SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 6, 1997
THE HARTCOURT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
UTAH
(State or other jurisdiction of incorporation)
0011-12671 87-0400541 (I.R.S.
(Commission File No.) (Employer Identification No.)
19104 S. Norwalk Boulevard 90701
Artesia, California (Zip Code)
(Address of Principal Executive Office)
Registrant's telephone number,
including area code: (562) 403-1126
N.A.
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On October 6, 1997 The Hartcourt Companies, Inc., a Utah Corporation
(Registrant), completed the purchase of all of the outstanding stock of Pego
Systems, Inc. (Pego Systems) for $2,450,000. The agreement provides for payment
of $500,000 cash, $1,500,000 in Hartcourt Cos. Preferred Stock, Series C and
$450,000 in restricted Hartcourt Cos. Common Stock. The $500,000 cash used in
the transaction came from the sale of restricted common shares of the
Registrant. The Hartcourt Cos. Preferred Stock, Series C provides for quarterly
redemption of $250,000 per quarter, over the six calendar quarters following the
closing date.
Consideration for the acquisition of Pego Systems, Inc. was based on the
value of the assets of Pego Systems, its earnings and cashflow potential and,
above all, the goodwill that Pego Systems has generated over its 27 year
existence.
The outstanding stock of Pego Systems was acquired from Simerco Trading,
Ltd. (a British Virgin Islands Company) and from Michael J. Caruana, who is also
a Director of the Registrant.
Pego Systems is a manufacturers' representative organization and also
offers a full line of value added services including distribution, service, and
the manufacturing of custom process equipment packages. The Company's primary
focus is air and gas handling equipment. Key applications for the products and
services that Pego Systems sells include pneumatic conveying, combustion process
air, wastewater secondary treatment applications of aeration and digester gas
mixing, bottle and can drying, contaminated soil vapor extraction, and landfill
gas handling. Pego Systems' markets include the Petro-Chemical industry, most
processing companies, food industry, brewing industry, cement plants and many
general industrial operations, as well as waste water treatment plants. The
environmental market for pollution control through vapor extraction and other
means is emerging as an area of major focus for Pego Systems.
The Registrant does not intend any changes in management and will operate
Pego Systems as a wholly-owned subsidiary.
2
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited financial statements of Pego Systems, Inc. for the years ended June
30, 1997 and 1996 are filed with this report as Exhibit 1.
(b) Pro forma Financial Information.
The unaudited pro forma condensed financial statements are filed with this
report as Exhibits 2 & 3.
(c) Exhibits.
The exhibits to this Report are listed in the Exhibit index set forth elsewhere
herein.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE HARTCOURT COMPANIES, INC.
Date: October 18, 1997 By:________________________________
Dr. Alan Phan
President
3
<PAGE>
Exhibits Index
Exh.
No.
- -----
1 Audited financial statements of Pego Systems, Inc. for the years ended
June 30, 1997 and 1996.
2 Unaudited pro forma condensed consolidated balance sheet of Registrant as
of June 30, 1997 and December 31, 1996.
3 Unaudited pro forma condensed consolidated statements of income for the
six and twelve months ended June 30, 1997 and December 31, 1996,
respectively.
4 Copy of Agreement between Registrant and the shareholders of Pego
Systems, Inc. for the purchase by Registrant of all of the outstanding
stock of Pego Systems, Inc.
5 Consent of Independent Accountants.
4
<PAGE>
PEGO SYSTEMS, INC.
AUDITED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT...............................................1
FINANCIAL STATEMENTS
Balance sheets as of June 30, 1997 and 1996............................. 2
Statements of operations for the years ended
June 30, 1997, 1996 and 1995 ......................................... 3
Statements of changes in stockholders' equity
for the years ended June 30, 1997, 1996 and 1995 ..................... 4
Statements of cash flows for the years ended
June 30, 1997, 1996 and 1995 ......................................... 5
Notes to Financial Statements......................................... 6 - 13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PEGO SYSTEMS, INC.:
We have audited the accompanying balance sheets of Pego Systems, Inc., a
California Corporation (the "Company"), as of June 30, 1997 and 1996, and the
related statements of operations, changes in stockholders' equity, and cash
flows for the years ended June 30, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30, 1997
and 1996, and the results of its operations and its cash flows for the years
ended June 30, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
Harlan & Boettger, LLP
San Diego, California
August 29, 1997
1
<PAGE>
PEGO SYSTEMS, INC.
BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996
ASSETS 1997 1996
---------- ----------
CURRENT ASSETS
Cash $ 132,659 $ 215,551
Accounts receivable, net of allowances
of $11,009 and $8,745, respectively 681,226 304,061
Inventory (Note C) 280,022 455,402
Prepaid expenses - 6,747
Deferred tax benefit (Note I) 29,241 9,885
---------- ----------
TOTAL CURRENT ASSETS 1,123,148 991,646
PROPERTY AND EQUIPMENT, net (Note D) 1,314,137 69,962
DEPOSITS 7,002 7,002
---------- ----------
$2,444,287 $1,068,610
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 437,974 $ 458,641
Accrued expenses 221,536 163,426
Prepaid credits 23,842 11,750
Current portion-Capital Lease
Obligation (Note F) 6,715 6,169
Current portion-Long-term
Debt (Note E) 12,343 -
---------- ----------
TOTAL CURRENT LIABILITIES 702,410 639,986
CAPITAL LEASE OBLIGATION,
less current portion (Note F) 6,112 13,340
DEFERRED TAX LIABILITY (Note I) 7,104 -
LONG-TERM DEBT,
less current portion (Note E) 1,201,228 -
---------- ----------
TOTAL LIABILITIES 1,916,854 653,326
COMMITMENTS AND CONTINGENCIES (Note F)
STOCKHOLDERS' EQUITY
Common Stock, $.04 par value, 75,000 shares
authorized, 33,000 and 25,000 shares
issued and outstanding, respectively 1,320 1,000
Additional paid-in capital 49,680 -
Retained earnings 476,433 414,284
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 527,433 415,284
---------- ----------
$2,444,287 $1,068,610
========== ==========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PEGO SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
---------- ---------- ----------
NET SALES $6,373,726 $6,195,473 $5,377,582
COST OF SALES 4,649,015 4,647,214 3,779,238
---------- ---------- ----------
Gross Profit 1,724,711 1,548,259 1,598,344
GENERAL AND ADMINISTRATIVE EXPENSES 1,601,035 1,573,876 1,552,362
---------- ---------- ----------
Income (loss) from operations 123,676 (25,617) 45,982
OTHER INCOME (EXPENSES)
Interest expense (2,596) (11,865) (4,188)
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSES) (2,596) (11,865) (4,188)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION 121,080 (37,482) 41,794
INCOME TAXES (Note I) 58,931 1,256 17,869
---------- ---------- ----------
NET INCOME (LOSS) $ 62,149 $ (38,738) $ 23,925
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PEGO SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Additional Total Stock-
Common Stock Paid-in Retained holders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- --------
Balance, June 30, 1994 501 $1,000 $ - $429,097 $430,097
Stock split 24,499 - - - -
Net income - - - 23,925 23,925
------ ------ ------- -------- --------
Balance, June 30, 1995 25,000 1,000 - 453,022 454,022
Net loss - - - (38,738) (38,738)
------ ------ ------- -------- --------
Balance, June 30, 1996 25,000 1,000 - 414,284 415,284
Stock issued for services
- related party 8,000 320 49,680 - 50,000
Net income - - - 62,149 62,149
------ ------ ------- -------- --------
Balance, June 30, 1997 33,000 $1,320 $49,680 $476,433 $527,433
====== ====== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PEGO SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 62,149 $ (38,738) $ 23,925
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Stock issued for services
- related party 50,000 - -
Depreciation and amortization 16,996 2,554 23,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (377,165) 266,615 (18,518)
Inventory 175,380 (81,620) (123,324)
Prepaid expenses 6,747 (6,747) 6,791
Income tax receivable (29,241) - -
Increase (decrease) in:
Prepaid credits 12,092 11,750 -
Accounts payable (20,667) 42,912 140,379
Accrued expenses 58,110 150,348 27,126
Deferred tax benefit 9,885 (9,885) -
Deferred tax liability 7,104 - -
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (28,610) 337,189 79,379
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (47,600) (29,462) (6,139)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (47,600) (29,462) (6,139)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing from line of credit - - 75,000
Payments on short-term debt - (75,000) -
Payments on capital lease obligation (6,682) (491) -
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (6,682) (75,491) 75,000
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (82,892) 232,236 148,240
CASH, BEGINNING OF YEAR 215,551 (16,685) (164,925)
--------- --------- ---------
CASH, END OF YEAR $ 132,659 $ 215,551 $ (16,685)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Organization:
Pego Systems, Inc. (the Company) was founded in 1970, as a California
Corporation. The original founder, Mr. Lee Guttero, first operated a
company called Lee Guttero and Associates, which he started in 1952. The
Company was a manufacturer's representative for two lines of equipment,
Philadelphia Gear Corporation and Coppus Engineering. In 1970, the Company
was and its name changed to Pego Systems, Inc.
Gardena, California was the original location of the Company. In 1972,
Michael Caruana joined the Company as a sales engineer and operations were
moved to Signal Hill, California. Mr. Caruana became president of the
Company in 1978 following the retirement of Mr. Guttero. At the end of
1983, a new division of Pego was started to include a fabrication and
service operation. Two major sales representatives/distribution contracts
were secured following this operational change by the Company, Sutorbilt
Blowers and Fuller Compressor. In 1990, due to the growth of the Company,
the entire operation was moved to a larger facility located at 1196 E.
Willow Street in Signal Hill, California. In 1995, the operation expanded
into the adjoining building, 1198 E. Willow Street.
In the period when the Company was on Spring Street, it grew from three
persons to six. While it was located on 29th Street, it grew from six to
twelve. From the move to East Willow Street in 1990, Pego had expanded its
operations to Northern California and had a total of 25 persons employed.
In 1995, Richard Greiner, the former head of Engineering, became Vice
President and General Manager. The President, M. Caruana, moved to the
Northern California office and took over the job of General Sales Manager,
as well as President.
Pego Systems, Inc. has evolved from a manufacturer's representative
organization to also offer a full line of value added services including
distribution, service, and the manufacturing of custom process equipment
packages. The Company's primary product focus is air and gas handling
equipment.
6
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
A. Organization: (continued)
Background
Air and gas handling machinery is a vital part of the entire industrial
world and holds much promise for growth. Air is used in almost every facet
of industry and has unlimited application. Key applications for the
products and services the Company sells include pneumatic conveying,
combustion process air, wastewater secondary treatment applications of
aeration and digester gas mixing, bottle and can drying, contaminated soil
vapor extraction, and landfill gas handling.
The Company's markets include the Petro-Chemical industry, most processing
companies, food industry, brewing industry, cement plants and many general
industrial operations, as well as waste water treatment plants. The
environmental market for pollution control through vapor extraction and
other means is emerging as an area of major focus for the Company.
B. Summary of Significant Accounting Policies:
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Inventory
Raw materials are stated at the lower of average cost or market.
Work-in-process and finished goods are stated at standard cost (which
approximates cost on a first-in, first-out basis) not in excess of market
value.
Accounts Receivable
The Company extends credit to its customers in the normal course of
business and performs ongoing credit evaluations of its customers,
maintaining allowances for potential credit losses which, when realized,
have been within management's expectations. The allowances for doubtful
accounts were $11,009 and $8,745 at June 30, 1997 and 1996, respectively.
7
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
B. Summary of Significant Accounting Policies: (continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
of property and equipment is provided using the straight line method over
estimated useful lives ranging from five to seven years. The building is
depreciated over an estimated useful live of 312 years. Upon retirement or
disposal of depreciated assets, the cost and related depreciation are
removed and the resulting gain or loss is reflected in operations. Major
renewals and betterments are capitalized while maintenance costs and
repairs are expensed in the year incurred.
Income Taxes
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." A deferred tax asset or liability is
recorded for all temporary differences between financial and tax reporting.
Deferred tax expense (benefit) results from the net change during the year
of deferred tax assets and liabilities. Investment and other general
business tax credits are accounted for using the flow-through method
whereby such credits are reflected as reductions of current tax expense in
the year they are allowed for tax purposes.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts at high quality
financial institutions. The balances at times may exceed federally insured
limits. Amounts in excess of insured limits were approximately $28,000 and
$79,000 at June 30, 1997 and 1996, respectively.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt or equity instruments purchased with an original
maturity of three months or less to be cash equivalents. There were no cash
equivalents as of June 30, 1997 and 1996.
C. Inventory:
Inventory at June 30, 1997 and 1996, consists of the following:
1997 1996
-------- --------
Raw materials $120,808 $247,056
Work-in-process 159,214 208,346
-------- --------
$280,022 $455,402
======== ========
8
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
D. Property and Equipment:
Property and equipment at June 30, 1997 and 1996
consists of the following:
1997 1996
---------- ---------
Building $1,213,571 $ -
Leasehold improvements 110,053 110,053
Furniture and fixtures 64,652 64,653
Equipment 54,655 29,416
Vehicles 38,001 38,001
Computer equipment 79,236 56,874
---------- ---------
1,560,168 298,997
Less accumulated depreciation and amortization 246,031 229,035
---------- ---------
$1,314,137 $ 69,962
========== =========
Depreciation and amortization expense for the years ended June 30, 1997 and
1996 were $16,996 and $2,554, respectively.
E. Long-term Debt:
Long-term debt at June 30, 1997 and 1996 consists of the following:
1997 1996
---------- ----------
Loan payable to individual secured
by office building, monthly payments
of $9,543, including interest at
8.5%, outstanding balance due and
payable January 1, 2025 $1,213,571 $ -
Less current portion 12,343 -
---------- ----------
$1,201,228 $ -
========== ==========
9
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
F. Commitment and Capital Lease Obligation:
Operating Lease
On June 1, 1993 Pego Systems, Inc. entered into a ten year operating lease
with Novato Building Association for its warehouse located in Novato,
California.
Future minimum lease payments required under the operating lease are as
follows:
Year ending
June 30,
-----------
1998 $ 10,800
1999 21,600
2000 21,600
2001 21,600
2002 21,600
Thereafter 32,400
---------
Total minimum lease payments $129,600
=========
Capital Lease
The Company entered into a three year capital lease for a delivery vehicle.
Details of the book value of the leased vehicle included in property and
equipment as of June 30, 1997 and 1996 are as follows:
1997 1996
------- -------
Delivery vehicle, cost $25,134 $25,134
Accumulated depreciation (5,027) (628)
------- -------
$20,107 $24,506
======= =======
10
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
F. Commitment and Capital Lease Obligation: (continued)
Future minimum lease payments required under capital lease are as follows:
Year ending
June 30,
1998 $ 7,591
1999 6,395
2000 -
2001 -
2002 -
Thereafter -
-------
Total minimum lease payments $13,986
Less amount representing
interest 1,159
-------
Present value of net minimum
lease payments 12,827
Less current portion 6,715
-------
$ 6,112
=======
G. Supplemental Disclosure of Cash Flow Information:
Operating activities for years ended June 30, 1997, 1996 and 1995 reflect
interest and income taxes paid as follows:
1997 1996 1995
---- ---- ----
Interest $2,596 $11,865 $ 4,188
Income taxes $ 800 $11,141 $17,869
Non Cash Operating and Financing Activities
In May 1996, the Company acquired a delivery vehicle through the use of a
capital lease valued at $20,000.
11
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
G. Supplemental Disclosure of Cash Flow Information: (continued)
During the fiscal year 1997 the Company issued 8,000 shares of stock at
$6.25 per share ($50,000) for services performed.
On June 20, 1997 the Company purchased a building located at 1196 E. Willow
Street from Michael Caruana, President of Pego Systems, Inc. The building
was acquired for the existing mortgage outstanding at June 20, 1997.
H. Employee Benefit Plans:
The Company has a contributory profit sharing plan as defined under
Sections 401(a) and 501(a) of the Internal Revenue Code. Under the plan,
employees may contribute 1% to 15% of their compensation. At the discretion
of the Board of Directors, the Company may contribute additional amounts to
the plan on behalf of those who actively participate. Company contributions
will vest over a six-year period as established in the plan. Employer
matching contributions of $83,800 and $50,000 were made to the plan for the
years ended June 30, 1997 and 1996, respectively.
I. Income Taxes:
The provision for income taxes for the years ended June 30, 1997, 1996 and
1995 are as follows:
1997 1996 1995
------- ------- -------
Current income taxes $71,183 $11,141 $17,869
Deferred income taxes (1996 purchases) 9,885 (9,885) -
Deferred income taxes (1997 purchases) (29,241) - -
Deferred income taxes (depreciation) 7,104 - -
------- ------- -------
Provision for income taxes $58,931 $ 1,256 $17,869
======= ======= =======
12
<PAGE>
PEGO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
I. Income Taxes: (continued)
The Company has recognized deferred tax assets and liabilities for the tax
effects of temporary differences at June 30, 1997 and 1996 as follows:
1997 1996
------- ------
Deferred tax benefit
Inventory $29,241 $9,885
Valuation allowance - -
Current deferred tax benefit $29,241 $9,885
Deferred tax liability
Property and equipment $ 7,104 $ -
Valuation allowance - -
Noncurrent deferred tax liability $ 7,104 $ -
J. Stockholders' Equity:
Common Stock
In January 1995 the board of directors and stockholders voted to split the
Company's stock at 24.9 for 1, which reduced the par value from $1 per
share to $.04 per share and increased the total number of outstanding
shares at January 1995 from 501 shares to 25,000 shares.
K. Subsequent Events:
In July 1997 the Company signed a stock purchase agreement with Hartcourt
Companies, Inc. ("Hartcourt") in which all of the Company's outstanding
stock will be acquired with Hartcourt stock and cash. The transaction is
expected to close in September 1997.
13
<PAGE>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
(UNAUDITED)
Pro Forma
Adjustments
----------------------
Elimination
Historical PEGO Entries Pro Forma
----------- ---------- ---------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 822 $ 259,089 $ - $ 259,911
Accounts receivable 91,088 91,088 500,461 - 591,549
Inventories 311,424 275,000 - 586,424
Prepaid consulting fees 900,000 - - 900,000
Note receivables-current 133,764 - - 133,764
Amount due from shareholder 32,356 - - 32,356
Interest receivable 3,877 - - 3,877
Other current assets - 14,000 - 14,000
----------- ---------- ---------- -----------
TOTAL CURRENT ASSETS 1,473,331 1,048,550 - 2,521,881
----------- ---------- ---------- -----------
Property, plant, and
equipment, net 44,809 1,212,995 - 1,257,804
Investments 17,906,520 - - 17,906,520
Note receivables 1,190,795 - - 1,190,795
Goodwill, net - 1,812,990 - 1,812,990
Investment in subsidiary 2,450,000 - 2,450,000(a) -
Other assets 7,550 107,002 - 114,552
----------- ---------- ---------- -----------
TOTAL ASSETS $23,073,005 $4,181,537 $2,450,000 $24,804,542
=========== ========== ========== ===========
(a) To eliminate Hartcourt Companies investment in Subsidiary.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
(UNAUDITED)
(Continued)
Pro Forma
Adjustments
----------------------
Elimination
Historical PEGO Entries Pro Forma
----------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - current $ 56,396 $ 7,000 $ - $ 63,396
Accounts payable - trade 148,569 402,666 - 551,235
Accrued expenses 133,747 237,601 - 371,348
Overdraft 5,691 - - 5,691
Subscription 45,000 - - 45,000
----------- ---------- ---------- -----------
TOTAL CURRENT LIABILITIES 389,403 647,267 - 1,036,670
Long-term debt 524,369 1,211,242 - 1,735,611
----------- ---------- ---------- -----------
TOTAL LIABILITIES 913,772 1,858,509 - 2,772,281
Preferred Stock C 10 - - 10
Preferred Stock A 5 - - 5
Preferred Stock 10 - - 10
Common Stock 11,010 1,000 1,000(a) 11,010
Additional paid-in capital 25,653,795 2,449,000 2,449,000(a) 25,653,795
Treasury Stock (279,928) - - (279,928)
Retained deficit (3,225,669) (126,972) - (3,352,641)
----------- ---------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY 22,159,233 2,323,028 2,450,000 22,032,261
----------- ---------- ---------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $23,073,005 $4,181,537 $2,450,000 $24,804,542
=========== ========== ========== ===========
(a) To eliminate Hartcourt Companies investment in Subsidiary.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997
(UNAUDITED)
Pro Forma
Adjustments
----------------------
Elimination
Historical PEGO Entries Pro Forma
----------- ---------- ---------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 105,971 $ 132,659 $ - $ 238,630
Accounts receivable 39,359 681,226 - 720,585
Inventories 128,759 280,022 - 408,781
Prepaid consulting fees 900,000 - - 900,000
Deposits and prepaid expenses 318,042 29,241 - 347,283
Note receivables-current 189,091 - - 189,091
Amount due from shareholder 52,418 - - 52,418
Interest receivable 11,272 - - 11,272
----------- ---------- ---------- -----------
TOTAL CURRENT ASSETS 1,744,912 1,123,148 - 2,868,060
----------- ---------- ---------- -----------
Property, plant, and
equipment, net 35,264 1,226,488 - 1,261,752
Investments 17,906,520 - - 17,906,520
Note receivables 1,354,947 - - 1,354,947
Goodwill, net - 1,737,526 - 1,737,526
Investment in subsidiary 2,323,208 - 2,323,208(a) -
Other assets 516,951 107,002 - 623,953
----------- ---------- ---------- -----------
TOTAL ASSETS $23,881,802 $4,194,164 $2,323,208 $25,752,758
=========== ========== ========== ===========
<PAGE>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997
(UNAUDITED)
(Continued)
Pro Forma
Adjustments
----------------------
Elimination
Historical PEGO Entries Pro Forma
----------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - current $ 51,926 $ 19,058 $ - $ 70,984
Accounts payable - trade 192,744 379,094 - 571,838
Other current liabilities 100,000 30,946 - 130,946
Accrued expenses 5,902 181,990 - 187,892
Subscription 89,000 - - 89,000
----------- ---------- ---------- -----------
TOTAL CURRENT LIABILITIES 439,572 611,088 - 1,055,660
Long-term debt 576,615 1,207,340 - 1,783,955
----------- ---------- ---------- -----------
TOTAL LIABILITIES 1,016,187 1,818,428 - 2,834,615
Preferred Stock C 10 - - 10
Preferred Stock A 5 - - 5
Preferred Stock 10 - - 10
Common Stock 12,556 1,000 1,000(a) 12,556
Additional paid-in capital 26,545,093 2,450,000 2,449,000(a) 26,546,093
Treasury Stock (279,928) - - (279,928)
Retained deficit (3,412,131) ( 75,264) (126,792) (3,360,603)
----------- ---------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY 22,865,615 2,375,736 2,353,208 22,918,143
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $23,881,802 $4,194,164 $2,323,208 $25,752,758
=========== ========== ========== ===========
(a) To eliminate Hartcourt Companies investment in Subsidiary.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
(UNAUDITED)
Pro Forma
Adjustments
---------------------
Elimination
Historical PEGO Entries Pro Forma
----------- ---------- -------- -----------
SALES $ 510,692 $6,543,494 $ - $ 7,054,186
----------- ---------- -------- -----------
COST OF SALES 797,667 4,789,554 - 5,587,221
----------- ---------- -------- -----------
GROSS PROFIT (286,975) 1,753,940 - 1,466,965
OPERATING EXPENSES
Depreciation & amortization 671,982 203,716 - 875,698
General and administrative 570,774 1,665,331 - 2,236,105
----------- ---------- -------- -----------
TOTAL OPERATING EXPENSES 1,242,756 1,869,047 - 3,111,803
LOSS FROM OPERATIONS (1,529,731) (115,107) - (1,644,838)
OTHER INCOME (EXPENSES)
Interest income 10,100 - - 10,100
Relief of debt 384,735 - - 384,735
Interest expense, net (443,042) (11,865) - (454,907)
----------- ---------- -------- -----------
TOTAL OTHER INCOME (EXPENSES) (48,207) (11,865) - (60,072)
NET LOSS BEFORE INCOME TAXES (1,577,938) (126,972) - (1,704,910)
Taxes on earnings 1,800 - - 1,800
----------- ---------- -------- -----------
NET LOSS $(1,579,738) $ (126,972) $ - $(1,706,710)
=========== ========== ======== ===========
Weighted Average Shares
Outstanding Including
Common Stock Equivalents 4,814,303 4,814,303
NET LOSS PER COMMON SHARE $ (.33) $ (.35)
============ ===========
<PAGE>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997
(UNAUDITED)
Pro Forma
Adjustments
---------------------
Elimination
Historical PEGO Entries Pro Forma
----------- ---------- -------- -----------
SALES $ 271,500 $6,373,726 $ - $6,645,226
----------- ---------- -------- -----------
COST OF SALES 195,325 4,649,015 - 4,844,340
----------- ---------- -------- -----------
GROSS PROFIT 76,175 1,724,711 - 1,800,886
OPERATING EXPENSES
Depreciation & amortization 5,145 116,983 - 122,128
General and administrative 144,290 1,534,039 - 1,678,329
TOTAL OPERATING EXPENSES 149,435 1,651,022 - 1,800,457
----------- ---------- -------- -----------
LOSS FROM OPERATIONS (73,260) 73,689 - 429
OTHER INCOME (EXPENSES)
Interest income 15,475 - - 15,475
Relief of debt - - - -
Other income 25,556 - - 25,556
Interest expense, net (26,400) (2,596) - (28,996)
----------- ---------- -------- -----------
TOTAL OTHER INCOME (EXPENSES) 14,631 (2,596) - 12,035
NET LOSS BEFORE INCOME TAXES (58,629) 71,093 - 12,464
Taxes on earnings 1,041 19,385 - 20,426
NET EARNINGS (LOSS) $ (59,670) $ 51,708 $ - $ (7,962)
=========== ========== ======== ===========
Weighted Average Shares
Outstanding Including
Common Stock Equivalents 12,029,029 12,029,029
NET LOSS PER COMMON SHARE $ (.005) $ (.001)
=========== ===========
<PAGE>
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is entered into on the 29th day of June, 1997, by and among
the following:
The Hartcourt Companies, a Utah corporation, ("Hartcourt") or its assignee
("Buyer");
Michael V. Caruana ("Caruana") and Simerco, Ltd., a British Virgin Islands
Corporation ("Simerco", and, together with Caruana, the "Sellers"); and
Pego Systems, Inc., a California corporation ("Pego").
Buyer, the Sellers, and Pego are referred to collectively herein as the
"Parties."
PRELIMINARY STATEMENTS
1. The Sellers in the aggregate own all of the outstanding capital stock
of Pego.
2. Sellers desire to sell and Buyer desires to purchase all of the shares
of Pego's outstanding capital stock owned, directly or indirectly, by
Sellers and any and all options, warrants, and other rights Sellers may
possess to acquire any capital stock in Pego, whether conferred by
contract, by statute, or by Pego's Articles of Incorporation or By-Laws,
including without limitation, all shares of Pego's common stock, par value
$1.00 per share, standing in the name of the Sellers in the books of the
Pego (hereinafter referred to as the "Pego Stock").
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
SECTION 1. PURCHASE AND SALE OF PEGO STOCK.
a. Basic Transaction. Subject to and in reliance upon the
representations, warranties and agreements hereinafter set forth, and
subject to the terms and conditions hereinafter set forth, Buyer
agrees to purchase from each of the Sellers, and each of the Sellers
agrees to sell to Buyer, all of his or her Pego Stock, which in the
aggregate constitutes all of the issued and outstanding capital stock
of Pego, free and clear of all liens and encumbrances, for the
consideration specified below in this Section 1.
i. Purchase Price. Buyer agrees to pay to the Sellers at Closing
(defined in Section 1.b below) a purchase price as determined
pursuant to Section 1.a.i.(1) below (the "Purchase Price") and
which Purchase Price shall be paid as provided in Section
1.a.i.(2) below.
(1) The Purchase Price shall be Two Million Two Hundred Fifty
Thousand ($2,250,000) Dollars, including the consideration
to be paid pursuant to the non-compete agreement under
Section 1.a.ii. below.
<PAGE>
(2) The Purchase Price shall be paid by Buyer on the Closing
Date in accordance with the following order and preference:
(a) $500,000 of the Purchase Price to be paid by Buyer
shall be paid to the Sellers by cashier's check or by
wire transfer or delivery of other immediately
available funds in the amount of $500,000 to be made
out, or transferred to, Simerco or otherwise at the
written direction of Sellers. The balance of the
Purchase Price payable to the Sellers pursuant to
Section 1(a)(i)(1) shall be allocated among the Sellers
in the following proportions:
Proportion of
Number of Pego Purchase Price
Name shares Owned to be Allocated
---- -------------- ---------------
Michael V. Caruana 20,000 60.6 %
Simerco, Ltd. 13,000 39.4 %
-------------- ---------------
Total Shares: 33,000 100.0 %
============== ===============
(b) $150,000 of the Purchase Price to be paid by Buyer
shall be paid to the Sellers in restricted common stock
of The Hartcourt Companies, Inc., $0.001 par value (the
"Hartcourt Common Stock").
(c) $1,500,000 of the Purchase Price to be paid by Buyer
shall be paid to the Sellers in the form of 1,500
shares of Redeemable Preferred Stock of The Hartcourt
Companies, Inc., $1,000 stated value (the "Hartcourt
Preferred Stock"). The Hartcourt Preferred Stock shall
have the following rights and preferences:
(i) Hartcourt shall have the right to redeem all or a
portion of the Hartcourt Preferred Stock at $1,000
per share at any time. In the event of any
redemption by Hartcourt, Hartcourt shall first
redeem shares held by Simerco, and shall not
redeem shares held by Caruana until all shares
held by Simerco have been redeemed, unless
instructed otherwise by the Sellers, in writing.
<PAGE>
(ii) On the last day of the calendar quarter in which
the Closing Date falls (the "First Redemption
Date"), the holders of the Hartcourt Preferred
Stock shall have the right to sell to Hartcourt,
and Hartcourt shall be obligated to purchase, up
to an aggregate whole number of shares of
Hartcourt Preferred Stock equal to 2.75 multiplied
by the number of days between and including the
Closing Date and the First Redemption Date,
rounded to the nearest whole share, at a price
equal to $1,000 per share. Thereafter, on the
last day of each calendar quarter, the holders of
the Hartcourt Preferred Stock shall have the right
to sell to Hartcourt, and Hartcourt shall be
obligated to purchase, up to an aggregate of 250
shares of Hartcourt Preferred Stock, less the
number of shares previously redeemed by Hartcourt
in such calendar quarter, if any, at a price equal
to $1,000 per share.
(iii)The Hartcourt Preferred Stock shall not have a
liquidation preference, any mandatory or accrued
dividend rights, or voting rights except as
required by law.
ii. Non-competition Covenants. An aggregate amount of One Hundred Thousand
($100,000) Dollars, payable in Hartcourt Common Stock, shall be paid
as set forth below to Caruana as consideration for Caruana's execution
and delivery to Buyer at Closing of a Non-Competition Agreement in the
form set forth in Exhibit 6(c) hereto. Payment hereunder shall be made
to Caruana at Closing.
iii. Employment Agreements. Buyer shall, or Buyer shall cause Pego to,
enter into employment agreements with Caruana and Richard Greiner in
the forms set forth in Exhibit 1(a)(iii)(a) and (b) hereto,
respectively.
iv. Bonus Plans, Health Plans, etc. Buyer shall continue all of Pego's
bonus plans for management, compensation commission agreements with
Pego salesmen, Pego K-1 plans and the Pego health plan, each as in
effect as of the date hereof, provided that the terms of each of such
plans are set forth in detail on Exhibit 1(a)(iv), and all written
plans are attached to such Exhibit 1(a)(iv).
v. Buyer shall not, and Buyer shall not cause or permit Pego to, issue,
sell or transfer any shares of Pego capital stock to any party until
the entire Purchase Price has been paid and all shares of Hartcourt
Preferred Stock have been redeemed; provided, however, that this
restriction shall not apply to issuances of shares of Pego the
proceeds of which are used for Pego's growth or working capital needs.
<PAGE>
b. The Closing and the Closing Date. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the
offices of American Equities LLC, at 11400 Olympic Blvd, Suite 212, Los
Angeles, California 90064, commencing at 10:00 a.m. local time on the third
(3rd) business day following the satisfaction or waiver of all conditions
(including all conditions set forth in Section 6 hereto) to the obligations
of the Parties to consummate the transactions contemplated hereby,
including all necessary regulatory approvals, other than conditions with
respect to actions the respective Parties will take at the Closing itself
or thereafter) or such other date as Buyer and the Sellers may mutually
agree but not later than six months from the execution of this agreement
(the "Closing Date").
i. Deliveries at Closing. At the Closing, (i) the Sellers will deliver to
Buyer the various certificates, instruments, and documents referred to
in Section 6.1 and 6.3 below, (ii) Buyer will deliver to the Sellers
the various certificates, instruments, and documents referred to in
Section 6.2 below, (iii) each of the Sellers will deliver to Buyer
stock certificates representing all of his or her Pego Stock, endorsed
in blank or accompanied by duly executed assignment documents, and
(iv) Buyer will deliver to each of the Sellers the consideration
specified in Section 1.a. above and in the manner specified in said
Section 1.a.
c. As used herein, the term Hartcourt Common Stock refers to restricted common
stock, the certificates for which shall bear an appropriate legend
restricting transfer of the shares evidenced by such certificate for a
period of two years from the date of issuance. After the expiration of such
two year period, the holder thereof shall be permitted to sell, in any
three month period, not more than the lesser of (i) one percent of the
issued and outstanding shares of Hartcourt Common Stock or (ii) the average
weekly trading volume for the four weeks prior to such sale, as reported on
the Nasdaq bulletin board or such other securities exchange as the common
stock is then trading. All payments referred to herein which are payable in
Hartcourt Common Stock shall be based on the average closing price per
share of such Common Stock quoted on the Nasdaq bulletin board, or on such
other securities exchange as the Common Stock is then trading, for the five
trading days prior to the issuance of such shares.
SECTION 2. REPRESENTATION AND WARRANTIES RELATING TO SELLERS AND PEGO.
The Sellers (individually and jointly) and Pego, jointly and severally,
represent and warrant to Buyer that the statements contained in this Section 2
are current and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
Section 2). Nothing in the exhibits hereto shall be deemed adequate to disclose
an exception to a representation or warranty made herein, unless the disclosure
identifies the exception with particularity and describes the relevant facts in
detail. In addition, for purposes of this Agreement, the terms "reserved" or
"reflected" when used with reference to financial statements shall mean an item
accounted for either: (a) as an expense on the income statements included in
such financial statements; or (b) as an offset to a particular asset account or
as a liability on the balance sheet included in such financial statements. The
terms "reserved" or "reflected" shall not mean an item which is disclosed in the
notes to a financial statement and which is not also accounted for in the
financial statements as contemplated in the preceding sentence.
<PAGE>
For purposes of this Agreement, an inaccuracy, breach or non-fulfillment of
a warranty, representation or covenant shall not constitute any inaccuracy,
breach or non-fulfillment hereunder unless and until the aggregate of all such
inaccuracies, breaches, and non-fulfilled representations or covenants exceeds
the sum of twenty thousand ($20,000) dollars. All such inaccuracies, breaches
and non-fulfilled warranties, representations and covenants that would
constitute an inaccuracy, breach or non-fulfillment of any representation,
warranty or covenant but for the fact that, individually or in the aggregate,
they do not satisfy such $20,000 threshold are hereinafter collectively
described a "Nonmaterial Breaches." Once the aggregate of all Nonmaterial
Breaches exceeds $20,000, then the aggregate amount of all such Nonmaterial
Breaches (from the first dollar of such Nonmaterial Breaches) shall nevertheless
be deemed breaches in respect of which Buyer may assert a claim pursuant to
Section 8 hereof.
a. Organization and Standing. Pego is a corporation duly organized,
validly existing and in good standing under the laws of the State of
California, has all requisite corporate power to own and operate its
properties and assets, and to carry on its business as presently
conducted and as presently proposed to be conducted in the future.
Neither the ownership of its properties nor the nature of its business
requires Pego to be qualified to do business in any jurisdiction other
than the State of California. Pego has delivered to Buyer complete and
correct copies of its Articles of Incorporation and By-Laws. Such
copies are true, correct, complete and properly executed (if
applicable) and contain all amendments through the date of this
Agreement, and will be true, correct and complete as of the Closing
Date.
b. Capitalization and Ownership.
i. The authorized capital stock of Pego consists of 75,000 shares of
common stock, par value $1.00, of which 33,000 shares are issued
and outstanding. There is no other class of capital stock
authorized or outstanding. The issued and outstanding shares of
Pego Stock are duly authorized, validly issued in compliance with
applicable law, are fully paid and nonassessable and are
registered in the names of the shareholders in such amounts as
appearing on the stock transfer books of Pego. The outstanding
Pego Stock, together with any stock options granted by Pego and
any shares of capital stock issued pursuant to the exercise of
any stock options, have not been issued in violation of federal
and state securities laws, rules and regulations. The number of
authorized, issued and outstanding shares of each class of
capital stock of Pego as of the Closing Date is set forth on
Exhibit 2(b)(i) attached hereto, together with a list of all of
the shareholders of Pego and the number of shares owned by each
such shareholder. Sellers have good and marketable title to the
entire legal and beneficial interest in and to all of the shares
of capital stock of Pego owned as of the date hereof by Sellers
as set forth in Exhibit 2(b)(i) hereto and to be acquired by
Buyer hereunder, all such shares of stock being free and clear of
any pledge, lien, security interest, encumbrance, charge, claim
or restriction whatsoever (other than restrictions imposed by
federal and state securities laws). Upon completion of the
transaction contemplated hereby, all of the outstanding capital
stock of Pego will have been sold to Buyer and all rights of any
nature whatsoever to purchase or otherwise acquire any of the
capital stock of Pego shall have been terminated.
<PAGE>
ii. There are (i) no dividends or other distributions accrued or
declared but unpaid in respect of the shares of capital stock of
Pego; (ii) no outstanding contracts, subscriptions, warrants,
options or other rights of any kind (including conversion,
exchange or preemptive rights) to subscribe for or purchase any
capital stock or other securities of Pego; (iii) no voting
trusts, voting agreements or irrevocable proxies executed by
Sellers or Pego; (iv) no existing rights of Sellers or any other
party to require Pego to register any securities of Pego or to
participate with Pego in any registration by Pego of its
securities; (v) no other agreements by Sellers or Pego which
provide for the purchase, sale, pledge, lien, encumbrance or
other transfer of the shares of common stock of Pego or any other
capital stock or securities of Pego, authorized or not, or any
restrictions thereon; and (vi) no agreements, commitments or
rights of Sellers, Pego or any other party to purchase, redeem or
otherwise acquire any shares of Pego.
c. Subsidiaries. Pego does not own, directly or indirectly, any capital
stock or other equity or ownership or voting interest (whether
controlling or not) in any corporation, trust, partnership,
association or business entity of any nature whatsoever.
d. Corporate and Individual Power; Validity of Agreements; Consents. Each
of the Sellers and Pego, individually and jointly, have all requisite
power and authority (including all corporate power and authority with
respect to Pego under its Articles of Incorporation, Bylaws and the
California General Corporation Law) to execute and deliver this
Agreement and all of the agreements, instruments and other documents
to be executed and delivered by any one or all of Sellers or Pego
incident to the consummation of the transactions contemplated hereby
("Ancillary Documents") and to carry out and perform their respective
obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and all Ancillary Documents has been
duly authorized by the Board of Directors of Pego, by Simerco as
shareholder of Pego and by all of the Sellers, which are all of the
shareholders of Pego. No other approval, consent, waiver or
authorization of, or filing or registration with, any governmental
authority or third party is required on the part of any or all of
Sellers or Pego for the execution, delivery or performance of this
Agreement and the Ancillary Documents and the transactions
contemplated hereby and thereby. This Agreement is, and the Ancillary
Documents are, duly executed and delivered by Sellers and Pego and
constitute valid and binding obligations of each and all of the Seller
and Pego, legally enforceable against Sellers and Pego in accordance
with their terms, except that such enforcement may be subject to
bankruptcy, insolvency, reorganization or other laws now or hereafter
in effect affecting the enforcement of creditors' rights generally and
general principle of equity.
<PAGE>
e. No Violation. Subject to the fulfillment of the requirements of
Sections 6(a) hereof as applicable to Sellers and Pego, the execution,
delivery and performance of this Agreement and the Ancillary Documents
will not and do not result in any violation or breach of, be in
conflict with, or constitute a default or event of default (whether by
notice of lapse of time or both) or give rise to a right of
termination, cancellation or acceleration under any provision of (a)
the Articles of Incorporation or Bylaws of Pego, (b) any law, rule or
regulation, or any judgment, decree, order, ruling, or award of any
court or governmental authority, domestic or foreign, applicable to
Pego or its business as conducted on the date of this Agreement and as
expected to continue thereafter based on applicable law and
regulations currently in existence; (c) any license, certificate or
permit (all such licenses, certificates or permits are set forth in
Exhibit 2(l) attached hereto) of Sellers or Pego; or (d) any
agreement, contract, understanding, indenture or other instrument to
which any or all of Sellers or Pego is a party or by which any of them
or their assets or business, or the shares of Pego are bound; nor will
such execution, delivery or consummation give to others any rights in
or with respect to the shares of Pego of any of the assets or
businesses of Pego or result in the creation of any lien, charge or
encumbrance upon the shares of Pego or any such assets or businesses.
f. Minute Books. The minute books and the corporate secretaries' files of
Pego have been made available to Buyer and shall be available until
the Closing Date, at which time they shall delivered to Buyer. The
minute books contain a complete and accurate summary of all meetings
of or actions by directors and shareholders which were required for
compliance with all material statutes and regulations and are in
compliance with Pego's Articles of Incorporation and Bylaws.
g. Financial Statements. Pego, prior to the Closing Date, will have
delivered to Buyer true and correct copies of the following which
shall be attached hereto as Exhibit 2(g): the audited balance sheet of
Pego for the fiscal years ended June 30, 1995 and 1996 and the audited
proforma combined statement of income, statement of changes in
shareholders' equity and statement of cash flows for the fiscal years
ending on June 30, 1995 and 1996, all of which have been prepared and
audited, at Buyer's expense, by Harlan and Boettger, Certified Public
Accountants, including any and all related notes, supplementary
information and exhibits thereto (the "Audited Financial Statements").
Pego has previously delivered to Buyer the unaudited statement of
income of Pego for the six months ended December 31, 1996, and the
unaudited proforma combined statement of income, balance sheet,
statement of changes in shareholders' equity and statement of cash
flows dated June 30, 1996, including any and all related notes,
supplementary information and exhibits thereto (the "Unaudited
Financial Statements"). Such Unaudited Financial Statements are
attached hereto as a part of Exhibit 2(g). Pego shall provide prior to
the Closing Date either (i) copies of any management letter comments
prepared by a firm of independent certified public accountants for
Pego for the fiscal years 1994, 1995 and 1996 and Pego's responses
thereto, or (ii) a certification by the Chief Financial Officer of
Pego that no such comments have been received with respect to such
periods. The Audited Financial Statements and the Unaudited Financial
Statements are sometime referred to herein as the "Financial
Statements."
<PAGE>
Pego represents and warrants that the Financial Statements as of, and for
the periods ending on, the respective dates thereof are complete and correct in
all respects and fairly present the information purported to be shown therein
and (a) are in accordance with and have been derived from the books and records
of Pego, (b) have been prepared in conformity with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods indicated except
as stated therein, (c) fairly present the combined results of operations of Pego
as well as changes in shareholders' equity for the periods indicated, (d) fairly
present the combined financial condition, assets and liabilities (fixed and
contingent) of Pego as of the dates thereof, (e) make full and adequate
provision for all fixed or contingent obligations, liabilities, or commitments
of Pego as of the dates thereof in accordance with GAAP, (f) reflect all accrued
and unpaid benefits of Pego's employees including, without limitation, vacation
and holiday pay, sick leave and pension liability, and (g) do not contain any
statement that is false or misleading with respect to any material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. In the event it is determined, by
audit or otherwise, that the Financial Statements reflect a greater than 10%
adverse variance from the Unaudited Financial Statements and the Buyer elects
not to close this transaction on the terms contemplated herein, then Pego shall
reimburse Buyer for the actual cost of the audit.
h. Absence of Undisclosed Liabilities. Pego does not have any debt,
liability or obligation of any nature, whether accrued, absolute,
contingent or otherwise (including, without limitation, amounts owed
to any Department of Labor), except as reserved or reflected in the
Financial Statements or incurred in the ordinary course of business
after the date hereof. There is no basis for the assertion against
Pego of any liabilities not reflected in the Financial Statements,
except for liabilities incurred in the ordinary course of business
after the date hereof.
i. Absence of Changes.
i. Since December 31, 1996, Pego has conducted its business and
Sellers have caused Pego to conduct its business in the ordinary
and usual course consistent with past practice so as to maintain
and preserve intact its properties, businesses, and other assets
including but not limited to the goodwill of customers and others
having relations with Pego.
<PAGE>
ii. Since December 31, 1996, there has not been any change in or
effect on the business of Pego that has had an adverse effect on
Pego's business, operations, properties, assets, working capital,
liabilities, relationship with marketing agents and brokers,
prospects or condition (financial or otherwise), and no fact or
condition exists or, to the knowledge of any Seller or Pego, is
contemplated or threatened that has a reasonable probability of
resulting in any change in or effect on the business of Pego or
that would result in an adverse effect on Pego's business,
operations, relationships with marketing agents and brokers,
properties, assets, working capital, liabilities, prospects or
condition (financial or otherwise). No representation or warranty
is made by any or all of Sellers or Pego regarding the possible
impact of future changes in federal or state law.
j. Insurance.
i. Exhibit 2(j) sets froth a list of all policies of property,
theft, fire, liability, workers' compensation, title,
professional liability, life insurance, reinsurance, fidelity or
any other insurance owned or maintained by Pego or in which Pego
is a named insured or on which Pego is paying any premiums. Pego
has provided Buyer with access to and copies of all policies
listed on Exhibit 2(j). All such policies are of a type customary
in businesses such as those engaged in by Pego and are and shall
remain in full force and effect at all times through and as of
the Closing Date, and none of the insured parties thereunder is
in default with respect to any provision contained in any such
insurance policies, or in the payment of premiums, nor has any
party failed to give any notice or present any claim thereunder
when due, to the extent such default, nonpayment or failure would
have an adverse effect on Pego. Except as set forth in Exhibit
2(j) hereto, no claims have been settled during the preceding two
(2) year period nor are there any claims outstanding with respect
to any such policies which would have an adverse effect on Pego.
k. Title to Properties and Assets; Liens, etc.
i. Pego does not own any real property. Exhibit 2(k) hereto is a
true, complete and correct list of all personal property owned by
Pego which is material to the businesses thereof including all
personal property reflected in the Financial Statement. All such
personal property is under physical custody of Pego, including
personal property under capital leases.
<PAGE>
ii. Except as otherwise set forth in the Financial Statements, Pego
has good and marketable title to all of its properties and
assets, whether real, personal, mixed, tangible or intangible, in
each case free and clear of all mortgages, liens, charges,
encumbrances, security interests, adverse claims, contracts of
sale, covenants, conditions or restrictions on use or transfer,
or other defects of title of any kind or nature which would have
an adverse effect on Pego. None of the encumbrances set forth in
the Financial Statements impairs or interferes with the present
or contemplated use of any of the properties subject thereto or
affected thereby or otherwise impairs the business operations
conducted by Pego in a manner which will have an adverse effect
thereon.
iii. Exhibit 2(k)(iii) also lists all leases and other agreement or
instruments under which Pego holds, leases or is entitled to the
use of any real or personal property. All such leases and
agreements are in full force and effect and all rentals,
royalties or other payments due and payable thereunder prior to
the date hereof have been duly paid. Pego has made available to
Buyer a true and correct copy of each lease and agreement for
real property and for equipment utilized in the business of Pego.
Buyer agrees that it shall not cause Pego to terminate any of the
lease agreements currently in force and as provided to Buyer and
set forth on Exhibit 2(k)(iii) for the two buildings in which
Pego currently occupies its offices and shop, provided, however,
that Pego shall have the right to sublease such property at any
time. Any property (real or personal) covered by the terms of
such leases is presently occupied or used by Pego as lessee under
the terms of such leases for its business, and Pego is entitled,
by the term of such leases and under applicable laws, rules and
regulations, to use any leased premises and/or property for the
purposes for which and in the manner in which they are currently
being used by Pego. Pego is not in default or in breach of any
material provision of any of its leases or licenses, nor has any
event occurred which, with the passage of time or giving of
notice or both, would constitute a default or breach of material
provision by Pego thereunder. To Pego's knowledge, none of the
other parties to any of such leases or licenses is in default or
in breach of any material provision of any of such leases or
licenses. Pego holds a valid leasehold or licensed interest in
the property which it leases or which is licensed to it.
<PAGE>
iv. The property, machinery and equipment listed on Exhibit 2(j) are
all of the property, machinery and equipment material to and used
by Pego in the ordinary course of its operations, are in good
repair, well maintained, and in good and satisfactory operating
condition, except for normal wear and tear and such minor defects
as do not substantially interfere with the continued use thereof
in the conduct of normal operations. To the best knowledge of
Sellers and Pego, all property, machinery and equipment used by
Pego in their operations are in conformity with all applicable
laws, ordinances, regulations, orders and other requirements
currently in effect or scheduled to come into effect relating to
their ownership, use and operation, the violation of which would
have an adverse effect on the business, operations, properties,
prospects, working capital, condition (financial or otherwise),
liabilities or assets of Pego.
l. Compliance with Law and Other Instruments. Attached as Exhibit 2(l) is
a list of all licenses, certificates and permits of Pego, together
with true and correct copies of each such license, certificate and
permit, which licenses, certificates and permits are in full force and
effect, and Pego is in compliance with the terms, undertakings,
conditions and provisions of such licenses, certificates and permits.
Pego is in compliance with all laws, ordinances, rules, regulations
and orders of all governmental or regulatory entities, bodies,
agencies and commissions ("Regulatory Entities") which are material
and applicable to the operation of its business as currently operated
and as anticipated to be operated. No notice has been issued and no
investigation or review is pending or, to the knowledge of any Seller
or Pego, threatened by any Regulatory Entities (i) with respect to any
alleged violation by any Seller or Pego of any law, ordinance, rule,
regulation, order, policy or guideline of any of the Regulatory
Entities, or (ii) with respect to any alleged failure to have all
permits, certificates, licenses, approvals and other authorizations
required in connection with the operation of the business of Pego as
operated currently and as anticipated to be operated. Except as
otherwise set forth on Exhibit 2(l), no proceeding is pending, or to
the knowledge of any Seller or Pego, threatened, which could result in
a revocation or denial to renew any license, permit, certificate,
approval or other authorization required in connection with the
operation of the business of Pego as conducted on the date hereof and
as Pego proposes to conduct such business thereafter. There is no
existing law, rule, regulation or order prohibits Pego from conducting
its business in any jurisdiction in which it is now conducting such
business or in which it presently proposes to conduct business in the
future.
<PAGE>
m. Regulatory Filings. Exhibit 2(m) contains a list of all filings and
submissions (other than submission of forms and approvals) made to,
and all inspection, audit or compliance survey reports received from,
all federal and state regulatory bodies having jurisdiction over Pego,
and (i) each of the filings and submissions listed on Exhibit 2(m) was
in compliance with all applicable laws, rules and regulations in all
material respects; (ii) none of the filings or submissions listed on
Exhibit 2(m) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading or necessary in order to provide the
applicable Regulatory Entities with adequate information as to Pego,
subject to the jurisdiction of such Regulatory Entities; (iii) neither
any of the Sellers or Pego has received notice of, and, to the
knowledge of any Seller or Pego, none of the applicable Regulatory
Entities have threatened to issue notice of, any deficiencies (a) with
respect to any filings or submissions listed on Exhibit 2(m) or (b)
with respect to the financial condition or conduct of the business of
Pego under applicable regulatory standards; and (iv) neither any of
the Sellers or Pego has submitted or is presently preparing or
planning to prepare any written response to any inspection, audit or
compliance survey report or to any notice of deficiency relating to
the ownership, operations or other activities of Pego.
n. Material Contracts.
i. Except as previously set forth on a different Exhibit, Exhibit
2(n)(i) sets forth a true and complete list of all written or
oral contracts (in the case of oral contracts, a summary
description is provided), agreements, leases, mortgages,
guarantees, matters of suretyship, powers of attorney, indemnity
arrangements and commitments ("Contracts") to which Pego is a
party or by which any of its assets are bound and which in any
case are material to the business of Pego. All the Contracts
constitute legal, valid and binding obligations of Pego and (i)
are in full force and effect on the date hereof, and (ii) Pego
has not violated any provision of, or committed or failed to
perform any act which, with notice, lapse of time or both, would
constitute a default, of any material provision of any Contract.
To Pego's or any Seller's knowledge, no other party to any of the
Contracts is in default thereof. Except as set forth on Exhibit
2(n)(ii), Pego has performed its obligations under all Contracts
in all material respects and, to Pego's knowledge, no party to
any Contract has grounds to terminate such Contract. Except as
set forth on Exhibit 2(n)(iii), each Contract is with unrelated
third parties and was entered into on an arm's length basis in
the ordinary course of business. None of the transactions
contemplated by this Agreement or any Ancillary Document creates
in any party to the Contracts the right to revise the terms of,
to demand a penalty or premium, to terminate or to accelerate any
obligations of Pego, or declare that such Contracts have been
breached. Correct and complete copies of all written Contracts
disclosed on Exhibit 2(n) have been made available to Buyer.
<PAGE>
o. Litigation. Except as set forth and summarized in Exhibit 2(o), their
is no: (i) action, suit, claim, proceeding, audit or investigation
pending or, to the knowledge of any Seller or Pego, after inquiry of
senior management and attorneys for Sellers and Pego, threatened by
any private or governmental litigant or before or by any federal,
state, municipal or other governmental department, court, commission,
board, bureau, agency or instrumentality, domestic or foreign, against
any Seller or Pego or any of their assets or employees, officers or
directors (in their capacities as employees, officers or directors of
Pego) or against persons or entities who perform professional services
under contract with Pego; (ii) arbitration proceedings relating to any
Seller or Pego pending under collective bargaining agreements or
otherwise; or (iii) governmental or professional inquiries pending or
threatened against any Seller or Pego (including, without limitation
any inquiry as to the qualification of any Seller or Pego to hold or
receive any license or permit), and to the best of Sellers' or Pego's
knowledge, their is no basis for any of the foregoing as to Pego or
any of its employees, officers, directors or assets or as to entities
or persons who perform professional services under contract with Pego
in connection with the performance of such services on behalf of, or
rendered to, Pego. Pego is not subject to any continuing injunction,
judgment, or other order of any court, arbitrator, or governmental or
quasi- governmental agency. Sellers and Pego are not in default under
any order, license, regulation, or demand of any Federal, state,
municipal or other governmental agency or regulatory body or with
respect to any order, writ, injunction or decree of any court.
p. Fees and Commissions. No person, firm or other entity retained or
procured by or through Sellers or Pego is entitled to or may claim any
fee or other payment as a finder, broker, agent, intermediary or in
any other capacity whatsoever (collectively "Intermediary") nor is any
Seller or Pego acting for the benefit of any person or entity (other
than the parties to this Agreement) in connection with the
transactions contemplated by this Agreement, and Sellers and Pego,
individually and jointly, will indemnify and hold harmless Buyer from
liability for any compensation to any Intermediary retained by, or
claiming through, Sellers or Pego and from the fees and expenses of
defending against such liability or alleged liability. The foregoing
indemnification is hereby made part of the indemnification obligation
of Sellers pursuant to Section 8 hereof.
q. Interested Party Transactions. Except for the ownership of the two
buildings in which Pego currently occupies its offices and ship, no
officer, director or shareholder, or any affiliate (defined below) of
any such person or entity or of Pego, has, either directly or
indirectly, (a) an interest in any person or entity which (i)
furnishes or sells services or products which are furnished or sold or
furnishes or sells products or services which compete with products or
services which are furnished or sold by or proposed to be furnished or
sold by Pego, or (ii) purchases from or sells or furnishes to Pego any
goods or services, or (b) has a beneficial interest in or is a party
to any contract or agreement to which Pego is a party or by which Pego
may be bound or affected, or has any direct or indirect interest
(other than in his capacity as a shareholder of Pego) in any property,
real or personal, tangible or intangible of Pego.
<PAGE>
For purpose of this Agreement, the term "affiliate" shall mean any
corporation, partnership, joint venture, person or other entity who
directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with any other
corporation, partnership, joint venture, person or other entity.
r. Taxes.
i. Pego has accurately prepared and timely filed with the
appropriate governmental authorities all Tax Returns and reports
required to be filed by it under all applicable laws or
regulations, including but not limited to payroll and other
employee taxes which are required to be filed, and has paid, or
made provision for the payment of, all amounts of Taxes which
have or may have become due pursuant to said returns or reports
or pursuant to any assessment which has been received by it or
which are otherwise due by Pego. Pego has provided to Buyer true,
accurate and complete copies of all such tax returns and all
schedules and other supporting documents thereto filed by Pego
with all appropriate taxing authorities, including all
communications relating thereto, for each of the last three (3)
fiscal years. The provisions for Taxes reflected in the Financial
Statements are, or will be, adequate for all Taxes for the
periods ending on the respective dates of said Financial
Statements and all years and periods prior thereto and for which
Pego may have been liable on such date. Pego is not a party to
any pending action, proceeding or audit, nor, to the knowledge of
any Seller or Pego, is any such action, proceeding or audit
threatened by any governmental authority for any assessment or
collection of taxes, interest, penalties, assessments or
deficiencies, and there is no basis for any assessment or
collection of taxes, interest, penalties, assessments,
deficiencies or for any deficiency notice, thirty (30) day
letter, or similar notice with respect to Taxes. There are no tax
liens on any of the properties or assets of Pego. Pego has made
all payments of estimated Taxes required to be made under Section
6655 of the Internal revenue Code of 1986, as amended (the
"Code"), and any comparable provisions of state or local law and
have collected or withheld (and have duly remitted or deposited)
all amounts required to be collected or withheld. Pego has not
waived any law or regulation fixing, or consented to the
extension of, any period of time for assessment of any Taxes
which waiver or consent is currently in effect and there is no
outstanding request for any extension of time within which to pay
any Taxes or file any Tax Returns with the appropriate
governmental authorities.
<PAGE>
ii. For purposes of this Agreement, "Tax" or "Taxes" shall mean any
and all federal, state, local, foreign and other taxes, levies,
fees, duties and charges of whatever kind (including any
interest, penalties or additions to the tax imposed in connection
therewith or with respect thereto), whether or not imposed on
Pego, including, without limitation, taxes imposed on, or
measured by, income, franchise, profits, or gross receipts, and
also ad valorem, value added, sales, use, service, real or
personal property, capital stock, license, payroll, withholding,
employment, social security, workers' compensation, unemployment
compensation, utility, severance, production, excise, stamp,
occupation, premium, windfall profits, transfer, and gains taxes,
and customs duties; and "Tax Return" shall mean returns, reports,
information statements, and other documentation (including any
additional or supporting material) filed or maintained, or
required to be filed or maintained, in connection with the
calculation, determination, assessment or collection of any Tax.
s. Bank Accounts. Exhibit 2(s) sets forth a true and correct list of the
names and addresses of all banks and other institutions at which Pego
has accounts, borrowing resolutions, deposits or safety deposit bases,
with the nature of such account, the account number, and the names of
all persons authorized to draw on or give instructions with respect to
such accounts or deposits, or to have access thereto, and the names
and addresses of all persons, if any, holding a power-of-attorney on
behalf of Pego. Except as set forth on Exhibit 2(s), all cash in such
accounts is held in demand deposits and is not subject to any
restriction or limitation as to withdrawal.
t. Employees, Consultants, Independent Contractors and Agents.
i. Exhibit 2(t)(i) is a true and correct list of all contracts
(whether written or oral) with employees, marketing
representatives, agents, independent contractors and consultants
of Pego, together with their titles or positions and the
annualized amounts of base pay or compensation being paid to, or
accrued for, each such person. Except as otherwise disclosed on
Exhibit 2(t)(i), no contract or agreement whether written or
oral, requires Pego to pay compensation, commissions (i.e.,
marketing sales of agent broker agreements) or other
remunerations at any time subsequent to termination of such
contract or agreement. Pego has not guaranteed any bonus due
and/or payable, now or in the future, to any employee,
representative, agent, contractor or consultant.
ii. Attached hereto as Exhibit 2(t)(ii) is a complete list of all
employees, their date of hire, their position or job description,
and their annualized compensation.
<PAGE>
iii. Except as disclosed on Exhibit 2(t)(iii) and as approved by
Buyer, neither Pego, nor any trade or business, whether or not
incorporated (an "ERISA Affiliate"), which together with Pego
would be deemed a "single employer" within the meaning of Section
4001 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), has any written or oral employment, severance
or termination agreements, or any incentive compensation
(including marketing or selling commissions, rates or schedules),
deferred compensation, profit sharing, stock option, stock bonus,
bonus plan, stock purchase savings, consultant, retirement,
pension or other "fringe benefit" plan, policy, agreement or
arrangement ("Plans") with or for the benefit of any officer,
director, employee, agent or other person, contract with any
officer or employee or any other consultant or person which is
not terminable by Pego at will without liability, except as Pego
right to terminate its employees at will may be limited by
applicable law. A copy of each Plan as currently in effect and,
if applicable, the most recent annual report, actuarial or
accountant report, summary plan description, trust agreement and
determination letter for each Plan is attached hereto as Exhibit
2(t)(iii).
iv. None of the Plans is a "multi-employer plan," as such term is
defined in Section (3)(37) of ERISA; each of the Plans that are
subject to ERISA is in compliance with ERISA; each of the Plans
intended to be "qualified" within the meaning of Section 401(a)
of the Code; each of the Plans is so qualified and has been the
subject of a favorable determination letter issued by the
Internal Revenue Service or there is currently pending before the
Internal Revenue Service a request for a favorable determination
letter with respect to timely made modifications to the Plans as
required under applicable law and regulations; (subject to such
additional modifications as may be required by the Internal
Revenue Service in connection with the pending favorable
determination letter request) no Plan has an accumulated or
waived funding deficiency within the meaning of Section 412 of
the Code; neither Pego nor an ERISA Affiliate has incurred,
directly or indirectly, any liability (including any contingent
liability) to or on account of a Plan pursuant to Title IV or
ERISA; no proceedings have been instituted to terminate any Plan
that is subject to Title IV or ERISA; no "reportable event," as
such term is defined in Section 4043(b) of ERISA, has occurred
with respect to any Plan; and no condition exists that presents a
material risk of Pego or an ERISA Affiliate of incurring a
liability to or on account of a Plan pursuant to Title IV or
ERISA.
<PAGE>
v. The current value of the assets of each of the Plans that are
subject to Title IV of ERISA exceed the present value of the
accrued benefits under each such Plan, taking into account
projected salary increases and based upon the actuarial
assumptions used for funding purposes in the most recent
actuarial report prepared for such Plans and all contributions or
other amounts payable by Pego through the Closing Date with
respect to each Plan in respect of current or prior plan years
have been or will be (prior to or on the Closing Date) either
paid or accrued on the Financial Statements. There are no
pending, threatened or anticipated claims (other than routine
claims for benefits) by, on behalf of or against any of the Plans
or any trust related thereto.
vi. No Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to
current or former employees for periods extending beyond their
retirement or other termination of service (other than (i)
coverage mandated by applicable law, (ii) death benefits or
retirement benefits under any "employee pension plan," as that
term is defined in Section 3(s) of ERISA, (iii) deferred
compensation benefits accrued as liabilities on the books of Pego
or the ERISA Affiliates, or (iv) benefits the full cost of which
is borne by the current or former employee or his beneficiary).
vii. Neither Pego nor any of its agents, representatives or employees
in connection with the business of Pego have committed any unfair
labor practice as defined in the National Labor Relations Act of
1947, as amended, and there is not now pending nor, to knowledge
of Pego after inquiry, threatened any unfair labor practice
charge, complaint, labor disturbance or other controversy,
administrative action or litigation respecting employment against
Pego. Pego has complied with all material applicable federal,
state and local equal employment opportunity and other laws
related to employment, including but not limited to any and all
federal, state and local rules, regulations and laws respecting
employment and employment practices, terms and conditions of
employment, the sponsorship, maintenance, administration and
operation of (or the participation of its employees in) employee
benefit plans and arrangements, and occupations safety and
health, and Pego is not engaged in any violation of any material
law, rule or regulation related to employment, including any
unfair labor practice or act of employment discrimination. Pego
is not a party to any collective bargaining agreement with any
labor union or organization representing or claiming to represent
any of its employees, nor are any of the employees of Pego
represented by any labor union or organization, nor are any union
organizing or election activities involving any employees of Pego
in progress or, to Pego's knowledge after inquiry, threatened.
<PAGE>
u. Environmental Matters. The operations of Pego comply with all
applicable environmental and health and safety laws, regulations,
ordinances and requirements. Pego has obtained all environmental,
health and safety permits, licenses, authorizations or other
entitlement necessary for its operations, the lack of which could
cause an adverse effect on the business, operations, properties,
assets, liabilities, working capital, prospects or condition
(financial or otherwise) of Pego, and all such permits, licenses,
authorizations or other entitlement are in good standing and Pego is
in compliance with all material terms and conditions of such permits.
Pego is not aware of, nor has Pego made or filed, any report or notice
reporting a release, spill, emission, leaking, disposal, discharge,
leaching or migration into the indoor or outdoor environment of a
waste, pollutant, hazardous substance, toxic substance, hazardous
waste, extremely hazardous waste, medical waste, restricted waste,
special waste, asbestos or any substance or waste relating to the
operations or activities of Pego, the presence of which will or could
require remedial action.
v. Books and Records. The books and records of Pego have been made
available, and shall be available hereafter, to Buyer. Subject to the
specific disclosures, exceptions, qualifications and limitations as to
the matters represented and warranted herein, the books and records
taken as a whole contain a complete and accurate record of the
business and operations of Pego and have been maintained in accordance
with good business practices. Pego has not engaged in any material
transaction, maintained any bank account or used any of its corporate
funds which has not been reflected in the regularly maintained books
and records of Pego.
w. Proprietary Rights. Pego owns or possess adequate licenses or other
rights to use all copyrights, uncopyrighted works, trademarks, service
marks, trade names, patents, unpatented inventions, trade secrets,
know- how and other proprietary rights necessary or desirable to
conduct its business as now conducted and hereafter proposed to be
conducted (collectively, the "Proprietary Rights") and has made all
applications and licenses necessary therefor. All such Proprietary
Rights are listed and briefly described on Exhibit 2(w). Neither the
validity of the Proprietary Rights nor the title thereto or use
thereof by Pego is being questioned in any pending or threatened
litigation and the conduct of the business of Pego, as now or
heretofore conducted, does not violate licenses, copyrights,
uncopyrighted works, trademarks, service marks, trade names, trade
name rights, patents, patent rights, unpatented inventions or trade
secrets of others in any way which could have an adverse effect on the
business, assets, liabilities, or conditions (financial or otherwise)
of Pego. To Pego's knowledge, there is no infringement by others of
any of the Proprietary Rights.
x. Letters of Intent. Except with respect to Buyer an as contemplated
hereby, neither any Seller nor Pego has entered into a letter of
intent, agreements in principle or other written agreement, whether
binding or non-binding by its terms, with respect to any merger, sale
of voting securities or assets or other corporate transaction which
could result in the sale, disposition or exchange of any securities or
material assets of Pego, other than as contemplated by this Agreement.
<PAGE>
y. Receivables. All receivables of Pego shown on the Financial Statements
(except to the extent reflected on the Financial Statements as
reserved against uncollectible receivables) are good and collectible
in the normal course of business.
z. Fraud and Abuse. To the knowledge of any Seller or Pego, Pego's
officers, directors and employees, as applicable, have not engaged in
any activities which are prohibited under federal, state or local
statutes or regulations or which are prohibited by rules of
professional conduct or which otherwise could constitute fraud.
aa. Post Closing Liability of Pego. Notwithstanding anything to the
contrary herein, from and after the Closing Date, Sellers, and not
Pego, shall be jointly and severally liable for any breach,
inaccuracy, non-fulfillment or misrepresentation of any
representation, warranty, covenant or agreement contained in this
Agreement or any Ancillary Agreement.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to Sellers and to Pego as follows, as of the
date hereof and the Closing Date:
a. Organization and Standing. Buyer is a corporation organized, validly
existing, and in good standing under the laws of the State of Utah.
b. Corporate Power; Validity of Agreement; Consents. Buyer has all
requisite corporate power and authority under its Articles of
Incorporation, Bylaws and the Utah Business Corporation Act to execute
and deliver this Agreement and all of the agreements, instruments and
other documents to be executed and delivered by Buyer incident to the
consummation of the transaction contemplated hereby, (collectively,
the Buyer Ancillary Documents) to which it is a party, and to carry
out and perform its obligations under the terms of this Agreement and
the Buyer Ancillary Documents. The execution, delivery and performance
of this Agreement and the Buyer Ancillary Documents, and the
consummation of the transactions contemplated hereby and thereby, have
been duly authorized by all necessary corporate action by Buyer. This
Agreement and the Buyer Ancillary Documents have been duly executed
and delivered by Buyer and constitute the legal, valid and binding
obligations of Buyer, legally enforceable against it in accordance
with their terms, except that such enforcement may be subject to
(a) bankruptcy, insolvency, reorganization or other laws now or
hereafter in effect affecting the enforcement of creditors' rights
generally, and (b) general principles of equity.
<PAGE>
c. No Violation. Subject to the fulfillment of the requirements of
Sections 6.1 hereof as applicable to Buyer, the execution, delivery
and performance of this Agreement and the Buyer Ancillary Documents
will not and do not result in any violation or breach of, be in
conflict with, or constitute a default or event of default (whether by
notice or lapse of time or both) or give rise to a right of
termination, cancellation or acceleration under any provision of
(a) the Articles of Incorporation or Bylaws of Buyer or (b) any law,
rule or regulation, or any judgment, decree, order, ruling, or award
of any court or governmental authority, applicable to Buyer and its
business as conducted on the date of this Agreement and as expected to
continue thereafter based on applicable law and regulations currently
in existence.
SECTION 4. CONDUCT OF BUSINESS PENDING CLOSING; ASSETS.
a. Ordinary Course of Business. During the period from April 8, 1997 to
the Closing Date and except as otherwise agreed to by the parties in
writing, Pego shall conduct its operations according to its ordinary
and usual course of business consistent with past practice. Until the
Closing Date, Pego shall also use its best efforts to preserve intact
its business organization, contracts and properties, keep available
the services of its officers and employees, maintain satisfactory
relationships with licensors, suppliers, distributors, customers,
employees, contractors and others having business relationships with
Pego. Without limiting the generality of the foregoing, prior to the
earlier of the Closing Date or the termination of this Agreement, and
except as otherwise required by this Agreement or any of the Ancillary
Documents, Pego shall not, and Sellers shall ensure that Pego shall
not, without the prior written consent of Buyer:
i. amend its Articles of Incorporation or Bylaws;
ii. authorize for issuance, issue or deliver any additional shares
of any stock of any class or securities convertible into shares
of stock or issue or grant any right, option, warrant or other
commitment for the issuance of shares of stock or such
securities;
iii. split, combine or reclassify any shares of Pego's capital stock
or declare, set aside or pay any dividend (whether in cash,
stock or property) in respect of Pego's capital stock or redeem
or otherwise acquire any of Pego's capital stock;
iv. solicit or encourage any inquiries or proposals or continue any
on- going negotiations (other than with Buyer) for the
acquisition of any of Pego's capital stock, assets or business;
v. sell or purchase marketable securities owned by Pego, if any;
vi. prepay Pego's expenses or obligations except in accordance with
the terms of applicable contracts or agreements and in the
ordinary course of business (or otherwise not to exceed
$1,000);
vii. increase compensation and/or benefits for any of Pego's
employees, consultants or officers;
<PAGE>
viii. terminate or enter into any employment or consulting contracts
or any collective bargaining agreement;
ix. sell or dispose of or encumber any amount of Pego's capital
assets with an aggregate value of $5,000 or more or make any
capital expenditures in an aggregate amount in excess of
$5,000, or enter into, renew or extend any lease of capital
equipment or real estate involving payments in an aggregate
amount in excess of $5,000 for the term of the lease;
x. create, amend, extend, renew, assume, incur or guarantee any
indebtedness either involving amounts in excess of $1,000,
individually or in the aggregate or not in the ordinary course
of its business;
xi. enter into any contract or commitment (including employment,
consulting and collective bargaining agreements) or engage in
any transaction which is not in the usual and ordinary course
of Pego's business or which is inconsistent with Pego's past
practices and which is not terminable at will upon 30 days'
notice without penalty of any kind;
xii. create any stock option or other stock-based incentive plan;
xiii. acquire any other business or interest therein;
xiv. enter into, amend or terminate (other than by expiration) any
material contract to which Pego is a party or by which its
assets are bound;
xv. amend, supplement or otherwise alter, in any material respect,
any contracts or relationships with suppliers or customers,
except as required hereunder or pursuant to any of the
Ancillary Documents;
xvi. commence, compromise, settle, waive, approve or permit the
settlement of, any litigation, proceeding, hearing, arbitration
or other dispute or claim involving amounts in controversy of
more than $1,000 in the aggregate, other than for fair
consideration in the ordinary course of business consistent
with past practice;
xvii. enter into any agreement or engage in any transaction with any
affiliate, stockholder, director, officer or affiliate of Pego;
xviii. make any change in the accounting practices of Pego;
xix. fail to keep in full force and effect insurance covering Pego
and Pego's assets comparable in amount and scope of coverage to
that which is now maintained;
xx. fail to comply with any laws and regulations applicable to
Pego, or to the conduct of Pego's business;
xxi. enter into any agreement or arrangements, written or oral, that
would cause any of the statements contained in Section 2 to be
untrue; or
<PAGE>
xxii. enter into any contract or commitment to do any of the things
described in Clauses (i) through (xxii) above.
b. Assets. The assets of Pego as of the Closing Date (tangible and
intangible) will include all the equipment, inventory and other assets
being presently used in and necessary or useful for the conduct of or
related to its business, except those consumed after the date hereof
in the ordinary course of business or those sold with Buyer's express
written consent.
SECTION 5. ADDITIONAL AGREEMENTS.
a. Access and Information.
i. Sellers and Pego have afforded and shall continue to afford Buyer
and its accountants, counsel and other representatives full
access during normal business hours for the period commencing on
the date hereof through and as of the Closing Date to all of the
properties, books, contracts, commitments, records and employees
of Pego and, during such period, shall furnish to Buyer all
information concerning the business, properties and personnel of
Pego as Buyer may reasonably request, provided that no
investigation pursuant to this Section 5 shall cure any breach of
any representations or warranties of Pego and Sellers.
ii. Sellers and Pego shall use their best efforts to cause Pego's
independent auditors to make available copies of all such
documents and information with respect to the business and
properties of Pego as representatives of Buyer may from time to
time reasonably request, including, without limitation, the
working papers used to prepare the Financial Statements and
income tax returns filed by Pego.
b. Notice of Changes. Between the date hereof and the Closing Date,
Sellers or Pego, as the case may be, shall promptly advise Buyer in
writing of any changes or matters which change or supplement the
information set forth in this Agreement or the exhibits attached
hereto; provided, however, that no such change or supplement shall
cure any breach of any representations or warranties of Sellers or
Pego. If, between the date hereof and the Closing Date, any federal,
state or local governmental authority shall commence any examination,
review, investigation, action, suit or proceeding against Sellers or
Pego, Sellers and Pego shall give prompt notice thereof to the others
and shall keep the other parties informed as to the status thereof.
Buyer shall have the right to be present at and participate in any
such proceeding affecting Pego or its status or operations.
c. Certain Defaults. Sellers and Pego shall give prompt notice to Buyer
of any notice of default received by it subsequent to the date of this
Agreement and prior to the Closing Date under any instrument or
agreement to which any Seller and/or Pego are a party or by which any
Seller and/or Pego are bound, which default could, if not remedied,
result in any adverse effect on Pego's business, prospects, condition
(financial or otherwise), properties, operations, working capital,
liabilities, or assets or which would render incorrect any
representation or warranty made herein.
<PAGE>
d. Consents. Each party shall cooperate with the other parties hereto and
shall use its best efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary and proper or
advisable to consummate and make effect, as soon as reasonably
practicable, the transactions contemplated by this Agreement and use
its best efforts to file all applications and information in order to
obtain the Closing Date all licenses, permits, consents or other
approvals required, respectively, to be obtained by each such party
from any governmental authority or other person in connection with
consummation of the transactions contemplated by this Agreement,
including without limitation, all consents necessary from regulatory
agencies and under supplier or lease agreements, so that the same will
continue in effect after the Closing.
e. Notice of Breach. Each party shall immediately give notice to the
others of the occurrence of any event, or the failure of any event to
occur, that results in a breach of any representation or warranty
contained herein by such party or a failure by such party to comply
with any covenant, condition or agreement contained herein.
f. Expenses. Except as otherwise expressly provided herein or in any
Ancillary Document, Buyer shall pay all of its costs and expenses
incurred in connection with this Agreement and the transactions
contemplated herein, and the Sellers shall pay all of the costs and
expenses of the Sellers incurred in connection with this Agreement and
the transactions contemplated herein, and Pego shall pay all of the
costs and expenses of Pego incurred in connection with this Agreement
and the transactions contemplated herein.
g. Press Release. Prior to the Closing Date, neither Buyer, Sellers, nor
Pego shall issue any press releases concerning the terms and
conditions of this Agreement or the transactions contemplated hereby
without the prior review and approval of Buyer and seller, other than
such announcements, filings or press releases as required by law.
h. Conduct. Except as provided by this Agreement or as Buyer may
otherwise consent in writing, neither Sellers nor Pego will enter
into, and Sellers will prevent Pego from entering into, any
transaction, take any action or permit any event to occur which would
result in any of the representations and warranties contained in this
Agreement, or in any other agreement, certificate or other document
delivered by or on behalf of Sellers or Pego, or any of their
representatives, to Buyer in connection with this Agreement or the
transactions contemplated herein, not being true and correct
immediately after such transaction has been entered into or
consummated or such event has occurred.
<PAGE>
i. Further Assurances. At the request of Buyer, Sellers and/or Pego shall
promptly take, or cause to be taken, all action, and do or cause to be
done, all things, and execute and deliver, or caused to be executed
and delivered, as the case may be, to Buyer or for the benefit of
Buyer, all such further assignments, endorsements, and other documents
as Buyer may reasonably request in order to consummate the
transactions contemplated by this Agreement. At the request of
Sellers, Buyer shall take all action, do all things, and execute and
deliver to Sellers all such further assignments, endorsements, and
other documents as Sellers may reason ably request in order to
consummate the transactions contemplated by this Agreement. In case at
any time after the Closing Date any further action is necessary or
desirable to carry out the purposes of this Agreement or any of the
Ancillary Documents, the Sellers (individually and jointly), proper
officers or directors of Pego, or Buyer, as the case may be, shall
take all such necessary action.
j. No Shop. Until the Closing Date or the termination of this Agreement
pursuant to Section 7 hereof, the Sellers and Pego shall not solicit,
directly or indirectly, any inquiries or proposals for the acquisition
of any of the capital stock, assets or business of Pego from, or
furnish information relating to the foregoing to, or engage in
negotiations or discussions relating to the foregoing with, or accept
any proposal relating to the foregoing from, any corporation,
partnership, person or other entity or group other than Buyer, and
Sellers and Pego shall use all reasonable efforts to restrict any
officer, director, employee, investment banker, attorney or other
advisor retained by Sellers or Pego from doing any of the foregoing.
Sellers and Pego shall promptly request the return or destruction of
any confidential documents and information or compilations of such
documents or information provided to third parties, if any, in
connection with any previous negotiations or discussions since
January 1, 1996, relating to the foregoing. Any Seller or Pego, as the
case may be, will, immediately upon receipt, advise Buyer orally and
promptly thereafter in writing of any inquiry or proposal received for
the acquisition of the capital stock, assets or business of Pego.
k. Withholding. Sellers shall provide any certificates or affidavits
required by Buyer so that Buyer shall not be required to withhold any
taxes from amounts to be paid the Sellers hereunder.
l. Business Name. On and after the Closing Date, Sellers and Pego
authorize Buyer to use the corporate and/or trade names of Pego for
all purposes in connection with the operations of Buyer.
m. Intercompany Indebtedness. Prior to or on the Closing Date, Sellers,
at the request of Buyer, shall pay to Pego all amounts due Pego,
offset by any amounts due Sellers by Pego, all as reflected in the
Financial Statements and exhibits attached hereto. Prior to or as of
the Closing Date, any obligation owed to Pego by any officer,
director, employee, agent or representative of Pego shall be paid
irrespective of the terms of repayment described in any note
evidencing such obligation other than amounts advanced in the ordinary
course of business under standard travel and expense plans in
connection with any such person's employment, including for education
purposes.
<PAGE>
n. Commencing in the calendar quarter following the Closing Date, Buyer
shall appropriately fund Pego, as needed, not less than $50,000 per
calendar quarter, and not less than $250,000 over the fifteen months
following the Closing Date.
SECTION 6. CONDITIONS PRECEDENT.
a. Conditions Precedent to Closing. Subject to waiver as set forth in
Section 7(g) below, the respective obligations of each party hereto to
consummate the transactions contemplated by this Agreement are subject
to the fulfillment at or prior to the Closing Date of each of the
following conditions:
i. All statutory and regulatory requirements necessary for the valid
consummation by Buyer, Sellers and Pego of the transactions
contemplated by this Agreement and the Ancillary Documents shall
have been fulfilled; all authorizations, consents, approvals and
waivers of all Regulatory Entities necessary to be obtained in
order to permit consummation of the transactions contemplated by
this Agreement, including, without limitation, the consents set
forth in Section 2(d), shall have been obtained. The parties
hereto agree to promptly apply for any license, permit or other
consent necessary to consummate the transactions contemplated
under this Agreement and the Ancillary Documents.
ii. No injunction, restraining order or other ruling or order issued
by any court of competent jurisdiction or governmental authority
or regulatory body or other legal restraint or prohibition shall
be in effect, and no proceeding, action, suit or claim brought or
made by any governmental authority or regulatory body shall be
pending or threatened that seeks any injunction, restraining
order or other order or other relief, and no statute, rule,
regulation or executive order shall have been enacted,
promulgated or proposed, in each case, that would prohibit the
consummation of the transactions contemplated by this Agreement;
it being understood that the parties hereto shall use their best
efforts to have any such injunction, ruling, order, restraint or
prohibition (each, a "Restraint") lifted and to oppose any action
to impose a Restraint, and to reasonably extend the date set
forth in Section 7(a)(ii) hereof so long as such efforts are
continuing in good faith.
iii. All approvals, consents, authorizations and waivers which Pego is
required to obtain to continue obligations or rights under any
Contracts after the Closing Date shall have been obtained.
iv. Pego and Buyer each shall have complied with and performed in all
material respects all of its obligations and duties hereunder as
of the Closing Date and shall not have breached in any material
respect any of the terms and conditions of this Agreement or the
Ancillary Documents.
v. If requested by Buyer, an authorized representatives of Pego
shall have completed and executed a Protective Carryover Basis
Election and Form 8023.
<PAGE>
b. Conditions Precedent to Obligations of Sellers. Subject to waiver as
set forth in Section 7(g) below, the obligations of Sellers to effect
the transactions contemplated by this Agreement are subject to the
fulfillment on or prior to the Closing Date of each of the following
conditions:
i. Buyer shall have performed and complied with all of the
agreements and covenants contained in this Agreement required to
be performed and complied by it on or prior to the Closing Date
and the representations and warranties of Buyer contained in this
Agreement shall be true in all material respects on the date
hereof and as of the Closing Date.
ii. Buyer shall have delivered to Sellers copies of the actions of
its Board of Directors authorizing and approving the execution,
delivery and performance of this Agreement and the Ancillary
Documents.
iii. No Restraint issued by any court of competent jurisdiction or
governmental authority or regulatory body or other legal
Restraint shall be in effect, and no proceeding, action, suit or
claim brought or made by any governmental authority or regulatory
body shall be rending or threatened that seeks any Restraint or
other relief, and no statute, rule, regulation or executive order
shall have been enacted, promulgated or proposed, in each case,
that would prohibit the consummation of the transactions
contemplated by this Agreement; it being understood that the
parties hereto shall use their best efforts to have any such
Restraint lifted and to oppose any action to impose a Restraint,
and to reasonably extend the date set forth in Section 7(a)(ii)
hereof so long as such efforts are continuing in good faith.
c. Conditions Precedent to Obligations of Buyer. Subject to waiver as set
forth in Section 7(g), the obligations of Buyer to effect the
transactions contemplated by this Agreement are subject to the
fulfillment on or prior to the Closing Date of each of the following
conditions:
i. Sellers and Pego shall have, individually and jointly, performed
and complied with all of the agreements and covenants contained
in this Agreement required to be performed and complied with by
each (both individually and jointly) on or prior to the Closing
Date and the representations and warranties of Sellers and Pego
contained in this Agreement shall be true in all material
respects on the date hereof and as of the Closing Date.
<PAGE>
ii. No Restraint issued by any court of competent jurisdiction or
governmental authority or regulatory body or other legal
Restraint shall be in effect, and no proceeding, action, suit or
claim brought or made by any governmental authority, regulatory
body, or third party shall be pending or threatened that seeks
any Restrain or other relief, and no statute, rule, regulation or
executive order shall have been enacted, promulgated or proposed,
in each case, that would prohibit the consummation of the
transactions contemplated by this Agreement, it being understood
that the parties hereto shall use their best efforts to have any
such Restraint lifted and to oppose any action to impose a
Restraint, and to reasonably extend the date set forth in Section
7(a)(ii) hereof so long as such efforts are continuing in good
faith.
iii. The Sellers and Pego shall have delivered to Buyer a certificate
to the effect that each of the conditions specified in
Sections 6(c)(i) and (ii) are satisfied in all respects.
iv. Buyer shall have received a certificate of Pego dated as of the
Closing Date certifying to the incumbency of the officers of Pego
signing for it and as to the authenticity of their signatures.
v. Pego shall have delivered to Buyer certified copies of the
written consent of all its shareholders and unanimous resolution
of its Board of Directors authorizing and approving the
execution, delivery and performance of this Agreement.
vi. Buyer shall have received the resignations, effective as of the
Closing Date, of each director and officers of Pego other than
those whose Buyer shall have specified in writing at least five
(5) business days prior to the Closing Date.
vii. Pego's Audited Financial Statements and Unaudited Financial
Statements shall indicate that (i) Pego has a proforma Tangible
Net Equity (defined below) for the period ending June 30, 1997 of
at least the same amount as reflected on Pego s Unaudited
Financial Statements dated as of June 30, 1996 (attached hereto
as Exhibit 2(g)), (ii) Pego has a proforma net income before
income taxes and bonuses to employee-shareholder for the year
ended June 30, 1997 of at least the amount reflected in the
Unaudited Financial Statements dated as of June 30, 1996
(attached hereto as Exhibit 2(g)). For purposes of this
Agreement, the term "Tangible Net Equity" shall mean the
Shareholders' Equity reflected on the applicable Financial
Statements (defined in Section 2(g) above) reduced (to the extent
included in such Shareholders' Equity) by or without taking into
account Intangibles. The term "Intangibles" shall have the
meaning given such term under generally accepted accounting
principles and shall include patents, copyrights, franchises,
trademarks, goodwill, going- concern value and similar intangible
assets.
<PAGE>
viii. Each of the Sellers and Richard Greiner shall have executed and
delivered to Buyer a Non-Competition Agreement in substantially
the form attached hereto as Exhibit 6(c). The Non-Competition
Agreement is at the essence of this Agreement, shall be construed
independently of any other provision of this Agreement and shall
be enforceable, at law or in equity to the extent permitted by
law, without limitation by reason of any other provision of this
Agreement, and the existence of any claim or cause of action
against Buyer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Buyer of any
covenant, term or provision of the Non-Competition Agreement. In
the event Caruana's or Richard Greiner's employment with Pego is
terminated without cause, then Section 3 of such employee's Non-
Competition Agreement shall be terminated. In the event Buyer is
or becomes in default of this Stock Purchase Agreement, and if
such default has not been cured 30 days after the receipt by
Buyer of written notice of the default, which shall include
specific facts constituting the default, then Section 3 of the
Non-Competition Agreement between the Buyer and Caruana shall be
terminated; provided, however, that such Section 3 of the
Non-Compentition Agreement shall be reinstated if the default is
later cured.
ix. Prior to the Closing Date, Buyer shall have received certified
copies of release and termination agreements executed by all the
shareholders of Pego, and all other parties to or which may be
bound by any shareholders' agreements, voting agreements, stock
option agreements and any and all other similar agreements
between current and/or past shareholders or employees of Pego
(collectively, the "Corporate Agreements"). The release and
termination agreements to be provided hereunder shall be in form
and substance acceptable to Buyer and shall provide for a full
and complete release and termination of all Corporate Agreements.
x. Prior to the Closing Date, Buyer shall have received an estoppel
letter dated not more than three (3) business days prior to the
Closing Date from each of the lessors of all real property
occupied by Pego, in form and substance acceptable to Buyer,
which estoppel letter(s) shall set forth all contracts between
Pego and such lessor, the term remaining under each such contract
and shall certify that as of the date of such letter(s) (i) all
such contracts are in full force and effect, (ii) to the best of
their knowledge, no party to any such contract has violated any
provision of, or committed or failed to perform any act which,
with notice, lapse of time or both, would constitute a default,
of any material provision of any such contract, (iii) to the
knowledge of the lessor, no other party to any of such contracts,
if any, is in default thereof, and (iv) the lessor consents to
and approves the transactions contemplated in this Agreement.
SECTION 7. TERMINATION, AMENDMENT AND WAIVER; DEFAULT.
a. Termination. This Agreement may be terminated at any time prior to the
Closing Date;
i. By mutual agreements of Pego, Sellers and Buyer;
<PAGE>
ii. By the Non-Defaulting Party, in the event of a Completed Default
pursuant to Section 7(b) hereof, upon written notice of default
and a fifteen (15) business day cure period.
b. Default Generally. In the event that prior to the Closing Date, any
party hereto fails in the due performance or observance of its
obligations under this Agreement, or any of its representations or
warranties set out herein is breached or determined to be materially
inaccurate as of the date of this Agreement or as of the Closing Date,
then so long as such state of facts continues, such party (a
"Defaulting Party") shall be deemed to be in default ("Default"). In
such event, the other party or parties (individually, a
"non-Defaulting Party") may deliver a written notice identifying the
claimed failure, breach or inaccuracy. If said failure or breach is
not or cannot be cured within fifteen (15) business days after the
delivery of written notice, or said inaccurate representation or
warranty is not or cannot be made true within fifteen (15) business
days after the delivery of written notice, a "Completed Default" may
be declared by the Non-Defaulting Party.
c. Default by Sellers or Pego. In the event of a Completed Default by all
or any of the Sellers or Pego, Buyer may (in its sole discretion):
i. terminate this Agreement and (i) bring an action against Sellers
and/or Pego for damages and/or (ii) make a Claim (as defined in
Section 8(a) hereof) against Sellers or Pego as provided in
Section 8(a) hereof; or
ii. consummate the purchase of the Pego Stock by requiring Sellers
and Pego to continue to satisfy their other covenants and
agreements provided herein and, in furtherance thereof, bring an
action against any or all of the Sellers and/or Pego for
equitable relief, including an action for specific performance,
and further to make a claim against Sellers and Pego for any
damages or losses suffered by Buyer as a result of the default.
No partial exercise of any remedy provided above shall preclude any further
exercise thereof.
d. Default by Buyer. Prior to the Closing Date, in the event of a
Completed Default by Buyer, Sellers and Pego may:
i. terminate this Agreement and (i) bring an action against Buyer
for damages and/or (ii) make a Claim against Buyer as provided in
Section 8(b) hereof; or
ii. consummate the sale of the Pego Stock by requiring Buyer to
continue to satisfy their other covenants and agreements provided
herein and, in furtherance thereof, bring an action against Buyer
for equitable relief, including an action for specific
performance.
No partial exercise of any remedy provided above shall preclude any further
exercise thereof.
<PAGE>
e. Default by Hartcourt. After the Closing Date, in the event of a
Completed Default, and the expiration of a 30 day cure period after
written notice by the Sellers of such Completed Default, by Hartcourt
arising as a result of Hartcourt's failure to redeem Hartcourt
Preferred Stock as demanded by the Holders thereof pursuant to Section
1(a)(i)(2)(c) of this Agreement, Sellers shall have the right, but not
the obligation, to:
i. Exchange their shares of Hartcourt Preferred Stock for shares of
Pego common stock in an amount equal to the percentage of the
total purchase price being surrendered to Hartcourt in the form
of Hartcourt Preferred Stock, based on the value allocated to
such Preferred Stock under this Agreement. For example, if, at
the time of the default, Hartcourt has paid the $500,000 cash
payment, the $250,000 of Hartcourt common stock and has redeemed
250 shares of Hartcourt Preferred Stock (for an aggregate
redemption price of $250,000), for total payments aggregating
$1,000,000, or 44.5% of the total $2,250,000 purchase price,
then, the Sellers would have the right, but not the obligation,
to exchange all of their remaining 1,250 shares of Hartcourt
Preferred Stock for 55.5% of the common stock of Pego.
ii. In addition, Sellers shall receive as a penalty for the Completed
Default an amount of restricted common stock of Hartcourt equal
to twenty percent (20%) of the stated value of the Hartcourt
Preferred Stock being surrendered to Hartcourt. The value of the
payment in Hartcourt common stock shall be based on the average
closing prices quoted for Hartcourt common stock for the five
trading days prior to the tender of the Hartcourt Preferred Stock
to Hartcourt for exchange under this Section 7(e).
f. Effect of Termination. In the event of termination of this Agreement
by either Sellers and Pego or by Buyer as provided in this Section 7,
no party hereto shall have any further liability hereunder; provided,
however, such termination shall not relieve a party whose breach of
this Agreement gave rise to such termination from liability for the
payment of liquidated damages or damages for such breach as provided
herein and provided further that the indemnification provisions of
Section 8 hereof and the confidentiality provision of Section 9 hereof
will survive any such termination.
g. Extension; Waiver. At any time, any party may (a) extend the time for
the performance of any of the obligations or other acts of the other
parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein for its benefit or in any document
delivered to it pursuant hereto, and/or (c) waive compliance with any
of the agreements or conditions contained herein for its benefit to
the extent legally permissible. Any agreement on the part of a party
hereto to such extension or waiver shall not be valid unless set forth
in an instrument in writing signed on behalf of such party and shall
not operate as an extension or waiver of any subsequent or other
failure.
<PAGE>
SECTION 8. INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
a. Indemnification by Sellers. Subject to Section 8(c) hereof, Sellers
(each individually and jointly) and, if this transaction is not
completed, Pego, agree to indemnify, defend and hold harmless Buyer
and its respective directors, officers, employees, agents, affiliates,
successors, attorneys and assigns (collectively, "Indemnitee") from
and against any and all losses, claims, demands, damages, liabilities,
deficiencies, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements and amounts paid in
settlement of any claim, act or suit) of every kind, nature and
description (each, a "Claim" and collectively, "Claims") suffered by
Indemnitee based upon, arising out of or otherwise in respect of:
i. any inaccuracy in or breach or non-fulfillment of any
representation, warranty, covenant or agreement of any or all of
the Sellers or Pego contained in this Agreement or in any
Ancillary Document, certificate or other documents delivered by
or on behalf Sellers or Pego pursuant to this Agreement;
ii. the ownership, management and conduct of Pego's business prior to
and including the Closing Date, including, but not limited to,
Claims arising out of termination of any of Pego's employees, if
any, as of and including the Closing Date, except for Claims
fully reflected or reserved against on the Financial Statements;
or
iii. any act or omission of either any or all of the Sellers or Pego,
or any of their respective agents and employees in respect of
periods prior to and including the Closing Date, except for
Claims fully reflected or reserved against on the Financial
Statements.
b. Indemnification by Buyer. Subject to Section 8(c) hereof, Buyer agrees
to indemnify, defend and hold harmless Sellers and Pego and their
respective directors, officers, employees, agents, affiliates,
successors, attorneys and assigns (collectively, "Pego Indemnitee")
from and against any and all Claims suffered by Pego Indemnitee based
upon, arising out of or otherwise in respect of any inaccuracy in or
breach or non-fulfillment of any representation, warranty, covenant or
agreement of Buyer contained in this Agreement or in any Ancillary
Document, certificate or other documents delivered by or on behalf
Buyer pursuant to this Agreement.
An Indemnitee's rights to indemnification hereunder shall not be prejudiced
or limited in any manner by any right to indemnification under any of the
Ancillary Documents and each such right of indemnification and agreements shall
be cumulative. An Indemnitee may proceed against any or all of Sellers with
respect to all or any portion of a Claim, and without first looking or
continuing to look to any other party.
<PAGE>
c. Notice and Opportunity to Defend.
i. Promptly after receipt by an Indemnitee of notice of the
assertion of any Claim or discovery of any fact upon which such
party expects to make a claim for indemnification hereunder, the
Indemnitee shall give the party or parties who may become
obligated to provide indemnification hereunder (the "Indemnifying
Party") written notice describing such Claim or fact in
reasonable detail; provided, however, that the failure of the
Indemnitee to provide notice of the Claim promptly after the
Indemnitee receives notice of such Claim shall not relieve the
Indemnifying Party of its obligations to indemnify the Indemnitee
with respect to such Claim except to the extent that such failure
actually prejudices the Indemnifying Party hereunder. Such
Indemnifying Party shall have the right, at such party's option,
to compromise or defend, at such party's own expense and by such
party's own counsel, any such matter involving the asserted
liability of the Indemnitee as to which the Indemnifying Party
shall have acknowledged its obligation to indemnify the party
seeking indemnification hereunder; provided that counsel for the
Indemnifying Party shall be approved by the Indemnitee; and
provided further that the Indemnifying Party shall not, without
the consent of the Indemnitee, consent to the entry of any
judgment or enter into any settlement that adversely affects the
business or operations of the Indemnitee or that does not include
the giving by the claimant or plaintiff to such Indemnitee of a
release from all liability with respect to such Claim for
litigation. If any Indemnifying Party shall undertake to
compromise or defend any such asserted liability, such party
shall promptly notify the Indemnitee of such party's intention to
do so, and the Indemnitee agrees to cooperate fully with the
Indemnifying Party and such party's counsel in the compromise of,
or defense against, any such asserted liability. All costs and
expenses incurred in connection with such cooperation shall be
borne by the Indemnifying Party. In any event, the Indemnitee
shall have the right at its own expense to participate in the
defense of such asserted liability.
ii. An Indemnitee shall not compromise or settle any matter which, if
sustained, would entitle the Indemnitee to indemnification
hereunder from Sellers without the prior consent of Caruana or
Simerco, which consent shall not be unreasonably withheld or
delayed. Michael Caruana (including any successor designated by
the unanimous written consent of Sellers) is hereby irrevocably
designated as the Sellers' agents for purposes of consenting to
any compromise or settlement in accordance with this Section
8(b)(ii) and each shall have authority to determine the validity
of, satisfy, compromise, settle or otherwise to adjust any Claims
on behalf of Sellers which may, in the sole judgment of either of
them, affect the liability of any or all of the Sellers to any
Indemnitee pursuant to this Agreement.
<PAGE>
d. Survival of Representations and Warranties. All representations and
warranties of Sellers and Pego contained herein (including all
schedules and exhibits hereto) or in any certificate, exhibit or other
instrument or document delivered pursuant to this Agreement and the
Ancillary Documents and the provisions of this Section 8 shall survive
the execution hereof and Closing Date for a period of four (4) years
from and after the Closing Date, except that with respect to any
warranty or representation with respect to Taxes and/or any willful,
intentional or knowing misrepresentation of Sellers or Pego or any of
the officers, directors, employees, agents or representatives of Pego
(collectively "Sellers and their Agents"), such warranty and
representation shall survive until the later of the end of said
four-year period or expiration of the applicable statute of
limitations pursuant to which Buyer or any Indemnitee can seek
recovery from Sellers and their Agents.
SECTION 9. CONFIDENTIALITY.
a. Respective Obligations. Each of the parties hereto and their
respective representatives will hold in confidence any data and
information obtained with respect to any other party, or the business
of any other party, from any representative, officer, director or
employee of such party, or from any books or records of such party in
connection with this Agreement or the transactions contemplated by
this Agreement, and shall not use such data and information except for
the reasonable due diligence purposes of such party exclusively
related to the transactions contemplated hereby. No party receiving
such confidential information shall disclose such information to any
person except for such party's officers, directors, independent
accountants, legal counsel or other representatives (collectively,
"Representatives") with a need to know such information for the
purpose of evaluating the transactions contemplated hereby. The
parties will inform their respective Representatives that by receiving
any such confidential information, they are agreeing to be bound by
the terms of this Section 9. Confidential information shall not
include information in the public domain, information published or
disseminated by the party generating such information without
restriction to other persons, information which is independently
developed by the other party, information identified in writing by the
furnishing party as not being confidential or information which is
required by any applicable law or regulation to be disclosed.
b. Survival. The obligations and rights of the parties under this Section
9 shall survive any expiration or termination of this Agreement for
any reason whatsoever.
c. Termination. If this Agreement is terminated pursuant to Section 7,
all copies of written data and information, including copies in the
possession of such party's Representatives, obtained by any of the
parties hereto from any other party shall be returned promptly to the
relevant party upon request therefore by the party providing such data
or information or that party's counsel. Each party hereto agrees to
use all reasonable efforts to keep confidential any information
obtained by it unless and until such information is ascertainable from
public or published information or trade sources or is otherwise a
matter of public knowledge or unless the information is needed in
connection with any on-going dispute among the parties hereto.
<PAGE>
The obligations under this Section 9 are in addition to the and not in lieu
of obligations arising under any other confidentiality or similar agreement
between Buyer and any of the other parties hereto.
SECTION 10. MISCELLANEOUS.
a. Governing Law. This Agreement and all transactions contemplated by
this Agreement shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of California without
regard to principles of conflicts of laws to the extent that such
principles would require the application of the laws of any
jurisdiction other than the State of California.
b. No Assignment; Successors and Assigns. Buyer may assign its rights and
obligations hereunder without the consent of any other party upon
notice to Sellers and to Pego. Except as otherwise provided herein,
the provisions hereof shall inure to the benefit of, are binding upon
and are enforceable by and against the parties and their respective
legal representatives, successors and permitted assigns.
c. Entire Agreement. This Agreement (including all the Exhibits and
Schedules hereto) constitutes the full and entire understanding and
agree among the parties with regard to the subject matter hereof and
supersedes all prior negotiations, understandings and representations,
both written and oral, if any, made by and among such parties,
including, without limitation, the letter of intent dated April 8,
1997, between Pego, Buyer and certain other parties.
d. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given (i) on the date of receipt, if
delivered personally; (ii) two (2) days after being mailed by
registered or certified mail, return receipt requested; (iii) upon
delivery by commercial overnight courier (e.g., Federal Express, DHL,
etc.), return receipt or confirmation of delivery requested; or (iv)
by facsimile transmission with voice confirmation of receipt, to the
parties at the following addresses (or at such other address for a
party as shall be specified by like notice):
i. If to Buyer to:
The Hartcourt Companies, Inc.
19104 Norwalk Blvd.
Artesia, California 90701
Attn: Mr. Alan V. Phan
Facsimile: (562) 403-1130
With a copy to:
American Equities LLC
11400 Olympic Blvd., Suite 212
Los Angeles, California 90064
Attn: Reid Breitman
Facsimile:(310) 312-9521
<PAGE>
ii. If to Pego to:
Pego Systems, Inc.
1196 East Willow Street
Long Beach, California 90806
Attn: Michael Caruana, President
Facsimile:(562) 490-0633
iii. If to Michael Caruana to:
Michael Caruana
525 Sonoma Mountain Road
Petaluma, California 94954
(707) 776-2712
(415) 382-0554
e. Cooperation. The parties agree to execute and deliver such other
documents, certificates, agreements and other writings and to take
such other actions as may be necessary or desirable in order to
expeditiously consummate or implement the transactions contemplated by
this Agreement.
f. Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Information disclosed in any
Schedule of this Agreement shall be deemed disclosed in all Schedules
of this Agreement.
g. Delays or Omissions. No delay or omission to exercise any right, power
or remedy accruing to any party to this Agreement, upon any breach or
default of another party under this Agreement, shall impair any such
right, power or remedy of such party nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or
of or in any similar breach or default thereunder occurring; nor shall
any waiver of any single breach or default theretofore or thereafter
occurring act as a waiver of any other breach or default under this
Agreement. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing
subject to the provisions of Section 7 hereof. Except as otherwise
provided herein, all remedies, either under this Agreement, or by law
or otherwise afforded to any party, shall be cumulative and not
alternative.
h. Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be executed by less than all of the
parties, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall
constitute one instrument.
<PAGE>
i. Severability. If any provision of this Agreement or any Ancillary
Document entered into pursuant hereto is contrary to, prohibited by or
deemed invalid under applicable law or regulation, such provision
shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be
invalidated thereby and shall be given full force and effect so far as
possible. If any provision of this Agreement may be construed in two
or more ways, one of which would render the provision invalid or
otherwise voidable or unenforceable and another of which would render
the provision valid and enforceable, such provision shall have the
meaning which renders it valid and enforceable.
j. Attorneys' Fees. In the event any arbitration, litigation or other
legal action or proceeding is brought between the parties to enforce
any provision of this Agreement or because of an alleged dispute,
breach, default or misrepresentation in connection with any provision
of this Agreement, the prevailing party will be entitled to an award
of judgment for all reasonable costs incurred by reason of such
proceeding, including reasonable attorneys' fees even if incident to
appellate, bankruptcy, post- judgment or alternative dispute
resolution proceedings, payments owed to arbitrators, travel expenses,
per diem expenses, witness fees, investigative fees, paralegal fees
and all other reasonable charges billed by an attorney for the
prevailing party. A party not entitled to recover its costs shall not
recover attorneys' fees. No sum for attorneys' fees shall be counted
in calculating the amount of a judgment for purposes of determining
whether a party is entitled to recover its costs or attorneys' fees.
k. Specific Performance. Each of the parties acknowledges that the
parties will be irreparably damaged (and damages at law would be an
inadequate remedy) if this Agreement is not specifically enforced.
Therefore, in the event of a breach or threatened breach by any party
of any provision of this Agreement, then the other parties shall be
entitled subject to the provisions of Section 9 hereof, in addition to
all other rights or remedies, to injunctions restraining such breach,
without being required to show any actual damage or to post any bond
or other security, unless the court adjudicating the motion for
equitable relief otherwise requires a bond, in which case the parties
agree that a bond in the amount of $1,000 is sufficient and
appropriate.
l. Waivers. No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party hereto, shall be deemed to
constitute a waiver by the party taking such action of compliance with
any representation, warranty, covenant or agreement contained herein
or in any Ancillary Document. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach.
m. Rules of Construction. In this Agreement, unless the context otherwise
requires, words in the singular include the plural and in the plural
include the singular, and words of masculine gender include the
feminine and the neuter, and when the sense so indicates words of the
neuter gender may refer to any gender, and the word "his" may include
"its".
<PAGE>
n. Jurisdiction. Each of the parties hereto irrevocably consents to the
exclusive jurisdiction of the federal and state courts located in Los
Angeles County, California, in any and all actions between or among
any of the parties hereto, whether arising hereunder or otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first above written.
BUYER:
THE HARTCOURT COMPANIES, INC.,
a Utah corporation
By: /s/ Alan V. Phan
-----------------------------
Alan V. Phan, President
SELLERS:
MICHAEL V. CARUANA PEGO SYSTEMS, INC.,
a California corporation
Michael V. Caruana By: /s/ Michael V. Caruana
------------------ ----------------------------------
Michael V. Caruana Michael V. Caruana, President
SIMERCO TRADING LTD.,
a British Virgin Islands Corporation
By: /s/ Nicholas Limer
-------------------------
Nicholas Limer,
Attorney in fact
<PAGE>
Exhibit 1(a)(iii)(a)
Form of Employment Agreement of Michael Caruana
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of __________, 1997 by and between PEGO
SYSTEMS, INC., a California corporation, (referred to as the "Company") and
Michael Caruana (the "Executive").
WHEREAS, the Company is in the business of environmental consulting and the
manufacturing of certain related environmental products (the "Business");
WHEREAS, the Executive is an experienced executive in the Business; and
WHEREAS the Company and the Executive desire to establish an employment
relationship with each other.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Employment. The Company agrees that the Company shall employ the Executive,
and the Executive accepts employment with the Company, on the terms and
conditions set forth herein.
2. Term. The term of employment (the "Employment Term") under this Agreement
shall commence as of the date hereof and continue, subject to the terms and
conditions of this Agreement, for a period of thirty-six (36) months from
such date.
3. Position. The Company shall employ the Executive for the Employment Term as
its President and Chief Executive Officer to perform when and where
necessary such duties relating to the overall operation of the Company as
may from time to time be assigned to the Executive by the Board of
Directors. These duties shall include duties related to the "First Six
Month's Agenda," to be mutually agreed upon in good faith and attached
hereto as Exhibit A and all updates and modifications thereto. The
Executive agrees to accept such employment and to devote his best efforts
in and to the faithful performance of his duties hereunder to the exclusion
of all other employment, subject to the general direction and control of
the Board of Directors of the Company. The parties agree that Executive
shall not be required to relocate.
4. Elected to Board. The Company shall use its best efforts to cause the
Executive to be elected to the Board of Directors of the Company at the
next Annual Meeting of Shareholders of the Company.
5. Compensation.
a. In consideration of the services to be rendered by the Executive for
his duties pursuant to Section 3 of this Agreement, including, without
limitation, any services rendered by the Executive as a director,
officer or employee of the Company or of any of its subsidiaries,
divisions or affiliated companies, and in full payment for the due and
faithful performance of said services, the Company shall pay the
Executive and the Executive agrees to accept a salary at the rate of
$150,000 per year (the "Base Compensation").
<PAGE>
b. Payments to the Executive of his Base Compensation hereunder shall be
made periodically on the dates established by the Company for payment
of other executive employees, but not less frequently than once a
month. All payments under this agreement shall be subject to all
deductions and withholdings required by law.
c. The Executive shall be entitled to reimbursement for reasonable
expenses incurred by him in connection with his employment hereunder,
upon the presentation of proper vouchers therefor in accordance with
the usual procedures of the Company. Such expenses shall not exceed
$1,000 per month without the authorization of the Board.
d. The Executive shall be entitled to participate in and receive benefits
(including vacation benefits) under and in accordance with the
provisions of any of the Company's employee benefit plans or programs
now or hereafter in effect, to the same extent that employees of the
Company in positions similar to that of the Executive have the right
to participate in such plans and programs. Such plans and programs
will include medical insurance plans.
e. The Executive shall be entitled during the Employment Term to an
automobile allowance equal to $600 per month.
6. Termination. The employment of the Executive may be terminated by the
Company upon the occurrence of any of the following events:
a. Subject to Section 7(a) below, the Company may terminate such
employment at any time without good cause upon written notice to the
Executive;
b. Such employment shall terminate automatically on the death of the
Executive;
c. The Company may terminate Executive's employment immediately upon
written notice to the Executive for good cause. In such event, the
Company shall pay to Executive an amount equal to three months Base
Compensation. For purposes of this Agreement "good cause" shall
include the following circumstances:
i. If there is a repeated and demonstrable failure on the part of
the Executive to perform material duties of Executive's
management position in a competent manner and where the Executive
fails to substantially remedy the failure within a reasonable
period of time after receiving written notice of such failure
from the Company (three written notices shall be sufficient to
establish "repeated and demonstrable" failure);
ii. If the Executive is convicted of a criminal offense;
iii. If the Executive or any member of his or his spouse's family
makes any personal profit at the expense of the Company without
prior written consent of the Company.
iv. If the Executive fails to fully observe the fiduciary duties
appropriate to his position; and
<PAGE>
v. If the Executive disobeys reasonable instructions given in the
course of employment by the Board of Directors of the Company
that are not inconsistent with the Executive's management
position and not remedied by the Executive within a reasonable
period of time, after receiving written notice of such
disobedience. A "reasonable period of time" shall be determined
in good faith by the Board (with the Executive not voting, if
Executive is then a member of the Board), but in no event shall
such period be more than thirty (30) days.
d. The Executive may terminate his employment hereunder upon two months
prior written notice to the Company.
7. Payments on Termination; Change of Control.
a. Upon termination of the Executive's employment for any reason, the
Company shall pay to the Executive, or if the termination is as a
result of the death of the Executive, to his personal representative,
any accrued but previously unpaid Basic Compensation prorated to the
effective date of such termination. In the event the Company
terminates the Executive's employment without good cause, the Company
shall make severance payments equal to and in the same manner as the
Executive's Basic Compensation in effect at the time of such
termination for the remaining term of this Employment Agreement. To
the extent Executive receives compensation from any form of employment
after such termination for any part of the period during which
termination payments are being made to the Executive by the Company,
Executive shall immediately so inform the Company, and the termination
payment payable pursuant to this subparagraph will be reduced at the
rate of $0.75 for each dollar of compensation so received by
Executive. In the event the Company terminates the Executive's
employment with good cause, the Company shall make severance payments
equal to and in the same manner as the Executive's Base Compensation
in effect at the time of such termination for a period of three months
from the effective date of such termination.
8. Covenant Not to Compete.
a. The Executive agrees that during the Employment Term, he will not,
directly or indirectly, have any ownership interest of five percent or
more in a corporation, firm, trust, association or other entity which
is in competition with the Company.
b. The Executive shall not, during the Employment Term and at any time
within one year after the termination of his employment with the
Company by the Executive or by the Company with cause, in any manner,
engage or become interested in (as owner, stockholder, partner,
director, officer, employee, consultant or otherwise) any business
which is competitive with the business conducted by the Company or any
of its affiliates at the time of the termination of his employment
hereunder. This Section 8 shall not apply if the Company terminates
Executive's employment without cause. The Executive's ownership of
less than five percent of the stock of a publicly-owned company which
competes with the Company shall not be considered a violation of the
provisions of this Section 8(b).
<PAGE>
c. Without limiting the rights of the Company hereunder, the parties
agree that in the event the Executive violates (in other than a
willful violation) any of the provisions of this Section 8, the
Company may give the Executive 30 days notice of such violation and
opportunity to cure it; in the event the violation is not cured within
such 30-day period, such violation will be grounds for termination of
this Agreement and the Executive's employment hereunder for cause, in
addition to any other remedies available to the Company. It is
expressly understood that the limitations contained in this Section 8
shall be in addition to, and not in substitution of, any provisions of
a separate non-competition agreement entered into between the
Executive and the Company. To the extent any provision herein is not
consistent with such non-competition agreement, the terms and
provisions of the non-competition agreement shall apply.
9. Inventions.
a. For purposes of this Agreement, "Invention" shall mean any and all
machines, apparatuses, compositions of matter, methods, know-how,
processes, designs, configurations, uses, ideas, concepts, or writings
of any kind, discovered, conceived, developed, made, or produced, or
any improvements to them, and shall include, but not be limited to the
definition of an invention contained in the United States Patent Laws.
b. The Executive understands and agrees that all Inventions, or
trademarks or copyrights relating thereto, which reasonably relate to
the business of the Company and which are conceived or made by him
during his employment by the Company either alone or with others, are
the sole and exclusive property of the Company. The Executive
understands and agrees that all Inventions, trademarks, or copyrights
described above in this Section 9(a) are the sole and exclusive
property of the Company whether or not they are conceived or made
during regular working hours.
c. The Executive agrees that he will disclose promptly and in writing to
the Company all Inventions within the scope of this Agreement, whether
he considers them to be patentable or not, which he, either alone or
with others, conceives or makes (whether or not during regular working
hours). The Executive hereby assigns and agrees to assign all his
right, title, and interest in and to those Inventions which relate to
the business of the Company and agrees not to disclose any of these to
others without the written consent of the Company, except as required
by the conditions of his employment.
<PAGE>
d. The Executive agrees that he will at any time during his employment
hereunder, or after this Employment Agreement terminates, on the
request of the Company, (i) execute specific assignments in favor of
the Company, or its nominee, of any of the Inventions covered by this
Agreement, (ii) execute all papers and perform all lawful acts the
Company considers necessary or advisable for the preparation,
application procurement, maintenance, enforcement, and defense of
patent applications and patents of the United States and foreign
countries for these Inventions, for the perfection or enforcement of
any trademarks or copyrights relating to such Inventions, and for the
transfer of any interest the Executive may have, and (iii) execute any
and all papers and lawful documents required or necessary to vest sole
right, title, and interest in the Company or its nominee of the above
Inventions, patent applications, patents, or any trademarks or
copyrights relating thereto. The Executive will, at the Company's
expense, execute all documents (including those referred to above) and
do all other acts necessary to assist in the preservation of all the
Company's interests arising under this Agreement.
10. Secrecy.
a. For purposes of this Agreement, "proprietary information" shall mean
any information relating to the business of the Company that has not
previously been publicly released by duly authorized representatives
of the Company and shall include (but shall not be limited to) Company
information encompassed in all computer code, software, notes, written
concepts, drawings, designs, plans, proposals, marketing and sales
plans, financial information, costs, pricing information, customer
information, and all methods, concepts, or ideas in or reasonably
related to the business of the Company.
b. The Executive agrees to regard and preserve as confidential all
proprietary information pertaining to the Company's business that has
been or may be obtained by the Executive prior to or during his
employment by the Company (whether before, during or after the
Employment Term hereof), whether he has such information in his memory
or in writing or other physical form. The Executive will not use for
his benefit or purposes, nor disclose to others, either during the
Employment Term or thereafter, except as required by the conditions of
his employment hereunder, any proprietary information connected with
the business or developments of the Company.
c. The Executive agrees not to remove from the premises of the Company,
except as an employee of the Company in pursuit of the business of the
Company or any of its subsidiaries, or except as specifically
permitted in writing by the Company, any document or object containing
or reflecting any proprietary information of the Company. The
Executive recognizes that all such documents and objects, whether
developed by him or by someone else, are the exclusive property of the
Company. A breach of this provision shall be considered good cause for
termination. Upon termination of his employment hereunder, for any
reason, the Executive shall forthwith deliver up to the Company all
proprietary information, including, without limitation, all lists of
customers, correspondence, accounts, records and any other documents
or property made or held by him or under his control in relation to
the business or affairs of the Company or its affiliates, and no copy
of any such proprietary information shall be retained by him.
<PAGE>
11. Injunctive Relief. The Executive acknowledges that in the event of a breach
or threatened breach by the Executive of any of the provisions of Sections
8, 9 or 10, monetary damages will not adequately compensate the Company and
the Company shall be entitled to an injunction restraining the Executive
from the commission of such breach, in addition to any other remedies or
rights the Company may have.
12. Notices. Any notice required or permitted to be given hereunder shall be in
writing and shall be delivered by prepaid registered or certified mail,
return receipt requested. Such duly mailed notice shall be deemed given
when dispatched. The address for mailed notices shall be:
a. For the Executive:
Mr. Michael Caruana
525 Sonoma Mountain Road
Petaluma, California 94954
Telephone: (707) 776-2712
Facsimile: (415) 382-0554
b. For the Company:
Pego Systems, Inc.
1196 East Willow Street
Long Beach, California 90806
Attn: Michael Caruana
Facsimile: (562) 490-0633
with a copy to: The Hartcourt Companies, Inc.
19104 Norwalk Blvd.
Artesia, California 90701
Attn: Mr. Alan V. Phan
Facsimile: (562) 403-1130
with a copy to:
American Equities LLC
11400 Olympic Blvd. Suite 212
Santa Monica, California 90064
Telephone: (310) 785-0330
Facsimile: (310) 312-9521
Any party may notify the other parties in writing of a change of address by
serving notice in the manner provided in this Section.
13. No Conflicting Agreements. Except as set forth herein, the Executive
represents and warrants that neither the execution and delivery of this
Agreement nor the performance of his duties hereunder violates or will
violate the provisions of any agreement to which he is a party or by which
he is bound.
14. Governing Law; Entire Agreement. This Agreement shall be construed
according to the laws of the State of California, and constitutes the
entire understanding between the parties, superseding and replacing all
prior understandings and agreements relating to employment between the
Company and the Executive and the parties shall cause such other
agreements, if any, to be terminated. This Agreement cannot be changed or
terminated except by an instrument in writing signed by each of the parties
hereto.
<PAGE>
15. Amendments. If any provision of this Agreement or the application thereof
shall for any reason be invalid or unenforceable, such provision shall be
limited only to the extent necessary in the circumstances to make such
provision valid and enforceable and its partial or total invalidity or
unenforceability shall in any event not affect the remaining provisions of
this Agreement which shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Agreement as of the date first above written.
PEGO SYSTEMS, INC.
By: ________________
Richard Greiner
MICHAEL V. CARUANA
____________________
<PAGE>
EXHIBIT A
First Six Month's Agenda
Executive shall use his reasonable best efforts to accomplish the following
objectives during the first six months of the Employment Term:
<PAGE>
Exhibit 1(a)(iii)(b)
Form of Employment Agreement of Richard Greiner
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of __________, 1997 by and between PEGO
SYSTEMS, INC., a California corporation, (referred to as the "Company") and
Richard Greiner (the "Executive").
WHEREAS, the Company is in the business of environmental consulting and the
manufacturing of certain related environmental products (the "Business");
WHEREAS, the Executive is an experienced executive in the Business; and
WHEREAS the Company and the Executive desire to establish an employment
relationship with each other.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Employment. The Company agrees that the Company shall employ the Executive,
and the Executive accepts employment with the Company, on the terms and
conditions set forth herein.
2. Term. The term of employment (the "Employment Term") under this Agreement
shall commence as of the date hereof and continue, subject to the terms and
conditions of this Agreement, for a period of thirty-six (36) months from
such date.
3. Position. The Company shall employ the Executive for the Employment Term as
its Vice President to perform when and where necessary such duties relating
to the overall operation of the Company as may from time to time be
assigned to the Executive by the Board of Directors. These duties shall
include duties related to the "First Six Month's Agenda," to be mutually
agreed upon in good faith and attached hereto as Exhibit A and all updates
and modifications thereto. The Executive agrees to accept such employment
and to devote his best efforts in and to the faithful performance of his
duties hereunder to the exclusion of all other employment, subject to the
general direction and control of the Board of Directors of the Company. The
parties agree that Executive shall not be required to relocate.
4. Elected to Board. The Company shall use its best efforts to cause the
Executive to be elected to the Board of Directors of the Company at the
next Annual Meeting of Shareholders of the Company.
<PAGE>
5. Compensation.
a. In consideration of the services to be rendered by the Executive for
his duties pursuant to Section 3 of this Agreement, including, without
limitation, any services rendered by the Executive as a director,
officer or employee of the Company or of any of its subsidiaries,
divisions or affiliated companies, and in full payment for the
faithful performance of said services, the Company shall pay the
Executive and the Executive agrees to accept a salary at the rate of $
per year (the "Base Compensation"). In addition, the Company shall
cause to be issued to Executive an amount of the common stock of The
Hartcourt Companies, Inc., a Utah corporation ("Hartcourt"), $0.001
par value (the "Common Stock"), equal to an aggregate of $50,000,
based on the average bid price per share of such Common Stock quoted
on the Nasdaq bulletin board, or on such other securities exchange as
the Common Stock is then trading, for the five trading days prior to
the execution of this agreement. Such Common Stock shall be restricted
securities, as such term is used in Rule 144 promulgated under the
Securities Act of 1933, as amended, and Executive shall enter into an
agreement with Hartcourt which provides that Executive shall not sell
any of such shares of Common Stock for a period of two years after the
issuance of such shares.
b. Payments to the Executive of his Base Compensation hereunder shall be
made periodically on the dates established by the Company for payment
of other executive employees, but not less frequently than once a
month. All payments under this agreement shall be subject to all
deductions and withholdings required by law.
c. The Executive shall be entitled to reimbursement for reasonable
expenses incurred by him in connection with his employment hereunder,
upon the presentation of proper vouchers therefor in accordance with
the usual procedures of the Company. Such expenses shall not exceed
$1,000 per month without the authorization of the Board.
d. The Executive shall be entitled to participate in and receive benefits
(including vacation benefits) under and in accordance with the
provisions of any of the Company's employee benefit plans or programs
now or hereafter in effect, to the same extent that employees of the
Company in positions similar to that of the Executive have the right
to participate in such plans and programs. Such plans and programs
will include medical insurance plans.
e. The Executive shall be entitled during the Employment Term to an
automobile allowance equal to $400 per month.
6. Termination. The employment of the Executive may be terminated by the
Company upon the occurrence of any of the following events:
a. Subject to Section 7(a) below, the Company may terminate such
employment at any time without good cause upon written notice to the
Executive;
b. Such employment shall terminate automatically on the death of the
Executive;
<PAGE>
c. The Company may terminate Executive's employment immediately upon
written notice to the Executive for good cause. In such event, the
Company shall pay to Executive an amount equal to three months Base
Compensation. For purposes of this Agreement "good cause" shall
include the following circumstances:
i. If there is a repeated and demonstrable failure on the part of
the Executive to perform material duties of Executive's
management position in a competent manner and where the Executive
fails to substantially remedy the failure within a reasonable
period of time after receiving written notice of such failure
from the Company (three written notices shall be sufficient to
establish "repeated and demonstrable" failure);
ii. If the Executive is convicted of a criminal offense;
iii. If the Executive or any member of his or his spouse's family
makes any personal profit at the expense of the Company without
prior written consent of the Company.
iv. If the Executive fails to fully observe the fiduciary duties
appropriate to his position; and
v. If the Executive disobeys reasonable instructions given in the
course of employment by the Board of Directors of the Company
that are not inconsistent with the Executive's management
position and not remedied by the Executive within a reasonable
period of time, after receiving written notice of such
disobedience. A "reasonable period of time" shall be determined
in good faith by the Board (with the Executive not voting, if
Executive is then a member of the Board), but in no event shall
such period be more than thirty (30) days.
d. The Executive may terminate his employment hereunder upon two months
prior written notice to the Company.
7. Payments on Termination; Change of Control.
a. Upon termination of the Executive's employment for any reason, the
Company shall pay to the Executive, or if the termination is as a
result of the death of the Executive, to his personal representative,
any accrued but previously unpaid Basic Compensation prorated to the
effective date of such termination. In the event the Company
terminates the Executive's employment without good cause, the Company
shall make severance payments equal to and in the same manner as the
Executive's Basic Compensation in effect at the time of such
termination for the remaining term of this Employment Agreement. To
the extent Executive receives compensation from any form of employment
after such termination for any part of the period during which
termination payments are being made to the Executive by the Company,
Executive shall immediately so inform the Company, and the termination
payment payable pursuant to this subparagraph will be reduced at the
rate of $0.75 for each dollar of compensation so received by
Executive. In the event the Company terminates the Executive's
employment with good cause, the Company shall make severance payments
equal to and in the same manner as the Executive's Base Compensation
in effect at the time of such termination for a period of three months
from the effective date of such termination.
<PAGE>
8. Covenant Not to Compete.
a. The Executive agrees that during the Employment Term, he will not,
directly or indirectly, have any ownership interest of five percent or
more in a corporation, firm, trust, association or other entity which
is in competition with the Company.
b. The Executive shall not, during the Employment Term and at any time
within one year after the termination of his employment with the
Company by the Executive or by the Company with cause, in any manner,
engage or become interested in (as owner, stockholder, partner,
director, officer, employee, consultant or otherwise) any business
which is competitive with the business conducted by the Company or any
of its affiliates at the time of the termination of his employment
hereunder. This Section 8 shall not apply if the Company terminates
Executive's employment without cause. The Executive's ownership of
less than five percent of the stock of a publicly-owned company which
competes with the Company shall not be considered a violation of the
provisions of this Section 8(b).
c. Without limiting the rights of the Company hereunder, the parties
agree that in the event the Executive violates (in other than a
willful violation) any of the provisions of this Section 8, the
Company may give the Executive 30 days notice of such violation and
opportunity to cure it; in the event the violation is not cured within
such 30-day period, such violation will be grounds for termination of
this Agreement and the Executive's employment hereunder for cause, in
addition to any other remedies available to the Company. It is
expressly understood that the limitations contained in this Section 8
shall be in addition to, and not in substitution of, any provisions of
a separate non-competition agreement entered into between the
Executive and the Company. To the extent any provision herein is not
consistent with such non-competition agreement, the terms and
provisions of the non-competition agreement shall apply.
9. Inventions.
a. For purposes of this Agreement, "Invention" shall mean any and all
machines, apparatuses, compositions of matter, methods, know-how,
processes, designs, configurations, uses, ideas, concepts, or writings
of any kind, discovered, conceived, developed, made, or produced, or
any improvements to them, and shall include, but not be limited to the
definition of an invention contained in the United States Patent Laws.
b. The Executive understands and agrees that all Inventions, or
trademarks or copyrights relating thereto, which reasonably relate to
the business of the Company and which are conceived or made by him
during his employment by the Company either alone or with others, are
the sole and exclusive property of the Company. The Executive
understands and agrees that all Inventions, trademarks, or copyrights
described above in this Section 9(a) are the sole and exclusive
property of the Company whether or not they are conceived or made
during regular working hours.
<PAGE>
c. The Executive agrees that he will disclose promptly and in writing to
the Company all Inventions within the scope of this Agreement, whether
he considers them to be patentable or not, which he, either alone or
with others, conceives or makes (whether or not during regular working
hours). The Executive hereby assigns and agrees to assign all his
right, title, and interest in and to those Inventions which relate to
the business of the Company and agrees not to disclose any of these to
others without the written consent of the Company, except as required
by the conditions of his employment.
d. The Executive agrees that he will at any time during his employment
hereunder, or after this Employment Agreement terminates, on the
request of the Company, (i) execute specific assignments in favor of
the Company, or its nominee, of any of the Inventions covered by this
Agreement, (ii) execute all papers and perform all lawful acts the
Company considers necessary or advisable for the preparation,
application procurement, maintenance, enforcement, and defense of
patent applications and patents of the United States and foreign
countries for these Inventions, for the perfection or enforcement of
any trademarks or copyrights relating to such Inventions, and for the
transfer of any interest the Executive may have, and (iii) execute any
and all papers and lawful documents required or necessary to vest sole
right, title, and interest in the Company or its nominee of the above
Inventions, patent applications, patents, or any trademarks or
copyrights relating thereto. The Executive will, at the Company's
expense, execute all documents (including those referred to above) and
do all other acts necessary to assist in the preservation of all the
Company's interests arising under this Agreement.
10. Secrecy.
a. For purposes of this Agreement, "proprietary information" shall mean
any information relating to the business of the Company that has not
previously been publicly released by duly authorized representatives
of the Company and shall include (but shall not be limited to) Company
information encompassed in all computer code, software, notes, written
concepts, drawings, designs, plans, proposals, marketing and sales
plans, financial information, costs, pricing information, customer
information, and all methods, concepts, or ideas in or reasonably
related to the business of the Company.
b. The Executive agrees to regard and preserve as confidential all
proprietary information pertaining to the Company's business that has
been or may be obtained by the Executive prior to or during his
employment by the Company (whether before, during or after the
Employment Term hereof), whether he has such information in his memory
or in writing or other physical form. The Executive will not use for
his benefit or purposes, nor disclose to others, either during the
Employment Term or thereafter, except as required by the conditions of
his employment hereunder, any proprietary information connected with
the business or developments of the Company.
<PAGE>
c. The Executive agrees not to remove from the premises of the Company,
except as an employee of the Company in pursuit of the business of the
Company or any of its subsidiaries, or except as specifically
permitted in writing by the Company, any document or object containing
or reflecting any proprietary information of the Company. The
Executive recognizes that all such documents and objects, whether
developed by him or by someone else, are the exclusive property of the
Company. A breach of this provision shall be considered good cause for
termination. Upon termination of his employment hereunder, for any
reason, the Executive shall forthwith deliver up to the Company all
proprietary information, including, without limitation, all lists of
customers, correspondence, accounts, records and any other documents
or property made or held by him or under his control in relation to
the business or affairs of the Company or its affiliates, and no copy
of any such proprietary information shall be retained by him.
11. Injunctive Relief. The Executive acknowledges that in the event of a breach
or threatened breach by the Executive of any of the provisions of Sections
8, 9 or 10, monetary damages will not adequately compensate the Company and
the Company shall be entitled to an injunction restraining the Executive
from the commission of such breach, in addition to any other remedies or
rights the Company may have.
12. Notices. Any notice required or permitted to be given hereunder shall be in
writing and shall be delivered by prepaid registered or certified mail,
return receipt requested. Such duly mailed notice shall be deemed given
when dispatched. The address for mailed notices shall be:
a. For the Executive:
Mr. Richard Greiner
1196 East Willow Street
Long Beach, California 90806
Attn: Richard Greiner
Facsimile:(562) 490-0633
b. For the Company:
Pego Systems, Inc.
1196 East Willow Street
Long Beach, California 90806
Attn: Michael Caruana
Facsimile: (562) 490-0633
with a copy to: The Hartcourt Companies, Inc.
19104 Norwalk Blvd.
Artesia, California 90701
Attn: Mr. Alan V. Phan
Facsimile: (562) 403-1130
with a copy to:
American Equities LLC
11400 Olympic Blvd. Suite 212
Santa Monica, California 90064
Telephone: (310) 785-0330
Facsimile: (310) 312-9521
Any party may notify the other parties in writing of a change of address by
serving notice in the manner provided in this Section.
<PAGE>
13. No Conflicting Agreements. Except as set forth herein, the Executive
represents and warrants that neither the execution and delivery of this
Agreement nor the performance of his duties hereunder violates or will
violate the provisions of any agreement to which he is a party or by which
he is bound.
14. Governing Law; Entire Agreement. This Agreement shall be construed
according to the laws of the State of California, and constitutes the
entire understanding between the parties, superseding and replacing all
prior understandings and agreements relating to employment between the
Company and the Executive and the parties shall cause such other
agreements, if any, to be terminated. This Agreement cannot be changed or
terminated except by an instrument in writing signed by each of the parties
hereto.
15. Amendments. If any provision of this Agreement or the application thereof
shall for any reason be invalid or unenforceable, such provision shall be
limited only to the extent necessary in the circumstances to make such
provision valid and enforceable and its partial or total invalidity or
unenforceability shall in any event not affect the remaining provisions of
this Agreement which shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Agreement as of the date first above written.
PEGO SYSTEMS, INC.
By: _________________________
Michael Caruana, President
RICHARD GREINER
_____________________________
<PAGE>
EXHIBIT A
First Six Month's Agenda
Executive shall use his reasonable best efforts to accomplish the following
objectives during the first six months of the Employment Term:
<PAGE>
Exhibit 1(a)(iv)
Bonus, Compensation, Health and Other Plans
<PAGE>
Exhibit 2(b)(i)
Authorized, Issued and Outstanding Capital Stock
COMMON STOCK
Authorized:
75,000 Shares Authorized.
Outstanding:
Shareholder Shares Percentage
----------- ------ ----------
Michael V. Caruana 20,000 60.6%
Simerco, Ltd. 13,000 39.4%
No other common stock is outstanding.
PREFERRED STOCK
None.
<PAGE>
Exhibit 2(g)
FINANCIAL STATEMENTS
<PAGE>
Exhibit 2(j)
Insurance Policies and Claims
<PAGE>
Exhibit 2(k)
Material Personal Property
<PAGE>
Exhibit 2(k)(iii)
Real Property Leases
<PAGE>
Exhibit 2(l)
Licenses, Certificates and Permits and
Pending/Threatened Proceedings
<PAGE>
Exhibit 2(m)
Regulatory Filings
<PAGE>
Exhibit 2(n)(i)
Material Contracts
<PAGE>
Exhibit 2(n)(ii)
Contracts in Default
<PAGE>
Exhibit 2(n)(iii)
Related Party Contracts
<PAGE>
Exhibit 2(o)
Litigation Summary
<PAGE>
Exhibit 2(s)
Bank Accounts
Bank Name Address Account No. Signatories
<PAGE>
Exhibit 2(t)(i)
Employment, Consulting and Other Personal Service Contracts
Employee Position/Job Description Hire Date Annual Salary
<PAGE>
Exhibit 2(t)(ii)
Employee List
Employee Position/Job Description Hire Date Annual Salary
<PAGE>
Exhibit 2(t)(iii)
ERISA Plans
<PAGE>
Exhibit 2(w)
Proprietary Rights
Right Description Expiration
<PAGE>
Exhibit 6(c)
Form of Covenant Not to Compete Agreement
COVENANT NOT TO COMPETE AGREEMENT
THIS COVENANT NOT TO COMPETE AGREEMENT (the "Agreement") is made as of
_______________, 19__ by and between The Hartcourt Companies, a Utah corporation
("Buyer"); and_______________, an individual ("Employee").
Preliminary Statements:
1. Buyer and Employee are parties to either (1) a Stock Purchase
Agreement dated as of June __, 1997, and/or (2) an Employment Agreement
dated as of _______________, 1997. Pursuant to the Stock Purchase
Agreement, Buyer is acquiring 100% of the outstanding Common Stock of Pego
Systems, Inc., a California corporation ("Pego"). Pego is the operator of
an environmental consulting and manufacturing business in California (the
"Environmental Business").
2. Buyer intends to continue the Environmental Business after the closing
of the Stock Purchase Agreement.
3. A condition precedent to the closing of the Stock Purchase Agreement
is the execution by Employee of an agreement restricting him from engaging
in certain activities that would be detrimental to the business of Buyer
and to the Environmental Business.
4. Employee will derive substantial personal benefit from the
consummation of the transactions contemplated by the Stock Purchase
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
agreements and promises hereinafter set forth, the parties hereto hereby agree
as follows:
Agreement:
1. Consideration. As consideration for the faithful performance of
Employee of all of the terms of this Agreement, Buyer shall pay to Employee
[the sum of [$100,000] [$50,000 in restricted Common Stock of the Hartcourt
Companies, Inc., $0.001 par value (the "Hartcourt Common Stock")] payable
upon closing of the Stock Purchase Agreement (the "Non-Compete Payment").
<PAGE>
2. Confidentiality.
a. Employee acknowledges that during the course of his association with
Pego, he has had and may in the future be given access to or may
become acquainted with Confidential Information and Trade Secrets of
Pego. As used in this Section 2, Confidential Information and Trade
Secrets of Pego means all trade practices, supplier and customers
lists, business and/or marketing plans, financial information, and all
other compilations of information that relate to the business of Pego
and its predecessors, affiliates, customers or suppliers, and which
have not been disclosed by Pego to the public. Pego and Employee
acknowledge that the Confidential Information and Trade Secrets of
Pego, as such may exist from time to time, are valuable, confidential,
special and unique assets of Pego, expensive to produce and maintain
and essential for the profitable operation of the Environmental
Business.
b. At all times from and after the date of this Agreement, except with
Buyer's express prior written consent, Employee shall not, directly or
indirectly, communicate, disclose or divulge to any Person (as defined
in Section 4 hereof), or use for his benefit or the benefit of any
Person, in any manner, any Confidential Information and Trade Secrets
of Pego, except as may be required by law.
3. Noncompetition. For a period of five years commencing on the Closing
Date, and for one year following the termination of Employee's employment
with the Company by the Employee or by the Company with cause, Employee
shall not, except with prior written consent of Buyer or Pego, or in the
proper course of any consulting relationship with Pego or Buyer, directly
or indirectly, in any capacity, for the benefit of any Person:
a. Within the geographical area consisting of the United States,
establish, engage, own, manage, operate, join or control, or
participate in the establishment, ownership, management, operation or
control of, or be a director, officer, employee, salesman,
agent/broker or representative of, or be a consultant to, any Person
in connection with the Environmental Business or similar organization
or entity which does or could be considered in competition with Buyer
(only to the extent of Buyer's conduct of business similar to the
business of Pego) or Pego or any of their subsidiaries and affiliates
(collectively, "Competitors"); provided, however, that Employee may
own up to 5% of the issued and outstanding securities of a
publicly-traded company in the above-described industries.
b. Solicit, interfere with, employ, endeavor to entice away from Pego, or
any subsidiary of Pego, any person who has been an employee of Pego or
any subsidiary or Pego in the preceding twelve-month period
immediately preceding the Closing Date (as such term is defined in the
Stock Purchase Agreement) and thereafter.
4. Definition of "Person". For the purposes of this Agreement, the term
"Person" means any individual, sole proprietorship, joint venture,
partnership, corporation, association, cooperation, trust, estate,
government (or any branch, subsidiary or agency thereof), governmental,
administrative or regulatory authority, or any other entity of any nature
whatsoever.
<PAGE>
5. Reliance. Employee acknowledges that this Agreement has been executed
concurrently with the closing of the Stock Purchase Agreement and the
execution of an Employment Agreement with Employee, and that his compliance
with the terms of this Agreement is an essential part of the transactions
contemplated by the Stock Purchase Agreement. Employee further acknowledges
that his compliance with the provisions of Sections 2 and 3 of this
Agreement (hereinafter referred to as the "Restrictive Covenants") is a
material part of the consideration bargained for by Buyer hereunder and
under the Stock Purchase Agreement and Employment Agreement. Employee
agrees to be bound by the provisions of Sections 2 and 3 of this Agreement
to the maximum extent permitted by law, it being the intent and spirit of
the parties that the provisions of Sections 2 and 3 of this Agreement shall
be enforceable. However, the parties further agree that if any portion of
any of the Restrictive Covenants or their application is construed to be
invalid or unenforceable by a competent court, then the other portions
thereof and the other Restrictive Covenants and their application shall not
be affected thereby and shall be enforceable. If any of the Restrictive
Covenants shall for any reason be held to be excessively broad as to
duration, geographical scope, property, subject or similar factor, then the
court making such determination shall have the power to reduce or limit
such scope, duration, area or other factor so as to be enforceable to the
maximum extent compatible with the applicable law, and such Restrictive
Covenant shall then be enforceable in its reduced or limited form.
6. Equitable Relief and Other Remedies. Employee acknowledges that any
breach by him of any of the Restrictive Covenants will result in
irreparable injury to Buyer, Pego and/or their respective subsidiaries or
affiliates, for which money damages could not be adequate compensation. In
the event of any such breach, Buyer and Pego shall be entitled, in addition
to all other rights and remedies which Buyer and Pego may have at law or in
equity, to have an injunction issued by any competent court enjoining and
restraining Employee and all other Persons involved therein from continuing
such breach. Buyer and Pego shall be entitled to such injunction without
the necessity of posting any bond, but if a bond is nonetheless required by
the court entertaining the motion for injunction, the parties hereto agree
that a bond in the amount of $1,000 is appropriate. The existence of any
claim or cause of action which Employee, or any other Person, may have
against Buyer, Pego or any subsidiary or affiliate of Buyer or Pego shall
not constitute a defense or bar to the enforcement of any of the
Restrictive Covenants. If Buyer or Pego must resort to litigation to
enforce any of the Restrictive Covenants which as a fixed term, then such
term shall be extended for a period of time equal to the period of such
breach, beginning on the date of a final court order (without further right
of appeal) acknowledging the validity of such Restrictive Covenant or, if
later, the last day of the original fixed term of the Restrictive Covenant.
7. Condition Precedent. This Agreement shall be effective as of the
Closing Date under the Stock Purchase Agreement and the consummation of the
Stock Purchase Agreement shall be a condition precedent to the obligations
of the parties hereunder.
8. Miscellaneous.
a. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes all prior negotiations, understandings, agreements,
arrangements and understandings, both oral and written, among the
parties hereto with respect to such subject matter.
<PAGE>
b. Amendment. This Agreement may not be amended or modified in any
respect, except by the mutual written agreement of the parties hereto.
c. Early Termination. In the event Employee's employment with Pego is
terminated without cause, then Section 3 of this Non-Competition
Agreement shall be terminated. In the event Buyer is or becomes in
default of the Stock Purchase Agreement referred to above, and if such
default has not been cured 30 days after the receipt by Buyer of
written notice of the default, which shall include specific facts
constituting the default, then Section 3 of the Non-Competition
Agreement between the Buyer and Michael Caruana shall be terminated;
provided, however, that such Section 3 of the Non-Competition
Agreement shall be reinstated if the default is later cured.
d. Waivers and Remedies. The waiver by any of the parties hereto of any
other party's prompt and complete performance, or breach or violation,
of any provision of this Agreement shall not operate nor be construed
as a waiver of any subsequent breach or violation, and the failure by
any of the parties hereto to exercise any right or remedy which it may
possess hereunder shall not operate nor be construed as a bar to the
exercise of such right or remedy by such party upon the occurrence of
any subsequent breach or violation.
e. Descriptive Headings. Descriptive headings contained herein are for
convenience only and shall not control or affect the meaning or
construction of any provision of this Agreement.
f. Counterparts. This Agreement may be executed in any number of
counterparts and by the separate parties hereto in separate
counterparts, each of which shall be deemed to be one and the same
instrument.
g. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given (i) on the date of receipt, if
delivered personally; (ii) two (2) days after being mailed by
registered or certified mail, (iii) upon delivery by commercial
overnight courier (e.g., Federal Express, DHL, etc.), return receipt
or confirmation of delivery requested to the parties at the following
addresses (or at such other address for a party as shall be specified
by like notice):
If to Employee:
___________________________
___________________________
___________________________
If to Buyer
The Hartcourt Companies, Inc.
19104 Norwalk Blvd.
Artesia, California 90701
Attn: Mr. Alan V. Phan
Facsimile: (562) 403-1130
<PAGE>
with a copy to:
American Equities LLC
11400 Olympic Blvd. Suite 212
Santa Monica, California 90064
Telephone: (310) 785-0330
Facsimile: (310) 312-9521
h. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective
personal representatives, heirs, successors and assigns.
i. Applicable Law. This Agreement shall be governed by, and shall be
construed, interpreted and enforced in accordance with, the laws of
the state of California without regard to its conflict of laws
principles to the extent that such principles would require the
application of laws other than the state of California.
j. Consent to Jurisdiction. Each of the parties hereto irrevocably
consents to the exclusive jurisdiction of the federal and state courts
located in Los Angeles, California in any and all actions between or
among any of the parties hereto, whether arising hereunder or
otherwise.
k. Attorneys' Fees. In the event any arbitration, litigation or other
legal action or proceeding is brought between the parties to enforce
any provision of this Agreement or because of an alleged dispute,
breach, default or misrepresentation in connection with any provision
of this Agreement, the prevailing party will be entitled to an award
of judgment for all reasonable costs incurred by reason of such
proceeding, including reasonable attorneys' fees even if incident to
appellate, bankruptcy, post- judgment or alternative dispute
resolution proceedings, travel expenses, per diem expenses, witness
fees, investigative fees, paralegal fees and all other reasonable
charges billed by an attorney for the prevailing party. A party not
entitled to recover its costs shall not recover attorneys' fees.
IN WITNESS WHEREOF, the parties hereto have placed their hands as of the
day and year first above written.
BUYER
THE HARTCOURT COMPANIES, INC.
By:__________________________________
Alan V. Phan, President
SELLER/EMPLOYEE:
By:__________________________________
<PAGE>
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AGREEMENT is entered into on the 30th day of September, 1997, by and
among The Hartcourt Companies, Inc., a Utah corporation (AHartcourt") or its
assignee ("Buyer"), Michael V. Caruana ("Caruana") and Simerco, Ltd., a British
Virgin Islands Corporation ("Simerco," and together with Caruana, the "Sellers")
and Pego Systems, Inc., a California corporation ("Pego").
WHEREAS, the Buyer and the Sellers have previously entered into that
certain Stock Purchase Agreement, dated June , 1997 (the Stock Purchase
"Agreement");
WHEREAS, the Buyers and Sellers have agreed that certain real estate will
be included in the sale as an asset owned by Pego;
NOW THEREFORE, the parties amend the Stock Purchase Agreement as follows:
1. Section 1.I(1) is hereby deleted and restated as follows:
(1) The Purchase Price shall be Two Million Four Hundred Fifty
Thousand Dollars ($2,450,000), including the consideration to be
paid pursuant to the non-compete agreement under Section 1.a.ii
below.
2. A subparagraph 1.i.(2)(b) is amended as follows:
(d) The sum of A$150,000" is deleted and replaced with $350,000,
Such that $350,000 of the Purchase Price will be paid in
Hartcourt Restricted Common Stock.
3. Section 2.k.i. is amended as follows:
The first sentence which states APego does not own any real property
is deleted and replaced with AAt the Closing Date, Pego will own good
and marketable title to the Real Property, described as:
Parcel 1 as shown on Parcel Map 11497, in the City of Signal
Hill, in the County of Los Angeles, State of California, as per
map filed in book 113 pages 78 and 79 of Parcel Maps, in the
Office of the County Recorder of said County.
Such Real Property secures a first note and deed of trust in favor of
Squire Fridell, III and Suzanne Fridell, Trustees under the Fridell
Revocable Family Trust dated April 27, 1983, in the approximate amount
of $1,213,751. There are no other encumbrances on the title of such
Real Property. Such note and trust deed are in good standing, and
there is no event, either currently or with the passage of time or
with notice, which would cause or result in a default under such note
and deed of trust. The beneficiary of such note has consented to the
transfer of the Real Property to Pego.
4. Buyer shall not have any restriction against terminating any lease of space
in the Real Property.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
BUYER:
THE HARTCOURT COMPANIES, INC.,
a Utah corporation
By: /s/ Alan V. Phan
-----------------------------
Alan V. Phan, President
SELLERS:
MICHAEL V. CARUANA PEGO SYSTEMS, INC.,
a California corporation
Michael V. Caruana By: /s/ Michael V. Caruana
------------------ ----------------------------------
Michael V. Caruana Michael V. Caruana, President
SIMERCO TRADING LTD.,
a British Virgin Islands Corporation
By: /s/ Nicholas Limer
-------------------------
Nicholas Limer,
Attorney in fact
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report included in the Registration
Statement on Form 8-K dated October 6, 1997 relating to the financial statements
of Pego Systems, Inc.
Harlan & Boettger, LLP
San Diego, California
October 21, 1997
