, or any fees or other amounts owed in connection with this Agreement or the Borrower shall fail to reimburse the Issuing Bank for any draw, accepted draft, deferred payment obligations or any other amounts owed in connection with any Letters of Credit when due; or (b) Any representation or warranty made or deemed made by the Borrower or any Guarantor herein or in the other Loan Documents or which is contained in any certificate, document, opinion, or financial or other statement furnished at any time under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or (c) The Borrower or any Guarantor shall fail to perform or observe (i) any term, covenant or agreement contained in Sections 5.01(a),(c),(d),(e),(f),(g),(h),(i) or (j) hereof within twenty (20) days after such performance or observation is required or (ii) the Borrower or any Guarantor shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or in any other Loan Document (other than the Notes) on its part to be performed or observed; or (d) The Borrower, any Guarantor, or any Subsidiary of the Borrower or a Guarantor shall fail to pay any Debt in the principal amount of $50,000.00 or more (excluding Debt evidenced by the Notes or any other Loan Document) of the Borrower, any Guarantor or any such Subsidiary (as the case may be), or any installment thereof, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Borrower, any Guarantor or any Subsidiary of the Borrower or a Guarantor shall generally not pay its Debts as such - 54 - Debts become due, or shall admit in writing its inability to pay its Debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower, any Guarantor or any such Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its Debts under any law relating to bankruptcy, insolvency or reorganization or the relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and if instituted against the Borrower, any Guarantor or any such Subsidiary shall remain undismissed for a period of 30 days; or the Borrower, any Guarantor or any such Subsidiary shall take any action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order or combination of judgments or orders for the payment of money, in excess of $250,000.00 in the aggregate, which sum shall not be subject to full, complete, effective and acknowledged insurance coverage, shall be rendered against the Borrower, any Guarantor or any Subsidiary of the Borrower or a Guarantor and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any Guarantor shall fail to perform or observe any term or provision of its Guaranty or any representation or warranty made by any Guarantor (or any of its officers or partners) in connection with such Guarantor's Guaranty shall prove to have been incorrect in any material respect when made; or (h) Any of the following events shall occur or exist with respect to the Borrower, any Guarantor, any Subsidiary of the Borrower or a Guarantor, or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; (v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, could in the opinion of the Agent subject the Borrower, any Guarantor, any such Subsidiary or any ERISA Affiliate to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise - 55 - (or any combination thereof) which in the aggregate exceeds or may exceed $250,000.00; or (i) This Agreement or any other Loan Document, at any time after its execution and delivery and for any reason, ceases to be in full force and effect in all material respects or shall be declared to be null and void, or the validity or enforceability of any document or instrument delivered pursuant to this Agreement shall be contested by the Borrower, any Guarantor or any party to such document or instrument or the Borrower, any Guarantor or any party to such document or instrument shall deny that it has any or further liability or obligation under any such document or instrument; or (j) Barry Steinberg shall, during his lifetime, fail or cease to maintain the ownership, directly or indirectly, of an amount of voting stock of the Borrower which is equal to the greater of (i) twenty-five (25%) percent of such voting stock or (ii) more of such voting stock than is owned or controlled by any other Person; or (k) Barry Steinberg shall not be retained in a reasonably active full time capacity in the management of the Borrower and the Guarantors, unless such failure is due to his death or permanent disability; or (l) An event of default specified in any Loan Document other than this Agreement shall have occurred and be continuing. SECTION 6.02. Remedies on Default. Upon the occurrence and continuance of an Event of Default the Agent may, and at the request of the Required Banks shall, by notice to the Borrower take any or all of the following actions: (i) terminate the Total Commitment, (ii) declare the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, and (iii) demand that the Borrower provide the Issuing Bank with cash collateral for any undrawn Letters of Credit and any accepted drafts or deferred payment obligations under any Letters of Credit, whereupon the Total Commitment shall be terminated, and the Notes, all such interest, all such cash collateral and all such other amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower and (iv) proceed to enforce its and the Banks' rights whether by suit in equity or by action at law, whether for specific performance of any covenant or agreement contained in this Agreement or any other Loan Document, or in aid of the exercise of any power granted in either this Agreement or any Loan Document or proceed to obtain judgment or any other relief whatsoever appropriate to the enforcement of its and the Banks' rights, or proceed to enforce any other legal or equitable right which the Agent or the Banks may have by reason of the occurrence of any Event of Default hereunder or under any other - 56 - Loan Document, provided, however, upon the occurrence of an Event of Default referred to in Section 6.01(e) hereof, the Total Commitment shall be immediately terminated, and the Notes, all interest thereon, all such cash collateral and all other amounts payable under this Agreement shall be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower. Any amounts collected pursuant to action taken under this Section 6.02 shall be applied to the payment of, first, any costs incurred by the Agent in taking such action, including but without limitation attorneys fees and expenses, second, to provide cash collateral to the Issuing Bank for any undrawn Letters of Credit, accepted drafts or deferred payment obligations, third, to payment of the accrued interest on the Notes and fourth, to payment of the unpaid principal of the Notes. SECTION 6.03. Remedies Cumulative. No remedy conferred upon or reserved to the Agent or the Banks hereunder or in any other Loan Document is intended to be exclusive of any other available remedy, but each and every such remedy shall be cumulative and in addition to every other remedy given under this Agreement or any other Loan Document or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Agent or the Banks to exercise any remedy reserved in this Article VI, it shall not be necessary to give any notice, other than such notice as may be herein expressly required in this Agreement or in any other Loan Document. - 57 - ARTICLE VII THE AGENT; RELATIONS AMONG BANKS AND BORROWER SECTION 7.01. Appointment, Powers and Immunities of Agent. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under any other Loan Document with such powers as are specifically delegated to the Agent by the terms of this Agreement and any other Loan Document, together with such other powers as are reasonably incidental thereto. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and any other Loan Document, and shall not by reason of this Agreement be a trustee or fiduciary for any Bank. The Agent shall not be responsible to the Banks for any recitals, statements, representations or warranties made by the Borrower or the Guarantors, or any officer or official of the Borrower or Guarantors, or any of them, or any other Person contained in this Agreement or any other Loan Document, or in any certificate or other document or instrument referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, legality, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document or instrument referred to or provided for herein or therein, except as explicitly provided herein, or for the failure by the Borrower, the Guarantors, or any of them to perform any of their or its respective obligations hereunder or thereunder. The Agent may employ agents and attorneys-in-fact and shall not be responsible, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Except as otherwise explicitly provided herein, neither the Agent nor any of its directors, officers, employees or agents shall be liable or responsible to any Bank for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith, except for its or their own gross negligence or wilful misconduct. The Borrower shall pay any fee agreed to by the Borrower and the Agent with respect to the Agent's services hereunder. SECTION 7.02. Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent with reasonable care. The Agent may deem and treat each Bank as the holder of the Loans made by it for all purposes hereof unless and until a notice of the permitted transfer thereof satisfactory to the Agent and signed by - 58 - such Bank shall have been furnished to the Agent but the Agent shall not be required to deal with any Person who has acquired a participation in any Loan from a Bank. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks and any other holder of all or any portion of any Loan. SECTION 7.03. Defaults. The Agent shall not be deemed to have knowledge of the occurrence of a Default or Event of Default (other than the non-payment of principal of or interest on the Loans or the non-payment of fees due hereunder) unless the Agent has actual knowledge of such Default or Event of Default or has received notice from a Bank or the Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default." In the event that the Agent receives such a notice of, or otherwise has actual knowledge of the occurrence of, a Default or Event of Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to Section 7.08 and Section 8.01 hereof) take such action with respect to such Default or Event of Default which is continuing as shall be directed by the Required Banks; provided that, unless and until the Agent shall have received such directions, the Agent may take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Banks; and provided further that the Agent shall not be required to take any such action which it determines to be contrary to law. SECTION 7.04. Rights of Agent as a Bank. With respect to the Loans made by it, any Person which is the Agent in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include any Person which is the Agent in its capacity as a Bank. The Agent or any Bank and their respective Affiliates may (without having to account therefor to any other Bank except as otherwise expressly provided in this Agreement) accept deposits from, lend money to (on a secured or unsecured basis), and generally engage in any kind of banking, trust or other business with, the Borrower, the Guarantors or any of them (and any of their Affiliates); provided that no payment or lien priority shall be given to the Agent or to any Bank for any other transaction without the express written approval of all of the other Banks. In the case of BNY, it may do so as if it were not acting as the Agent, and the Agent may accept fees and other consideration from the Borrower, the Guarantors or any of them for services in connection with this Agreement or otherwise without - 59 - having to account for the same to the Banks. Although the Agent or a Bank or any of their respective Affiliates may in the course of such relationships and relationships with other Persons acquire information about the Borrower, the Guarantors, their Affiliates and such other Persons, neither the Agent nor such Bank shall have any duty to the other Banks or the Agent to disclose such information to the other Banks or the Agent except as otherwise provided herein with respect to the occurrence of an Event of Default. SECTION 7.05. Indemnification of Agent. The Banks agree to indemnify the Agent (to the extent not reimbursed under Section 8.04 hereof or under the applicable provisions of any other Loan Document, but without limiting the obligations of the Borrower and Guarantors under Section 8.04 hereof or such provisions), ratably in accordance with their Pro Rata Shares of the Total Commitment (without giving effect to any participation in all or any portion of the Total Commitment sold by them to any other Person), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement, any other Loan Document or any other documents contemplated by or referred to herein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which the Borrower and Guarantors are obligated to pay under Section 8.04 hereof or under the applicable provisions of any other Loan Document but excluding, unless a Default or Event of Default has occurred, normal administrative costs and expenses incidental to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents or instruments; provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or wilful misconduct of the Agent. SECTION 7.06. Documents. It is the responsibility of the Borrower to forward to each Bank, on or before the due dates set forth herein, a copy of each report, notice or other document required by this Agreement or any other Loan Document to be delivered to the Agent. The Agent is not responsible for forwarding such information to the Banks. SECTION 7.07. Non-Reliance on Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower, the Guarantors and their Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and - 60 - decisions in taking or not taking action under this Agreement or any other Loan Document. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrower or Guarantors of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or to inspect the properties or books of the Borrower, the Guarantors or any Subsidiary of the Borrower or any Guarantor. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to any other Bank to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrower, the Guarantors or any Subsidiary (or any of their Affiliates) which may come into the possession of the Agent or of its Affiliates. The Agent shall not be required to file this Agreement, any other Loan Document or any document or instrument referred to herein or therein, or record or give notice of this Agreement, any other Loan Document or any document or instrument referred to herein or therein, to any Person. SECTION 7.08. Failure of Agent to Act. Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall have received further assurances (which may include cash collateral) of the indemnification obligations of the Banks under Section 7.05 hereof in respect of any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. SECTION 7.09. Resignation of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving written notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a bank which has an office in New York, New York. The Required Banks or the retiring Agent, as the case may be, shall upon the appointment of a Successor Agent promptly so notify the Borrower, the Guarantors and the other Banks. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation as Agent, the provisions of this Article 7 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. - 61 - SECTION 7.10. Amendments Concerning Agency Function. The Agent shall not be bound by any waiver, amendment, supplement or modification of this Agreement or any other Loan Document which affects its rights or duties hereunder or thereunder unless it shall have given its prior written consent thereto. SECTION 7.11. Liability of Agent. The Agent shall not have any liabilities or responsibilities to the Borrower, the Guarantors or any of them on account of the failure of any Bank to perform its obligations hereunder or to any Bank on account of the failure of the Borrower, the Guarantors or any of them to perform their or its obligations hereunder or under any other Loan Document. SECTION 7.12. Transfer of Agency Function. Without the consent of the Borrower, the Guarantors or any Bank, the Agent may at any time or from time to time transfer its functions as Agent hereunder to any of its offices wherever located, provided that the Agent shall promptly notify the Borrower, the Guarantors and the Banks thereof. SECTION 7.13. Withholding Taxes. Each Bank represents that it is entitled to receive any payments to be made to it hereunder without the withholding of any tax and will furnish to the Agent such forms, certifications, statements and other documents as the Agent may request from time to time to evidence such Bank's exemption from the withholding of any tax imposed by any jurisdiction or to enable the Agent to comply with any applicable laws or regulations relating thereto. Without limiting the effect of the foregoing, if any Bank is not created or organized under the laws of the United States of America or any state thereof, in the event that the payment of interest by the Borrower is treated for U.S. income tax purposes as derived in whole or in part from sources from within the United States, such Bank will furnish to the Agent Form 4224 or Form 1001 of the Internal Revenue Service, or such other forms, certifications, statements or documents, duly executed and completed by such Bank as evidence of such Bank's exemption from the withholding of United States tax with respect thereto. The Agent shall not be obligated to make any payments hereunder to such Bank in respect of any Loan until such Bank shall have furnished to the Agent the requested form, certification, statement or document. SECTION 7.14. Several Obligations and Rights of Banks. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but no Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. - 62 - SECTION 7.15. Pro Rata Treatment of Loans, Etc. Except to the extent otherwise provided, each prepayment and payment of principal of or interest on Loans of a particular type and a particular Interest Period, if any, shall be made to the Agent for the account of the Banks holding Loans of such type and Interest Period, if any, pro rata in accordance with the respective unpaid principal amounts for such Loans of such Interest Period held by such Banks. SECTION 7.16. Sharing of Payments Among Banks. If a Bank shall obtain payment of any principal of or interest on any Loan, any fee due hereunder or on any L/C Exposure, made by it through the exercise of any right of setoff, banker's lien, counterclaim, or any other means, it shall share such payment with the other Banks and the amount of such payment shall be applied to reduce the Loans of all the Banks pro rata in accordance with the unpaid principal on the Loans held by each of them, and make such other adjustments from time to time as shall be equitable to the end that all the Banks shall share the benefit of such payment (net of any expenses which may be incurred by such Bank in obtaining or preserving such benefit) pro rata in accordance with the unpaid principal and interest on the Loans held by each of them. To such end the Banks shall make appropriate adjustments among themselves if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Bank so purchasing a participation (or direct interest) in the Loans made by the other Banks may exercise all rights of set off, banker's lien, counterclaim or similar rights with respect to such participation (or direct interest). Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness of the Borrower. Notwithstanding the foregoing or any other provision of this Agreement, no right or remedy of any Bank relating to any assets of the Borrower (including real property, improvements or fixtures) not covered by this Agreement or the other Loan Documents shall in any way be affected by this Agreement or otherwise with respect to any other indebtedness of the Borrower to any of the Banks. SECTION 7.17. Nonreceipt of Funds by Agent; Payments to Banks. (a) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent in its sole discretion may, but shall not be obligated to, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment in full to the Agent, such Bank agrees to repay to the Agent on demand such amount and if for any reason the Agent does not receive such amount from such Bank on the day of such demand, if such demand is made before - 63 - 2:00 p.m. on such day, or on the next Business Day if demand is made after 2:00 p.m. on such day, such Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the customary rate set by the Agent for the correction of errors among banks for three (3) Business Days and thereafter at the Prime Rate. (b) If the Agent shall fail to pay any amounts owing by the Agent to a Bank as promptly as may be required by this Agreement, the Agent shall pay to such Bank, on its demand, interest on such delinquent amount at the customary rate set by the Agent for the correction of errors among banks for three (3) Business Days and thereafter at the Prime Rate. - 64 - ARTICLE VIII SECTION 8.01. Amendments. Etc. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Borrower, the Guarantors, the Agent and the Required Banks, and any provision of this Agreement may be waived by the Borrower (if such provision requires performance by the Agent or the Banks) or by the Agent acting with the consent of the Required Banks (if such provision requires performance by the Borrower); provided that no amendment, modification or waiver shall, unless by an instrument signed by all of the Banks or by the Agent acting with the consent of all of the Banks: (a) increase or extend the term of the Commitment or the Loans, (b) extend the date fixed for the payment of principal of or interest on any Loan, (c) reduce the amount of any payment of principal thereof or the rate at which interest is payable thereon or any fee payable hereunder, (d) alter the terms of this Section 8.01, (e) amend the definition of the term "Required Banks", (f) change the fees payable to any Bank except as otherwise provided herein, (g) permit the Borrower to transfer or assign any of its obligations hereunder or under the other Loan Documents, (h) amend the provisions of Article 7 hereof, (i) give any payment priority to any Person (including any of the Banks) over amounts due in connection with the Loans or the Letters of Credit, (j) release any Collateral (other than as permitted by a security agreement) or (k) amend any provision of this Agreement or any other Loan Document which requires the action of all Banks. No failure on the part of the Agent or any Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof or preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed via certified mail, return receipt requested, telegraphed, sent by overnight mail delivery service, sent by facsimile or delivered, if to the Borrower or any Guarantor, at the address of the Borrower or Guarantor, as the case may be, set forth at the beginning of this Agreement and if to the Agent or any Bank, at the address of the Agent or such Bank set forth at the beginning of this Agreement to the attention of Manchester Equipment Co., Inc. Account Officer, or, as to each party, at such other address as shall be designated by such party in a written notice complying as to delivery with the terms of this Section 8.02 to the other parties. Copies of all notices to the Borrower or any Guarantor shall be sent to Joel Rothlein, Esq., Kressel, Rothlein and Roth, 684 Broadway, - 65 - Massapequa, New York 11758. All such notices and communications shall be effective when mailed, telegraphed or delivered, except that notices to the Agent or any of the Banks shall not be effective until received by the Agent or such Bank. SECTION 8.03. No Waiver, Remedies. No failure on the part of the Agent or any Bank to exercise, and no delay in exercising, any right, power or remedy under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any Loan Document preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, execution, delivery and administration of this Agreement, the Notes, the Letters of Credit and any other Loan Documents, including, without limitation, the reasonable fees and expenses of counsel for the Agent with respect thereto and with respect to advising the Banks as to their respective rights and responsibilities under this Agreement, and all costs and expenses, if any (including reasonable counsel fees and expenses), of the Agent and the Banks in connection with the enforcement of this Agreement, the Notes, the Letters of Credit and any other Loan Documents. The Borrower shall at all times protect, indemnify, defend and save harmless the Agent and the Banks from and against any and all claims, actions, suits and other legal proceedings, and liabilities, obligations, losses, damages, penalties, judgments, costs, expenses or disbursements which the Agent or the Banks may, at any time, sustain or incur by reason of or in consequence of or arising out of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. The Borrower acknowledges that it is the intention of the parties hereto that this Agreement shall be construed and applied to protect and indemnify the Agent and the Banks against any and all risks involved in the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, all of which risks are hereby assumed by the Borrower, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent or any Bank's gross negligence or willful misconduct. The provisions of this Section 8.04 shall survive the payment of the Notes and the termination of this Agreement. SECTION 8.05. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Banks each are - 66 - hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Banks or any Affiliates of the Banks to or for the credit or the account of the Borrower or any Guarantor against any and all of the obligations of the Borrower or any Guarantor now or hereafter existing under this Agreement and the Notes, irrespective of whether or not the Agent or the Banks shall have made any demand under this Agreement or the Notes and although such obligations may be unmatured. The rights of the Banks under this Section are in addition to all other rights and remedies (including, without limitation, other rights of set-off) which the Agent and the Banks may have. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower, the Guarantors, the Agent and the Banks. SECTION 8.07. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans and interests in Letters of Credit. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clauses (a) through (i) of Section 8.01 hereof without the consent of such Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of this Article VIII and Article III hereof with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this - 67 - Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) (i) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $2,000,000.00) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit B hereto executed by such Assignee and such transferor Bank, with the subscribed consent of the Agent, which shall not be unreasonably withheld and with, so long as no Default or Event of Default has occurred and is continuing (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld; provided that if an Assignee is an affiliate of such transferor Bank, no such consent shall be required. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. (ii) Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $3,500.00. If an Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 7.13 hereof. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. SECTION 8.08. Further Assurances. The Borrower and each Guarantor agree at any time and from time to time at its expense, upon request of the Agent, the Banks or their respective counsel, to promptly execute, deliver, or obtain or cause to be executed, delivered or obtained any and all further instruments and documents and to take or cause to be taken all such other action the Agent or any Bank may deem desirable in obtaining the full benefits of this Agreement or any other Loan Document. - 68 - SECTION 8.09. Section Headings, Severability, Entire Agreement. Section and subsection headings have been inserted herein for convenience only and shall not be construed as part of this Agreement. Every provision of this Agreement and each other Loan Document is intended to be severable; if any term or provision of this Agreement, any other Loan Document, or any other document delivered in connection herewith or therewith shall be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions hereof or thereof shall not in any way be affected or impaired thereby. All exhibits and schedules to this Agreement shall be annexed hereto and shall be deemed to be part of this Agreement. This Agreement and the exhibits and schedules attached hereto embody the entire agreement and understanding between the Borrower, the Guarantors, the Agent and the Banks and supersede all prior agreements and understandings relating to the subject matter hereof provided, however, that to the extent that the provisions of the Commitment Letter are not inconsistent with the provisions of this Agreement and the other Loan Documents but are cumulative with respect thereto, such provisions of the Commitment Letter shall survive the execution and delivery of this Agreement. SECTION 8.10. Governing Law. This Agreement, the Notes and all other Loan Documents shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 8.11. Waiver of Jury Trial. The Borrower, each Guarantor, the Agent and the Banks waive all rights to trial by jury on any cause of action directly or indirectly involving the terms, covenants or conditions of this Agreement or any Loan Document. SECTION 8.12. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. - 69 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE BANK OF NEW YORK, as Agent ELECTROGRAPH SYSTEM, INC. By:____________________________ By:______________________ Name: Gerard Waters Name: Barry R. Steinberg Title: Vice President Title: President THE BANK OF NEW YORK COASTAL OFFICE PRODUCTS, INC. By:____________________________ By:______________________ Name: Gerard Waters Name: Barry R. Steinberg Title: Vice President Title: President EUROPEAN AMERICAN BANK By:____________________________ Name: Stuart Berman Title: Vice President MANCHESTER EQUIPMENT CO., INC. By:____________________________ Name: Barry R. Steinberg Title: President MANCHESTER INTERNATIONAL LTD. By:____________________________ Name: Barry R. Steinberg Title: President MANTECH COMPUTER SERVICES, INC. By:____________________________ Name: Barry R. Steinberg Title: President MEC LEASING GROUP, LTD. By:____________________________ Name: Barry R. Steinberg Title: President MANCHESTER SOLUTIONS, INC. By:____________________________ Name: Barry R. Steinberg Title: President - 70 - SCHEDULE 1.01 Total Commitments of Each Bank Initial Dollar Amount Pro Rata Share The Bank of New York - $ 10,500,000.00 70% European American Bank - $ 4,500,000.00 30% - 71 - SCHEDULE 4.01(a) SUBSIDIARY'S NAME STATE OF IDENTITY AND AND ADDRESS INCORPORATION AND PERCENTAGE OF EACH STATE IN WHICH OWNERSHIP OF EACH IT IS QUALIFIED TO SHAREHOLDER DO BUSINESS ManTech Computer New York Corporation Manchester Equipment Co., Inc. Services, Inc. doing Business in Sole Shareholder 160 Oser Avenue State of New York Hauppauge, NY 11788 MEC Leasing Group, Ltd. 160 Oser Avenue Hauppauge, NY 11788 New York Corporation doing Business in State of New York. Manchester Equipment Co., Inc. Sole Shareholder Manchester Solutions, Inc. 160 Oser Avenue Hauppauge, NY 11788 New York Corporation doing Business in State of New York. Manchester Equipment Co., Inc. Sole Shareholder Manchester International Ltd. 160 Oser Avenue Hauppauge, NY 11788 New York Corporation doing Business in State of New York. Manchester Equipment Co., Inc. Sole Shareholder Coastal Office Products, Inc. 4812 Frankford Avenue Baltimore, MD 21206 Maryland Corporation doing Business in State of Maryland. Manchester Equipment Co., Inc. Sole Shareholder Electrograph Systems, Inc. 160 Oser Avenue Hauppauge, NY 11788 New York Corporation doing Business in New York, Maryland, California, Texas. Manchester Equipment Co., Inc. Sole Shareholder - 72 - SCHEDULE 4.01(g) Litigation (Borrower as Defendant) United States District Court, Eastern District of New York 97 CV 1504(TCP)(MLD) Vincent Manngard, Raymond M. Wapner and Kurt Joerger, On Behalf of Themselves and Others Similarly Situated, Plaintiffs, -against- Manchester Equipment Co., Inc., Barry R. Steinberg, Joel G. Stemple and Joseph Looney, Defendants. - ------------------------------------------------------------------- This Class Action on behalf of the Shareholders has been settled pending a final approval of the settlement terms by the Court. The Bar date has long passed without any party objecting or opting out. Accordingly, there is no reason to doubt that the Court will approve the settlement. - 73 -
SCHEDULE 4.01(s) Creditor Nature of Amount of Liens Securing Agreement Credit Credit Mitsubishi Electronics Guarantee of No Limits None America, Inc. Electrograph Systems, Inc., a Subsidiary of Manchester Equipment Co., Inc. Fujitsu General Electrograph No Limits None America, Inc. Systems, Inc., Guarantee of a Subsidiary of Manchester Equipment Co., Inc. Matsushita Guaranty of No Limits None Electric Electrograph Corporation of Systems, Inc. a America Subsidiary of Manchester Equipment Co., Inc. Tech Data Guaranty of No Limits None Corporation Coastal Office Products, Inc., a Subsidiary of Manchester Equipment Co., Inc. Deutsche Credit $10 Million None Financial Agreement of Services, Inc. Manchester Equipment Co. Inc. International Capital Lease $71,667.58 None Business of AS400-Main (Balance) Machines Frame Computer Corporation for Manchester Equipment Co., Inc.
- 74 -
Creditor Nature of Amount of Liens Securing Agreement Credit Credit First National Auto Loan of $5,164.79 On Title Bank Coastal Office (Balance) Products, Inc., a Subsidiary of Manchester Equipment Co., Inc. First National Auto Loan of $8,334.88 On Title Bank Coastal Office (Balance) Products, Inc. a Subsidiary of Manchester Equipment Co., Inc. GMAC Auto Loan of $9,918.45 On Title Coastal Office (Balance) Products, Inc. a Subsidiary of Manchester Equipment Co., Inc. GMAC Auto Loan of $10,481.49 On Title Coastal Office (Balance) Products, Inc. a Subsidiary of Manchester Equipment Co., Inc. Ford Motor Auto Loan of $222.04 On Title Credit Coastal Office (Balance) Products, Inc. a Subsidiary of Manchester Equipment Co., Inc. Ford Motor Auto Loan of $222.04 On Title Credit Coastal Office Products, Inc. a Subsidiary of Manchester Equipment Co., Inc.
- 75 - SCHEDULE 5.02(a) Creditor Amount Property Subject to Lien Except as disclosed in Schedule 4.01(s), none. - 76 - SCHEDULE 5.02(b) Creditor Amount Except as disclosed in Schedule 4.01(s), none. - 77 - SCHEDULE 5.02(i) Description of All Guaranties of Borrower: Mitsubishi Electronics America, Inc. Guarantee of Electrograph Systems, Inc. Fujitsu General America, Inc. Guarantee of Electrograph Systems, Inc. Matsushita Electric Corporation of America Guaranty of Electrograph Systems, Inc. - 78 - EXHIBIT A REVOLVING CREDIT NOTE $_________________ Garden City, New York __________, 199_ FOR VALUE RECEIVED, on the Maturity Date, MANCHESTER EQUIPMENT CO., INC., a ___________ corporation, having its principal place of business at 160 Oser Avenue, Hauppauge, New York 11788 ("Borrower"), promises to pay to the order of __________________ ("Bank") at the office of The Bank of New York, as Agent, located at 604 Broad Hollow Road, Melville, New York 11747, the principal sum of the lesser of: (a) ________________ ($___________) DOLLARS; or (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by Bank to Borrower pursuant to the Agreement (as defined below). Borrower shall pay interest on the unpaid principal balance of this Note from time to time outstanding, at said office, at the rates of interest, at the times and for the periods set forth in the Agreement. All payments including prepayments on this Note shall be made in lawful money of the United States of America in immediately available funds. Except as otherwise provided in the Agreement, if a payment becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate herein specified during such extension. Borrower hereby authorizes Bank to enter from time to time the amount of each Loan to Borrower and the amount of each payment on a Loan on the schedule annexed hereto and made a part hereof. - 79 - Failure of Bank to record such information on such schedule shall not in any way effect the obligation of Borrower to pay any amount due under this Note. This Note is one of the Revolving Credit Notes referred to in that certain Loan Agreement among Borrower, certain Guarantors, The Bank of New York, as Agent, The Bank of New York, and European American Bank, of even date herewith (the "Agreement"), as such Agreement may be amended from time to time, and is subject to prepayment and its maturity is subject to acceleration upon the terms contained in said Agreement. All capitalized terms used in this Note and not defined herein shall have the meanings given them in the Agreement. If any action or proceeding be commenced to collect this Note or enforce any of its provisions, Borrower further agrees to pay all costs and expenses of such action or proceeding and reasonable attorneys' fees and expenses and further expressly waives any and every right to interpose any counterclaim in any such action or proceeding. Borrower hereby submits to the jurisdiction of the Supreme Court of the State of New York and agrees with Bank that personal jurisdiction over Borrower shall rest with the Supreme Court of the State of New York for purposes of any action on or related to this Note, the liabilities, or the enforcement of either or all of the same. Borrower hereby waives personal service by manual delivery and agrees that service of process may be made by certified mail, return receipt requested, directed to the Borrower at the Borrower's address set forth above or at such other address as may be designated in writing by the Borrower to Bank in accordance with Section 8.02 of the Agreement, and that upon - 80 - mailing of such process such service shall be effective with the same effect as though personally served. Borrower hereby expressly waives any and every right to a trial by jury in any action on or related to this Note, the liabilities hereunder or the enforcement of either or all of the same. Subject to the provisions of the Agreement, Bank may transfer this Note to a transferee or transferees, who shall thereupon become vested with all the powers and rights above given to Bank in respect thereto, and Bank shall thereafter be forever relieved and fully discharged from any liability or responsibility with respect to any matters occurring after the date of such transfer. The failure of any holder of this Note to insist upon strict performance of each and/or all of the terms and conditions hereof shall not be construed or deemed to be a waiver of any such term or condition. Borrower and all endorsers and guarantors hereof waive presentment and demand for payment, notice of non-payment, protest, and notice of protest. This Note shall be construed in accordance with and governed by the laws of the State of New York. MANCHESTER EQUIPMENT CO., INC. By: Name: Title: - 81 - Schedule of Revolving Credit Loans Amount of Principal Unpaid Name of Making Amount of Type of Paid or Principal Person Making Date Loan Loan Prepaid Balance Notation - 82 - EXHIBIT B ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Assignment") dated as of __________________ among ___________________ (the "Assignor"), ________________ (the "Assignee") and THE BANK OF NEW YORK, as Agent (the "Agent"). WITNESSETH WHEREAS, this Assignment and Assumption Agreement (the "Assignment") relates to the Loan Agreement dated July __, 1998 among Manchester Equipment Co. Inc., certain Guarantors, the Assignor as a Bank and the Agent (as amended, the "Agreement"); and WHEREAS, as provided under the Agreement, the Assignor has heretofore made Loans to the Borrower and has, or may have, participations in Letters of Credit; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Agreement in respect of all or a portion of its Commitment, the Loans and the L/C Exposure and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Agreement. SECTION 2. Assignment. The Assignor hereby sells and assigns to the Assignee, without recourse, and the Assignee hereby purchases and assumes from the Assignor, a ____% interest in and to all of the Assignor's rights and obligations as a Bank under the Agreement as of the Effective Date (as defined below) including, without limitation, such percentage interest in (w) the Assignor's Commitment, (x) the Revolving Credit Loans owing to Assignor outstanding on the Effective Date, (y) the Revolving Credit Note held by the Assignor under the Agreement, together with the rights to interest accruing from the Effective Date and (z) the Assignor's participation in Letters of Credit, drawings thereunder, unmatured drafts accepted and deferred payment obligations incurred under Letters of Credit ("L/C Exposure"). SECTION 3. Assignor Representations. The Assignor (i) represents and warrants that as of the date hereof, (x) its Commitment, unreduced by any assignments thereof which have not yet become effective, is $_____________, (y) the outstanding balance of - 83 - its Revolving Credit Loans, unreduced by any assignments thereof which have not yet become effective, is $___________ and (z) its L/C Exposure, unreduced by any assignments which have not yet become effective, is $__________; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or any other Loan Document or any other instrument or document furnished pursuant thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by it; (iii) makes no representation or warranty and assumes no responsibility with respect to the solvency or financial condition of the Borrower or the Guarantors, or the performance or observance by the Borrower or the Guarantors of any of their obligations under the Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto; and (iv) confirms that its Revolving Credit Note shall be exchanged as of the Effective Date for two Revolving Credit Notes, each dated the Effective Date, to be delivered to the Assignor and the Assignee, in an aggregate principal amount of $____________ and $__________, respectively. SECTION 4. Assignee Representations. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Assumption Agreement; (ii) confirms that it has received copies of the Agreement and the other Loan Documents, together with copies of such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption Agreement; (iii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Agreement and the Notes or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty; (iv) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement and the other Loan Documents; and (v) agrees that it will perform in accordance with their terms all the obligations which by the terms of the Agreement are required to be performed by it as a Bank. SECTION 5. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in federal funds an amount equal to the outstanding principal of the Revolving Credit Loans and any outstanding Letter of Credit reimbursement obligations assigned hereunder. Each of the Assignor and the Assignee hereby agrees that if either of them receives any amount - 84 - under the Agreement or any other Loan Document which is for the account of the other, it shall receive the same for the account of such other party to the extent of such other party's interest herein and shall promptly pay the same to the Agent on behalf of such other party. SECTION 6. Effectiveness. Subject to the remaining provisions of this Section 6, the effective date for this Assignment and Assumption Agreement shall be ___________, 19__ (the "Effective Date"). Following the execution of this Assignment and Assumption Agreement, it will be delivered by the Assignor to the Agent for acknowledgment and recording by the Agent. The Assignor agrees to pay to the Agent, on or prior to the Effective Date, the $3,500.00 assignment fee required by Section 8.07 of the Agreement. This Assignment and Assumption Agreement shall become effective, as of the Effective Date, upon (i) its execution by the Agent and (ii) if required by Section 8.07 of the Agreement, the consent of the Borrower. SECTION 7. Effect of Assignment. On and after the Effective Date, (i) the Assignee shall be a party to the Agreement and the other Loan Documents to which each Bank is a party and, to the extent provided in this Assignment and Assumption Agreement, shall have the rights and obligations of a Bank and (ii) the Assignor shall, to the extent provided in this Assignment and Assumption Agreement, relinquish its rights and be released from its obligations under the Agreement and the other Loan Documents to which it is a party. SECTION 8. Payments. From and after the Effective Date, the Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest and other amounts) to the Assignee. SECTION 9. Governing Law. This Assignment and Assumption Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 10. Counterparts. This Assignment and Assumption Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. - 85 - IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By:_____________________ Name: Title: [ASSIGNEE] By:_____________________ Name: Title: THE BANK OF NEW YORK, as Agent By:____________________ Name: Title: - 86 - CONSENT OF BORROWER Manchester Equipment Co., Inc., the Borrower under that certain Loan Agreement dated as of ____________, 199_ among Manchester Equipment Co. Inc., certain Guarantors and The Bank of New York, as Agent and The Bank of New York, and European American Bank as lending banks, as amended or supplemented from time to time (the "Agreement"), hereby consents to the attached Assignment and Assumption Agreement and the transactions contemplated thereby. Date:_______________ MANCHESTER EQUIPMENT CO., INC. By:_________________________ Name: Title: - 87 - EX-27 3 ART. 5 FDS FOR FORM 10-K
5 1,000 YEAR JUL-31-1998 JUL-31-1998 7,816 1,501 27,446 1,150 9,167 45,552 9,326 3,351 56,894 19,440 0 0 0 81 37,264 56,894 202,530 202,530 171,930 171,930 27,414 0 41 3,732 1,560 2,172 0 0 0 2,172 .26 .26
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