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 29, 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
(Commission File No.) (IRS 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 29, 1997 The Hartcourt Companies, Inc., a Utah Corporation
(Registrant), completed the purchase of all of the issued and outstanding stock
of Electronic Components & Systems, Inc. (ECS) and Pruzin Technology, Inc. (PTI)
for $11,400,000. The purchase price was paid at closing as follows: $250,000
cash, a promissory note for $250,000, $3,169,000 (3,169 shares) of Hartcourt
Cos. Series D Preferred Stock, and $7,731,000 (2,500,000 shares) of restricted
Hartcourt Cos. Common Stock. In addition, the Company agreed infuse $2,000,000
of equity capital, in cash and cash equivalence or securities.
ECS specialized in high technology contract manufacturing and assembly
of printed circuit boards, phone and cable wires, coil winding, and plastic
injection. PTI is a pioneer in the new technology of ball-grid array connection
for the semi-conductor industry. ECS operates out of four facilities,, the
largest of which is in the maquiladora free trade zone in Sonora, Mexico. The
other three facilities are located in Nogales, Tucson and Chandler, Arizona. The
total work force includes 50 employees in the U.S. and 749 in Mexico.
ECS has grown steadily since its inception in 1988. Total revenues for
the fiscal year ending on December 31, 1996 were $12.8 million with net income
of $813,069. The Company will leave the management of ECS in place and operate
ECS as a subsidiary of the Company.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited financial statements of Electronic Components & Systems, Inc. for
the year ended December 31, 1996 and the seven months ended July 31, 1997 are
filed with this report.
(b) Pro forma Financial Information.
The unaudited pro forma condensed financial statements are filed with this
report.
(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.
<PAGE>
Date: November 11, 1997 By:__________________________________
Dr. Alan Phan
President
<PAGE>
FINANCIAL STATEMENTS INDEX
Audited financial statements of Electronic Components & Systems, Inc. for
the year ended December 31, 1996 and the seven months ended July 31, 1997.
Unaudited pro forma condensed consolidated balance sheet of Registrant as of
September 30, 1997 and December 31, 1996. Unaudited pro forma condensed
consolidated statements of income for the nine and twelve months ended September
30, 1997 and December 31, 1996, respectively.
Exhibits Index
2. Acqusition of Assets - Agreement between Registrant, Electronic Components
& Systems, Inc.,
Pruzin Technologies, Inc. and the majority shareholder of Electronic Components
& Systems, Inc. and Pruzin Technologies, Ic. dated October 28, 1997.
3. Certificate of Incorporation- Designation for Series D Preferred
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.:
We have audited the accompanying combined balance sheets of Electronic
Components and Systems, Inc. (an Arizona corporation) and Pruzin Technologies,
Inc. (an Arizona corporation) as of July 31, 1997 and December 31, 1996, and the
related combined statements of income, shareholders' equity and cash flows for
the seven months and year then ended. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial
position of Electronic Components and Systems, Inc. and Pruzin Technologies,
Inc. as of July 31, 1997 and December 31,
1996, and the results of its operations and its cash flows for the seven months
and year then ended, in conformity with
generally accepted accounting principles.
San Diego, California
September 19, 1997
4
<PAGE>
5
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
COMBINED BALANCE SHEETS
ASSETS As of
As of July 31, December 31,
CURRENT ASSETS 1997 1996
--------------- ----------
<S> <C> <C>
Accounts receivable (Note B) $1,429,012 $1,225,925
Inventory, net (Note C) 1,921,920 1,784,069
Shareholder's loan receivable 249,928 304,678
Employee receivables 20,116 30,896
Prepaid expenses 24,860 24,860
-------------- -----------
TOTAL CURRENT ASSETS 3,645,836 3,370,428
PROPERTY AND EQUIPMENT, net (Note D) 1,557,993 1,687,230
OTHER ASSETS 983 983
--------------- -------------
$ 5,204,812 $5,058,641
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 57,538 $ 58,298
Accounts payable 1,211,081 1,411,272
Accrued expenses (Note E) 270,855 133,398
Due to factor (Note F) 592,972 535,975
Notes payable, related party (Note G) 60,000 20,000
Note payable, current portion (Note H) 80,893 75,306
Capital lease obligations, current portion (Note I) 153,366 125,983
------------- ------------
TOTAL CURRENT LIABILITIES 2,426,705 2,360,232
NOTE PAYABLE, net of current portion (Note H) 81,655 130,044
CAPITAL LEASE OBLIGATIONS, net of current portion (Note I) 500,078 526,844
MINORITY INTEREST (Note A) (37,367) 16,925
-------------- ------------
2,971,071 3,034,045
COMMITMENTS AND CONTINGENCIES (Note I) - -
SHAREHOLDERS' EQUITY (Note J)
Common stock (Note J) 91,200 91,200
Additional paid-in-capital 126,800 126,800
Retained earnings 2,015,741 1,806,596
------------- -----------
TOTAL SHAREHOLDERS' EQUITY 2,233,741 2,024,596
------------- -----------
$ 5,204,812 $5,058,641
============ ==========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
COMBINED STATEMENTS OF INCOME
Seven months
ended Year ended
July 31, 1997 December 31, 1996
<S> <C> <C>
NET SALES $7,348,593 $12,858,123
COST OF SALES 5,573,674 10,080,936
----------- -----------
Gross Profit 1,774,919 2,777,187
OPERATING EXPENSES
Selling, general and administrative 1,441,858 1,885,076
Depreciation and amortization 230,665 257,634
------------ -------------
TOTAL OPERATING EXPENSES 1,672,523 2,142,710
----------- ------------
INCOME FROM OPERATIONS 102,396 634,477
OTHER INCOME (EXPENSES)
Minority interest in combined companies, net loss 54,292 8,075
Interest expense (137,870) (143,398)
Interest income - 143
Other income 190,327 313,772
------------ ------------
TOTAL OTHER INCOME 106,749 178,592
------------ ------------
INCOME BEFORE INCOME TAXES 209,145 813,069
Income taxes (Note A) - -
---------------- ----------------
NET INCOME $ 209,145 $ 813,069
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Retained Shareholders'
Common Stock Additional
Amount Paid-in-Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 162 $ 16,200 $126,800 $1,236,249 $1,379,249
Issuance of common stock 100 100,000 - - 100,000
Minority interest (25) (25,000) - - (25,000)
Net income - - - 813,069 813,069
Distributions to shareholders - - - (242,722) (242,722)
------------- ------------- ------------- ----------- -----------
Balance, December 31, 1996 237 91,200 126,800 1,806,596 2,024,596
Net income - - - 209,145 209,145
------------- ------------- -------------- ------------ -----------
Balance, July 31, 1997 237 $ 91,200 $ 126,800 $2,015,741 $2,233,741
</TABLE>
The accompanying notes are an integral part of
these financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
Seven months
ended Year ended
July 31, 1997 December 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 209,145 $ 813,069
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 230,665 257,634
Minority interest in combined companies, net loss (54,292) (8,075)
Changes in operating assets and liabilities:
Accounts receivable (203,087) (218,211)
Inventory (137,851) (61,657)
Employee receivables 10,780 (14,432)
Prepaid expenses - (19,360)
Other assets - (983)
Accounts payable (200,191) (496,115)
Accrued expenses 137,457 (375,141)
Due to factor 56,997 535,975
---------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,623 412,704
---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (31,775) (228,607)
---------- -------------
NET CASH USED IN INVESTING ACTIVITIES (31,775) (228,607)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments received on loans to shareholder 54,750 42,406
Net payments on line of credit - (96,177)
Proceeds from note payable, related party 40,000 20,000
Distributions to shareholders - (242,722)
Payments on notes payable (42,802) (35,650)
Payments on capital lease obligations (69,036) (38,218)
--------- -----------
NET CASH USED IN FINANCING ACTIVITIES (17,088) (350,361)
--------- ----------
NET INCREASE (DECREASE) IN CASH 760 (166,264)
CASH, BEGINNING OF PERIOD (58,298) 107,966
--------- ----------
BANK OVERDRAFT, END OF PERIOD $ (57,538) $ (58,298)
========= ===========
</TABLE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
ASummary of Significant Accounting Policies:
Organization and Nature of Operations
The combined financial statements include the accounts of Electronic
Components and Systems, Inc. (ECS), an Arizona corporation incorporated on
November 24, 1987, and Pruzin Technologies, Inc. (Pruzin), an Arizona
corporation incorporated on November 20, 1996, (together "the Company"). The
majority shareholder of ECS is also the majority shareholder of Pruzin. All
significant intercompany payables and receivables have been eliminated in
the combining process.
The Company's principal operations are the wholesale manufacturing and
selling of cabling and other electronic components to the telecommunication
and computer industries. ECS operated under the name Electronic Components
and Services, Inc. until June 13, 1996, at which date the name was changed
to Electronic Components and Systems, Inc.
The Company maintains manufacturing operations under maquiladora agreements
in Nogales, Mexico. A substantial amount of the Company's cables and
electronic components are manufactured and assembled at the Mexico facility.
The Company also has smaller manufacturing facilities in Tucson and
Chandler, Arizona and a distribution facility in Nogales, Arizona.
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.
Cash and Equivalents
For purpose of the statements of cash flows, all highly liquid investments
with a maturity of three months or less are considered to be cash
equivalents. There were no cash equivalents at July 31, 1997 and December
31, 1996.
Concentrations
In the normal course of business, the Company extends unsecured credit to
customers principally in the United States and Mexico. Credit is extended
based on an evaluation of the customer's financial condition. Credit losses
have been within management's expectations. The Company's sales are
substantially all to two large electronic components manufacturers, one of
which is located in Nogales, Mexico (Note M).
As mentioned above, the Company maintains manufacturing operations under
maquiladora agreements in Nogales, Mexico which includes plant and equipment
with a net book value estimated at $300,000. It is always reasonably
possible that operations located outside an entity's home country will be
disrupted in the near term, but management believes it is remote (Note E).
A. Summary of Significant Accounting Policies: (continued)
10
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventory costs include material, labor and manufacturing overhead.
Property and Equipment
Property and equipment is stated at cost and depreciated using an
accelerated depreciation method over the estimated useful lives of the
assets, which range from three to twelve years. Maintenance, repairs and
minor renewals are charged to operations as incurred. Major replacements
or betterments are capitalized. When assets are retired or otherwise
disposed, the related cost and accumulated depreciation are eliminated
from the respective accounts and any gain or loss on disposition is
reflected as income or expense.
Minority Interest
Minority interest represents the 25% shareholder's interest in the net
assets and operations of Pruzin Technologies, Inc.
Revenue Recognition
Revenue from product sales is generated primarily from the manufacture
and sale of cabling and other electronic components. Revenue is
recognized when the product is shipped.
Income Taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporate income
taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal or state income taxes has been
included in the financial statements.
Fair Value
The carrying amounts reflected in the balance sheets for cash,
receivables, loans, accounts payable and accrued expenses approximate the
respective fair values.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
11
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
B. Accounts Receivable:
Accounts receivable at July 31, 1997 and December 31, 1996 consists of
the following:
July 31 December 31,
1996
Accounts receivable, unassigned $ 595,074$ 449,315
Accounts receivable, assigned (Note F) 833,938 776,610
1,429,012 1,225,925
Less: Allowance for doubtful accounts - -
------------------------------
$1,429,012 $1,225,925
========== ==========
As stated in Note A, the Company manufactures and sells cabling and
other electronic components to the telecommunication and computer
industries. Sales are made based upon customer-specific orders.
Therefore, management believes that all accounts receivable as of July
31, 1997 and December 31, 1996 were fully collectible, and no allowance
for doubtful accounts was recorded.
C. Inventory:
Inventory at July 31, 1997 and December 31, 1996 is summarized as
follows:
July 31 December 31,
1996
Raw materials $1,772,998 $1,651,294
Work-in-process 5,888 -
Finished goods 143,034 132,775
----------- ------------
1,921,920 1,784,069
Less reserve for obsolescence - -
------------ ----------------
Inventory, net $1,921,920 $1,784,069
========== =========
12
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
D. Property and Equipment:
Property and equipment at July 31, 1997 and December 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
July 31 December 31,
1997 1996
<S> <C> <C>
Machinery and equipment $2,099,046 $2,023,914
Furniture and fixtures 92,139 92,139
Office equipment 8,544 -
Leasehold improvements 8,820 8,820
Vehicles 17,752 -
------------ ---------------
2,226,301 2,124,873
Less accumulated depreciation and
amortization (668,308) (437,643)
----------- -----------
Property and equipment, net $1,557,993 $1,687,230
========== ==========
</TABLE>
E. Accrued Expenses:
Accrued expenses at July 31, 1997 and December 31, 1996 are summarized as
follows:
July 31, December 31,
1997 1996
Mexican operating costs $270,855 $133,398
The above represents amounts accrued by management as expenses related to
Mexican government and traditionally cultural requirements connected with
foreign entities doing business in Mexico. The premise for this accrual is
the possibility of the foreign entity discontinuing local operations and
leaving Mexican workers jobless.
F. Due to Factor:
On March 13, 1996, the Company entered into a factoring agreement with an
unrelated third party for credit administration purposes. This continuing
contract is automatically renewable for successive periods of three months
unless terminated by written notice.
Under the factoring agreement, the factor purchases substantially all
trade accounts receivable, mainly for one of the Company's major
customers, General Instrument, at a price equal to the net face amount of
the receivable, less a discount of 1.25% if the account is paid within
thirty days of the purchase. The Company may take advances of up to 75% of
the net face amount of the accounts sold to the factor. The Company is
contingently liable to the factor for merchandise disputes, customer
claims, and other chargebacks on eligible receivables. As collateral, the
Company has granted a continuing security interest in substantially all
assets to the factor.
13
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
F. Due to Factor: (continued)
The proceeds received from the factor for the seven months ended July 31,
1997
and year ended December, 31, 1996 totaled $3,631,383 and $5,751,199,
respectively. At July 31, 1997 and December 31, 1996, the balance due to
the factor for advances taken prior to the collection of the accounts
receivable was $592,972 and $535,975, respectively.
G. Notes Payable, Related Party:
Notes payable, related party at July 31, 1997 and December 31, 1996
consist of the following:
<TABLE>
<CAPTION>
July 31, December 31,
1997 1996
Unsecured note payable due to an employee of the Company,
interest at 10%
per annum, interest only, monthly payments of $166.67
<S> <C> <C>
with principal due upon demand $20,000 $20,000
Unsecured note payable due to a relative of the president
of the Company,
interest at 10% per annum, interest only, monthly payments of
$333.33 with principal due upon demand 40,000 -
-------- -----------
60,000 20,000
Less current portion (60,000) (20,000) --------
-------
$ - $ -
</TABLE>
===========
==========
H. Note Payable:
Note payable at July 31, 1997 and December 31, 1996 consists of the
following:
July 31,December 31,
1997 1996
Note payable due to an unrelated third party, maturing in June 1999, with
monthly installments of $ 8,038.85, including interest at 12.29%,
collateralized by equipment and personally guaranteed by the
shareholders $162,548 $205,350
Less current portion (80,893) (75,306)
--------- ---------
$ 81,655 $130,044
========= ========
14
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
H. Notes Payable: (continued)
Aggregate maturities of debt at July 31, 1997 are as follows:
Period Ending
July 31, Amount
1998 $ 80,893
1999 81,655
2000 -
2001 -
2002 -
------------
$162,548
I. Commitments and Contingencies:
Operating Leases
The Company leased its Nogales, Arizona facility under a noncancelable
operating lease from an unrelated third party through August 1996.
Thereafter, the lease has been on a month-to-month basis. During 1996, the
Company entered into two five year noncancelable operating leases with
unrelated third parties for its Tucson and Chandler, Arizona facilities
which expire through November 2001. The Company also leases its vehicles
under noncancelable operating leases which expire through June 1999.
Rental expense for the facilities for the seven months ended July 31, 1997
and the year ended December 31, 1996 was $242,527 and $242,452,
respectively.
At July 31, 1997, minimum annual rent payable under the noncancelable
leases in each of the next five periods ending July 31 and thereafter are
as follows:
<TABLE>
<CAPTION>
Rent Vehicles Total
<S> <C> <C> <C> <C>
1998 $211,649 $23,158 $234,807
1999 215,032 15,362 230,394
2000 218,584 - 218,584
2001 188,750 - 188,750
2002 48,000 - 48,000
Thereafter - - -
Total $882,015 $38,520 $920,535
======== ======= ========
</TABLE>
The noncancelable operating leases for the facilities provide that the
Company pays for property taxes, insurance and certain other operating
expenses applicable to the leased premises.
15
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
I. Commitments and Contingencies: (continued)
Capital Leases
The Company leases part of its equipment under various capital leases. The
economic substance of the capital lease agreements is that the Company
finances the acquisition of machinery by making monthly payments totaling
$18,032 over a period ranging from thirty-six to sixty months through June
2002, and accordingly, the capital leases are reflected as a capital lease
obligation and the assets as a component of property and equipment. The
following is an analysis of the book value of the leased assets included
in property and equipment at July 31, 1997 and December 31, 1996:
July 31, December 31,
1997 1996
Cost $760,697 $691,045
Less accumulated depreciation (168,753) (56,620)
$591,944 $634,425
======== ========
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments at July 31, 1997 are as follows:
1998 $ 216,382
1999 216,382
2000 161,684
2001 161,684
2002 48,742
----------
804,874
Less amount representing interest
(151,430)
653,444
Less current portion of capital lease obligations
(153,366)
$500,078
At July 31, 1997, $539,946 of the total capital lease obligations was
personally guaranteed by the principal shareholder of the Company.
16
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
J. Shareholders' Equity
Common Stock
Electronic Components and Systems, Inc. and Pruzin Technologies, Inc. have
different capital structures which are summarized as follows at July 31,
1997 and December 31, 1996:
July 31, December 31,
Electronics Components and Systems, Inc.: 1997 1996
----------------------------------------- -------------------
Common stock, $100 par value, 10,000 shares
authorized, 162 shares issued and outstanding $16,200 $16,200
Pruzin Technologies, Inc.:
Common stock, no par value, 1,000,000 shares authorized, 100 shares issued
and outstanding, of which 25 shares represent a minority interest
in the Company 75,000 75,000
$91,200 $91,200
======= =======
S Corporation Distributions
For the seven months ended July 31, 1997 and December 31, 1996, the
Company distributed $ 0 and $242,722, respectively, to its shareholders.
These amounts represent a portion of the S Corporation earnings through
December 31 of each year.
K. Supplemental Cash Flow Information:
Supplemental disclosures of cash flow information for the seven months
ended July 31, 1997 and year ended December 31, 1996 are summarized as
follows:
July 31,December 31,
1997 1996
Cash paid for interest and income taxes:
Interest $137,870 $143,398
Noncash investing and financing activities:
Assets purchased through capital leases$ 69,652 $691,045
Assets purchased through note payable- 241,000
Common stock issued for property and
equipment contributed by shareholders- 100,000
17
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
AND PRUZIN TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
L. Profit Sharing Plan:
The Company maintains a defined contribution plan for its U.S. employees
(the Plan) that provides for tax deferred benefits under Section 401(K)
of the Internal Revenue Code. The Plan allows employees to make
contributions, 25% of which will be matched by the Company, up to 5% of
an employee's gross salary or the amount allowed by law, as defined. The
Company has made matching contributions to the Plan of approximately
$3,489 and $3,686 for the seven months ended July 31, 1997 and year ended
December 31, 1996, respectively. The Company pays the administrative
costs of the Plan, which approximates $2,000 per year.
M. Major Customers:
During the seven months ended July 31, 1997, the Company had one major
customer and during the year ended December 31, 1996, the Company had two
major customers, sales to each of which exceeded 10% of the Company's
total sales. Sales to these customers for the seven months ended July 31,
1997 and year ended December 31, 1996 totaled $4,912,281 and $10,486,139,
respectively.
One of the two major customers is General Instrument which is located in
Nogales, Mexico. Sales to General Instrument for the seven months ended
July 31, 1997 and year ended December 31, 1996 totaled $4,912,281 and
$8,505,498, respectively, which represents 67% and 66% of net sales for
the respective period.
N. 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 in exchange for Hartcourt stock and cash. The
transaction is expected to close in October 1997.
Currently, Jim Pruzin, the majority shareholder of Pruzin Technologies,
Inc., is in negotiations with the minority shareholder to purchase the
minority shareholder's 25% interest. The negotiations center around a
consulting and commission agreement signed at the time the Company
purchased its 75% share of Pruzin Technologies, Inc. Under the terms of
the original agreement, the Company is required to remit $5,000 per month
in consulting fees plus 5% of total combined company sales to the former
owner. The proposed agreement would allow for the buy-out of the 25%
minority interest and terminate all future royalties.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
ELECTRONIC COMPONENTS AND SYSTEMS, INC.:
We have audited the accompanying balance sheets of Electronic Components and
Systems, Inc. (an Arizona corporation) as of December 31, 1995 and 1994, and the
related statements of income, shareholders' equity and cash flows for the years
then ended. 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 Electronic Components and
Systems, Inc. as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
San Diego, California
September 19, 1997
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
BALANCE SHEETS
ASSETS
As of December 31,
CURRENT ASSETS 1995 1994
--------------- --------
<S> <C> <C>
Cash $ 107,966 $ 90,810
Accounts receivable (Note A) 1,007,714 17,085
Inventory, net (Note B) 1,722,412 -
Shareholder's loan receivable 347,084 326,173
Employee receivables 16,464 10,688
Prepaid expenses 5,500 9,000
------------- -----------
TOTAL CURRENT ASSETS 3,207,140 453,756
PROPERTY AND EQUIPMENT, net (Note C) 684,212 27,025
------------ ----------
$3,891,352 $ 480,781
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,907,387 $ 24,612
Accrued expenses (Note E) 508,539 381,598
Line of credit (Note D) 96,177 -
------------ --------------
TOTAL CURRENT LIABILITIES 2,512,103 406,210
COMMITMENTS AND CONTINGENCIES (Note F) - -
SHAREHOLDERS' EQUITY (Note H)
Common stock, $100 par value, 10,000 shares
authorized; 162 shares issued and outstanding 16,200 16,200
Additional paid-in-capital 126,800 126,800
Retained earnings (deficit) 1,236,249 (68,429 )
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,379,249 74,571
----------- ----------
$3,891,352 $ 480,781
========== =========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
STATEMENTS OF INCOME
Year Ended December 31,
1995 1994
<S> <C> <C>
NET SALES $11,201,158 $4,204,694
COST OF SALES 8,489,817 3,411,228
----------- ----------
Gross Profit 2,711,341 793,466
OPERATING EXPENSES
Selling, general and administrative 1,359,752 968,691
Depreciation and amortization 117,579 10,765
------------ ------------
TOTAL OPERATING EXPENSES 1,477,331 979,456
----------- ------------
INCOME (LOSS) FROM OPERATIONS 1,234,010 (185,990)
OTHER INCOME (EXPENSES)
Interest expense (6,384) (772)
Interest income 3,422 382
Loss on disposal of assets (7,076) (2,496)
Other income 305,066 307,440
------------ ------------
TOTAL OTHER INCOME 295,028 304,554
------------ ------------
INCOME BEFORE INCOME TAXES 1,529,038 118,564
Income taxes (Note A) - -
---------------- ----------------
NET INCOME $ 1,529,038 $ 118,564
=========== ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Retained Total
Earnings Shareholders'
Common Stock Additional
Shares Amount Paid-in-Capital (Deficit) Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 162 $16,200 $126,800 $ (186,993) $ (43,993)
Net income - - - 118,564 118,564
------------- ----------- ------------- ------------ -----------
Balance, December 31, 1994 162 16,200 126,800 (68,429) 74,571
Net income - - - 1,529,038 1,529,038
Distributions to shareholders - - - (224,360) (224,360)
------------- ----------- -------------- ----------- -----------
Balance, December 31, 1995 162 $ 16,200 $ 126,800 $1,236,249 $1,379,249
=========== ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994
------------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $1,529,038 $ 118,564
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 117,579 10,765
Loss on disposal of assets 7,076 2,496
Changes in operating assets and liabilities:
Accounts receivable (990,629) 65,116
Inventory (1,722,412) -
Employee receivables (5,776) (697)
Prepaid expenses and other assets 3,500 (6,500)
Accounts payable 1,882,775 (149,372)
Accrued expenses 126,941 244,311
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 948,092 284,683
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (781,842) (7,364)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (781,842) (7,364)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans to shareholder (20,911) (189,849)
Net proceeds from line of credit 96,177 -
Distributions to shareholders (224,360) -
------------ --------------
NET CASH USED IN FINANCING ACTIVITIES (149,094) (189,849)
------------ ----------
NET INCREASE IN CASH 17,156 87,470
CASH, BEGINNING OF YEAR 90,810 3,340
------------ ------------
CASH, END OF YEAR $ 107,966 $ 90,810
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
23
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
ASummary of Significant Accounting Policies:
Organization and Nature of Operations
Electronic Components and Systems, Inc. (the "Company") was incorporated on
November 24, 1987 in the state of Arizona. The Company's principal
operations are the wholesale manufacturing and selling of cabling and other
electronic components to the telecommunication and computer industries. The
Company operated under the name Electronic Components and Services, Inc.
until June 13, 1996, at which date the Company changed its name to
Electronic Components and Systems, Inc.
The Company maintains manufacturing operations under maquiladora agreements
in Nogales, Mexico. A substantial amount of the Company's cables and
electronic components are manufactured and assembled at the Mexico facility.
The Company also has a smaller manufacturing facility in Tucson, Arizona and
a distribution facility in Nogales, Arizona.
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.
Cash and Equivalents
For purpose of the statements of cash flows, all highly liquid investments
with a maturity of three months or less are considered to be cash
equivalents. There were no cash equivalents as of December 31, 1995 and
1994.
Accounts Receivable
Management believes that all accounts receivable as of December 31, 1995 and
1994 were fully collectible. Therefore, no allowance for doubtful accounts
was recorded.
Concentrations
In the normal course of business, the Company extends unsecured credit to
customers principally in the United States and Mexico. Credit is extended
based on an evaluation of the customer's financial condition. Credit losses
have been within management's expectations. The Company's sales are
substantially all to three large electronic components manufacturers located
in Nogales, Mexico (Note J).
As mentioned above, the Company maintains manufacturing operations under
maquiladora agreements in Nogales, Mexico which includes plant and equipment
with a net book value estimated at $300,000. It is always reasonably
possible that operations located outside an entity's home country will be
disrupted in the near term but management believes it is remote (Note E).
24
<PAGE>
A. Summary of Significant Accounting Policies: (continued)
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventory costs include material, labor and manufacturing overhead.
Property and Equipment
Property and equipment is stated at cost and depreciated using an
accelerated depreciation method over the estimated useful lives of the
assets, which range from three to five years. Maintenance, repairs and
minor renewals are charged to operations as incurred. Major replacements
or betterments are capitalized. When assets are retired or otherwise
disposed, the related cost and accumulated depreciation are eliminated
from the respective accounts and any gain or loss on disposition is
reflected as income or expense.
Revenue Recognition
Revenue from product sales is generated primarily from the manufacture
and sale of cabling and other electronic components. Revenue is
recognized when the product is shipped.
Income Taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporate income
taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal or state income taxes has been
included in the financial statements.
Fair Value
The carrying amounts reflected in the balance sheets for cash,
receivables, loans, accounts payable and accrued expenses approximate the
respective fair values.
Acquisition
In July 1995 the Company acquired substantially all of the assets of
Artisoft, Inc., which principally consisted of machinery and equipment
valued at $500,000. The transaction was completed through a sales and
purchase agreement whereby $4.00 per unit on the first 125,000 units sold
to Artisoft, Inc. was credited in the form of a reduction in total
invoice cost. As of December 31, 1995 all amounts owed on the sales and
purchase agreement had been remitted.
25
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
B. Inventory:
Inventory at December 31, 1995 and 1994 is summarized as follows:
Prior to 1995 the Company provided fabrication functions and services on
consigned materials of the Company's customers.
<TABLE>
<CAPTION>
1995 1994
------------- ------
<S> <C> <C>
Raw materials $1,594,226 $ -
Finished goods 128,186 -
Less reserve for obsolescence - -
---------------- -----------
Inventory, net $ 1,722,412 $ -
=========== ==========
</TABLE>
C. Property and Equipment:
Property and equipment at December 31, 1995 and 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Machinery and equipment $ 806,405 $ 37,835
Furniture and fixtures 23,223 21,719
Office equipment 25,773 14,004
Leasehold improvements 8,820 8,820
Vehicles - 11,057
-------------- ---------
864,221 93,435
Less accumulated depreciation and
amortization (180,009) (66,410)
--------- ---------
Property and equipment, net $ 684,212 $ 27,025
========= =========
</TABLE>
D. Line of Credit:
The Company has a line of credit facility with a bank which expired on
April 15, 1996 and was not renewed. The line bears interest at prime
(8.75% at December 31, 1995) plus 9.0%. The line of credit provides for
maximum borrowings of $100,000, is secured by inventory, accounts
receivable and equipment of the Company and is personally guaranteed by
the principal shareholders. At December 31, 1995, the Company had $3,823
of available credit under the line.
26
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
E. Accrued Expenses:
Accrued expenses at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Mexican operating costs at year-end $508,539 $381,598
</TABLE>
The above represents amounts accrued by management as expenses related to
Mexican government and traditionally cultural requirements connected with
foreign entities doing business in Mexico. The premise for this accrual is
the possibility of the foreign entity shutting down local operations and
leaving Mexican workers jobless.
F. Commitments and Contingencies:
Operating Leases
The Company leased its Nogales, Arizona facility under a noncancelable
operating lease from an unrelated third party through August 1996.
Thereafter, the lease has been on a month-to-month basis. On March 1,
1996, the Company entered into a five year noncancelable operating lease
with an unrelated third party for its Tucson, Arizona facility which
expires in March 2001. Rental expense for the years ended December 31,
1995 and 1994 was $172,662 and $87,987, respectively.
At December 31, 1995, minimum annual rent payable under the noncancelable
leases in each of the next five years ending December 31 and thereafter
are as follows:
1996 $107,224
1997 66,269
1998 69,030
1999 72,482
2000 76,106
Thereafter 12,786
Total $403,897
The noncancelable operating lease provides that the Company pays for
property taxes, insurance and certain other operating expenses applicable
to the leased premises.
27
<PAGE>
ELECTRONIC COMPONENTS AND SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
G. Supplemental Cash Flow Information:
Supplemental disclosures of cash flow information for the years ended
December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $6,384 $ 772
Noncash investing and financing activities:
Vehicle given by shareholder to Company
with corresponding reduction to loan receivable $ - $11,056
Vehicle written-off due to disposal 7,076 2,496
</TABLE>
H. Shareholders' Equity:
S Corporation Distributions
For the years ended December 31, 1995 and 1994, the Company distributed
$224,360 and $0, respectively, to its shareholders. These amounts
represent a portion of the S Corporation earnings through December 31 of
each year.
I. Profit Sharing Plan:
The Company maintains a defined contribution plan for its U.S. employees
(the Plan) that provides for tax deferred benefits under Section 401(K) of
the Internal Revenue Code. The Plan allows employees to make
contributions, 25% of which will be matched by the Company, up to 5% of an
employee's gross salary or the amount allowed by law, as defined. The
Company has made matching contributions to the Plan of approximately
$1,287 and $0 for the years ended December 31, 1995 and 1994,
respectively. The Company pays the administrative costs of the Plan, which
approximates $2,000 per year.
J. Major Customers:
During the year ended December 31, 1995, the Company had three major
customers, sales to each of which exceeded 10% of the Company's total
sales. During the year ended December 31, 1994, there was one major
customer. Sales to these customers for the years ended December 31, 1995
and 1994 totaled $10,073,587 and $3,901,106, respectively.
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 in exchange for Hartcourt stock and cash.
The transaction is expected to close in October 1997.
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
(UNAUDITED)
Pro Forma
djustments
Elimination
Historical ECS Entries Pro Forma
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 822$ -$ - $ 822
Accounts receivable 91,088 1,225,925 - 1,317,013
Inventories 311,424 1,784,069 - 2,095,493
Prepaid consulting fees 900,000 - - 900,000
Note receivables-current 133,764 - - 133,764
Amount due from shareholder 32,356 304,678 - 337,034
Interest receivable 3,877 - - 3,877
Other current assets - 55,756 - 55,756
-------------------- ----------------------------------- ----------------
TOTAL CURRENT ASSETS 1,473,331 3,370,428 - 4,843,759
------------- --------------------------------- --------------
Property, plant, and equipment, net 44,809 1,716,064 - 1,760,873
Investments 17,906,520 - - 17,906,520
Note receivables 1,190,795 - - 1,190,795
Goodwill, net - 9,965,641 - 9,965,641
Investment in subsidiary 11,400,000 - 11,400,000 (a)-
Other assets 7,550 983 - 8,533
------------------------------------------------------ -----------------
TOTAL ASSETS $32,023,005 $15,053,116 $ 11,400,000 $ 35,676,121
=========== ----------- ============= ============
(a) To eliminate Hartcourt Companies investment in Subsidiary.
</TABLE>
See accompanying notes to
proforma consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
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 ECS Entries Pro Forma
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C> <C>
Notes payable - current $ 56,396 $ 75,306$ - $ 131,702
Due to Factor - 535,975 - 535,975
Capital Lease Obligation - 125,983 - 125,983
Accrued Expenses - Mexico - 133,398 - 133,398
Note Payable, Related Party - 20,000 - 20,000
Accounts payable - trade 148,569 1,411,272 - 1,559,841
Accrued expenses 133,747 519,000 - 652,747
Overdraft 5,691 58,298 - 63,989
Subscription 45,000 - - 45,000
-------------- -------------------------------------------------
TOTAL CURRENT LIABILITIES 389,403 2,879,232 - 3,268,635
Capital Lease - Long Term - 526,844 - 526,844
Long-term debt 774,369 130,044 - 904,413
------------- -------------------------------- --------------
TOTAL LIABILITIES 1,163,772 3,536,120 - 4,699,892
Preferred Stock D 3,169,000 - - 3,169,000
Preferred Stock 10 - - 10
Common Stock 16,185 11,400 11,400 (a)16,185
APIC 31,179,635 11,388,600 11,388,600 (a) 31,179,635
Treasury Stock (279,928) - - (279,928)
Retained deficit (3,225,669) 116,996 - (3,108,673)
------------- -------------------------------- -------------
TOTAL STOCKHOLDERS' EQUITY 30,859,233 11,516,996 11,400,000 30,976,229
------------ ----------- ----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $32,023,005 $15,053,116 $11,400,000 $35,676,121
=========== =========== =========== ===========
</TABLE>
(a) To eliminate Hartcourt Companies investment in Subsidiary.
See accompanying notes to
proforma consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AT DECEMBER 31, 1996
(UNAUDITED)
Pro Forma
Adjustments
Elimination
Historical ECS Entries Pro Forma
<S> <C> <C> <C>
SALES $ 510,692 $13,171,895$ - $13,682,587
------------ ---------------------------- -----------
COST OF SALES 797,667 10,080,936 - 10,878,603
GROSS PROFIT (286,975) 3,090,959 - 2,803,984
OPERATING EXPENSES
Depreciation & amortization 671,982 940,632 - 1,612,614
General and administrative 570,774 1,890,076 - 2,460,850
------------- ------------------------------ ------------
TOTAL OPERATING EXPENSES 1,242,756 2,830,708 - 4,073,464
------------ ------------------------------ ------------
LOSS FROM OPERATIONS (1,529,731) 260,251 - (1,269,480)
OTHER INCOME (EXPENSES)
Interest income 10,100 143 - 10,243
Relief of debt 384,735 - - 384,735
Interest expense, net (443,042) (143,398) - (586,440)
------------- ---------- ------------------ --------------
TOTAL OTHER INCOME (EXPENSES) (48,207) (143,255) - (191,462)
-------------- ------------- ------------------ --------------
NET LOSS BEFORE INCOME TAXES (1,577,938) 116,996 - (1,460,942)
Taxes on earnings 1,800 - - 1,800
-------------------------------------------------------------------
NET LOSS $(1,579,738) $ 116,996$ - $(1,462,742)
=========== ============================= ============
Weighted Average Shares Outstanding
Including Common Stock Equivalents 4,814,303 7,314,303
NET LOSS PER COMMON SHARE $ (.33) $ (.20)
================ ================
</TABLE>
See accompanying notes to
proforma consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
(UNAUDITED)
Pro Forma
Adjustments
Elimination
Historical ECS Entries Pro Forma
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 144,790 $ 6,602 $ - $ 151,392
Accounts receivable 38,651 1,832,722 - 1,871,373
Inventories 128,591 1,813,839 - 1,942,430
Marketable Securities 5,874,966 - - 5,874,966
Employee Receivables - 17,350 - 17,350
Prepaid consulting fees 900,000 - - 900,000
Prepaid expenses 328,736 24,860 - 353,596
Note receivables-current 193,103 - - 193,103
Amount due from shareholder 74,985 263,319 - 338,304
Interest receivable 14,760 - - 14,760
------------------------------------------------------------------------
TOTAL CURRENT ASSETS 7,698,582 3,958,692 - 11,657,274
------------- ---------------------------------- ------------
Property, plant, and equipment, net 31,992 1,640,031 - 1,672,023
Investments 17,906,520 - - 17,906,520
Note receivables 1,346,278 - - 1,346,278
Goodwill, net - 9,431,767 - 9,431,767
Investment in subsidiary 11,516,996 - 11,516,996(a) -
Other assets 51,951 983 - 52,934
----------------------------------------------------- ---------------
TOTAL ASSETS $38,552,319 $15,031,473 $11,516,996 $42,066,796
=========== ----------- =========== ===========
</TABLE>
(a) To eliminate Hartcourt Companies investment in Subsidiary.
See accompanying notes to
proforma consolidated financial
statements.
1
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
(UNAUDITED)
(Continued)
Pro Forma
Adjustments
Elimination
Historical ECS Entries Pro Forma
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C> <C> <C>
Notes payable - current $ 51,586 $ 82,564 $ - $ 134,150
Accounts payable - trade 232,610 1,298,758 - 1,531,368
Capital Lease Obligation - 156,232 - 156,232
Due to factor - 796,061 - 796,061
Note payable - related party - 60,000 - 60,000
Accrued expenses 4,960 514,000 - 518,960
Accrued Expenses - Mexico - 270,855 - 270 855
------------------ ------------------------------ -------------
TOTAL CURRENT LIABILITIES 289,156 3,178,470 - 3,467,626
Capital Lease Obligation - Long Term - 472,818 - 472,818
Long-term debt 826,615 67,182 - 893,797
------------- ------------------------------- -------------
TOTAL LIABILITIES 1,115,771 3,718,470 - 4,834,241
Preferred Stock D 3,169,000 - - 3,169,000
Preferred Stock A 4,000,000 - - 4,000,000
Preferred Stock B 2,000,000 - - 2,000,000
Preferred Stock 10 - - 10
Common Stock 17,731 11,400 11,400(a) 17,731
APIC 32,070,933 11,388,600 11,388,600(a) 32,070,933
Treasury Stock (279,928) - - (279,928)
Stock Subscription Receivables (276,000) - - (276,000)
Retained deficit (3,265,198) (86,997) 116,996 (a) (3,469,191)
------------- ------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 37,436,548 11,313,003 11,516,996 37,232,555
------------ ----------- ----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $38,552,319 $15,031,473 $11,516,996 $42,066,796
=========== =========== =========== ===========
</TABLE>
(a) To eliminate Hartcourt Companies investment in Subsidiary.
See accompanying notes to
proforma consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AT SEPTEMBER 30, 1997
(UNAUDITED)
Pro Forma
Adjustments
Elimination
Historical ECS Entries Pro Forma
<S> <C> <C> <C> <C>
SALES $ 316,706 $9,847,294$ - $10,164,000
------------ --------------------------- -----------
COST OF SALES 213,727 7,242,591 - 7,456,318
------------- ---------------------------- ----------
GROSS PROFIT 102,979 2,604,703 - 2,707,682
OPERATING EXPENSES
Depreciation & amortization 10,792 714,724 - 725,516
General and administrative 271,448 1,917,874 - 2,189,322
------------- ---------------------------- ----------
TOTAL OPERATING EXPENSES 282,240 2,632,598 - 2,914,838
------------- ---------------------------- ----------
LOSS FROM OPERATIONS (179,261) (27,895) - (207,156)
OTHER INCOME (EXPENSES)
Interest income 21,885 - - 21,885
Relief of debt - - - -
Other income 25,556 - - 25,556
Interest expense, net (22,305) (181,098) - (203,403)
-------------- ------------------------------ -----------
TOTAL OTHER INCOME (EXPENSES) 25,136 (181,098) - (155,962)
NET LOSS BEFORE INCOME TAXES (154,125) (208,993) - (363,118)
Taxes on earnings 2,400 - - 2,400
-------------------------------------------------- --------------
NET EARNINGS (LOSS)$ (156,525) $ (208,993)$ - $ (365,518)
============= ========== ================= ==========
Weighted Average Shares Outstanding
Including Common Stock Equivalents 12,029,029 14,529,029
NET LOSS PER COMMON SHARE $ (.013) $ (.025)
=============== ==============
</TABLE>
See accompanying notes to
proforma consolidated financial
statements.
3
<PAGE>
THE HARTCOURT COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA
FINANCIAL DATA
A. Organization:
The accompanying unaudited condensed consolidated pro forma financial
statements include the
accounts of the Hartcourt Companies, Inc. (Hartcourt) a Utah
corporation, Electronic Components
and Systems, Inc. and Pruzin Technologies, Inc. (collectively ECS),
both Arizona corporations. All
significant intercompany payables and receivables have been eliminated
in the consolidating
process.
B. Basis of Presentation:
The unaudited pro forma condensed consolidated balance sheets present
the financial position of Hartcourt and ECS as of December 31, 1996 and
September 30, 1997, assuming that the merger had occurred as of January
1, 1996. The unaudited condensed consolidated pro forma statement of
operations give the effect to the merger by consolidating the results
of condensed operations of the respective companies for the twelve
months ended December 31, 1996 and the nine months ended September 30,
1997 assuming that the proposed merger had occurred as of January 1,
1996.
The unaudited condensed consolidated pro forma financial statements
should be read in conjunction with Hartcourt's and ECS's historical
consolidated and combined financial statements and the notes thereto as
of December 31, 1996 and July 31, 1997, respectively. Pro forma
adjustments are based upon current estimates, historical information
and certain assumptions that management deems appropriate. The
unaudited condensed consolidated pro forma financial data presented
herein are not necessarily indicative of the results that would have
been reported had such events actually occurred on January 1, 1996, nor
are they necessarily indicative of the future results of Hartcourt and
ECS.
7
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered
into as of the 28th day of October, 1997 between The Hartcourt Companies, Inc.,
a Utah corporation ("Company"), Electronic Components and Systems, Inc., an
Arizona corporation ("ECS"), Pruzin Technologies, Inc., an Arizona corporation
("PTI"), Electronic Components and Systems, Inc., a Nevada corporation ("Newco")
and James Pruzin, the majority shareholder of ECS and the majority shareholder
of PTI ("Shareholder").
ECS and PTI are each referred to herein as "Acquiree."
WHEREAS, Shareholder is the owner of approximately 99% of the outstanding shares
of ECS, being 200 shares of Common Stock, par value $100.00, and 75% of the
outstanding shares of PTI, being 75 shares of Common Stock, without par value;
and
WHEREAS, Shareholder beneficially owns Anjelo, S.A. de C.V., a Mexican
corporation which provides
manufacturing services to ECS; and
WHEREAS, the Boards of Directors of the Company, Newco, ECS and PTI deem it
advisable and in the best interests of the Company, Newco, ECS and PTI and their
respective shareholders that Newco, ECS and PTI combine; and
WHEREAS, the Company is a public company required to file reports under Section
13 of the Securities Exchange Act of 1934, as amended; and
WHEREAS, the Company is the owner of all of the outstanding shares of Newco; and
WHEREAS, the Board of Directors of the Company, Newco, ECS and PTI deem it
advisable that the acquisition by the Company of PTI and ECS be effected through
the merger (the "Merger") of Newco, ECS and PTI pursuant to this Agreement and
the Articles of Merger (as defined below); and
WHEREAS, the Company desires to acquire all of the outstanding ECS shares and
the PTI shares for shares of Common Stock and Series D Preferred Stock of the
Company, in a transaction that qualifies under Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, following the Merger, the Company intends to cause the shares of Newco
to be listed on NASDAQ and to cause Newco to be publicly traded; and
WHEREAS, the Board of Directors of Company, Newco, ECS and PTI intend that the
Merger constitute a "reorganization" under Sections 368(a)(2)(D) and
368(a)(2)(E) of the Code, and the rules and regulations of the Internal Revenue
Service (the "IRS") promulgated thereunder, have approved and adopted this
Agreement as a "plan of reorganization" within the meaning of Section 368 of the
Code, and the rules and regulations of the IRS promulgated thereunder, and
intend that the Merger be treated as a tax free merger under the Code and the
rules and regulations of the IRS promulgated thereunder.
NOW THEREFORE, in consideration of the mutual agreements hereinafter set forth,
the parties hereto, intending to be legally bound, hereby agree as follows:
<PAGE>
Section 1. Definitions. Certain words and terms as used in this Agreement shall
have the meanings given to them by the definitions and descriptions in this
Section, and such definitions shall be equally applicable to both the singular
and plural forms of any of the words and terms defined below. All accounting
terms not specifically defined shall be construed in accordance with generally
accepted accounting principles.
"Acquiree Group" means ECS and PTI and any Subsidiary thereof.
"Affiliate" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person, or (ii) any trust of which such Person is
the settlor. For the purposes of this definition, "control" when used with
respect to any specified Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings relative to the foregoing.
"Closing" has the definition set forth in Section 3.
"Closing Date" means the date on which the Closing shall take place pursuant to
Section 3 of this Agreement.
"Code" means the Internal Revenue Code of 1986, as now in effect or hereafter
amended, and as now or hereafter construed, interpreted and applied by
regulations, rulings and cases.
"Commission" means the Securities and Exchange Commission.
"Company" has the meaning set forth in the opening paragraph of this Agreement
and includes, unless the context otherwise requires, its Subsidiaries.
"Company 10-KSB" has the meaning assigned to that term in Section 6.28 of this
Agreement.
"Company Common Stock" means the common stock of Company, $.01 par value.
"Contractual Obligation" means for any Person any evidence of Indebtedness or
any agreement or instrument under or pursuant to which any evidence of
Indebtedness has been issued, or any other agreement, instrument or Guaranty,
whether written or oral, to which such Person is a party or by which such Person
or any of its assets or properties are bound.
"Designation" shall mean Articles of Amendment of the Articles of Incorporation
of The Hartcourt Companies, Inc. Designating Series D Preferred Stock attached
hereto as Exhibit 3.
"Disclosure Schedules" means those certain schedules of even date herewith
delivered in response to the List of Requested Documents delivered by Company to
Acquiree, consisting of a Schedule of Financial Statements, a Schedule of
Capitalization, a Schedule of Subsidiaries, a Schedule of Changes, a Schedule of
Personal Property, a Schedule of Real Property, a Schedule of Contracts, a
Schedule of Litigation, a Schedule of Patents and Trademarks, a Schedule of
Compliance, a Schedule of Consents, a Schedule of Employees, a Schedule of
Enforceability, a Schedule of Transactions with Interested Persons, a Schedule
of Insurance, a Schedule of Permitted Affiliate Transactions, a Schedule of
Taxes, and a Schedule of Bank Accounts.
"ECS Common Stock" means the common stock, $100.00 par value, of ECS.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accredited accounting principles, consistently applied.
"Government" means the government of the United States of America, the
government of any other nation, any political subdivision of the United States
of America or any such other nation (including, without limitation, any state,
commonwealth, territory, federal district, municipality or possession) and any
department, agency, or instrumentality thereof; and "Governmental" means of, by
or pertaining to, any Government.
"Guaranty" means, at any date, for any Person, all obligations of such Person
guaranteeing or in effect guaranteeing any Indebtedness, Leases, dividends or
other obligations of any other Person (the "primary obligor") in any manner,
whether directly or indirectly; provided, however, that Guaranty does not
include endorsements for collection in the ordinary course.
"Indebtedness" means all items which, in accordance with generally accepted
accounting principles, would be included in determining total liabilities as
shown on the liabilities side of a balance sheet of such Person as at the date
on which Indebtedness is to be determined.
"IRS" means the Internal Revenue Service.
"Lease" means any lease or other agreement (however denominated) providing for
the use by one Person of real or personal property owned by another Person (or,
the entering into such a lease or agreement).
"Lien" means any mortgage, lien, charge, security interest or encumbrance of any
kind upon, option to acquire, equity in, or pledge of, any property or asset,
whether now owned or hereafter acquired, and includes the acquisition of, or
agreement to acquire any property or asset subject to any conditional sale
agreement or other title retention agreement, including a Lease on terms
tantamount thereto or on terms otherwise substantially equivalent to a purchase.
"Market Price" shall mean the closing bid price of the Common Stock, averaged
over the twenty (20) trading days ending on and including the second trading day
prior to the Closing, as such prices are reported by the Electronic Bulletin
Board sponsored by the National Association of Securities Dealers, Inc., or, if
the Common Stock is then traded on NASDAQ, the closing bid price as reported on
NASDAQ, or on such other national exchange or market as the Company's Common
Stock is then listed.
"Marks" means any trademarks, trade names, copyrights, service marks, label
filings or patents.
"Material" when capitalized and used in this Agreement in relation to any Person
means Material in relation to the business, financial condition, or results of
operations of such Person and its Subsidiaries, if any, taken as a whole.
"Merger" has the meaning assigned to that term in Section 2 of this Agreement.
"NASDAQ" means the Automated Quotation System of the National Association of
Securities Dealers, Inc.
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"Permitted Lien" means (a) Liens for current taxes not yet due and payable, (b)
such imperfections of title and easements, if any, which are not known and which
are not Material in character, amount or extent and do not Materially detract
from the value or interfere with the use, of the assets subject thereto or
affected thereby or otherwise impair business operations, (c) statutory Liens of
landlords and Liens of carriers, warehousemen, mechanics, workmen and
Materialmen incurred in the ordinary course of business for sums not yet due or
being contested in good faith and disclosed on the Schedule of Real Property or
Personal Property, and (d) Liens (other than any Lien created by Section 4068 of
ERISA) incurred on deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
Government.
"Plan" means any employee benefit plan, as defined in ERISA, and any other plan,
benefit or program of benefits or perquisites (other than a Governmental plan,
benefit or program) provided to one or more employees, which is or has been
established, maintained, participated in or contributed to by a Person or a
predecessor or successor of a person within the meaning of Section 414 of the
Code.
"PTI Common Stock" means the Common Stock, without par value, of PTI.
"Related Party" of any specified Person means any Affiliate of such Person.
"Reporting Act Documents" means the documents filed by Company with the
Commission pursuant to the Exchange Act since the date their reporting
obligations arose under Section 13 or 15(d) of the Exchange Act (including
without limitation, each Annual Report on Form 10-KSB, Quarterly Report on Form
10-QSB, Current Report on Form 8-K and all proxy Material) and all press
releases distributed or disseminated by Company.
"Requirement of Law" means, for any Person, any law, rule, judgment, regulation,
order, writ, injunction or decree of any court or Government and any decision or
ruling of any arbitrator to which such Person is a party or by which such Person
or any of its assets or property is bound or affected or from which such Person
derives benefits, including without limitation, those relating to the discharge
of Materials into the environment and environmental protection, and if such
Person is a corporation, its charter documents and bylaws.
"Securities Act" means the Securities Act of 1933, as amended.
"Series D Preferred Stock" means the Series D Preferred Stock of Company
proposed to be issued as described in Section 3 hereof, with the rights,
limitations, privileges and restrictions set forth on the Designation.
"Subsidiary" of a Person means any corporation of which at least a majority of
the outstanding stock having by the terms thereof ordinary voting power to elect
a majority of the directors of such corporation, irrespective of whether or not
at the time stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency, is at
the time directly or indirectly owned by such Person, by one or more
Subsidiaries of such Person, or by such Person and one or more Subsidiaries.
Section 2. Merger. ECS and PTI shall merge with and into Newco pursuant to the
Arizona and Nevada
General Corporation Laws (the "Merger") and in accordance with the Articles of
Merger among the
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<PAGE>
Company, ECS, PTI and Newco (the "Articles of Merger"), a copy of which is
attached hereto as Exhibit 2. The Merger shall be effective on the date on which
the Articles of Merger, or a conformed copy thereof, in substantially the form
annexed hereto as Exhibit 2, has been filed with the Secretaries of the State of
Arizona and Nevada, which filing shall take place upon Closing.
Section 3. Time, Date and Place of Closing. The Closing of the transaction
contemplated by this Agreement (the "Closing") shall take place as soon as
practicable, but is expected to take place on or prior to October 31, 1997.
3.1 At Closing, and pursuant to the Articles of Merger, all outstanding
shares of Common Stock of ECS shall be canceled and in lieu thereof,
the shareholders of ECS Common Stock shall receive: (a) 2,500,000
shares of Company Common Stock; (b) 3,169 shares of Company Series D
Preferred Stock; (c) cash in the amount of $250,000.00; and, (d) a
Promissory Note in the form attached at Exhibit 3.1.
3.2 At Closing, and pursuant to the Articles of Merger, all outstanding
shares of PTI Common Stock shall be canceled and in lieu thereof the
shareholders of PTI Common Stock shall receive 308 shares of Series D
Preferred Stock; provided, however, that in the event the 25 shares of
PTI Common Stock not held by Shareholder on the date hereof
(constituting 25% of the outstanding PTI Common Stock) is acquired by
the Company or an Affiliate thereof, and canceled, or in the event the
holder of such shares of PTI Common Stock exercises its dissenter's
rights under the Arizona Business Corporation Act, the consideration
for the PTI Common Stock shall be reduced to 231 shares of Series D
Preferred Stock.
Section 4. Deliveries at Closing. The following documents shall be delivered at
Closing:
4.1 Company shall cause its transfer agent to issue 2,500,000 shares of
Company Common Stock and Company shall issue 3,400 shares of the Series
D Preferred Stock, and all of such Common Stock and Series D Preferred
Stock shall be delivered to Shareholder;
4.2 Company shall deliver a check or wire transfer in the amount of
$250,000 and the Note to
Shareholder;
4.3 Company and Newco shall cause the Designation to be filed with the
Secretary of State of Nevada and the Company, Newco, ECS and PTI shall
cause the Articles of Merger to be filed with the Secretaries of State
of Nevada and Arizona;
4.4 Company and Newco shall deliver to Shareholder an officer's certificate
in the form attached as Exhibit 4.4, certifying, as of the date of
Closing, the continued truthfulness of the Company's representations
and warranties made herein;
4.5 Company and Newco shall deliver to Shareholder an opinion of counsel,
in the form attached as
Exhibit 4.5 hereto;
4.6 PTI, ECS and Shareholder shall deliver to Company an officer's
certificate, in the form attached as Exhibit 4.6, and, in the case of
Shareholder, a certificate, certifying as of the date of Closing, the
continued truthfulness of the representations and warranties of
Shareholder, ECS and PTI made herein;
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<PAGE>
4.7 ECS and PTI shall deliver to Company the opinion of their counsel, in
the form attached as Exhibit
4.7; and
4.8 Shareholder shall deliver the Investment Letter in the form attached as
Exhibit 4.8 to Company.
Section 5. Representations, Warranties and Covenants of Acquirees.
Each of Shareholder, ECS and PTI represent, warrant and covenant as follows,
jointly and severally:
5.1 Organization, etc. Each member of the Acquiree Group is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Each member of the Acquiree Group has the
corporate power to own its properties and carry on its business as now
being conducted, execute and deliver this Agreement and consummate the
transactions contemplated hereby and thereby. The copies of the charter
documents of each member of the Acquiree Group provided to Company shall
reflect all amendments made thereto at any time prior to and as of the
Closing and are correct and complete.
5.2 Capital Stock and Related Matters. The authorized capital stock of ECS
consists of 10,000 shares of common stock, par value $100.00 per share, of
which 201 shares are issued and outstanding, and no shares of preferred
stock are authorized, and the authorized capital stock of PTI consists of
1,000,000 shares of Common Stock, without par value, of which 100 shares
are issued and outstanding, and no shares of preferred stock are
authorized. The authorized capital stock of each member of the Acquiree
Group is as set forth in its respective charter documents and the all of
the outstanding capital stock of each member of the Acquiree Group is
owned by Acquiree, except as set forth in the Schedule of Compliance (all
of which capital stock is validly issued, fully paid and nonassessable in
full compliance with all applicable securities laws). Except as set forth
in the Schedule of Compliance, (i) no member of the Acquiree Group will
have outstanding any stock or securities convertible or exchangeable for
any shares of capital stock, nor will there be outstanding any rights or
options to subscribe for or to purchase any capital stock or any stock or
securities convertible into or exchangeable for any capital stock of any
member of the Acquiree Group, (ii) no member of the Acquiree Group will be
subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock, except as
contemplated by this Agreement, and (iii) there are no shareholder
agreements, proxies, voting trust agreements or similar agreements or
options executed by any shareholder of Acquirees.
5.3 Subsidiaries. Except as set forth in the Schedule of Compliance, Acquirees
own no securities of any Person and no officer, director or controlling
shareholder of Acquirees owns, directly or indirectly, any security or
financial interest in any other Person which competes with or does
business with any member of the Acquiree Group.
5.4 Authorization; No Breach. The execution and delivery by each member of
the Acquiree Group of
this Agreement and each of the other agreements and transactions
contemplated hereby have been duly
authorized by all necessary proceedings of the Board of Directors of each
member of the Acquiree
Group and, upon the requisite adoption and approval by a majority of the
shareholders of each member
of the Acquiree Group, all corporate action of each member of the Acquiree
Group necessary for the
authorization and consummation of the transactions contemplated by this
Agreement shall have been
taken. This Agreement and each of the other agreements contemplated
hereby constitute the valid and
binding obligations of Acquiree enforceable against it in accordance with
their respective terms. The
34
<PAGE>
execution, delivery and compliance with and performance by each member of
the Acquiree Group of this Agreement and each of the other agreements
contemplated hereby, does not and will not (i) conflict with or result in
a breach of the terms, conditions or provisions of, (ii) constitute a
default under, (iii) result in the creation of any Material lien, security
interest, charge or encumbrance upon either Acquiree's or any Subsidiary's
capital stock or assets pursuant to, (iv) give any third party the right
to accelerate any Material obligation under, (v) result in a Material
violation of, or (vi) require any authorization, consent, approval,
permit, exemption or other action by or notice to any court or
Governmental body, pursuant to the charter documents of Acquiree or its
Subsidiary or any Requirement of Law to which Acquiree or its Subsidiary
is subject or any Contractual Obligation or other instrument, order,
judgment or decree to which Acquiree or its Subsidiary is subject.
5.5 Changes Since July 31, 1997. Except as set forth in the Schedule of
Changes or as contemplated hereby, since July 31, 1997, no member of the
Acquiree Group has:
5.5.1 Incurred any Material obligations or liabilities, whether absolute,
accrued, contingent or otherwise, including, without limitation,
liabilities as guarantor under any Guaranty, other than obligations and
liabilities (a) incurred under this Agreement or (b) incurred in the
ordinary course of its business or (c) incurred under the Contractual
Obligations referred to in the Schedule of Contracts;
5.5.2 Suffered any adverse change in its business, condition, sales, income,
assets or liabilities, other than changes in the ordinary course of
business, none of which has been, in any case or in the aggregate,
Materially adverse to such Acquiree;
5.5.3 Suffered any strike, any threatened strike, work stoppage,
organizational attempts, boycotts, or informational or direct picketing
or leafletting with regard to labor matters;
5.5.4 Made any loans or advances or entered into any Contractual Obligations
therefor, other than (a) those not exceeding $5,000 in the aggregate or
(b) those made in the ordinary course of business which have been
properly reflected as "receivables" or "prepaid expenses" on the books
of account and records of any member of the Acquiree Group;
5.5.5 Changed any of the Material accounting principles, methods of applying
such principles or estimates used to prepare the Financial Statements;
5.5.6 Mortgaged, pledged or subjected to any Lien or Lease any Material
assets, tangible or intangible,
except for Permitted Liens;
5.5.7 Acquired or disposed of any assets or properties, by sale, merger or
otherwise, or entered into any Contractual Obligation for any such
acquisition or disposition, except in the ordinary course of business
or except for such acquisitions or dispositions which do not, in any
case or in the aggregate, exceed $25,000;
5.5.8 Forgiven or canceled any Indebtedness or Contractual Obligation or
waived any rights of value, in any case of in the aggregate, involving
amounts exceeding $25,000;
5.5.9 Entered into any transaction involving the expenditure of more than
$25,000 other than in the ordinary course of business, except with
respect to the Contractual Obligations referred to in the Schedule of
Contracts;
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5.5.10 Granted any rights or licenses under any Marks, or entered into
any licensing or distributorship
arrangement;
5.5.11 Suffered any damage, destruction or loss in any amount exceeding
$25,000 (whether or not covered by insurance) Materially
adversely affecting, in any case or in the aggregate, its
business, condition, operations, prospects, properties or assets;
5.5.12 Modified, altered, amended, terminated, adopted, commenced or
withdrawn from participation in any Plan or any Contractual
Obligation relating to any Plan, in whole or in part, or caused
or permitted any such modification, alteration, amendment,
termination, adoption, commencement or withdrawal from
participation;
5.5.13 Caused or permitted any Material change in the manner in which
it conducts its business;
5.5.14 Caused or suffered any Material amendment or termination (other
than by its terms) of any
Contractual Obligation;
5.5.15 Discharged or satisfied any Lien or paid any liability exceeding
$25,000 other than (a) with respect to the Contractual
Obligations referred to in the Schedule of Contracts or Schedule
of Capitalization, (b) those adequately and specifically
disclosed or reserved against on the Financial Statements, or (c)
those incurred in the ordinary course of its business consistent
with past practices;
5.5.16 Failed to discharge or satisfy when due any liability and such
failure has caused or will cause actual damages or risk of loss
in any amount exceeding $25,000 over and above amounts actually
due which appear on the Financial Statements;
5.5.17 Issued, sold, or delivered or agreed to issue, sell or deliver
any additional shares of its capital stock or any options,
warrants or rights to acquire any such capital stock or
securities convertible into or exchangeable for such capital
stock;
5.5.18 Declared, made, paid or set apart any Material sum or property
for any dividend or other distribution to its shareholders or
purchased or redeemed any shares of its capital stock or any
option, warrant or right to purchase any such capital stock, or
reclassified its capital stock;
5.5.19 Increased the wages, salaries, compensation, pension or other
benefits payable or to become payable by any member of the
Acquiree Group to any officer, employee or agent, other than
merit, cost-of-living and other normal increases, in any Material
amount;
5.6 Taxes.Except as set forth in the Schedule of Taxes;
5.6.1 Each member of the Acquiree Group has timely filed (within the
applicable extension periods) with the appropriate Governmental
agencies all Governmental tax returns, information returns, tax reports
and declarations which are required to be filed by any member of the
Acquiree Group, except for late filings which did not result in the
imposition of any substantial monetary liabilities.
5.6.2 All Governmental tax returns, information returns, tax reports and
declarations filed by any member of the Acquiree Group for years for
which the statute of limitations has not run (the "Tax Returns") are
correct in all Material respects.
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5.6.3 Each member of the Acquiree Group has timely paid (or has collected and
paid over in the case of sales, use or similar taxes) all Material
taxes, additions to tax, penalties, interest, assessments, deposits,
and other Governmental charges imposed by law upon it or any of its
properties, tangible or intangible assets, income, receipts, payrolls,
transactions, capital, net worth, franchises, or upon the sale, use or
delivery of any item sold by any member of the Acquiree Group, other
than as may be disclosed in the Schedule of Taxes. Except as set forth
in the Schedule of Taxes, no Tax Returns have been examined by any
Governmental authority.
5.6.4 Except as may be disclosed in the Schedule of Taxes or in any document
delivered to Acquiree therewith, no member of the Acquiree Group (i) is
currently being audited with respect to any tax, assessment or other
Governmental charge, (ii) has received formal or informal notice from
any Government that an audit or investigation with respect to any tax,
assessment or other Governmental charge is to be initiated, (iii) is
formally or informally discussing Material pending ruling requests
(except in connection with the transactions contemplated by this
Agreement) or other Material tax or assessment issued with any other
Governmental taxing authority in connection with any matter concerning
any member of the Acquiree Group, or (iv) has been formally or
informally notified of any potential tax or assessment issued which any
Governmental taxing authority intends to raise in connection with any
matter concerning any member of the Acquiree Group.
5.6.5 Except (i) as may be disclosed in the Schedule of Taxes or (ii) in
connection with any pending audit or investigation, no member of the
Acquiree Group has granted or proposed any waiver of any statue of
limitations with respect to, or any extension of a period for the
assessment or collection of, or any offer in compromise of any
Governmental tax.
5.6.6 The accruals and reserves for taxes reflected on the Financial
Statements are adequate to cover substantially all taxes (including
additions to tax, interest, penalties, and other charges or assess-
ments, if any) which become due and payable or accruable by reason of
business conducted by any member of the Acquiree Group through July 31,
1997.
5.6.7 No Person has ever been a "consenting corporation" within the meaning
of Section 341(f) of the Code. No member of the Acquiree Group is now
or has ever been a "personal holding company" within the meaning of
Section 542(a) of the Code nor is now nor has ever been a corporation
which meets the tests of Section 542(b)(2) of the Code. No member of
the Acquiree Group has participated in, or is required to participate
in for any period prior to the date of this Agreement, the filing of
any consolidated Tax Return, other than (i) as set forth in the
Schedule of Taxes or (ii) as a member of an affiliated group of which
an Acquiree is the common parent.
5.7 Contractual Obligations.
5.7.1 Except as may be set forth in the Schedule of Contracts, there are no
Material Contractual Obligations of the following types to which any
member of the Acquiree Group or any Plan is a party or by which any
member of the Acquiree Group or any of their properties are bound as of
the date hereof:
(a) Mortgages, indentures, loan agreements, security agreements,
conditional sales contracts, forms of consumer credit agreements
or other Contractual Obligations relating to Indebtedness, the
extension of credit to any member of the Acquiree Group or by any
member of the Acquiree Group to their customers or the obtaining
or issuance of letters of credit.
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(b) Partnership or joint venture agreements.
(c) Employment, consulting or management service agreements.
(d) Collective bargaining agreements.
(e) Plans or Contractual Obligations, trusts, funds or arrangements
for the benefit of employees
(whether or not legally binding).
(f) License, sales, agency, franchise, or distributorship agreements.
(g) Contractual Obligations for the assignment by any member of the
Acquiree Group of accounts
receivable.
(h) Contractual Obligations for the sale or Lease by any member of
the Acquiree Group of any assets for a sales price or aggregate
rentals exceeding $10,000 in the aggregate to any one Person.
(i) Licenses of Marks or other intellectual property rights.
(j) Contractual Obligations for capital expenditures in excess of
$25,000 for a single project.
(k) Brokerage or finder's agreements.
(l) Agreements or other documents creating Liens relating to any real
or personal property owned
or Leased.
(m) Leases of, commitments to Lease, and other agreements relating to
the Lease of, real or
personal property.
(n) Contractual Obligations containing covenants limiting the freedom
of any member of the Acquiree Group or any of its Shareholders to
compete in any line of business with any Person or in any area.
(o) Contractual Obligations containing in any case a specific clause
or affected by a Requirement of Law giving any Person who is a
party to such Contractual Obligation the right to renegotiate or
require a reduction in price or the repayment of any amount
previously paid because the profit resulting to any member of the
Acquiree Group from such Contractual Obligation is directly
related to a specific factor or factors including, but not
limited to sales, cost, assets or invested capital.
(p) Guaranties.
(q) Any registration rights or pre-emptive rights to any holder or
prospective holder of its
securities.
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(r) Other Contractual Obligations which in any case involve payments
or receipts thereunder of more than $25,000 in the aggregate with
any one Person or which cannot be terminated without any payment
on notice of 30 days or less.
5.7.2 Except as may be set forth in the Schedule of Contracts:
(a) Each Material Contractual Obligation therein listed in is full
force and effect;
(b) Each member of the Acquiree Group, all other parties to such
Contractual Obligations have performed all obligations required
to be performed by them to date and no party to any such
Contractual Obligation is in default thereunder;
(c) There has been no expressly or impliedly irrevocable termination
or cancellation of the business relationship of any member of the
Acquiree Group with (i) any supplier or affiliated group of
suppliers whose sales, individually or in the aggregate,
constituted more than $50,000 of gross purchases made by any
member of the Acquiree Group for the past 12 months or (ii) any
customer or affiliated group of customers whose purchases,
individually or in the aggregate, constituted more than $25,000
of gross sales made by any member of the Acquiree Group for the
past 12 months.
(d) No member of the Acquiree Group has outstanding any powers of
attorney except as may have been granted in the ordinary course
of business in connection with leases or security agreements.
5.7.3 The Schedule of Contracts, to the nearest $100,000, sets forth the
aggregate amount of open purchase orders and sales orders outstanding
on the date hereof.
5.8 Litigation.
5.8.1 Except as may be disclosed in the Schedule of Litigation, there are no:
(a) Material pending or, to the knowledge of any member of the
Acquiree Group, contemplated, Material administrative or judicial
proceedings against any member of the Acquiree Group arising
under any Governmental provisions regulating the discharge or
Materials into the environment or otherwise relating to the
protection of the environment or occupational and safety laws
relating to job conditions or safety;
(b) pending or, to the knowledge of any member of the Acquiree Group,
contemplated, administrative or judicial proceedings against any
member of the Acquiree Group arising out of the Foreign Corrupt
Practices Act; nor
(c) Material claims, actions, suits, proceedings, arbitrations,
investigations or inquiries pending before any court or
Governmental body or agency, or any private arbitration tribunal,
or, to the knowledge of any member of the Acquiree Group,
threatened against or relating to any member of the Acquiree
Group, any Plan, any assets, properties, or business of any
member of the Acquiree Group, or the transactions contemplated by
this Agreement nor to the knowledge of any member of the Acquiree
Group is there any basis for any such claim, action, suit,
proceeding, arbitration, investigation or inquiry.
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5.8.2 Except as set forth in the Schedule of Litigation, neither any member
of the Acquiree Group, nor any officer, director, partner, or employee
of the same, has been permanently or temporarily enjoined by order,
judgment or decree of any court or other tribunal or any Governmental
agency from engaging in or continuing in the conduct or practice of its
business. There is not in existence any judgment, order, writ,
injunction or decree to take action of any kind or to which any member
of the Acquiree Group or their business, properties or assets are
subject or bound.
5.9 Product Liability. Except as set forth on the Schedule of Litigation,
there is no existing or, to their knowledge threatened claim, or facts
upon which a claim could be based, against any member of the Acquiree
Group for any product sold or Leased or service performed by any member of
the Acquiree Group prior to the date of this Agreement which is defective
or fails or has failed to meet any product warranties.
5.10 Claims for Injuries. Except as set forth on the Schedule of Litigation,
there are no Material claims seeking damages for personal or other
injuries resulting from the Lease, sale or use of any of the assets,
products, services, or goods of Acquiree or any of its assets,
products, services, or goods of any member of the Acquiree Group which
any member of the Acquiree Group has placed in the hands of insurance
carriers.
5.11 Trademarks, Trade Names, Patents, etc.
5.11.1 Except as may be listed in the Schedule of Patents and
Trademarks, (a) there are no Marks owned, licensed, used by or
registered in the name of any member of the Acquiree Group and no
applications for Marks made by any member of the Acquiree Group
or by their employees for the benefit of any member of the
Acquiree Group; (b) each member of the Acquiree Group is the
regis-
tered and beneficial owner of the Marks listed in the Schedule of
Patents and Trademarks as owned by it, free and clear of any
royalty or Lien; (c) all of such Marks are freely assignable by
any member of the Acquiree Group; (d) no member of the Acquiree
Group has any knowledge of any notice or claim or other reason to
believe that any Mark is not valid or enforceable by the owner
thereof or of any infringement upon or conflict with any Mark or
proprietary right of any third Person by the owner thereof or any
claim of a third Person alleging such infringement or conflict;
(e) no member of the Acquiree Group has any knowledge of any
infringement by any third Person upon any Mark listed in the
Schedule of Patents and Trademarks; and (f) no member of the
Acquiree Group has taken or omitted to take any action which
would have the effect of waiving any of the rights of Acquiree or
its Subsidiaries under any Mark.
5.11.2 The Schedule of Patents and Trademarks sets forth a complete and
correct list of all Material
inventions, formulae, trade secrets, manufacturing processes,
know-how or other intellectual
property rights which have been reduced to writing and which are
necessary or useful in the
operation of the business of Acquiree or its Subsidiaries in the
manner presently operated by any
member of the Acquiree Group or in the marketing of the products
presently marketed by any
member of the Acquiree Group. Except as set forth in the
Schedule of Patents and Trademarks, (a)
any member of the Acquiree Group has the right to use, free and
clear of any royalties, claims or
rights of others, all such Material inventions, formulae, trade
secrets, manufacturing processes,
know-how or other intellectual property rights (whether or not
reduced to writing) necessary or
useful in the operation of the business of such Acquiree in the
manner presently operated by such
Acquiree or in the marketing of the products presently marketed
by such Acquiree, including,
without limitation (subject to licensor's rights under
Contractual Obligations which are listed in the
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Schedule of Contracts), any product licensed from others; and (b)
the record and beneficial ownership of all Marks, inventions,
formulae, trade secrets, know-how and other intellectual property
rights used in the business of any Acquiree has been duly and
effectively transferred to such Acquiree.
5.12 Employee Matters.
5.12.1 Except as may be set forth in the Schedule of Employees, (a)
each member of the Acquiree Group
is in Material compliance with Material Requirements of Law
respecting employment and
employment practices, terms and conditions of employment, and
wages and hours and is not engaged
in any unfair labor practice; (b) there is no unfair labor
practice complaint pending or, to the
knowledge of any member of the Acquiree Group, threatened against
any member of the Acquiree
Group before the National Labor Relations Board or any
Governmental agency; (c) there is not now
nor has there been during the last four years any labor strike,
or any set of, disputes, grievance,
controversies or other labor trouble which are Material in the
aggregate; (d) no union representation
question exists respecting the employees of any member of the
Acquiree Group; (e) there are no
collective bargaining agreements binding upon any member of the
Acquiree Group; and (f) there is
no pending arbitration or judicial proceeding arising out of or
under collective bargaining agreements
or other employment agreements or the employer-employee
relationship.
5.12.2 Except as set forth in the Schedule of Employees, no employee of
any member of the Acquiree
Group is now due a Material bonus, or would be due such a bonus
at the end of the current fiscal
year, upon the occurrence of a contingency or otherwise, under
agreements currently in effect.
Except as may be set forth in the Schedule of Employees, all
Material accrued Material obligations
of any member of the Acquiree Group, whether arising by operatio
of law, by Contractual
Obligation or by past custom, for payments to trusts or other
funds or to any Governmental agency,
with respect to unemployment compensation, social security,
workers' compensation, disability
programs, accrued vacation, accrued sick pay, pension or any
other benefits for employees as of the
date hereof have been paid or adequate accruals therefor on the
books of account of any member
of the Acquiree Group have been provided, and none of the
foregoing has been rendered not due by
reason of any extension or waiver.
5.12.3 The Schedule of Employees sets forth each Material employee,
consultant or commission agent of
the Acquiree Group who is employed by the Acquiree Group as of
the date it was printed and with
respect to each such employee presently employed, such Person's
rate of compensation (including
any commissions) for the period specified and such Person's year
to date compensation as of the end
of such period. The Schedule of Employees, with reasonable
accuracy, lists with respect to each
employee, consultant or commission agent of the Acquiree Group
who, during the last fiscal year
earned or who, during the current fiscal year would earn (based
on current practices) $25,000 or
more on an annualized basis, and with respect to each such
Person, the positions held as of the date
hereof and held since January 1, 1994, and the date on which the
compensation of such Person was
last changed, including the amount of such change.
5.1Except as set forth in the Schedule of Employees, Acquiree is not a
party to or bound by any employment or commission agreements in excess
of one year or which could require compensa-
tion and benefits, collective employment contracts, deferred
compensation agreements, bonus plans, profit sharing plans, pension
plans or any other Plans. There have been no Material labor
difficulties.
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5.13 Employee Benefit Plans.
5.13.1 All Plans comply with all Material Requirements of Law. No
liabilities to any Government for taxes, penalties, interest,
premiums, contributions, or any other items have been incurred
with respect to any Plan other than in the ordinary course of
business for current items paid or items set forth or reserved
against on the Financial Statements.
5.13.2 The Schedule of Employees sets forth a complete list of all Plans
covering any employee of any member of the Acquiree Group, the
identity of each funding agency holding assets of any such Plan,
the identity of any insurance company issuing any contract or
policy under any such Plan, and the identity of any actuarial
adviser or service provider retained by, or who provided services
to, any Plan during the past 18 months.
5.13.3 No Plan has incurred any liability other than pursuant to the
terms of the Plan in the ordinary course of business of the Plan.
No assets of any Plan have suffered any Material adverse change
since the last valuation report.
5.13.4 Each Plan has good and marketable title to all of the assets it
purports to own free and clear of all Liens. No Plan is a party
to any (a) Contractual Obligation other than one entered into in
the ordinary course of business, (b) partnership or joint venture
agreements, or (c) employment, consulting, or management
agreements except as may be set forth on the Schedule of
Contracts.
5.13.5 The Schedule of Transactions with Interested Persons completely
and accurately describes (a) all Indebtedness outstanding on June
30, 1997 or thereafter incurred and (b) all sales of property or
performances of services for which payment has been incurred or
accrued on or after June 30, 1997, between any Plan on the one
hand, and any officer, director, or partner of any member of the
Acquiree Group, or any Affiliate of any of them, on the other.
5.14 Compliance with Laws. Except as set forth in the Schedule of
Compliance, no member of the Acquiree Group is in Material violation of
any Material applicable Requirement of Law.
5.15 Consents. Except as may be set forth in the Schedule of Consents:
5.15.1 There is no consent, approval, order, or authorization of, or
registration, declaration or filing with, any Governmental
authority on the part of any member of the Acquiree Group
required in connection with the valid execution, delivery and
performance by any member of the Acquiree Group of this Agreement
and the consummation of the transactions contemplated herein by
any member of the Acquiree Group.
5.15.2 All Material permits, concessions, grants, franchises, licenses
and other Governmental authorizations and approvals necessary for
the conduct of the business of Acquiree and its Subsidiaries have
been duly obtained and are in full force and effect, and there
are no proceedings pending or, to the knowledge of any member of
the Acquiree Group, threatened which may result in the
revocation, cancellation or suspension, or any Materially adverse
modification of any thereof.
5.15.3 There is no consent, approval or authorization of any landlord
under any Material Lease of any member of the Acquiree Group
required in order to prevent such landlord from having the right
to take action (or refrain from taking action).
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5.15.4 There is no consent, approval or authorization of any other
Person (a) whose consent is required
under any Material agreement set forth in the Schedule of
Contracts in order to permit Acquiree to
consummate the transaction contemplated hereby, (b) who in the
absence of such consent, would
have the right to (i) declare such agreement in default, (ii)
terminate or modify such agreement, or
(iii) accelerate the time within which, or the terms under which
any member of the Acquiree Group
is to perform any act or receive any rights or benefits under
such agreement, or (c) which, if not
received, would result in (i) a default under such agreement,
(ii) the termination or modification of
such agreement, or (iii) the acceleration of the time within
which, or the terms under which, any
member of the Acquiree Group is to perform any act or receive
any rights or benefits under such
agreement.
5.16 Effect of Agreement. Except as disclosed in the Schedule of
Enforceability, the execution, delivery and performance of this
Agreement by any member of the Acquiree Group and the consummation of
the transactions contemplated hereby will not, with or without the
giving of notice or the lapse of time, or both:
5.16.1 Violate any Material Requirement of Law applicable to any member
of the Acquiree Group (except as to compliance with federal and
state securities laws, as to which no representations are made
except pursuant to Exhibit 4.8).
5.16.2 Result in the breach of or conflict with any Material term,
covenant, condition, or provision of, result in the modification
or termination of, constitute a default under, or result in the
creation or imposition of any Lien upon any of the properties or
assets of any member of the Acquiree Group under, any Contractual
Obligation to which any member of the Acquiree Group is a party
or by which any of their property is bound.
5.17 Transactions With Interested Persons.
5.17.1 Except as may be set forth in the Schedule of Transactions with
Interested Persons, no officer, director, or partner of any
member of the Acquiree Group or any Affiliate of the foregoing
owns, directly or indirectly, on an individual or joint basis,
any Material interest in, or serves as an officer, director or
employee of, any customer, competitor or supplier of any member
of the Acquiree Group, or any Person which has a Material
contract or arrangement with any member of the Acquiree Group or
any Related Party.
5.17.2 The Schedule of Transactions with Interested Persons correctly
and accurately describes all Material Indebtedness, all sales of
Material property and performances of Material services and any
other Material transaction between any member of the Acquiree
Group, on the one hand, and any Related Party or officer,
director or partner of any member of the Acquiree Group or any
Affiliate of the foregoing, on the other, which (a) was
outstanding on June 30, 1994, (b) was incurred or took place
after June 30, 1994, or (c) was outstanding on the date hereof.
5.17.3 The Schedule of Transactions with Interested Persons correctly
and accurately sets forth with respect to the sale of any
Material property or the performance of any Material services
between any member of the Acquiree Group, on the one hand, and
any Related Party or officer, director, or partner of any member
of the Acquiree Group or any Affiliates of the foregoing, on the
other, which is described in response to Section 5.17.2, (a)
whether such transaction was on terms comparable to those that
would have resulted from dealing between unrelated parties, and,
(b) if any such
43
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transaction was not on terms which would have resulted from
dealings between unrelated parties, the terms comparable to those
that would have resulted from dealings between unrelated parties.
5.17.4 The Schedule of Transactions with Interested Persons correctly
and accurately describes all items of personal property, other
than expendable supplies, physically removed from the possession
of any member of the Acquiree Group or retired from the books of
accounts of any member of the Acquiree Group by any Related Party
or officer, director, or partner of any member of the Acquiree
Group or any Affiliate of the foregoing since January 1, 1994.
5.18 Books and Records. Except as disclosed in the Schedule of Compliance,
the books of account and other financial and corporate records of
Acquiree and its Subsidiaries and of each Plan are in all Material
respects complete and correct, are maintained in accordance with usual
business practices and comply with all Material applicable Requirements
of Law. Except as disclosed on the Schedule of Compliance, such books
and records reflect only valid transactions and all valid transactions
involving any member of the Acquiree Group of a kind required to be
reflected on such books and records by GAAP are reflected on such books
and records. The corporate minute books of each member of the Acquiree
Group contain accurate records of all Material meetings and consents of
all of the directors and shareholders since the incorporation of each
member. The stock books and ledgers of each member of the Acquiree
Group contain accurate records of all issuances, retirements and
transfers of record of capital stock.
5.19 Property.
5.19.1 The Schedule of Real Property or the Schedule of Leases
reasonably accurately describes all
Material real property and interests in real property owned or
Leased by the Acquiree Group
including, without limitation, for each Lease, the address of th
real property, the name and address
of the landlord, the term of the Lease, the amount of rent
payable under the Lease and, as to any
option to renew, for each option, the number of years covered by
such option. Acquiree and its
Subsidiaries have good and marketable title to all real
properties which they purport to own and valid
leasehold interests in all real properties which they purport to
Lease, in each case free and clear of
all Liens, except Permitted Liens or Liens set forth in the
Schedule of Real Property. Except as set
forth in the Schedule of Real Property, (i) each Lease of real
property to which any member of the
Acquiree Group is a party is in full force and effect in
accordance with its terms, (ii) all rents and
other amounts required to be paid to date under such Leases have
been paid, (iii) to the best
knowledge of ECS, PTI and Shareholder no event or condition
exists which constitutes, or after
notice or lapse of time or both would constitute, a default on
the part of any member of the Acquiree
Group under any Lease of real property to which any member of
the Acquiree Group is a party and,
to the knowledge of any member of the Acquiree Group, there
exists no such event or condition
which constitutes or would constitute such a default on the part
of any of the other parties thereto.
Except as set forth in the Schedule of Real Property, no Materia
property owned by any member
of the Acquiree Group is subject to any sublease, concession or
license which entitles any Person
(other than employees of any member of the Acquiree Group) to
transact business on any such
property.
5.19.2 Acquiree and its Subsidiaries have valid Leases respecting all
Material personal property they purport to Lease. The rights of
Acquiree and its Subsidiaries as lessee under such Leases are
free and clear of all Liens, except Permitted Liens. Except as
set forth in the Schedule of Personal Prop-
erty, (i) each Lease of personal property to which any member of
the Acquiree Group is a party is
44
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in full force and effect in accordance with its terms, (ii) all
rents and other amounts required to be paid to date under such
Leases have been paid, (iii) no event or condition exists which
constitutes, or after notice or lapse of time or both would
constitute, a default on the part of any member of the Acquiree
Group under any such Lease, and (iv) to the knowledge of any
member of the Acquiree Group, there exists no such event or
condition which constitutes or would constitute such a default on
the part of any of the other parties thereto.
5.20 Financial Statements. Except as set forth on the Schedule of Financial
Statements, the financial
statements of each member of the Acquiree Group (for purposes of this
Section 5, the "Financial State-
ments) present fairly the consolidated financial position and results
or operations and changes in the consolidated financial position of
Acquiree and its Subsidiaries at the respective dates and for the
respective periods indicated in accordance with generally accepted
accounting principles applied on a consistent basis. The financial
records of each member of the Acquiree Group are of such character and
quality that an unqualified audit report may be issued for the
Financial Statements for the year ended December 31, 1996 and the six
months ended June 30, 1997.
5.21 Absence of Undisclosed Liabilities. Except to the extent reflected or
reserved against on the Financial Statements or as set forth in the
Disclosure Schedules, no member of the Acquiree Group has any Material
liability, whether absolute, accrued, known or unknown, contingent or
otherwise, whether due or to become due, including without limitation,
liabilities as guarantor under any Guaranty and any liabilities for
taxes or other Governmental charges, for any period prior to June 30,
1997, or arising out of any transaction any member of the Acquiree
Group entered into prior to such date or arising out of any state of
facts arising prior to such date, other than those incurred in the
ordinary course of business, none of which has had, or may be
reasonably expected to have, a Material adverse effect on Acquiree.
5.22 Insurance. Except as set forth in the Schedule of Insurance:
5.22.1 (a) Acquiree and each of its Subsidiaries has maintained
insurance with respect to its properties and business against
loss or damage. Each insurance policy maintained by Acquiree and
its Subsidiaries is in full force and effect, all premiums due
thereon having been paid and all provisions of such policy having
been complied with.
5.22.2 Neither Acquiree nor any of its Subsidiaries has received any
notice of any pending or threatened terminations or Material
premium increases with respect to such insurance policies.
5.22.3 Neither Acquiree nor any Subsidiary of Acquiree has failed to
give any notice or present any claim under any insurance policy
in a due and timely fashion.
5.22.4 There are no outstanding requirements or recommendations by or
made on behalf of any insurance company that issued a policy with
respect to any of the properties, assets or business of any
member of the Acquiree Group requiring or recommending any
equipment or facilities to be installed on or in connection with
any of the properties or assets owned or leased by any member of
the Acquiree Group.
5.23 Disclosure. To the best knowledge of ECS, PTI and Shareholder, neither
this Agreement nor any written document, statement, list, schedule,
certificate or other instrument referred to herein or delivered by or
on behalf of any member of the Acquiree Group in connection with the
transactions contemplated hereby contains any untrue statement of a
Material fact or omits to state a Material fact
45
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necessary to make the statements herein and therein, in light of the
circumstances under which they were made, not misleading. There is no
fact known to any member of the Acquiree Group which Materially
adversely affects, or in the future is likely to (so far as any member
of the Acquiree Group can now reasonably foresee) Materially adversely
affect Acquiree or any Plan, other than (a) general economic or
business conditions or (b) facts set forth herein or which may be set
forth in the Disclosure Schedules referred to herein.
5.24 Brokers. Neither Acquiree nor any Subsidiary of Acquiree has incurred
or become liable for any commission, fee or other similar payment to
any broker, agent, finder or other intermediary in connection with the
negotiation of this Agreement or the consummation of the transactions
contemplated hereby, except to Fox and Fin Financial Group, L.C.
5.25 Bank Accounts. Except as set forth in the Schedule of Bank Accounts,
there are no bank accounts or safe deposit boxes maintained by the
Acquiree Group or in which its property is held at the date hereof, and
(b) there are no Persons authorized to draw thereon or have access
thereto.
Section 6.Representations and Warranties of Company. Company hereby represents
and warrants to Acquirees and Shareholder as follows:
6.1 Organization, etc. Company and Newco are each a corporation duly
organized, validly existing and in good standing under the laws of the
State of Utah and Nevada, respectively. Each of Company and Newco has the
corporate power to own its properties and carry on its business as now
being conducted, execute and deliver this Agreement and consummate the
transactions contemplated hereby and thereby. The copies of the articles
of incorporation and bylaws of Company and Newco provided to Acquiree
shall reflect all amendments made thereto at any time prior to and as of
the Closing and are correct and complete.
6.2 Capital Stock and Related Matters. The authorized capital stock of Company
consists of 50,000,000 shares of common stock, par value $.001 per share,
of which 10,560,352 shares are issued and outstanding, and 10,001,000
shares of preferred stock, $.01 par value per share, of which 1,000 shares
of original preferred stock, 4,000 shares of Series A 9% Convertible
Preferred Stock, 2,000 Shares of Series B 9% Convertible Preferred Stock,
1,500 shares of Series C Convertible Preferred Stock and 1,000 shares of
Original Preferred Stock are outstanding. The authorized capital stock of
Newco consists of 50,000,000 shares of Common Stock and 1,000,000 shares
of Preferred Stock, of which no shares are outstanding. There are
currently outstanding warrants and options to purchase 2,000,000 shares of
Company Common Stock at prices ranging from $.30 to $2.10. Except as set
forth in Exhibit 6.2, (i) Company will not have outstanding any stock or
securities convertible or exchangeable for any shares of capital stock,
nor will there be outstanding any rights or options to subscribe for or to
purchase any capital stock or any stock or securities convertible into or
exchangeable for any capital stock of Company, (ii) Company is not subject
to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital stock, except as contemplated
by this Agreement, and (iii) to the best of the knowledge of the officers
of the Company, there are no shareholder agreements, proxies, voting trust
agreements or similar agreements or options executed by any shareholders
of Company.
6.3 Subsidiaries. Except for Newco, Company owns no securities of any Person
and to the best of
Company's knowledge, no officer, director or controlling shareholder of
Company owns, directly or
46
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indirectly, any security or financial interest in any other Person, which
competes with or does business with Company. Newco has been newly
incorporated and has no history of business operations.
6.4 Authorization. The execution and delivery by Company of this Agreement and
each of the other agreements and transactions contemplated hereby have
been duly authorized by all necessary proceedings of the Board of
Directors of Company and all corporate action of Company necessary for the
authorization and consummation of the transactions contemplated by this
Agreement shall have been taken. This Agreement and each of the other
agreements contemplated hereby constitute the valid and binding
obligations of Company enforceable against it in accordance with their
respective terms.
6.5 Changes Since June 30, 1997. Except as set forth in the Schedule of
Changes or as contemplated hereby, since June 30, 1997, Company has not:
6.5.1 Incurred any Material obligations or liabilities, whether absolute,
accrued, contingent or otherwise, including, without limitation,
liabilities as guarantor under any Guaranty, other than obligations and
liabilities (a) incurred under this Agreement or (b) incurred in the
ordinary course of its business or (c) incurred under the Contractual
Obligations referred to in the Schedule of Contracts;
6.5.2 Suffered any adverse change in its business, condition, sales, income,
assets or liabilities, other than changes in the ordinary course of
business, none of which has been, in any case or in the aggregate,
Materially adverse to Company;
6.5.3 Suffered any strike, or to the knowledge of Company after due inquiry,
any threatened strike, work stoppage, organizational attempts,
boycotts, or informational or direct picketing or leafletting with
regard to labor matters;
6.5.4 Made any loans or advances or entered into any Contractual Obligations
therefor, other than (a) those not exceeding $10,000 in the aggregate
or (b) those made in the ordinary course of business which have been
properly reflected as "receivables" or "prepaid expenses" on the books
of account and records of Company;
6.5.5 Changed any of the Material accounting principles, methods of applying
such principles or estimates used to prepare the Financial Statements;
6.5.6 Mortgaged, pledged or subjected to any Lien or Lease any Material
assets, tangible or intangible,
except for Permitted Liens;
6.5.7 Acquired or disposed of any assets or properties, by sale, merger or
otherwise, or entered into any Contractual Obligation for any such
acquisition or disposition, except in the ordinary course of business
or except for such acquisitions or dispositions which do not, in any
case or in the aggregate, exceed $25,000;
6.5.8 Forgiven or canceled any Indebtedness or Contractual Obligation or
waived any rights of value, in any case of in the aggregate, involving
amounts exceeding $25,000;
6.5.9 Entered into any transaction involving the expenditure of more than
$25,000 other than in the ordinary course of business, except with
respect to the Contractual Obligations referred to in the Schedule of
Contracts;
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6.5.10 Granted any rights or licenses under any Marks, or entered into
any Material licensing or
distributorship arrangement;
6.5.11 Suffered any damage, destruction or loss in any amount exceeding
$25,000 (whether or not covered by insurance) Materially
adversely affecting, in any case or in the aggregate, its
business, condition, operations, prospects, properties or assets;
6.5.12 Modified, altered, amended, terminated, adopted, commenced or
withdrawn from participation in any Plan or any Contractual
Obligation relating to any Plan, in whole or in part, or caused
or permitted any such modification, alteration, amendment,
termination, adoption, commencement or withdrawal from
participation;
6.5.13 Caused or permitted any Material change in the manner in which
it conducts its business;
6.5.14 Caused or suffered any Material amendment or termination (other
than by its terms) of any
Contractual Obligation referred to in the Schedule of Contracts
or Schedule of Capitalization;
6.5.15 Discharged or satisfied any Lien or paid any liability exceeding
$25,000 other than (a) with respect to the Contractual
Obligations referred to in the Schedule of Contracts or Schedule
of Capitalization, (b) those adequately and specifically
disclosed or reserved against on the Financial Statements, or (c)
those incurred in the ordinary course of its business consistent
with past practices;
6.5.16 Failed to discharge or satisfy when due any liability and such
failure has caused or will cause actual damages or risk of loss
in any amount exceeding $25,000 over and above amounts actually
due which appear on the Financial Statements;
6.5.17 Issued, sold, or delivered or agreed to issue, sell or deliver
any additional shares of its capital stock or any options,
warrants or rights to acquire any such capital stock or
securities convertible into or exchangeable for such capital
stock;
6.5.18 Declared, made, paid or set apart any Material sum or property
for any dividend or other distribution to its shareholders or
purchased or redeemed any shares of its capital stock or any
option, warrant or right to purchase any such capital stock, or
reclassified its capital stock;
6.5.19 Increased the wages, salaries, compensation, pension or other
benefits payable or to become payable by Company to any officer,
employee or agent, other than merit, cost-of-living and other
normal increases in any Material amount;
6.6 Taxes.Except as set forth in the Schedule of Taxes;
6.6.1 Company has timely filed (within the applicable extension periods) with
the appropriate Governmental agencies all Governmental tax returns,
information returns, tax reports and declara-
tions which are required to be filed by the Company, except for late
filings which did not result in the imposition of any substantial
monetary liabilities.
6.6.2 All Material Governmental tax returns, information returns, tax reports
and declarations filed by the Company for years for which the statute
of limitations has not run (the "Tax Returns") are correct in all
Material respects.
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6.6.3 Company has timely paid (or has collected and paid over in the case of
sales, use or similar taxes) all Material taxes, additions to tax,
penalties, interest, assessments, deposits, and other Governmental
charges imposed by law upon it or any of its properties, tangible or
intangible assets, income, receipts, payrolls, transactions, capital,
net worth, franchises, or upon the sale, use or delivery of any item
sold by the Company, other than as may be disclosed in the Schedule of
Taxes. Except as set forth in the Schedule of Taxes, no Tax Returns
have been examined by the IRS or any other Governmental authority.
6.6.4 Except as may be disclosed in the Schedule of Taxes or in any document
delivered to Company therewith, the Company (i) is not currently being
audited with respect to any tax, assessment or other Governmental
charge, (ii) has not received formal or informal notice from any
Government that an audit or investigation with respect to any tax,
assessment or other Governmental charge is to be initiated, (iii) is
not formally or informally discussing Material pending ruling requests
(except in connection with the transactions contemplated by this
Agreement) or other Material tax or assessment issued with the IRS or
any other Governmental taxing authority in connection with any matter
concerning any member of the Company Group, or (iv) has not been
formally or informally notified of any potential tax or assessment
issued which the IRS or any other Governmental taxing authority intends
to raise in connection with any matter concerning any member of the
Company Group.
6.6.5 Except (i) as may be disclosed in the Schedule of Taxes or (ii) in
connection with any pending audit or investigation, Company has not
granted or proposed any waiver of any statue of limitations with
respect to, or any extension of a period for the assessment or
collection of, or any offer in compromise of any Governmental tax.
6.6.6 The accruals and reserves for taxes reflected on the Financial
Statements are adequate to cover substantially all taxes (including
additions to tax, interest, penalties, and other charges or assess-
ments, if any) which become due and payable or accruable by reason of
business conducted by the Company through September 30, 1993.
6.6.7 No Person has ever been a "consenting corporation" within the meaning
of Section 341(f) of the Code. The Company is not now or has ever been
a "personal holding company" within the meaning of Section 542(a) of
the Code nor is now nor has ever been a corporation which meets the
tests of Section 542(b)(2) of the Code. The Company has not
participated in, or is required to participate in for any period prior
to the date of this Agreement, the filing of any consolidated Tax
Return, other than (i) as set forth in the Schedule of Taxes or (ii) as
a member of an affiliated group of which Company is the common parent.
6.7 Contractual Obligations.
6.7.1 Except as may be set forth in the Schedule of Contracts, there are no
Material Contractual Obligations of the following types to which
Company or any Plan is a party or by which Company or any of their
properties are bound as of the date hereof:
(a) Mortgages, indentures, loan agreements, security agreements,
conditional sales contracts, forms of consumer credit agreements
or other Contractual Obligations relating to Indebtedness, the
extension of credit to Company or by Company or to their
customers or the obtaining or issuance of letters of credit.
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(b) Partnership or joint venture agreements.
(c) Employment, consulting or management service agreements.
(d) Collective bargaining agreements.
(e) Plans or Contractual Obligations, trusts, funds or arrangements
for the benefit of employees
(whether or not legally binding).
(f) License, sales, agency, franchise, or distributorship agreements.
(g) Contractual Obligations for the assignment by Company of accounts
receivable.
(h) Contractual Obligations for the sale or Lease by Company of any
assets for a sales price or aggregate rentals exceeding $10,000
in the aggregate to any one Person.
(i) Licenses of Marks or other intellectual property rights.
(j) Contractual Obligations for capital expenditures in excess of
$125,000 for a single project.
(k) Brokerage or finder's agreements.
(l) Agreements or other documents creating Liens relating to any real
or personal property owned
or Leased.
(m) Leases of, commitments to Lease, and other agreements relating to
the Lease of, real or
personal property.
(n) Contractual Obligations containing covenants limiting the freedom
of Company to compete in any line of business with any Person or
in any area.
(o) Contractual Obligations containing in any case a specific clause
or affected by a Requirement of Law giving any Person who is a
party to such Contractual Obligation the right to renegotiate or
require a reduction in price or the repayment of any amount
previously paid because the profit resulting to Company from such
Contractual Obligation is directly related to a specific factor
or factors including, but not limited to sales, cost, assets or
invested capital.
(p) Guaranties.
(q) Any registration rights or pre-emptive rights to any holder or
prospective holder of its
securities.
(r) Other Contractual Obligations which in any case involve payments
or receipts thereunder of more than $25,000 in the aggregate with
any one Person or which cannot be terminated without any payment
on notice of 30 days or less.
6.7.2 Except as may be set forth in the Schedule of Contracts:
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(a) Each Material Contractual Obligation therein listed in is full
force and effect;
(b) Company and, to the knowledge of Company, all other parties to
such Contractual Obligations have performed all obligations
required to be performed by them to date and no party to any such
Contractual Obligation is in default thereunder;
(c) There has been no expressly or impliedly irrevocable termination
or cancellation of the business relationship of Company with (i)
any supplier or affiliated group of suppliers whose sales,
individually or in the aggregate, constituted more than $100,000
of gross purchases made by Company for the past 12 months or (ii)
any customer or affiliated group of customers whose purchases,
individually or in the aggregate, constituted more than $100,000
of gross sales made by Company for the past 12 months.
(d) Company has no outstanding powers of attorney.
6.7.3 The Schedule of Contracts accurately sets forth the aggregate amount of
open purchase orders and sales orders outstanding on the date hereof.
6.8 Litigation.
6.8.1 Except as may be disclosed in the Schedule of Litigation, there are no:
(a) Material pending, or to the knowledge of Company, contemplated,
Material administrative or judicial proceedings against Company
arising under any Governmental provisions regulating the
discharge or Materials into the environment or otherwise relating
to the protection of the environment or occupational and safety
laws relating to job conditions or safety;
(b) pending or, to the knowledge of Company , contemplated,
administrative or judicial
proceedings against Company arising out of the Foreign Corrupt
Practices Act; nor
(c) Material claims, actions, suits, proceedings, arbitrations,
investigations or inquiries pending before any court or
Governmental body or agency, or any private arbitration tribunal,
or, to the knowledge of Company, threatened against or relating
to Company, any Plan, any assets, properties, or business of
Company, or the transactions contemplated by this Agreement nor
to the knowledge of Company is there any basis for any such
claim, action, suit, proceeding, arbitration, investigation or
inquiry.
6.8.2 Except as set forth in the Schedule of Litigation, neither Company, nor
any officer, director, partner, or employee of Company has been
permanently or temporarily enjoined by order, judgment or decree of any
court or other tribunal or any Governmental agency from engaging in or
continuing in the conduct or practice of its business. There is not in
existence any judgment, order, writ, injunction or decree to take
action of any kind or to which Company or their business, properties or
assets are subject or bound.
6.9 Product Liability. Except as set forth on the Schedule of Litigation,
there is no existing or, to its knowledge, threatened claim, or facts upon
which a claim could be based, against Company for any product sold or
Leased or service performed by Company prior to the date of this Agreement
which is defective or fails or has failed to meet any product warranties.
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6.10 Claims for Injuries. Except as set forth on the Schedule of Litigation,
there are no Material claims seeking damages for personal or other
injuries resulting from the Lease, sale or use of any of the assets,
products, services, or goods of Company or any of its assets, products,
services, or goods of Company which Company has placed in the hands of
insurance carriers.
6.11 Trademarks, Trade Names, Patents, etc.
6.11.1 Except as may be listed in the Schedule of Patents and
Trademarks, (a) there are no Marks owned,
licensed, used by or registered in the name of Company and no
applications for Marks made by
Company or by their employees for the benefit of Company; (b)
Company is the registered and
beneficial owned or the Marks listed in the Schedule of Patents
and Trademarks as owned by it, free
and clear of any royalty or Lien; (c) all of such Marks are
freely assignable by Company; (d)
Company has no knowledge of any notice or claim or other reason
to believe that any Mark is not
valid or enforceable by the owner thereof or of any infringement
upon or conflict with any Mark or
proprietary right of any third Person by the owner thereof or
any claim of a third Person alleging
such infringement or conflict; (e) Company has no knowledge of
any infringement by any third Per-
son upon any Mark listed in the Schedule of Patents and
Trademarks; and (f) neither Company has not taken or omitted to
take any action which would have the effect of waiving any of the
rights of Company under any Mark.
6.11.2 The Schedule of Patents and Trademarks sets forth a complete and
correct list of all Material
inventions, formulae, trade secrets, manufacturing processes,
know-how or other intellectual
property rights which have been reduced to writing and which are
necessary or useful in the
operation of the business of Company in the manner presently
operated by Company or in the
marketing of the products presently marketed by Company.
Except as set forth in the Schedule of
Patents and Trademarks, (a) Company has the right to use, free
and clear of any royalties, claims or
rights of others, all such Material inventions, formulae, trade
secrets, manufacturing processes,
know-how or other intellectual property rights (whether or not
reduced to writing) necessary or
useful in the operation of the business of Company in the manner
presently operated by Company
or in the marketing of the products presently marketed by
Company, including, without limitation
(subject to licensor's rights under Contractual Obligations
which are listed in the Schedule of
Contracts), any product licensed from others; and (b) the record
and beneficial ownership of all
Marks, inventions, formulae, trade secrets, know-how and other
intellectual property rights used in
the business of Company has been duly and effectively transferred
to Company.
6.12 Employee Matters.
6.12.1 Except as may be set forth in the Schedule of Employees, (a)
Company is in Material compliance
with Material Requirements of Law respecting employment and
employment practices, terms and
conditions of employment, and wages and hours and is not engaged
in any unfair labor practice; (b)
there is no unfair labor practice complaint pending or, to the
knowledge of Company, threatened
against Company before the National Labor Relations Board or any
Governmental agency; (c) there
is not now nor has there been during the last four years any
labor strike, nor any dispute, grievance,
controversy or other labor trouble which is Material in the
aggregate; (d) no union representation
question exists respecting the employees of Company; (e) there
are no collective bargaining
agreements binding upon Company; and (f) there is no pending
arbitration or judicial proceeding
arising out of or under collective bargaining agreements or
other employment agreements or the
employer-employee relationship.
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6.12.2 Except as set forth in the Schedule of Employees, no employee
of Company is now due a Material
bonus, or would be due such a bonus at the end of the current
fiscal year, upon the occurrence of a
contingency or otherwise, under agreements currently in effect.
Except as may be set forth in the
Schedule of Employees, all accrued Material obligations of
Company, whether arising by operation
of law, by Contractual Obligation or by past custom, for
payments to trusts or other funds or to any
Governmental agency, with respect to unemployment compensation,
social security, workers'
compensation, disability programs, accrued vacation, accrued
sick pay, pension or any other benefits
for employees as of the date hereof have been paid or adequate
accruals therefor on the books of
account of Company have been provided, and none of the foregoing
has been rendered not due by
reason of any extension or waiver.
6.12.3 The data printout attached to the Schedule of Employees with
reasonably accuracy sets forth each
Material employee, consultant or commission agent of the Company
who is employed by the
Company as of the date of such printout and with respect to each
such employee presently employed,
such Person's rate of compensation (including any commissions)
for the period specified and such
Person's year to date compensation as of the end of such period.
The Schedule of Employees with
reasonable accuracy lists with respect to each employee,
consultant or commission agent of the
Company who, during the last fiscal year earned or who,
during the current fiscal year would earn
(based on current practices) $25,000 or more on an annualized
basis, and with respect to each such
Person, the positions held as of the date hereof and held
since April 1, 1994, and the date on which
the compensation of such Person was last changed, including
the amount of such change.
6.1Except as set forth in the Schedule of Employees, Company is not a
party to or bound by any employment or commission agreements in excess
of one year or which could require compensa-
tion and benefits, collective employment contracts, deferred
compensation agreements, bonus plans, profit sharing plans, pension
plans or any other Plans. There have been no Material labor
difficulties.
6.13 Employee Benefit Plans.
6.13.1 All Plans comply with all Material Requirements of Law. No
liabilities to any Government for taxes, penalties, interest,
premiums, contributions, or any other items have been incurred
with respect to any Plan other than in the ordinary course of
business for current items paid or items set forth or reserved
against on the Financial Statements.
6.13.2 The Schedule of Employees sets forth a complete list of all Plans
covering any employee of Company, the identity of each funding
agency holding assets of any such Plan, the identity of any
insurance company issuing any contract or policy under any such
Plan, and the identity of any actuarial adviser or service
provider retained by, or who provided services to, any Plan
during the past 18 months.
6.13.3 No Plan has incurred any liability other than pursuant to the
terms of the Plan in the ordinary course of business of the Plan.
No assets of any Plan have suffered any Material adverse change
since the last valuation report.
6.13.4 Each Plan has good and marketable title to all of the assets it
purports to own free and clear of all
Liens. No Plan is a party to any (a) Contractual Obligation
other than one entered into in the
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ordinary course of business, (b) partnership or joint venture
agreements, or (c) employment, consulting, or management
agreements except as may be set forth on the Schedule of
Contracts.
6.13.5 The Schedule of Transactions with Interest Persons completely and
accurately describes (a) all Indebtedness outstanding on June 30,
1997 or thereafter incurred and (b) all sales of property or
performances of services for which payment has been incurred or
accrued on or after June 30, 1997, between any Plan on the one
hand, and any officer, director, or partner of Company, or any
Affiliate of any of them, on the other.
6.14 Compliance with Laws. Except as set forth in the Schedule of
Compliance, the Company is not in Material violation of any Material
applicable Requirement of Law and all necessary filings and
prerequisites under federal and state securities laws with respect to
the issuance of the Company Common Stock and the Series D Convertible
Preferred Stock have been complied with.
6.15 Consents. Except as may be set forth in the Schedule of Consents:
6.15.1 There is no consent, approval, order, or authorization of, or
registration, declaration or filing with, any Governmental
authority on the part of Company required in connection with the
valid execution, delivery and performance by Company of this
Agreement and the consummation of the transactions contemplated
herein by Company.
6.15.2 All Material permits, concessions, grants, franchises, licenses
and other Governmental authorizations and approvals necessary for
the conduct of the business of Company have been duly obtained
and are in full force and effect, and there are no proceedings
pending or, to the knowledge of Company, threatened which may
result in the revocation, cancellation or suspension, or any
Materially adverse modification of any thereof.
6.15.3 There is no consent, approval or authorization of any landlord
under any Material Lease of the Company required in order to
prevent such landlord from having the right to take action (or
refrain from taking action).
6.15.4 There is no consent, approval or authorization of any other
Person (a) whose consent is required
under any Material agreement set forth in the Schedule of
Contracts in order to permit Company to
consummate the transaction contemplated hereby, (b) who in the
absence of such consent, would
have the right to (i) declare such agreement in default, (ii)
terminate or modify such agreement, or
(iii) accelerate the time within which, or the terms under which
the Company is to perform any act
or receive any rights or benefits under such agreement, or (c)
which, if not received, would result
in (i) a default under such agreement, (ii) the termination or
modification of such agreement, or (iii)
the acceleration of the time within which, or the terms under
which, the Company is to perform any
act or receive any rights or benefits under such agreement.
6.16 Effect of Agreement. Except as disclosed in the Schedule of
Enforceability, the execution, delivery and performance of this
Agreement by Company and the consummation of the transactions
contemplated hereby will not, with or without the giving of notice or
the lapse of time, or both:
6.16.1 Violate any Material Requirement of Law applicable to Company.
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6.16.2 Result in the breach of or conflict with any Material term,
covenant, condition, or provision of, result in the modification
or termination of, constitute a default under, or result in the
creation or imposition of any Lien upon any of the properties or
assets of Company under, any Contractual Obligation to which
Company is a party or by which any of their property is bound.
6.17 Transactions With Interested Persons.
6.17.1 Except as may be set forth in the Schedule of Transactions with
Interested Persons, no officer, director, or partner of Company
or any Affiliate of the foregoing owns, directly or indirectly,
on an individual or joint basis, any Material interest in, or
serves as an officer, director or employee of, any customer,
competitor or supplier of Company, or any Person which has a
Material contract or arrangement with Company or any Related
Party.
6.17.2 The Schedule of Transactions with Interested Persons correctly
and accurately describes all Material Indebtedness, all sales of
Material property and performances of Material services and any
other Material transaction between Company, on the one hand, and
any Related Party or officer, director or partner of Company or
any Affiliate of the foregoing, on the other, which (a) was
outstanding on June 30, 1997 (b) was incurred or took place after
June 30, 1997, or (c) was outstanding on the date hereof other
than for personal services performed by an officer for Company
within the past 30 days.
6.17.3 The Schedule of Transactions with Interested Persons correctly
and accurately sets forth with respect
to the sale of any Material property or the performance of any
Material services between Company,
on the one hand, and any Related Party or officer, director, or
partner of Company or any Affiliates
of the foregoing, on the other, which is described in response
to Section 6.17.2, (a) whether such
transaction was on terms comparable to those that would have
resulted from dealing between
unrelated parties, and, (b) if any such transaction was not on
terms which would have resulted from
dealings between unrelated parties, the terms comparable to those
that would have resulted from
dealings between unrelated parties.
6.17.4 The Schedule of Transactions with Interested Persons correctly
and accurately describes all items of personal property, other
than expendable supplies, physically removed from the possession
of Company or retired from the books of accounts of Company by
any Related Party or officer, director, or partner of Company or
any Affiliate of the foregoing since June 30, 1994.
6.18 Books and Records. Except as set forth in the Schedule of Compliance,
the books of account and other financial and corporate records of
Company and of each Plan are in all Material respects complete and
correct, are maintained in accordance with usual business practices and
comply with all Material applicable Requirements of Law. Such books and
records reflect only valid transactions and all valid transactions
involving Company of a kind required to be reflected on such books and
records are reflected on such books and records. The corporate minute
books of Company contain accurate records of all Material meetings and
consents of all of the directors and shareholders since the
incorporation of the Company. The stock books and ledgers of Company
contain accurate records of all issuances, retirements and transfers of
record of capital stock.
6.19 Property.
6.19.1 The Schedule of Real Property or the Schedule of Leases
reasonably describes all Material real property and interests in
real property owned or Leased by the Company including, without
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limitation, for each Lease, the address of the real property, the
name and address of the landlord, the term of the Lease, the
amount of rent payable under the Lease and, as to any option to
renew, for each option, the number of years covered by such
option. Company has good and marketable title to all real
properties which they purport to own and valid leasehold
interests in all real properties which they purport to Lease, in
each case free and clear of all Liens, except Permitted Liens or
Liens set forth in the Schedule of Real Property. Except as set
forth in the Schedule of Real Property, (i) each Lease of real
property to which Company is a party is in full force and effect
in accordance with its terms, (ii) all rents and other amounts
required to be paid to date under such Leases have been paid,
(iii) to the best knowledge of Company and Newco, no event or
condition exists which constitutes, or after notice or lapse of
time or both would constitute, a default on the part of Company
under any Lease of real property to which Company is a party and,
to the knowledge of Company, there exists no such event or
condition which constitutes or would constitute such a default on
the part of any of the other parties thereto. Except as set forth
in the Schedule of Real Property, no Material property owned by
Company is subject to any sublease, concession or license which
entitles any Person (other than employees of Company) to transact
business on any such property.
6.19.2 Company has valid Leases respecting all Material personal
property they purport to Lease. The
rights of Company as lessee under such Leases are free and
clear of all Liens, except Permitted
Liens. Except as set forth in the Schedule of Personal
Property, (i) each Lease of personal property
to which Company is a party is in full force and effect
in accordance with its terms, (ii) all rents and
other amounts required to be paid to date under such Leases
have been paid, (iii) no event or
condition exists which constitutes, or after notice or lapse of
time or both would constitute, a default
on the part of Company under any such Lease, and (iv) to the
knowledge of Company, there exists
no such event or condition which constitutes or would constitute
such a default on the part of any
of the other parties thereto.
6.20 Reporting Act Documents. Except as set forth in the Schedule of
Compliance, Company has, in all Reporting Act Documents, complied in
all Material respects with the reporting and proxy requirements of the
Exchange Act and the rules and regulations of the Commission
promulgated thereunder. The information contained in each Reporting Act
Document of Company is true and correct in all Material respects as of
the date thereof, and no Reporting Act Document contains any untrue
statement of a Material fact or omits to state a Material fact required
to be stated therein or necessary to make the statements therein not
misleading as of the date thereof.
6.21 Financial Statements. Except as set forth on the Schedule of Financial
Statements, the Financial Statements present fairly the consolidated
financial position and results or operations and changes in the
consolidated financial position of Company at the respective dates and
for the respective periods indicated in accordance with generally
accepted accounting principles applied on a consistent basis.
6.22 Absence of Undisclosed Liabilities. Except to the extent reflected or
reserved against on the Financial Statements or as set forth in the
Disclosure Schedules, the Company has no Material liability, whether
absolute, accrued, known or unknown, contingent or otherwise, whether
due or to become due, including without limitation, liabilities as
guarantor under any Guaranty and any liabilities for taxes or other
Governmental charges, for any period prior to October 1, 1993, or
arising out of any transaction the Company entered into prior to such
date or arising out of any state of facts arising prior to such date,
other than those incurred in the ordinary course of business, none of
which has had, or may be reasonably expected to have, a Material
adverse effect on Company.
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6.23 Insurance. Except as set forth in the Schedule of Insurance:
6.23.1 (a) Company has maintained insurance with respect to its
properties and business against loss or damage. Each insurance
policy maintained by Company is in full force and effect, all
premiums due thereon having been paid and all provisions of such
policy having been complied with.
6.23.2 Company has not received any notice of any pending or threatened
terminations or Material premium increases with respect to such
insurance policies.
6.23.3 Neither Company nor any Subsidiary of Company has failed to give
any notice or present any claim under any insurance policy in a
due and timely fashion.
6.23.4 There are no outstanding requirements or recommendations by or
made on behalf of any insurance company that issued a policy with
respect to any of the properties, assets or business of Company
requiring or recommending any equipment or facilities to be
installed on or in connection with any of the properties or
assets owned or leased by Company.
6.24 Disclosure. To the best knowledge of Company and Newco neither this
Agreement nor any written document, statement, list, schedule,
certificate or other instrument referred to herein or delivered by or
on behalf of Company in connection with the transactions contemplated
hereby contains any untrue statement of a Material fact or omits to
state a Material fact necessary to make the statements herein and
therein, in light of the circumstances under which they were made, not
misleading. There is no fact known to Company which Materially
adversely affects, or in the future is likely to (so far as Company can
now reasonably foresee) Materially adversely affect Company or any
Plan, other than (a) general economic or business conditions or (b)
facts set forth herein or which may be set forth in the Disclosure
Schedules referred to herein.
6.25 Brokers. Company has not incurred or become liable for any commission,
fee or other similar payment to any broker in connection with the
negotiation of this Agreement or the consummation of the transactions
contemplated hereby, except as set forth in Section 7.11.
6.26 Bank Accounts. Except as set forth in the Schedule of Bank Accounts,
there are no bank accounts or safe deposit boxes maintained by the
Company or in which its property is held at the date hereof, and (b)
there are no Persons authorized to draw thereon or have access thereto.
6.27 Records of the Business. The books of account and other financial
records of Company are complete and correct, are maintained in
accordance with usual business practices and comply with all
Requirements of Law. Such books and records reflect only valid
transactions and all valid transactions required to be reflected on
such books and records are reflected upon such books and records.
6.28 Financials. Company has previously furnished Acquirees a true and
complete copy of its Annual Report on Form 10-KSB/A for the year ended
December 31, 1997 (the "Company 10-KSB") and a true and complete copy
of its Quarterly Report on Form 10QSB for the quarter ended June 30,
1997 (the "Company 10QSB"). The financial statements contained in the
10KSB and the 10QSB have been prepared in conformity with generally
accepted accounting principles consistently applied. The balance sheets
of Company contained in the 10KSB and the 10-QSB fairly present the
financial condition of Company as at the dates thereof, and the related
statements of operations of Company contained in the 10KSB and the
10-QSB fairly present the results of operations of Company for the
periods ended.
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6.29 Status of Company Common Stock. The shares of Company Common Stock and
Preferred Stock to be issued pursuant to this Agreement, when so
issued, will be duly authorized, validly issued and outstanding, fully
paid and non-assessable.
Section 7.Certain Understandings and Agreements.
7.1Audit; Form 8-K. On or prior to Closing, and as a condition thereto, ECS
and PTI shall deliver to Company audited financial statements conforming
to the requirements of the Exchange Act as of and for the year ended
December 31, 1996 and the seven months ended July 31, 1997 (the "Audit").
The Audit shall be accompanied by an unqualified opinion of Harlan &
Boettger L.L.P., which is an independent accounting firm. Company shall
file a current report on Form 8-K within 15 days of the Closing in
compliance with the Exchange Act, with the Audit and the pro forma
statements required by the Exchange Act, and will otherwise comply with
the reporting requirements of the Exchange Act following the Closing.
7.2 Employment Agreements. On Closing, and as a condition precedent thereto,
Newco shall enter into an employment agreement with Shareholder providing
for compensation and benefits as are set forth in the Employment Agreement
attached as Exhibit 7.2.
7.3 Option. On Closing, and as a condition precedent thereto, James Pruzin
shall transfer and assign to Newco any and all of his rights, if any, to
acquire the 25 shares of PTI held by the Meehan family.
7.4 Tax Reimbursement. Newco and Company acknowledge that ECS and PTI have
elected to be taxed under Subchapter S of the Code, and that Shareholder
will be personally liable for earnings and profits of ECS and PTI for its
fiscal year up to the Closing. Company and Newco acknowledge that ECS
and/or PTI have a payable on their books of account for a distribution due
to Shareholder for such period in the amount reasonably equal to his
personal tax liability, and Company and Newco agree that such payable will
be paid to Shareholder by January 1, 1998.
7.5 Bonus Pool. On or prior to Closing, and as a condition precedent to such
Closing, Newco shall establish a five year bonus pool program to be
administered by the president of Newco, pursuant to which the key
executive officer of Newco shall receive bonus compensation on terms
similar to comparable companies.
7.6 Capital Infusion. On or prior to Closing, the Company shall infuse into
Newco no less than $2 million of equity capital, in cash, cash equivalence
or securities ("Equity Capital"), which shall be used exclusively by Newco
for its working, growth, and expansion capital requirements of Newco, as
Mr. Pruzin shall determine appropriate during his employment with Newco.
Any securities Equity Capital shall be publicly-traded securities which
are freely and immediately saleable without limitation or restriction
(excluding only public demand limitations) and traded upon a
nationally-recognized securities exchange which for the purposes of this
Agreement shall include the Electronic Bulletin Board sponsored by the
National Association of Securities Dealers, Inc. The Equity Capital shall
remain at all times with Newco until utilized by Newco for its business
purposes in accordance with this paragraph and shall not be liened,
pledged or encumbered or transferred by the Company or any of its
subsidiaries, directors or officers in a manner inconsistent with this
paragraph. Any funds obtained from the sale of Equity Capital securities
shall be available for exclusive use by Newco in accordance with the terms
of this paragraph. In the event the sale of any securities provided to
satisfy the Equity Capital requirement are not readily tradable or produce
a sale of less than their pro rata
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amount to produce $2 million of working capital, the Company shall
immediately fund such differential to provide Newco the equivalent of the
Equity Capital required hereunder. Nothing herein shall require Newco to
expend such funds and Newco may retain such funds as Mr. Pruzin deems
appropriate to provide its working capital and expansion needs as
appropriate.
7.7 Survival of Representations and Warranties. No representations or
warranties of the parties hereto contained in this Agreement, in any
exhibit hereto, in the Disclosure Schedules, or in any certificate or
document delivered in connection herewith or pursuant hereto, shall
survive after the second anniversary of the date of the Closing except (a)
as to any matters with respect to which an action at law or in equity
shall have been commenced before such date, in which event such survival
shall continue until the resolution of such action, or (b) as to any claim
by any Person (other than a party to this Agreement, or an Affiliate of
any such party) the existence of which breaches a representation or
warranty of a party to this Agreement, in which event such survival shall
continue until the running of the applicable statute of limitations and
any extensions thereof.
7.8 Indemnity by Shareholder. Subject to Section 7.12, the Shareholder hereby
agrees to indemnify, defend and hold harmless the Company and Newco (and
their respective directors, officers, employees, Affiliates, successors
and assigns), on an after-tax basis, from and against any losses,
liabilities, damages, costs or expenses, including, without limitation,
interest, penalties and reasonable fees and expenses of counsel
(collectively, "Losses"), based upon, arising out of or otherwise
resulting from (1) any inaccuracy in any representation or breach of any
warranty of Shareholder, ECS or PTI contained in this Agreement or in any
schedule or certificate delivered pursuant hereto or thereto or (2) the
breach or nonfulfillment of any covenant, agreement or other obligation of
Shareholder, ECS or PTI under this Agreement. The obligations of
Shareholder, ECS or PTI under this Section 7.8 shall survive for a period
of two years from Closing.
7.9 Indemnity by Company. Subject to Section 7.13, the Company hereby agrees
to indemnify, defend and hold harmless the Shareholder (and its
affiliates, successors and assigns), on an after-tax basis, from and
against any losses, liabilities, damages, costs or expenses, including,
without limitation, interest, penalties and reasonable fees and expenses
of counsel (collectively, "Losses"), based upon, arising out of or
otherwise resulting from (1) any inaccuracy in any representation or
breach of any warranty of the Company or Newco contained in this Agreement
or in any schedule or certificate delivered pursuant hereto or thereto; or
(2) the breach or non-fulfillment of any covenant, agreement or other
obligation of the Company or Newco under this Agreement; or (3) any breach
of Newco's obligation to Fox and Fin Financial Group, L.C. under paragraph
7.11; or (4) Shareholder's beneficial ownership of Anjelo S.A. de C.V. The
obligations of the Company under this Section 7.9 shall survive for a
period of two years from Closing.
7.10. Tax Treatment. Each party to this Agreement acknowledges that they each
have been represented by their own tax advisors in connection with this
transaction; that neither has made any representation or warranty to the
other with respect to the treatment of such transaction or the effect
thereof under applicable tax laws, regulations, or interpretations; and
that no attorney's opinion or private revenue ruling has been obtained
with respect to the effects thereof under the Code, as amended. The
parties agree that they all intend this transaction to be tax-free under
the Code and agree to make such amendments to this Agreement as may be
necessary to cause it to be tax-free, to the extent possible without
altering its economic substance. Company shall apply to the Internal
Revenue Service for a change in accounting approval to change the system
of accounting utilized by ECS for inventory and
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asset tax treatment to conform to the accounting system utilized by
Company in accordance with the procedure proposed and submitted by Harlan
& Boettger, L.L.P. ("Accountants"). The Accountants shall use their best
efforts to obtain a satisfactory result for the change in accounting
procedure and, Company and Newco shall assist in such process and not take
any actions inconsistent therewith.
7.11 Brokerage Fee. Following Closing, Newco shall be responsible for
payment of the brokerage fee to
Fox and Fin Financial Group, L.C. in full satisfaction of such firm's
services in introduction of the
parties.
7.12 Limit of Shareholder Liability. Notwithstanding anything to be contrary
in this Agreement, Shareholder's liability for breach of the
representations and warranties of Article 5 and under Section 7.8 shall
be limited as follows:
(a)Shareholder will not be liable for the first $900,000 in damages to or
indemnification due by Shareholder to
Company and Newco;
(b)Shareholder's liability in any event shall be limited in amount equal
to the sum of (i) the value of the Series D Convertible Preferred Stock or
the shares of Company Common Stock issued on conversion thereof as of the
date a claim is made under Sections 5 or 7.8, and (ii) the proceeds to
Shareholder from the sale of Series D Convertible Preferred Stock or
Company Common Stock issued upon conversion thereof;
(c)The recourse of Company and Newco for a breach by Shareholder of
Section 5 or 7.8 shall be limited to the assets described in subsection
(b) of this Section 7.12;
(d)Notwithstanding the foregoing, in the event of a claim under Section 5
or 7.8 of this Agreement, Newco and Company do not waive their right to
sue for rescission of this Agreement; and
(e)Notwithstanding Subsections (b) and (c) of this Section 7.12, Company
and Newco may make claims under Sections 5 or 7.8 in excess of the limits
described in those subsections, but in such event Shareholder shall have
the right in his election to a rescission of the Agreement provided that
in such rescission Shareholder will agree to repay the $2 million provided
by Section 7.6 within one year of the rescission.
7.13 Guarantees. Company agrees to use its best efforts to cause all
personal guarantees of Shareholder to be canceled as soon as
practicable following the Closing.
7.14 NASDAQ, Public Offering. Company shall use its reasonable best efforts
to cause its common stock to be listed on the Automated Quotation
System of the National Association of Securities Dealers, Inc.
("NASDAQ") within 12 months of closing. Company shall also use its
reasonable best efforts to cause Newco to become publicly traded within
18 months of Closing. The Company will not sell majority control of
Newco to a third party until the earlier of two years from the Closing
or until Newco becomes publicly traded.
7.15 Anjelo S.A. de C.V. Shareholder, as beneficial owner of all of the
capital stock of Anjelo S.A. de C.V.
shall on request of Newco or Shareholder, to take such actions as may
be required to transfer beneficial
ownership of such capital stock to Newco or its nominee in a format
which minimizes any taxes or
other transaction costs.
Section 8. Conditions to Closing.
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8.01.Conditions to Obligation of Shareholder, ECS and PTI. The obligations of
Shareholder, ECS and PTI under this Agreement shall be subject to each of the
following conditions:
8.01(a)Representations and Warranties of Company and Newco to be True. The
representations and warranties of Company and Newco herein contained shall be
true in all Material respects at the Closing with the same effect as though
made at such time. Company and Newco shall have performed in all Material
respects all obligations and complied in all Material respects, to its actual
knowledge, with all covenants and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing, including
without limitation those described in Sections 7.2, 7.6 and otherwise in
Section 7 hereof.
8.01(b)No Legal Proceedings. No injunction or restraining order shall be in
effect, and no action or proceeding shall have been instituted and, at what
would otherwise have been the Closing, remain pending before a court to
restrain or prohibit the transactions contemplated by this Agreement.
8.01(c)Statutory Requirements. All statutory requirements for the valid
consummation by Company and Newco of the transactions contemplated by this
Agreement shall have been fulfilled. All authorizations, consents and
approvals of all governments and other Persons required to be obtained in
order to permit consummation by Company and Newco of the transactions
contemplated by this Agreement, to continue unimpaired in all Material
respects immediately following the Closing shall have been obtained.
8.01(d)Closing Documents. Company and Newco shall have executed and delivered
all documents required to be executed and delivered by Company and Newco
pursuant to this Agreement.
8.02.Conditions to Obligations of Company. The obligations of Company and Newco
under this Agreement shall be subject to the following conditions:
8.02(a)Representations and Warranties of Shareholder, PTI and ECS to be True.
The representations and warranties of Shareholder, PTI and ECS herein
contained shall be true in all Material respects as of the Closing, and shall
have the same effect as though made at the Closing; Shareholder, PTI and ECS
shall have performed in all Material respects all obligations and complied in
all Material respects, to its knowledge, with all covenants and conditions
required by this Agreement to be performed or complied with by it prior to
the Closing, including without limitation those described in Section 7.
8.02(b)No Legal Proceedings. No injunction or restraining order shall be in
effect prohibiting this Agreement, and no action or proceeding shall have
been instituted and, at what would otherwise have been the Closing, remain
pending before the court to restrain or prohibit the transactions
contemplated by this Agreement.
8.02(c)Statutory and Other Requirements. All statutory requirements for the
valid consummation by Shareholder, PTI and ECS of the transactions
contemplated by this Agreement shall have been fulfilled; all authorizations,
consents and approvals of all Governmental agencies and authorities required
to be obtained in order to permit consummation by Shareholder, PTI and ECS of
the transactions contemplated by this Agreement shall have been obtained.
8.02(d)Closing Documents. Each of Shareholder, PTI and ECS shall have
executed and delivered all documents required to be executed and delivered by
PTI, ECS and Shareholder pursuant to this Agreement.
8.03.Termination of Agreement. Anything herein to the contrary notwithstanding,
this Agreement may be
terminated at any time before the Closing as follows and in no other manner;
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8.03(a)Mutual Consent. By mutual consent of the parties.
8.03(b)Expiration Date. By either Company, ECS or PTI if the Closing shall
not have taken place by October 31, 1997, which date may be extended by mutual
agreement of the parties.
8.04.Payment of Expenses; Waiver of Conditions. In the event that this Agreement
shall be terminated pursuant to Section 8.03 all obligations of the parties
under this Agreement shall terminate and there shall be no liability of any
party to the other. Each party hereto will pay all costs and expenses incident
to its negotiation and preparation of this Agreement and performance of and
compliance with all agreements and conditions contained herein or therein on its
part to be performed or complied with, including the fees, expenses and
disbursements of counsel. If any of the conditions specified in Section 8.01
hereof has not been satisfied, PTI, ECS and Shareholder may nevertheless at the
joint election of PTI, ECS and Shareholder proceed with the transactions
contemplated hereby and if any of the conditions specified in Section 8.02
hereof has not been satisfied, Company and Newco may nevertheless at their joint
election proceed with the transactions contemplated hereby. In the event that
the Closing shall be consummated, each party hereto will pay all of its costs
and expenses in connection therewith.
Section 9.General.
9.1 Successors. Each and all of the provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto, and their
respective heirs, legal representatives, successors and assigns. Neither
this Agreement, nor any rights herein granted may be assigned, transferred
or encumbered by any party.
9.2 Survival of Representations and Warranties. The respective representations
and warranties of Company and Acquiree contained herein shall survive for
two years following the Closing.
9.3 Governing Law. Except where the laws of another jurisdiction are
mandatorily applicable, this Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
laws of the State of California.
9.4 Headings. The descriptive headings of the sections and subsections of this
Agreement are inserted for convenience only and do not constitute a part
of this Agreement. They do not define, limit, construe or describe the
scope or intent of the provision of this Agreement.
9.5 Counterparts. This Agreement may be executed in one or more counterparts,
each of which, when executed by a party hereto, shall be deemed an
original and all of which together shall be deemed one and the same
agreement.
9.6 Reliance Upon Representations and Warranties. Notwithstanding any right of
any party hereto to fully to investigate the affairs of any other party,
the parties hereto may rely upon the representations, warranties and
covenants made to it in this Agreement and on the accuracy of any
certificate, any schedule attached hereto (collectively, the "Disclosure
Schedules"), exhibit or other document given or delivered to it pursuant
to this Agreement. Further, knowledge by an agent of any party hereto of
any facts not otherwise disclosed in this Agreement the Disclosure
Schedules shall not constitute a defense to any claim for
misrepresentation, breach of any warranty, agreement, or covenant under
this Agreement, or the Disclosure Schedules. No representations or
warranties have been made by or on behalf of any Person to induce any
party to enter into this Agreement or to abide by or consummate the
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transactions contemplated by this Agreement, except representations and
warranties expressly set forth herein or in the Disclosure Schedules or in
any certificate, exhibit or other document delivered in connection with or
pursuant to this Agreement. No representations or warranties of any kind
have been made by any representative or agent of the parties hereto.
9.7 Waiver. No purported waiver by any party of any default by any other party
of any term, covenant or condition contained herein shall be deemed to be
a waiver of such term, covenant or condition unless the waiver is in
writing and signed by the waiving party. No such waiver shall in any event
be deemed a waiver of any subsequent default under the same or any other
term, covenant or condition contained herein.
9.8 Notices. Any consent, waiver, notice, demand, request or other instrument
required or permitted to be given under this Agreement shall be in writing
and shall be deemed to have been properly given when delivered in person
or sent by certified or registered United States mail, return receipt
requested, postage prepaid, addressed:
If to Company: The Hartcourt Companies, Inc.
19104 S. Norwalk Boulevard
Artesia, California 90701
copy to: Jehu Hand, Esq.
Hand & Hand
24901 Dana Point Harbor Dr., #200
Dana Point, California 92629
copy to: American Equities, L.L.C.
11400 Olympic Boulevard, Suite 212
Los Angeles, CA 90064
Attn: Reid Breitman
If to ECS, PTI
or Shareholder:James J. Pruzin
2520 N. Coyote Drive, Suite 110
Tucson, Arizona 85745
copy to: Scott W. Gray, Esq.
Jones, Skelton & Hochuli
2901 N. Central Avenue, Suite 800
Phoenix, Arizona 85012
9.9 Entire Agreement. This Agreement, as from time to time amended, together
with the schedules attached hereto and any certificate, exhibit or other
document given or delivered pursuant hereto, sets forth the entire
understanding among the parties concerning the subject matter of this
Agreement and incorporates all prior negotiations and understandings.
There are no covenants, promises, agreements, conditions or
understandings, either oral or written, between them relating to the
subject matter of this Agreement other than those set forth herein. No
alteration, amendment, change or addition to this Agreement shall be
binding upon any party unless in writing and signed by the party to be
charged.
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9.10 No Partnership. Nothing contained in this Agreement will be deemed or
construed by the parties hereto or by any third person to create the
relationship of principal and agent or partnership or joint venture.
9.11 Partial Invalidity. If any term, covenant or condition in this
Agreement or the application thereof to any Person or circumstance
shall be invalid or unenforceable, the remainder of this Agreement or
the application of such term, covenant or condition to Persons or
circumstances, other than those as to which it is held invalid, shall
be unaffected thereby and each term, covenant or condition of this
Agreement shall be valid and enforced to the fullest extent permitted
by law.
9.12 Joint Preparation. This Agreement is to be deemed to have been prepared
jointly by the parties hereto and any uncertainty or ambiguity existing
herein, if any, shall not be interpreted against any party, but shall
be interpreted according to the application of the rules of
interpretation for arm's length agreements.
9.13 Disclosure. Until the Closing, no press releases or other disclosures
(except those required by law) shall be made with respect to the
transactions contemplated hereunder by either Company or Acquiree
without the approval of both parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their authorized officers as of the date and year first above written.
THE HARTCOURT COMPANIES, INC.ELECTRONIC COMPONENTS AND
a Utah corporation SYSTEMS, INC.,
an Arizona corporation
By: By:
Name:Alan V. Phan Name: James J. Pruzin
Title:President Title:President
PRUZIN TECHNOLOGIES, INC., ELECTRONIC COMPONENTS AND
an Arizona corporation SYSTEMS, INC., a Nevada corporation
By: By:
Name:James J. Pruzin Name: Alan V. Phan
Title:President Title: President
SHAREHOLDER
James J. Pruzin
<PAGE>
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
THE HARTCOURT COMPANIES, INC.
DESIGNATING SERIES D PREFERRED STOCK
Alan Phan certifies that they are the President and Assistant
Secretary, respectively, of The Hartcourt Companies, Inc., a Utah corporation
(hereinafter referred to as the "Corporation" or the "Company"); that, pursuant
to the Articles of Incorporation, as amended, and Section 16-10a-602 of the Utah
Business Corporation Act, the Board of Directors of the Corporation acting
without shareholder approval, which is not required under such Section 16-
10a-602 adopted the following amendment to Article IV of the Articles of
Incorporation on October 28, 1997:
The following is hereby appended to the end of Article IV of the
Articles of Incorporation.
1. Creation of Series D Convertible Preferred Stock. There is hereby
created a series of preferred stock consisting of 10,000 shares and designated
as the Series D Convertible Preferred Stock, having the voting powers,
preferences, relative, participating, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set forth below.
2. Dividend Provisions. The holders of shares of Series D Convertible
Preferred Stocks shall be entitled to receive, when and as declared by the Board
of Directors out of any funds at the time legally available therefor, dividends
at a par with holders of the common stock, $.01 par value, of the Corporation
("Common Stock") as if the Series D Convertible Preferred Stock has been
converted into Common Stock on the record date for the payment of dividend.
Dividends shall be waived with respect to any shares of Series D Convertible
Preferred Stock which are converted prior to any dividend payment record date.
Each issued share of Series D Convertible Preferred Stock shall rank on a parity
with each other issued share of Series D Convertible Preferred Stock with
respect to dividends.
3. Redemption Provisions. The Series D Convertible
Preferred Stock shall have no redemption rights.
4. Liquidation Provisions. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the Series D
Convertible Preferred Stock shall be entitled to receive an amount equal to
$1,000.00 per share. Only after the full preferential liquidation amount has
been paid to, or determined and set apart for, the Series D Convertible
Preferred Stock and all other series of Preferred Stock heretofore or hereafter
authorized and issued, if any, the remaining assets of the Corporation available
for distribution to shareholders shall be distributed ratably to the holders of
the Common Stock. In the event the assets of the Corporation available for
distribution to
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its shareholders are insufficient to pay the full preferential liquidation
amount per share required to be paid to the holders of the Corporation's
Preferred Stock, the entire amount of assets of the Corporation available for
distribution to shareholders shall be paid up to their respective full
liquidation amounts to the holders of all classes of Preferred Stock, all of
which amounts shall be distributed among holders of each such series of
Preferred Stock according to their respective terms, and the holders of Common
Stock shall receive nothing. A reorganization or any other consolidation or
merger of the Corporation with or into any other corporation, or any other sale
of all or substantially all of the assets of the Corporation, shall not be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this Section 4, and the Series D Convertible Preferred Stock
shall be entitled only to (i) the right provided in any agreement or plan
governing the reorganization or other consolidation, merger or sale of assets
transaction, (ii) the rights contained in the Utah General Corporation Law and
(iii) the rights contained in other Sections hereof.
5. Conversion Provisions. The holders of shares of Series
D Convertible Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert.
(1) Each share of Series D Convertible Preferred
Stock shall be convertible, at the option of its holder, at
any time, into a number of shares of common stock of the
Company at the conversion rate (the "Conversion Rate") defined
below.
The Conversion Rate, subject to the adjustments
described below, shall be equal to $1,000 divided by the
Market Price. For purposes of this Section 5(a)(1), Market
Price shall be the closing bid price of the Common Stock on
the Conversion Date, as reported by the Electronic Bulletin
Board sponsored by the National Association of Securities
Dealers or the closing bid price on the NASDAQ Small Cap
Market, if the Common Stock is then trading on NASDAQ,
averaged over the twenty (20) trading days ending on and
including the second trading day prior to the date of
conversion. Notwithstanding the foregoing, in no event shall
the Conversion Rate be less than $1.00 nor more than $2.25, as
adjusted for any stock split or recapitalization.
The holder shall notify the Corporation, by facsimile
notice to the Corporation at (562) 403-1130, copy by overnight
courier at 19104 S. Norwalk Boulevard, Artesia, California
90701, of the holder's intent to convert (the "Notice of
Conversion") in the form set forth in Section 5(a)(2) hereof,
executed by the holder of the shares of Series D Preferred
Stock evidencing such holder's intention to convert such
shares of Series D Convertible Preferred Stock or a specified
portion (as
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above provided) thereof, and accompanied, if required by the
Company, by proper assignment thereof in blank. Such
conversion shall be effectuated by surrendering the
certificates representing the shares of Series D Convertible
Preferred Stock to be converted. The date on which notice of
conversion shall be given shall be the date on which the
holder has delivered to the Company, by facsimile or hand
delivery, of the Notice of Conversion duly executed to the
Company; provided, however, that the Conversion Date specified
in such Notice of Conversion is no less than thirty days after
the date on which the Notice of Conversion is given. The
Company shall cause its transfer agent to complete the
issuance of Common Stock within ten (10) business days of
receipt of such Notice of Conversion, provided that the
Company has received the Series D Convertible Preferred Stock
certificates which are the subject of the conversion on or
prior to such tenth business day.
(2) No less than 10 (or multiple thereof) shares of
Series D Convertible Preferred Stock may be converted at any
one time. No fractional shares of Common Stock shall be issued
upon conversion of the Series D Convertible Preferred Stock,
in lieu of fractional shares, the number of shares issuable
will be rounded to the nearest whole share. The form of Notice
of Conversion shall read substantially as follows:
The undersigned holder ( the "Holder") is
surrendering to The Hartcourt Companies, Inc., a Utah
corporation (the "Company"), one or more certificates
representing shares of Series D Convertible Preferred Stock of
the Company (the "Preferred Stock") in connection with the
conversion of all or a portion of the Preferred Stock into
shares of Common Stock, $.01 par value per share, of the
Company (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock
was issued by the Company pursuant to the exemption from
registration under the United States Securities Act of 1933,
as amended (the "Securities Act"), provided by Section 4(2)
thereof.
2. The Holder represents and warrants that all offers
and sales of the Common Stock issued to the Holder upon such
conversion of the Preferred Stock shall be made (a) pursuant
to an effective registration statement under the Securities
Act, (b) in compliance with Rule 144, or (c) pursuant to some
other exemption from registration.
Number of Shares of Preferred Stock being converted:
Conversion Date:
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Delivery Instructions for certificates of Common Stock and for
new certificates representing any remaining shares of
Preferred Stock:
NAME OF HOLDER:
(Signature of Holder)
(b) Adjustments to Conversion Rate.
(1) Reclassification, Exchange and Substitution. If
the Common Stock of the Corporation issuable on conversion of
the Series D Convertible Preferred Stock shall be changed into
the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization,
reclassification, reverse stock split or forward stock split
or stock dividend or otherwise (other than a subdivision or
combination of shares provided for above), the holders of the
Series D Convertible Preferred Stock shall, upon its
conversion, be entitled to receive, in lieu of the Common
Stock which the holders would have become entitled to receive
but for such change, a number of shares of such other class or
classes of stock that would have been subject to receipt by
the holders if they had exercised their rights of conversion
of the Series D Convertible Preferred Stock immediately before
that change.
(2) Reorganizations, Mergers, Consolidations or
Sale of Assets. If at any time there shall be a capital
reorganization of the Common Stock (other than a sub
division, combination, reclassification or exchange of shares
provided for elsewhere in this Section (b) or merger of the
Corporation into another corporation, or the sale of the
Corporation's properties and assets as, or substantially as,
an entirety to any other person), then, as a part of such
reorganization, merger or sale, lawful provision shall be made
so that the holders of the Series D Convertible Preferred
Stock shall thereafter be entitled to receive upon conversion
of the Series D Convertible Preferred Stock, the number of
shares of stock or other securities or property of the
Corporation, or of the successor corporation resulting from
such merger, to which holders of the Common Stock deliverable
upon conversion of the Series D Convertible Preferred Stock
would have been entitled on such capital reorgan
ization, merger or sale as if the Series D Convertible
Preferred Stock had been converted immediately before that
capital reorganization, merger or sale to the end
that the provisions of this paragraph (b)(2) (including
adjustment of the Conversion Rate then in effect and number of
shares purchasable upon conversion of the Series D Convertible
Preferred Stock) shall be applicable after that event as
nearly equivalently as may be prac
ticable.
(c) No Impairment. The Corporation will not, by
amendment of its Articles of Incorporation or through any re
organization, recapitalization, transfer of assets, merger,
dissolution, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section
5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of
the Series D Convertible Preferred Stock against impairment.
(d) Certificate as to Adjustments. Upon the occurrence
of each adjustment or readjustment of the Conversion Rate for
any shares of Series D Convertible Preferred Stock, the
Corporation at its expense shall promptly compute such adjust
ment or readjustment in accordance with the terms hereof and prepare
and furnish to each holder of Series D Convertible Preferred Stock
effected thereby a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment
or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series D Convertible Preferred
Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Rate in effect at the time, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such holder's
shares of Series D Convertible Preferred Stock.
(e) Notices of Record Date. In the event of the establishment
by the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, the Corporation shall mail to each holder of Series D
Convertible Preferred Stock at least twenty (20) days prior to the date
specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution
and the amount and character of such dividend or distribution.
(f) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose
of effecting the conversion of the shares of the Series D Convertible
Preferred Stock such number of its shares of Common Stock as shall from
time to time be
sufficient to effect the conversion of all then outstanding shares of
the Series D Convertible Preferred Stock; and if at any time the number
of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of
the Series D Convertible Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(g) Notices. Any notices required by the provisions of this
Section 5 to be given to the holders of shares of Series D Convertible
Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at its
address appearing on the books of the Corporation.
6. Voting Provisions. The Series D Convertible Preferred Stock shall be
entitled to vote as a class with holders of Common Stock with such number of
votes per share as the holder would be entitled to, and at the Conversion Rate,
as if the Series D Preferred Stock were converted on the record date for the
vote of holders of Common Stock.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment
to the Articles of Incorporation to be duly executed by its President and
attested to by its Assistant Secretary this 28th day of October, 1997.
THE HARTCOURT COMPANIES, INC.
Alan Phan, President
