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 Xxxxx Xxxxxx, 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:
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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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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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
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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.
39
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 Xxxx is not valid or enforceable by the owner
thereof or of any infringement upon or conflict with any Xxxx 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 Xxxx 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 Xxxx.
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
40
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.
41
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).
42
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
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
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
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
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;
47
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.
48
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.
49
(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:
50
(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.
51
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 Xxxx is not
valid or enforceable by the owner thereof or of any infringement
upon or conflict with any Xxxx 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 Xxxx 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 Xxxx.
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.
52
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
00
xxxxxxxx xxxxxx xx xxxxxxxx, (x) 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.
54
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
55
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.
56
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.
57
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 Xxxxxx &
Xxxxxxxx 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, Xxxxx Xxxxxx
shall transfer and assign to Newco any and all of his rights, if any, to
acquire the 25 shares of PTI held by the Xxxxxx 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
Xx. Xxxxxx 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 Xx. Xxxxxx 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
59
asset tax treatment to conform to the accounting system utilized by
Company in accordance with the procedure proposed and submitted by Xxxxxx
& Xxxxxxxx, 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
xxx 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;
61
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
62
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.
00000 X. Xxxxxxx Xxxxxxxxx
Xxxxxxx, Xxxxxxxxxx 00000
copy to: Jehu Hand, Esq.
Hand & Hand
00000 Xxxx Xxxxx Xxxxxx Xx., #000
Xxxx Xxxxx, Xxxxxxxxxx 00000
copy to: American Equities, L.L.C.
00000 Xxxxxxx Xxxxxxxxx, Xxxxx 000
Xxx Xxxxxxx, XX 00000
Attn: Xxxx Xxxxxxxx
If to ECS, PTI
or Shareholder:Xxxxx X. Xxxxxx
0000 X. Xxxxxx Xxxxx, Xxxxx 000
Xxxxxx, Xxxxxxx 00000
copy to: Xxxxx X. Xxxx, Esq.
Xxxxx, Xxxxxxx & Xxxxxxx
0000 X. Xxxxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, Xxxxxxx 00000
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.
63
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:Xxxx X. Xxxx Name: Xxxxx X. Xxxxxx
Title:President Title:President
PRUZIN TECHNOLOGIES, INC., ELECTRONIC COMPONENTS AND
an Arizona corporation SYSTEMS, INC., a Nevada corporation
By: By:
Name:Xxxxx X. Xxxxxx Name: Xxxx X. Xxxx
Title:President Title: President
SHAREHOLDER
Xxxxx X. Xxxxxx
