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As filed with the Securities and Exchange Commission on February 25, 2000
Registration No. 333- ______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE HARTCOURT COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
UTAH 87-0400541
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1196 E. Willow Street
Long Beach, California 90806
(562) 426-9796
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Dr. Alan V. Phan
1196 E. Willow Street
Long Beach, California 90806
(562) 426-9796
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(Name, address, including zip code, and telephone number, including area code,
for agent for service)
With a copy to
Sanford T. Sherman, Esq.
Jeffers, Shaff & Falk, LLP
18881 Von Karman Avenue, Suite 1400
Irvine, California 92612
Telephone (949) 475-9086
Facsimile (949) 475-9087
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE REGISTRATION FEE
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
common stock 8,406,040(2) $12.03 $101,124,661.20 $26,696.91
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Total 8,406,040(3) $101,124,661.20 $26,696.91
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
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(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) and (g) under the
Securities Act of 1933, based upon the average of the bid and asked
price of our common stock as reported on the OTC Bulletin Board on
February 24, 2000.
(2) Includes (i) 400,000 shares issuable upon exercise of a common stock
purchase warrant and (ii) a presently indeterminable number of shares
of common stock, estimated to be not more than 5,000,000 shares, to be
offered and sold by a selling shareholder named herein pursuant to the
exercise of our put right to sell shares of our common stock.
(3) The Registration Statement also covers any additional shares of common
stock which may become issuable by virtue of the antidilution
provisions of the warrant. No additional registration fee is included
for these shares.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
(Subject to Completion, Dated February 25, 2000) PROSPECTUS
THE HARTCOURT COMPANIES, INC.
Certain of our shareholders named on page 1 of this prospectus are
offering and selling up to an estimated 8,406,040 shares of our common stock,
which includes up to (i) 400,000 shares of our common stock which are reserved
for issuance upon exercise of a warrant and (ii) 5,000,000 shares of our common
stock issuable upon exercise of a put right.
We will not receive any of the proceeds from the sale of our common
stock by selling shareholders. However, 400,000 of the shares offered by the
selling shareholders are issuable upon the exercise of an outstanding stock
purchase warrant at an exercise price equal to the market price of our common
stock for the five day period prior to their exercise and a put right pursuant
to which we can sell to the selling shareholder an aggregate of $35,000,000 of
our common stock at a purchase price equal to the lesser of (i) the lowest
closing bid price of our common stock during the 20 day period immediately
preceding the sale minus $.10 or (ii) 91% of the market price for our common
stock as determined in (i). If the warrant and put right were exercised in full,
we would receive gross proceeds of up to $39,812,000.
The selling shareholders may offer and sell some, all or none of the
common stock under this prospectus. The selling shareholders may determine the
prices at which they will sell such common stock, which may be at market prices
prevailing at the time of such sale or some other price. In connection with such
sales, the selling shareholders may use brokers or dealers which may receive
compensation or commissions for such sales. Because the selling shareholders
will offer and sell the shares at various times, we have not included in this
prospectus information about the price to the public of the shares or the
proceeds to the selling shareholders.
Our common stock is quoted on the over-the-counter bulletin board under
the symbol HRCT. On February 24, 2000, the average of the bid and asked prices
of our common stock was $12.03 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD INVEST IN OUR COMMON STOCK ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 1 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy of the disclosure in this prospectus. Any representation to the
contrary is a criminal offense.
The date of this prospectus is _____________, 2000.
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No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus in connection with the offer made by this prospectus and, if
given or made, the information or representations must not be relied upon as
having been authorized by Hartcourt. This prospectus does not constitute an
offer to sell or a solicitation of any offer to buy any security other than the
securities offered by this prospectus, nor does it constitute an offer to sell
or a solicitation of any offer to buy the securities offered by this prospectus
by anyone in any jurisdiction in which the offer or solicitation is not
authorized, or in which the person making the offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make an offer or
solicitation. Neither the delivery of this prospectus nor any sale made under
this prospectus shall, under any circumstances, create any implication that
information contained in this prospectus is correct as of any time subsequent to
the date of this prospectus.
SOME TERMS OF THE SALE
We have put rights to sell shares of our common stock to a selling
shareholder at a price equal to the lesser of (i) the lowest closing bid price
of our common stock for the 20 days prior to the date of sale minus $.10 or (ii)
91% of said market price. The number of shares we can sell depends upon the
price and trading volume of our common stock. We estimate that we may sell a
maximum of 3,196,347 shares of common stock under this arrangement.
As a result, the actual number of shares that we may issue to the
selling shareholders and which the selling shareholders may sell under this
prospectus will depend upon the market price and trading volume of our common
stock at various times. You should look at the discussion under "Selling
Shareholders" for more details about these terms.
In any event, the total number of shares which this prospectus covers
will be the maximum number of shares that we may issue to the selling
shareholders and which the selling shareholders may sell under this prospectus.
<TABLE>
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Table of Contents
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Prospectus Summary...........................................................................
Risk Factors.................................................................................
Use of Proceeds..............................................................................
Selling Security Holders.....................................................................
Plan of Distribution.........................................................................
Description of Securities to be Registered...................................................
Interests of Named Experts and Counsel.......................................................
Incorporation of Certain Information by Reference............................................
Disclosure of Commission Position on Indemnification for Securities Act Liabilities..........
</TABLE>
PROSPECTUS
8,406,040 Shares of Common Stock
THE HARTCOURT COMPANIES, INC.
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THE HARTCOURT COMPANIES, INC.
The Hartcourt Companies, Inc. ("Hartcourt") was incorporated in Utah in
September 1983 under the name of Stardust, Inc. After undergoing various
organizational changes, our new mission is to establish our company as a leading
Internet service provider in China. To date, we have not generated significant
revenue or positive net income from our business plan.
Our executive office is located at 1196 E. Willow Street, Long Beach,
California 90806, telephone number (562) 426-9796.
We have informed the selling shareholders that the anti-manipulative
rules under the Exchange Act of 1934, as amended (the "Exchange Act"), including
Regulation M, may apply to their sales in the market. We have furnished the
selling shareholders with a copy of these rules. We have also informed the
selling shareholders that they must deliver a copy of this prospectus with any
sale of their shares.
RISK FACTORS
An investment in our common stock is very risky. You should be aware
that you could lose the entire amount of your investment. Prior to making an
investment decision, you should carefully consider the following risk factors
and the other information contained in this prospectus.
WE HAVE BEEN ENGAGED IN THE INTERNET BUSINESS FOR A VERY SHORT PERIOD OF TIME,
AND THEREFORE CANNOT PREDICT OUR SUCCESS OR FUTURE PERFORMANCE WITH ANY
REASONABLE DEGREE OF CERTAINTY.
Although we were incorporated over ten years ago, our existing line of
business commenced operations in 1999. As a result, our potential should be
considered in light of the risks, expenses, and problems frequently encountered
by companies in their early stage of development, particularly companies in new
and rapidly evolving Internet and software markets, and by companies operating
in international markets. Such risks include:
o our failure to anticipate and adapt to a developing market;
o the rejection of our products and services;
o development of superior products or services by our competitors;
o the failure of the market to adopt the Internet as a commercial
medium; and
o the inability to identify, attract, retain, and motivate the
qualified personnel we will need to expand our operations.
There can be no assurance that we will be successful in addressing such
risks. It is likely that our expenses will exceed our revenues for the
foreseeable future, and it is possible that we will not be able to generate
enough revenue to sustain our operations.
In addition, our business has incurred net losses from inception. As a
result, we have a deficit in our retained earnings of $26,388,322 at September
30, 1999. We expect to continue to incur net losses as we continue to expend
substantial resources on sales, marketing and administration and the development
of our products and services. In addition, we currently intend to increase our
capital expenditures and operating expenses in order to expand our operations.
There can be no assurance that we will achieve or sustain profitability or
positive cash flow from our operations.
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WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN OR OUR GROWTH STRATEGY.
Our prospects are subject to the risks, expenses and uncertainties
frequently encountered by young companies that operate exclusively in the new
and rapidly evolving markets for Internet products and services, including the
risk that we will not be able to implement our business plan or our growth
strategy.
Successfully implementing the Internet portal portion of our business
plan depends on, among other things, our ability to:
o develop and extend the Hartcourt (SinoBull.com) brand;
o market our Internet properties to Internet users;
o develop new Internet properties;
o develop, maintain and increase the level of traffic on our
Internet properties; and
o effectively integrate new businesses and technologies into our
Internet properties.
The overall success of our business plan and growth strategy depends
on, among other things, our ability to:
o react to changing business, economic, and political environments;
o anticipate the needs of our customers and the actions of our
competitors; and
o continue to identify, attract, retain and motivate qualified
personnel.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT OUR
OPERATING RESULTS, FINANCIAL CONDITION AND THE TRADING PRICE OF OUR COMMON
STOCK.
We cannot predict with any significant degree of certainty our
quarterly revenue and operating results, which have fluctuated in the past and
will likely fluctuate in the future. As a result, we believe that
period-to-period comparisons of our revenues and results of operations are not
necessarily meaningful and you should not rely upon them as indicators of future
performance. It is likely that in one or more future quarters our results may
fall below the expectations of analysts and investors. In such event, the
trading price of our common stock would likely decrease.
Our quarterly operating results may fluctuate significantly in the
future due to several factors, many of which are beyond our control. These
factors include the rate at which customers subscribe to our services, the
prices subscribers pay for such services, subscriber turnover rates and the
demand for Internet services. Additional factors that may affect our quarterly
operating results generally include the amount and timing of capital
expenditures and other costs relating to the expansion of our business, our or
our competitors' introduction of new Internet services, price competition or
pricing changes in the Internet industry, technical difficulties or network
downtime, general economic conditions and economic conditions specific to the
Internet and Internet media. Because we rely on revenue forecasts when
committing to a significant portion of our future expenditures, we may not be
able to adjust our spending in the event of revenue shortfalls. Consequently,
such shortfalls could have an immediate material adverse effect on our business
and financial condition and operating results. We also plan on increasing our
operating expenditures to fund increased sales and marketing efforts, general
and administrative activities and to strengthen our infrastructure. To the
extent that these expenditures are not accompanied by a commensurate increase in
revenues, our business, operating results and financial condition could be
materially adversely affected.
2
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OUR NETWORK'S SCALABILITY AND SPEED ARE UNPROVEN AND ITS VIABILITY HAS NOT BEEN
TESTED AT FULL CAPACITY.
Because we only recently initiated our services, we do not know whether
we will be able to connect and manage a substantial number of online subscribers
at high transmission speeds. If we achieve our expected subscriber levels, we
may not be able to maintain our system's superior performance. While peak
downstream data transmission speeds approach 10 megabits per second, the actual
downstream data transmission speeds over our system could be significantly
slower due to several factors, including the type and location of content,
Internet traffic, the number of active subscribers at the time and the
capability of modems used by such subscribers. As subscriber penetration
increases, we may need to augment our equipment in order to maintain adequate
downstream data transmission speeds. A subscriber's actual data delivery speed
also may be significantly lower than peak data transmission speeds due to the
subscriber's hardware, operating system and software configurations. Due to the
foregoing factors, as the number of subscribers to our system increases, we
cannot guarantee that we will be able to achieve or maintain high-speed data
transmission. Our failure to achieve or maintain high-speed data transmission
could significantly reduce consumer demand for our services and have a material
adverse effect on our business, operating results and financial condition.
MARKET ACCEPTANCE OF OUR SERVICES SUBSTANTIALLY DEPENDS UPON THE CONTINUED
GROWTH OF ONLINE COMMERCE AND INTERNET USAGE.
The markets for online commerce and Internet access services are at an
early stage of development and are rapidly evolving. As is typical for new and
rapidly evolving industries, demand and market acceptance for recently
introduced services are subject to a high level of uncertainty. In the case of
our Internet services, this uncertainty is compounded by the risks that
consumers will not adopt online commerce and that an appropriate infrastructure
necessary to support increased commerce on the Internet will fail to develop.
Critical issues concerning the commercial use of the Internet remain unresolved
and may affect the growth of Internet use, especially in the business and
consumer markets we have targeted. Inconsistent quality of service, the
unavailability of cost-effective, high-speed service, and a limited number of
local access points for corporate users, have deterred many consumers from
purchasing Internet access services. In addition, the inability to integrate
business applications on the Internet, and inadequate security to protect
confidential information have deterred consumers. The adoption of the Internet
for commerce and communications, particularly by those individuals and
enterprises that have historically relied upon alternative means of commerce and
communications, generally requires an understanding and acceptance of a new way
of conducting business and exchanging information. In particular, enterprises
that have already invested substantial resources in other means of conducting
commerce and exchanging information, or in relationships with other Internet
service providers, may be reluctant and slow to adopt a new strategy that may
make their existing personnel, infrastructure and relationships with other
service providers obsolete. If these markets fail to develop or develop more
slowly than expected, or if Internet usage decreases, our business, operating
results and financial condition may be materially adversely affected.
A FAILURE OF OUR SYSTEM COULD CAUSE INTERRUPTION OF OUR INTERNET SERVICES.
Our operations are dependent upon our ability to support our highly
complex network infrastructure and avoid damage from fires, earthquakes, floods,
power losses, telecommunications failures and similar events. The occurrence of
any one or more of these events could interrupt our services and materially
disrupt our operations. In addition, the failure of any of our service providers
to provide the communications capacity we require could interrupt our services
and materially disrupt our operations. Any systems damage or failure that
disrupts our operations could increase our operating costs and reduce our
operating income, and could have a material adverse effect on our business,
financial condition and prospects.
3
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WE MUST RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS, INTRODUCTIONS OF NEW
COMPETING PRODUCTS AND SERVICES, AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE.
The markets for consumer and business Internet access services, online
content and data transmission services are characterized by rapid technological
developments, frequent introductions of new products and services, and evolving
industry standards. In order to remain competitive in these rapidly evolving
markets, we must continually improve the performance, features and reliability
of our network, Internet content and consumer and business services,
particularly in response to competitive offerings. We cannot assure you that we
will be able to respond quickly, cost effectively and sufficiently to any such
developments. The market opportunity for our Internet services may be limited or
short-lived. We cannot guarantee that we will successfully achieve widespread
acceptance of our services before competitors offer products and services with
performance features similar to our current offerings. Our inability to respond
quickly to any such developments could cause us to lose substantial market share
and could have a material adverse effect on our business, operating results and
financial condition.
WE WILL NEED SUBSTANTIAL CAPITAL INVESTMENTS TO FUND OUR FUTURE OPERATIONS.
Our business is very capital intensive. Because we intend to continue
our expansion efforts into additional markets, we may be required to seek
additional capital in the future through equity or debt financings or credit
facilities in order to fund such growth. We have no commitments for such
additional financing. We cannot guarantee that we will be successful in
obtaining such additional financing or that it will be available on satisfactory
terms when needed. If we are unable to obtain such additional funding in a
timely manner, we may be unable to expand into additional markets and implement
our business plan.
WE HAVE HAD NET LOSSES IN RECENT FISCAL PERIODS AND OUR AUDITORS HAVE EXPRESSED
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have had net losses in recent fiscal periods. We expect to incur
losses as we expend substantial resources on sales, marketing and administration
and the development of our products and services.
Our auditors, Harlan & Boettger have stated in the opinion on our
financial statements for fiscal year 1998 that there is doubt, as of December
31, 1998 as to whether we will be able to pay our liabilities in the normal
course of our business and thus continue as a going concern. We believe that we
have strengthened our financial position since that time by raising gross
proceeds of $3,000,000 in a private placement in January 2000. However, it is
possible that in the future our capital expenditures and operating losses will
limit our ability to pay our liabilities in the normal course of business and
that we may not be able to continue as a going concern.
THE TERMINATION OF ANY OF OUR RELATIONSHIPS WITH THIRD PARTIES UPON WHOM WE RELY
FOR ITEMS THAT ARE CRITICAL TO OUR OPERATIONS COULD ADVERSELY AFFECT OUR
BUSINESS.
We depend on arrangements with third parties for a variety of goods and
services that are critical to our operations. There can be no assurance that our
existing arrangements will result in sustained business partnerships, successful
service offerings, significant traffic on our Internet properties or significant
revenues. We cannot give you any assurance that these arrangements will continue
in the future, nor can there be any assurance that these arrangements will
generate significant revenues.
4
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ANY POTENTIAL ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR
FINANCIAL CONDITION.
While we have not identified any specific acquisitions, an element of
our growth strategy includes the acquisition of companies we believe have
synergistic business models. Acquisitions entail a number of risks that could
materially and adversely affect our business and operating results, including:
o problems integrating the acquired operations, technologies or
products;
o diversion of our management's time and attention from our core
business;
o difficulties in retaining business relations with suppliers and
customers of the acquired company;
o risks associated with entering markets in which we lack prior
experience; and
o potential loss of key employees from the acquired company.
WE MAY FACE POTENTIAL LIABILITY FOR FAILING TO PROTECT SUBSCRIBER INFORMATION
AND SYSTEMS FROM UNAUTHORIZED ACCESS, COMPUTER VIRUSES AND OTHER DISRUPTIVE
PROBLEMS.
Our network may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. Internet service providers and online service
providers in the past have experienced, and in the future may experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others. Unauthorized access
could also potentially jeopardize the security of confidential information
stored in our or our subscribers' computer systems. This may result in our
becoming liable to our subscribers and also might deter potential subscribers.
Prior industry-standard security measures employed by us have been susceptible
to circumvention. Accordingly, we cannot guarantee that new industry-standard
security measures employed by us will not be circumvented. Eliminating computer
viruses and alleviating other security problems may require interruptions,
delays or cessation of service to our subscribers. Any such interruptions,
delays or cessation of service to our subscribers, could have a material adverse
effect on our business, operating results and financial condition.
DIRECT AND INDIRECT GOVERNMENT REGULATION CAN ADVERSELY AFFECT OUR BUSINESS.
Our services are subject to current regulations of the Federal
Communications Commission. In addition, changes in the regulatory environment
relating to the Internet connectivity market could affect the prices at which we
may sell our services. These include regulatory changes that, directly or
indirectly, affect telecommunications costs, limit usage of subscriber-related
information or increase the likelihood or scope of competition from the regional
Bell operating companies or other telecommunications companies. For example,
regulations recently adopted by the Federal Communications Commission are
intended to subsidize Internet connectivity rates for schools and libraries,
which could affect demand for our services. We cannot predict the impact, if
any, that future regulation or regulatory changes might have on our business.
Any changes in law or regulations directly or indirectly relating to
telecommunications and the Internet, whether in the United States or abroad,
could materially adversely affect our business, operating results, financial
condition, prospects and ability to repay our debts.
5
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WE MAY FACE POTENTIAL LIABILITY FOR DEFAMATORY OR INDECENT CONTENT.
The law relating to liability of Internet service providers and online
service providers for information carried on or disseminated through their
networks is currently unsettled. A number of lawsuits have sought to impose
liability for defamatory speech and indecent materials. A recent federal statute
seeks to impose liability, in some circumstances, for transmission of obscene or
indecent materials. In one case, a court has held that an online service
provider could be found liable for defamatory matter provided through its
service, on the grounds that the service provider exercised active editorial
control over postings to its service. Other courts have held that Internet
service providers and online service providers may, under certain circumstances,
be subject to damages for copying or distributing copyrighted materials. The
Telecommunications Act of 1996 prohibits, and imposes criminal penalties and
civil liability for using, an interactive computer service for transmitting
indecent or obscene communications. Because of the potential liability on
Internet service providers or online service providers for materials carried on
or disseminated through their systems, we may have to implement costly measures
to reduce our exposure to such liability. Consequently, we may be required to
expend substantial resources or discontinue certain product or service
offerings. In addition, our business, operating results and financial condition
could be adversely affected if we become liable for information carried on our
network.
WE ARE HIGHLY DEPENDENT ON THE CONTINUED EXPANSION OF THE INTERNET
INFRASTRUCTURE AND COMMERCIAL USE OF THE INTERNET.
The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic. The
current Internet infrastructure may not be able to support the demands placed on
it by this continued growth. Our business, operating results or financial
condition will be materially adversely affected if:
o critical issues concerning the commercial use of the Internet are
not favorably resolved;
o the necessary infrastructure is not developed; or
o the Internet does not become a viable commercial marketplace.
Several critical issues concerning the commercial use of the Internet
remain unresolved, including:
o security of information transferred via the Internet;
o reliability of the Internet;
o cost of using the Internet;
o ease of use;
o accessibility to the Internet; and
o quality of the services provided via the Internet.
Use of the Internet could also be adversely affected by delays in the
development or adoption of new standards and protocols, or an increase in
governmental regulation. Such issues may negatively affect the growth of
Internet use or the attractiveness of commerce and communications on the
Internet and, therefore impede our ability to grow.
WE ARE EXPOSED TO THE RISKS ASSOCIATED WITH PERIODIC FOREIGN ECONOMIC DOWNTURNS
AND FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE AND INTEREST RATES.
6
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We expect that the international markets will represent most of our
business and our revenues for the foreseeable future. Revenues from outside of
the United States expose us to currency exchange rate fluctuations and to
fluctuating foreign interest rates. Past and future economic downturns in the
Asia Pacific region and the devaluation of Asian currencies against the U.S.
dollar have affected and in the future could affect our operating results. We do
not currently, but may in the future, hedge our receivables denominated in
foreign currencies. We cannot predict whether exchange rate fluctuations will
have a material adverse effect on our operations and financial results in the
future.
BECAUSE WE MAY EARN REVENUES AND INCUR COSTS IN CHINESE RENMINBI, WE MAY BE
ADVERSELY AFFECTED BY CHANGES IN ITS RELATIVE VALUE.
We expect to sell our products and services in China and anticipate
that we will earn revenues and incur costs in the Chinese Renminbi. As a result,
we will be subject to the following risks associated with the Renminbi:
o the Renminbi is not a freely convertible currency; and
o conversion between the Renminbi and foreign currencies is subject
to government approval.
On January 1, 1994, the People's Bank of China implemented a managed
floating exchange rate system based on the market supply and demand of the
Renminbi and proposed to establish a unified foreign exchange inter-bank market
among designated banks. In place of the official rate and the swap center rate,
the People's Bank of China publishes a daily exchange rate for Renminbi based on
the previous day's dealings in the inter-bank market. It is expected that swap
centers will be phased out. However, the unification of exchange rates does not
imply full convertibility of Renminbi into U.S. dollars or other foreign
currencies. Payment for imported materials and remittance of earnings outside of
China are subject to the availability of foreign currency that is dependent on
official exchange rates set by the Chinese government. Approval for exchange at
the exchange center is granted to enterprises in China for valid reasons such as
the purchase of imported goods and the remittance of earnings. While conversion
of Renminbi into foreign currencies can generally be effected at the exchange
center, we cannot guarantee that it can be effected at all times. In the event
of shortages of foreign currency, we may be unable to convert sufficient
Renminbi into foreign currency to enable us to comply with foreign currency
payment obligations we may have.
WE WILL CONTINUE TO EXPAND OUR BUSINESS INTO INTERNATIONAL MARKETS AND THIS WILL
EXPOSE US TO THE RISKS ASSOCIATED WITH DOING BUSINESS IN EMERGING MARKETS, SUCH
AS THE RISK OF POLITICAL, CIVIL AND ECONOMIC INSTABILITY.
A key part of our business plan is to develop Hartcourt (SinoBull.com)
properties in international markets. To date, we have only limited experience in
developing, marketing and operating our products and services internationally.
International markets we have selected may not develop at a rate that supports
our level of investment.
In addition, we will face certain risks in doing business on an
international level, including:
o unexpected changes in regulatory requirements;
o trade barriers;
o difficulties in staffing and managing foreign operations because
of language and cultural differences;
o longer payment cycles;
o currency exchange rate fluctuations;
o problems in collecting accounts receivable;
o political and economic instability;
o import and export restrictions;
o seasonal fluctuations in business activity; and
o adverse tax consequences.
7
<PAGE>
These risks are dynamic and difficult to quantify. Many Asian
governments have liberalized their policies on international trade, foreign
ownership and development, investment and currency repatriation. While this has
increased both international trade and investment in Asia, such policies might
change unexpectedly.
OUR OPERATIONS IN CHINA ARE SUBJECT TO CHANGES IN GOVERNMENTAL AND ECONOMIC
POLICIES.
Our operations in China are subject to the rules and restrictions
imposed by China's legal and economic system as well as general economic and
political conditions in China.
In the past, China has had a centralized economy with rigid economic
controls imposed by the Chinese government. More recently, China has begun to
pursue economic reform policies that have improved business conditions in China
for foreign companies. We cannot give you any assurance that the Chinese
government will continue to pursue such policies, or that such policies will be
successful. In addition, China does not have a well-developed body of law
governing foreign enterprises, such as the permissible percentage of foreign
investment and permissible rates of equity returns. Official Chinese statements
regarding these evolving policies have been conflicting and are subject to broad
interpretation and modification.
As a result, our operations may be adversely affected by one or more of
the following:
o new laws or regulations, or different interpretations of existing
laws and regulations;
o preemption of provincial or local laws by national laws;
o our ability to timely obtain the necessary administrative
approvals;
o our ability to comply with applicable administrative
requirements;
o content restrictions on our Internet properties;
o confiscatory taxation;
o restrictions on imports;
o currency devaluations;
o expropriation or nationalization of our operations, which could
result in the total loss of ownership and control of any assets
or operations that we develop in China; and
o adoption of measures intended to reduce inflation, such as price
controls.
WE ARE SUBJECT TO REGULATION BY THE CHINESE MINISTRY OF POSTS AND
TELECOMMUNICATIONS AND OTHER GOVERNMENT AGENCIES.
The Ministry of Posts and Telecommunications regulates the
telecommunications industry in China. The Ministry of Posts and
Telecommunications directly or indirectly regulates:
o entry into the telecommunications industry;
o scope of permissible business;
o interconnection and transmission line arrangements;
o technology and equipment standards; and
o other aspects of the Chinese telecommunications industry.
8
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This regulation may limit our ability to respond to certain development
opportunities in China. In addition, changes in existing regulations or policies
or adoption of new regulations or policies could have an adverse effect on our
operations in China.
In addition, governmental agencies in China may:
o require us to obtain licenses in order to commence our business;
o revoke or suspend any licenses we may have;
o regulate the rates that we will be permitted to charge for
telecommunications services; or
o impose or change the tariffs or fees on our operations.
Any of these actions could have an adverse effect on our operations in
China.
WE MUST ATTRACT AND RETAIN QUALIFIED EMPLOYEES TO SUCCEED IN OUR BUSINESS PLAN.
Current economic conditions make it difficult to attract, compensate
and retain qualified employees. We expect to hire additional personnel in all
segments of our business and in all of the markets in which we conduct business.
Our success will depend on getting the right people involved in our continued
growth and development. Our business could be materially adversely affected if
we are not able to attract new, qualified employees, or retain and motivate our
existing employees.
WE DEPEND ON OUR KEY PERSONNEL.
Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our
operations;
o they are integral to the management of our operations; or
o they would be particularly difficult to replace.
We depend on the continued service of these key personnel. The loss of
any of these employees could dramatically affect our productivity until we find
and train a replacement.
We do not maintain key person life insurance for any of our personnel.
As a result, we are exposed to the costs associated with the death of one or
more of our key employees.
WE LACK DISINTERESTED, INDEPENDENT DIRECTORS.
Our directors have a direct financial interest in our company. While
our management believes that our current directors will be able to exercise
their fiduciary duties as directors, there may exist inherent conflicts of
interest in the execution of their duties.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Our articles of incorporation provide that the holders of the original
preferred stock have the right to elect three of the five members of our board
of directors. This provision could delay, defer or prevent a change in control
of our company or our management. This provision could also discourage proxy
contests and makes it more difficult for you and our other shareholders to elect
directors and take other corporate actions. As a result, this provision could
limit the price that investors are willing to pay in the future for shares of
our common stock.
9
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THE LIQUIDITY OF OUR COMMON STOCK WOULD BE RESTRICTED IF OUR COMMON STOCK FALLS
WITHIN THE DEFINITION OF A PENNY STOCK.
Under the rules of the Securities and Exchange Commission, if the price
of our common stock on the OTC Bulletin Board is below $5.00 per share, our
common stock will come within the definition of a "penny stock." As a result, it
is possible that our common stock may become subject to the "penny stock" rules
and regulations.
Broker-dealers who sell penny stocks to certain types of investors are
required to comply with the Commission's regulations concerning the transfer of
penny stock. These regulations require broker-dealers to:
o make a suitability determination prior to selling penny stock to
the purchaser;
o receive the purchaser's written consent to the transaction; and
o provide certain written disclosures to the purchaser.
These requirements may restrict the ability of broker-dealers to sell
our common stock and may affect your ability to resell our common stock.
THE SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK THAT ARE ELIGIBLE FOR
FUTURE SALE IN THE PUBLIC MARKET COULD ADVERSELY AFFECT PREVAILING MARKET PRICES
OF OUR COMMON STOCK OR LIMIT OUR ABILITY TO RAISE ADDITIONAL CAPITAL.
Future sales of substantial amounts of our common stock in the public
market, or the perception that these sales might occur, could adversely affect
the prevailing market price of our common stock or limit our ability to raise
additional capital. We currently have 30,003,622 shares of our common stock
issued and outstanding.
No precise prediction can be made of the effect, if any, that market
sales of our common stock or the future availability of shares for sale will
have on the market price of our common stock from time to time. Sales of
substantial amounts of our common stock in the public market could adversely
affect prevailing market prices and limit our ability to raise additional
capital.
THE EXERCISE OF OUR PUT RIGHTS MAY LOWER THE MARKET PRICE OF OUR COMMON STOCK
AND SUBSTANTIALLY DILUTE THE INTERESTS OF OTHER HOLDERS OF OUR COMMON STOCK.
AS WE EXERCISE OUR PUT RIGHTS, WE WILL BE REQUIRED TO ISSUE SHARES OF
OUR COMMON STOCK TO SELLING SHAREHOLDERS AT A PRICE BELOW THE PREVAILING MARKET
PRICE OF OUR COMMON STOCK.
The shares issuable to the selling shareholder upon exercise of our put
rights will be issued at a price equal to the lesser of (i) the lowest closing
bid price of our common stock over the 20 consecutive trading days immediately
prior to the exercise of our put rights minus $.10 or (ii) 91% of the closing
bid price of our common stock over the 20 consecutive trading days ending on the
trading day immediately prior to the exercise of our put rights. Accordingly,
the shares issuable to the selling shareholders upon exercise of our put rights
will be issued at a floating rate that will be below the market price of our
common stock.
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THE SALE OF MATERIAL AMOUNTS OF OUR COMMON STOCK COULD REDUCE THE PRICE
OF OUR COMMON STOCK AND ENCOURAGE SHORT SALES.
As we sell shares of our common stock to the selling shareholder
pursuant to our put rights and then the selling shareholder sells the common
stock, our common stock price may decrease due to the additional shares in the
market. As the price of our common stock decreases, we will be required to issue
more shares of our common stock upon exercise of our put rights for any given
dollar amount invested by the selling shareholder. This may encourage short
sales, which could place further downward pressure on the price of our common
stock.
THE EXERCISE OF OUR PUT RIGHTS MAY SUBSTANTIALLY DILUTE THE INTERESTS
OF OTHER HOLDERS.
The shares of our common stock issuable upon exercise of our put rights
will be available for sale immediately upon issuance. Accordingly, the exercise
of our put rights may result in substantial dilution to the interests of the
other holders of our common stock and the price of our common stock may decrease
which would entitle the selling shareholder to receive a greater number of
shares of our common stock upon exercise of our put rights.
OUR STOCK PRICE IS VOLATILE.
Our common stock's trading price could be subject to wide fluctuations
in response to quarterly variations in operating results, or in response to our
competitors' announcement of technological innovations or new products, and
other events or factors. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations that have had a substantial
effect on the market prices for many computer, Internet and emerging growth
companies, which may be unrelated to the operating performance of the specific
companies. General market price declines or market volatility in the future
could adversely affect the price of our common stock, and thus, the current
market price may not be indicative of future market prices.
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON OUR COMMON STOCK IN THE NEAR FUTURE.
The holders of our common stock are entitled to receive dividends when,
and if, declared by our board of directors out of funds legally available for
the payment of such dividends. To date, we have not paid any cash dividends. Our
board of directors does not intend to declare any cash dividends in the
foreseeable future, but instead intends to retain any and all earnings for use
in our business operations. Since we may be required to obtain additional
financing, it is likely that the terms of such financing will impose
restrictions on our ability to declare any dividends.
OUR SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus, in particular the
"Risk Factors" sections, discuss future expectations, contain projections of
results of operation or financial condition or state other unknown risks,
uncertainties, and other factors that could cause our actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and is derived using numerous
assumptions. Important factors that may cause actual results to differ from
projections include, for example: the success or failure of our management's
efforts to implement our business strategy, our ability to raise sufficient
capital to meet operating requirements, our ability to compete with major
established companies, the effect of changing economic conditions, our ability
to attract and retain quality employees, and other risks that may be described
in future filings with the Commission. We do not promise to update
forward-looking information to reflect actual results or changes in assumptions
or other factors that could affect those statements.
11
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the offer and sale of the
shares by the selling shareholders. However, 400,000 of the shares offered by
the selling shareholders are issuable upon the exercise of an outstanding
warrant at an exercise price equal to the lowest closing bid price of our common
stock during the five days immediately preceding the date of exercise of the
warrant. Also, 5,000,000 of the shares offered are issuable upon exercise of our
put right to sell to the selling shareholder a number of shares of our common
stock at a price equal to the lesser of (i) the lowest closing bid price of our
common stock during the 20 day period immediately preceding the sale minus $.10
or (ii) 91% of said market price. If these warrants and put rights were
exercised in full, we would receive up to $64,962,000 in the aggregate.
SELLING SHAREHOLDERS
The common stock covered by this prospectus consists of 3,006,040
shares of our common stock, warrants to purchase 400,000 shares of our common
stock and 5,000,000 shares of our common stock issuable upon exercise of our put
rights.
The number of shares that may be actually sold by the selling
shareholders will be determined by the selling shareholders. Because the selling
shareholders may sell all, some or none of the shares of common stock that they
hold, and because the offering contemplated by this prospectus is not currently
being underwritten, no estimate can be given as to the number of shares of our
common stock that will be held by the selling shareholders upon determination of
the offering.
The following table sets forth information as of February 24, 2000,
regarding the selling shareholders. The actual number of shares of our common
stock issuable upon exercise of the warrant and our put rights is subject to
adjustment and could be materially less or more than the amount set forth in the
table below, depending on factors which we cannot predict at this time,
including, among other factors, the future price of our common stock.
Other than Pego Systems Inc., a wholly-owned subsidiary of Enove
Holdings Inc., a company we spun-off in March 1999, none of the selling
shareholders currently is an affiliate of ours, and none of them has had a
material relationship with us during the past three years. None of the selling
shareholders are or were affiliated with registered broker-dealers. The selling
shareholders have advised us that they possess sole voting and investment power
with respect to the shares being offered.
The percentages shown in the table are based upon 30,003,627 shares
issued as of the date of this prospectus. The numbers shown in the column
"Shares Being Offered" include additional shares that may be issuable to the
selling shareholders upon exercise by us of our put rights and exercise by the
selling shareholders of their warrants.
<PAGE>
<TABLE>
<CAPTION>
Name and address of selling Number of shares Percent of class of Number of
shareholder beneficially shares beneficially shares
owned prior to owned prior to the offered
the offering offering hereby
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Swartz Private Equity, LLC(1) 5,000,000 16.60% 5,000,000
1080 Holcomb Bridge Road
200 Roswell Summit, Suite 285
Roswell, GA 30076
UAC Stock Exchange Online Inc.(2) 1,000,000 3.33% 1,000,000
B1005 Tsinghua Science Park
Xue Yua
Beijing, China 100101
Financial Telecom Ltd. (3) 1,606,040 5.35% 1,606,040
Room 308 Hang Bong Centre
28 Shanghai St. Kowloon
Hong Kong
Chateau D'orly Ltd.(4) 300,000 1.00% 300,000
9/F Ruttonjee House
11 Duddell St. Central Hong Kong
Pego Systems Inc.(5) 100,000 * 100,000
1196 East Willow St.
Long Beach, CA 90806
</TABLE>
* Represents less than 1%.
(1) Represents the estimated maximum number of shares of common stock that
we may sell to Swartz Private Equity, LLC pursuant to the Investment
Agreement and upon the exercise by Swartz of options issued or issuable
in connection with the Investment Agreement. It is expected that Swartz
will not own beneficially more than 9.9% of our outstanding common
stock at any time. Swartz Private Equity, LLC is beneficially owned and
controlled by Eric S. Swartz and Michael C. Kendrick.
(2) UAC Stock Exchange Online, Inc. is beneficially owned and controlled by
Zhang Shi.
(3) Financial Telecom Ltd. is beneficially owned and controlled by
Stephen Tang.
(4) Chateau d'Orly is beneficially owned and controlled by
______________________.
(5) Pego Systems Inc. is beneficially owned and controlled by Enova
Holdings Inc., which we spun-off on March 1, 1999.
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AMENDED AND RESTATED INVESTMENT AGREEMENT
On November 3, 1999, we entered into an Investment Agreement with
Swartz Private Equity, LLC ("Swartz") which was subsequently amended on November
19, 1999. The Investment Agreement, as amended, entitles us to issue and sell
our common stock to Swartz for up to an aggregate of $35 million from time to
time during the three-year period ending on November 3, 2002. Each election by
us to sell stock to Swartz is referred to as a put right.
PUT RIGHTS. In order to invoke a put right, we must have an effective
registration statement on file with the Securities and Exchange Commission
registering the resale of the shares of our common stock that may be issued as a
consequence of the exercise of that put right. We must also give at least ten
but not more than 20 business days advance notice to Swartz of the date on which
we intend to exercise a particular put right and we must indicate the maximum
number of shares of our common stock that we intend to sell to Swartz. At our
option, we may also designate a maximum dollar amount of our common stock, not
to exceed $5,000,000, that we will sell under the put and/or a minimum purchase
price per share at which Swartz may purchase shares under the put. The minimum
purchase price may not exceed 80% of the closing bid price of our common stock
on the date on which we give Swartz advance notice of our exercise of a put
right. The number of common shares sold to Swartz may not exceed the lesser of
(i) 15% of the aggregate daily reported trading volume during a period that
begins on the business day immediately following the day we exercise the put
right and ends on and includes the day that is 20 business days after the date
we exercise the put right, or (ii) 9.9% of the total number of shares of our
common stock that would be outstanding upon completion of the put.
For each share of our common stock, Swartz will pay us the lesser of
the market price for such share, minus $.10, or 91% of the market price for the
share; provided, however, that Swartz may not pay us less than the designated
minimum per share price, if any, that we indicate in our notice.
Market price is defined as the lowest closing bid price for our common
stock on its principal market during the pricing period. The pricing period is
defined as the 20 business days immediately following the day we exercise the
put right.
WARRANTS. Within five business days after the end of each pricing
period, we are required to issue and deliver to Swartz a warrant to purchase a
number of shares of our common stock equal to 8% of the common shares issued to
Swartz in the applicable put. Each warrant will be exercisable at a price that
will initially equal 110% of the market price of our common stock on the date on
which we exercised the put right. Each warrant will be immediately exercisable
and have a term beginning on the date of issuance and ending five years
thereafter.
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS. Swartz is not
required to acquire and pay for any shares of our common stock with respect to
any particular put for which, between the date we give advance notice of an
intended put and the date the particular put closes: (i) we have announced or
implemented a stock split or combination of our common stock; (ii) we have paid
a common stock dividend; (iii) we have made a distribution of all or any portion
of our assets or evidences of indebtedness to the holders of our common stock;
or (iv) we have consummated a major transaction, such as a sale of all or
substantially all of our assets or a merger or tender or exchange offer that
results in a change in control of our company.
SHORT SALES. Swartz and its affiliates are prohibited from engaging in
short sales of our common stock unless Swartz has received a put notice under
which shares have not yet been issued and the amount of shares involved in the
short sale does not exceed the number of shares specified in the put notice.
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<PAGE>
CANCELLATION OF PUTS. We must cancel a particular put between the date
of the advance put notice and the last day of the pricing period if we discover
an undisclosed material fact relevant to Swartz's investment decision, the
registration statement registering resales of the common shares becomes
ineffective or our shares are delisted from the then primary exchange.
If a put is canceled, it will continue to be effective, but the pricing
period for the put will terminate on the date notice of cancellation of the put
is given to Swartz. Because the pricing period will be shortened, the number of
shares Swartz will be required to purchase in the canceled put will be smaller
than it would have been had the put not been canceled.
SHAREHOLDER APPROVAL. Under the Investment Agreement, as amended, we
may sell Swartz a number of shares that is more than 20% of our shares
outstanding on the date of this prospectus. However, if we become listed on The
Nasdaq Small Cap Market or Nasdaq National Market, we may be required to obtain
shareholder approval to issue some or all of the shares to Swartz. As we are
currently a Bulletin Board company, we do not need shareholder approval.
TERMINATION OF INVESTMENT AGREEMENT. We may terminate our right to
initiate further puts or terminate the Investment Agreement at any time by
providing Swartz with notice of such intention to terminate; provided, however,
any such termination will not affect any other rights or obligations we have
concerning the Investment Agreement or any related agreement.
RESTRICTIVE COVENANTS. During the term of the Investment Agreement and
for a period of 90 days after the Investment Agreement is terminated, we are
prohibited from engaging in certain transactions. These include the issuance of
any of our equity securities, or debt securities convertible into equity
securities, for cash in a private transaction without obtaining the prior
written approval of Swartz. We are also prohibited from entering into any
private equity line type agreements similar to the Investment Agreement without
obtaining Swartz's prior written approval.
RIGHT OF FIRST REFUSAL. Swartz has a right of first refusal, subject to
another first refusal obligation for which we are contractually obligated, to
participate in any private capital raising transaction of equity securities that
closes at any time during the period from the date of the Investment Agreement,
November 3, 1999, until 90 days after the Investment Agreement is terminated.
SWARTZ'S RIGHT OF INDEMNIFICATION. We have agreed to indemnify
Swartz,including its stockholders, officers, directors, employees, investors and
agents, from all liability and losses resulting from any misrepresentations or
breaches we make in connection with the Investment Agreement, our registration
rights agreement, other related agreements, or the registration statement.
ADDITIONAL SECURITIES BEING REGISTERED
On July 8, 1999, we sold 1,000,000 shares of our common stock to UAC
Stock Exchange Online Inc. at a price of $.98 per share. On October 4, 1999, we
sold 1,606,040 shares of our common stock to Financial Telecom Ltd. at a price
of $.934 per share. On December 10, 1999 we sold 100,000 shares of our common
stock to Pego Systems, Inc. at a price of $17.80 per share. All of these shares
are being registered for resale by this prospectus.
15
<PAGE>
PLAN OF DISTRIBUTION
Each selling shareholder is free to offer and sell his or her common
shares at such times, in such manner and at such prices as he or she may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market, including block
transactions, negotiated transactions, the settlement of short sales of common
shares or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers. The selling shareholders have advised
us that they have not entered into agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their shares. The
selling shareholders do not have an underwriter or coordinating broker acting in
connection with the proposed sale of the common stock.
The selling shareholders may sell their shares directly to purchasers
or to or through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders. They may also receive compensation
from the purchasers of common shares for whom such broker-dealers may act as
agents or to whom they sell as principal, or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions. Swartz is,
and each remaining selling shareholder and any broker-dealer that assists in the
sale of our common stock may be deemed to be, an underwriter within the meaning
of Section 2(a)(11)(1) of the Securities Act. Any commissions received by such
broker-dealers and any profit on the resale of the common shares sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions. The selling shareholders may agree to indemnify broker-dealers for
transactions involving sales of our common stock against certain liabilities,
including liabilities arising under the Securities Act.
Because Swartz is, and the remaining selling shareholders may be deemed
to be, "underwriters" within the meaning of Section 2(a)(11)(1) of the
Securities Act, the selling shareholders will be subject to prospectus delivery
requirements.
In connection with distributions of the shares or otherwise, the
selling shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares registered hereunder in the course of hedging the positions they
assume with the selling shareholders. After the effective date of the
registration statement of which this prospectus is a part, the selling
shareholders may also sell shares short and deliver the shares registered
hereunder to close out such short positions. The selling shareholders may also
enter into option, swap, derivatives or other transactions with broker-dealers
which require the delivery to the broker-dealer of the shares covered by this
prospectus, which the broker-dealer may resell pursuant to this prospectus. The
selling shareholders may also pledge the shares registered hereunder to a broker
or dealer and upon a default, the broker or dealer may effect sales of the
pledged shares pursuant to this prospectus.
From time to time the selling shareholders may engage in short sales,
short sales against the box, puts and calls and other hedging transactions in
our securities, and may sell and deliver the shares covered by this prospectus
in connection with such transactions or in settlement of securities loans. These
transactions may be entered into with broker-dealers or other financial
institutions. In addition, from time to time, the selling shareholders may
pledge their shares pursuant to the margin provisions of their customer
agreements with their broker-dealer. Upon delivery of the shares or a default by
the selling shareholders, the broker-dealer or financial institution may offer
and sell the pledged shares from time to time.
16
<PAGE>
To comply with the securities laws of some states, if applicable, the
shares will be sold in those states only through brokers or dealers. In
addition, in some states, the shares may not be sold in those states unless they
have been registered or qualified for sale in those states or an exemption from
registration or qualification is available and is complied with.
If necessary, the specific shares of our common stock to be sold, the
names of the selling shareholders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement of which this prospectus
is a part. We entered into a registration rights agreement in connection with
the private placement of our common stock, the warrants which required us to
register the underlying shares of our common stock under applicable federal and
state securities laws. The registration rights agreement provides for
cross-indemnification of the selling shareholders and our company and each
party's respective directors, officers and controlling persons against liability
in connection with the offer and sale of our common stock, including liabilities
under the Securities Act of 1933, and to contribute to payments the parties may
be required to make in respect thereof. We have agreed to indemnify and hold
harmless the selling shareholders from liability under the Securities Act of
1933.
Under applicable rules and regulations under Regulation M under the
Securities Exchange Act of 1934, any person engaged in the distribution of our
common stock generally may not simultaneously engage in market making activities
with respect to our common stock for a specified period set forth in Regulation
M prior to the commencement of such distribution and until its completion. In
addition, and without limiting the foregoing, the selling shareholders will be
subject to the applicable provisions of the Securities Act of 1933 and
Securities Exchange Act of 1934 and the rules and regulations thereunder,
including, without limitation, Regulation M, which provisions may limit the
timing of purchases and sales of shares of our common stock by the selling
shareholders. The foregoing may affect the marketability of our common stock.
Selling shareholders also may resell all or a portion of the common
shares in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of such Rule.
We are responsible for all costs, expenses and fees incurred in
registering the shares offered hereby. The selling shareholders are responsible
for brokerage commissions, if any, attributable to the sale of such securities.
DESCRIPTION OF SECURITIES
We are authorized to issue 110,001,000 shares, consisting of
100,000,000 shares of common stock, $.001 par value, of which 30,003,627 shares
are issued and outstanding, 1,000 shares of Preferred Stock, $.01 par value, the
"Original Preferred Stock," of which 1,000 shares are issued and outstanding,
and 10,000,000 shares of Preferred Stock, $.01 par value, the "Class A Preferred
Stock," of which no shares are issued and outstanding.
COMMON STOCK
Each of our common stockholders is entitled to one vote in person or by
proxy for each share of our common stock. Dividends upon our capital stock,
subject to the provisions of the articles of incorporation, if any, may be
declared by our board of directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of capital
stock, subject to the provisions of our articles of incorporation. There are no
preemptive rights.
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<PAGE>
PREFERRED STOCK
Our board of directors has the power by resolution only and without
further action or approval, to cause us to issue one or more classes or one or
more series of preferred stock within any class thereof and which classes or
series may have such voting powers, full or limited, or no voting powers, and
such designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, as
shall be stated and expressed in the resolution or resolutions adopted by our
board of directors, and to fix the number of shares constituting any classes or
series and to increase or decrease the number of shares of any such class or
series.
As sole holder of the 1,000 outstanding shares of Original Preferred
Stock, Dr. Phan is entitled to elect three of the five members of our board of
directors.
OVER-THE-COUNTER MARKET
Our common stock is currently listed on the OTC Bulletin Board. We
intend to list our common stock on the NASDAQ National Market, and believe that
we will be able to satisfy and maintain its current and proposed entry
standards.
If we are unable to satisfy the requirements for listing on the NASDAQ
National Market, trading, if any, of our shares, will continue to be conducted
in the over-the-counter market on the OTC Bulletin Board. Consequently, our
shares may be subject to Rule 15g-9 of the Securities Exchange Act. That rule
imposes additional sales practice requirements on broker-dealers that sell
low-priced securities to persons other than established customers, "accredited
investors" or institutional accredited investors. Accredited investors are
generally defined to include individuals with a net worth in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their
spouses. For transactions covered by this rule, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to consummating the sale.
Consequently, the rule may affect the ability of the broker-dealers to sell our
shares and affect the ability of holders to sell our shares in the secondary
market.
TRANSFER AGENT
The transfer agent for our shares of common stock is Signature Stock
Transfer, 14675 Midway Road, Suite 221, Dallas, Texas 75244 and their telephone
number is (972)788-4193.
LEGAL MATTERS
Certain legal matters in connection with the shares of our common stock
being offered hereby will be passed upon by Jeffers, Shaff & Falk, LLP, 18881
Von Karman Avenue, Suite 1400, Irvine, California 92612.
EXPERTS
The consolidated financial statements of Hartcourt appearing in our
Annual Report on Form 10-KSB for the year ended December 31, 1998 have been
audited by Harland & Boettger, independent certified public accountants, as set
forth in their report thereon included therein and incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
18
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the Commission at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for further information on the public reference
room. Our Commission filings are also available to the public at the
Commission's web site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" the information
we file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be part of this prospectus, and information that we file with
the Commission in the future will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we make with the Commission under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act prior to the termination of the offerings
described in this prospectus:
(a) Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998;
(b) Quarterly Reports on Form 10-QSB, for the periods
ended March 31, 1999, June 30, 1999 and September 30,
1999; and
(c) Current Reports on Form 8-K filed with the Commission
on October 20, 1999, December 6, 1999, December 8,
1999, February 4, 2000 and February 10, 2000.
You may request a copy of these filings, at no cost, by writing or
calling us as follows:
The Hartcourt Companies, Inc.
Attention: Investor Relations
1196 E. Willow Street
Long Beach, California 90806
(562) 426-9796
This prospectus is part of a registration statement on Form S-3 we
filed with the SEC under the Securities Act. You should rely only on the
information or representations provided in this prospectus. We have authorized
no one to provide you with different information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front of the document.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act is permitted as to directors, officers and controlling persons, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy and is therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by us in
the successful defense of any action, suit or proceeding) is asserted, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy. We will be governed by the
final adjudication of such issue.
19
<PAGE>
Our Certificate of Incorporation and By-Laws provide:
"No officer or director shall be personally liable for any obligations
of the corporation or for any duties or obligations arising out of any acts or
conduct of said officer or director performed on behalf of the corporation. The
corporation shall and does hereby indemnify and hold harmless each person and
his heirs and administrators who shall serve at any time hereafter as a director
or officer of the corporation from and against any and all claims, judgments and
liabilities to which such person shall become subject by reason of his having
heretofore or hereafter been a director or officer of the corporation or by
reason of any action alleged to have been heretofore or hereafter taken or
omitted to have been taken by him as such director or officer, and shall
reimburse each such person for all legal and all other expenses reasonably
incurred by him in connection with any such claim or liability, including the
power to defend such person from all suits or claims as provided for under the
provisions of the Utah Business Corporation Act; provided however, that no such
person shall be indemnified against, or be reimbursed for, any expense incurred
in connection with any claim or liability arising out of his own negligence or
willful misconduct. The rights accruing to any person under the foregoing
provisions of this section shall not exclude any right to which he may be
lawfully entitled, nor shall anything herein contained restrict the right of the
corporation to indemnify or reimburse such person in any proper case, even
though not specifically herein provided for. The corporation, its directors,
officers, consultants and agents shall be fully protected in taking any action
or making any payment, or in refusing to do so in reliance upon the advice of
counsel."
20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, all of which are
being paid by us, in connection with this offering.
SEC Registration Fee $ 26,696.91
Printing and Engraving $ 2,000.00
Legal Fees $ 25,000.00
Accounting Fees and Expenses $ 5,000.00
Miscellaneous $ 2,000.00
-----------
TOTAL $ 60,696.91
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation and By-Laws provide:
"No officer or director shall be personally liable for any obligations
of the corporation or for any duties or obligations arising out of any acts or
conduct of said officer or director performed on behalf of the corporation. The
corporation shall and does hereby indemnify and hold harmless each person and
his heirs and administrators who shall serve at any time hereafter as a director
or officer of the corporation from and against any and all claims, judgments and
liabilities to which such person shall become subject by reason of his having
heretofore or hereafter been a director or officer of the corporation or by
reason of any action alleged to have been heretofore or hereafter taken or
omitted to have been taken by him as such director or officer, and shall
reimburse each such person for all legal and all other expenses reasonably
incurred by him in connection with any such claim or liability, including the
power to defend such person from all suits or claims as provided for under the
provisions of the Utah Business Corporation Act; provided however, that no such
person shall be indemnified against, or be reimbursed for, any expense incurred
in connection with any claim or liability arising out of his own negligence or
willful misconduct. The rights accruing to any person under the foregoing
provisions of this section shall not exclude any right to which he may be
lawfully entitled, nor shall anything herein contained restrict the right of the
corporation to indemnify or reimburse such person in any proper case, even
though not specifically herein provided for. The corporation, its directors,
officers, consultants and agents shall be fully protected in taking any action
or making any payment, or in refusing to do so in reliance upon the advice of
counsel."
ITEM 16. EXHIBITS
5.1* Opinion re: legality
10.1 Investment Agreement with Swartz
10.2 Amendment to Investment Agreement
23.1 Consent of Independent Auditors
23.2* Consent of Jeffers, Shaff & Falk, LLP
* To be filed by amendment.
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned company hereby undertakes:
(i) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to include
any additional or changed material information on the plan of distribution;
(ii) that, for determining any liability under the Securities
Act, treat each such post-effective amendment as a new registration statement of
the securities offered at that time shall be deemed to be the intial BONA FIDE
offering thereof; and
(iii) to file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
(f) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's Annual Report pursuant to Section 13(a) or 15(d) of the Exchange
Act that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the intial BONA FIDE offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we certify
that we have reasonable grounds to believe that we meet all of the requirements
for filing on the Form S-3 and have duly caused this registration statement to
be signed on our behalf by the undersigned, thereunto duly authorized, in the
City of Long Beach, State of California, on February 25, 2000.
The Hartcourt Companies, Inc.
/s/ Alan V. Phan
------------------------------------
Alan V. Phan
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Alan V. Phan February 25, 2000
Name: Alan V. Phan
Title: Director, Chief Executive Officer
/s/ Manu Ohri February 25, 2000
Name: Manu Ohri
Title: Director, Chief Financial Officer
/s/ Fred Cohn February 25, 2000
Name: Fred Cohn
Title: Director, Secretary
/s/ Kenneth Silva February 25, 2000
Name: Kenneth Silva
Title: Director
/s/ Hans Kloepfer February 25, 2000
Name: Hans Kloepfer
Title: Director
10.1 Investment Agreement with Swartz
THE HARTCOURT COMPANIES, INC.
INVESTMENT AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER
SECURITIES AUTHORITIES. THEY MAY NOT BE SOLD OR TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE FEDERAL
AND STATE SECURITIES LAWS.
THIS INVESTMENT AGREEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE
SECURITIES DESCRIBED HEREIN BY OR TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH
AUTHORITIES CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF
RISK. THE INVESTOR MUST RELY ON ITS OWN ANALYSIS OF THE
INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK
FACTORS SET FORTH IN THE ATTACHED DISCLOSURE DOCUMENTS AS
EXHIBIT J.
SEE ADDITIONAL LEGENDS AT SECTIONS 4.7.
THIS INVESTMENT AGREEMENT (this "Agreement" or "Investment Agreement")
is made as of the 3rd day of November, 1999, by and between The
Hartcourt Companies, Inc., a corporation duly organized and existing
under the laws of the State of Utah (the "Company"), and the
undersigned Investor executing this Agreement ("Investor").
RECITALS:
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor,
and the Investor shall purchase from the Company, from time to time as
provided herein, shares of the Company's Common Stock, as part of an
offering of Common Stock by the Company to Investor, for a maximum
aggregate offering amount of Twenty Five Million Dollars ($25,000,000)
<PAGE>
(the "Maximum Offering Amount"); and WHEREAS, the solicitation of this
Investment Agreement and, if accepted by the Company, the offer and
sale of the Common Stock are being made in reliance upon the provisions
of Regulation D ("Regulation D") promulgated under the Act, Section
4(2) of the Act, and/or upon such other exemption from the registration
requirements of the Act as may be available with respect to any or all
of the purchases of Common Stock to be made hereunder.
TERMS:
NOW, THEREFORE, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement (including the
recitals above), the following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
"20% Approval" shall have the meaning set forth in Section 5.25.
"9.9% Limitation" shall have the meaning set forth in Section
2.3.1(f).
"Accredited Investor" shall have the meaning set forth in Section
3.1.
"Act" shall mean the Securities Act of 1933, as amended.
"Advance Put Notice" shall have the meaning set forth in Section
2.3.1(a), the form of which is attached hereto as Exhibit E.
"Advance Put Notice Confirmation" shall have the meaning set forth
in Section 2.3.1(a), the form of which is attached hereto as Exhibit F.
"Advance Put Notice Date" shall have the meaning set forth in
Section 2.3.1(a).
"Affiliate" shall have the meaning as set forth Section 6.4.
"Aggregate Issued Shares" equals the aggregate number of shares of
Common Stock issued to Investor pursuant to the terms of this Agreement
or the Registration Rights Agreement as of a given date, including Put
Shares and Warrant Shares.
"Agreed Upon Procedures Report" shall have the meaning set forth in
Section 2.5.3(b).
"Agreement" shall mean this Investment Agreement.
"Automatic Termination" shall have the meaning set forth in Section
2.3.2.
<PAGE>
"Bring Down Cold Comfort Letters" shall have the meaning set forth
in Section 2.3.6(b).
"Business Day" shall mean any day during which the Principal Market
is open for trading.
"Calendar Month" shall mean the period of time beginning on the
numeric day in question in a calendar month and for Calendar Months
thereafter, beginning on the earlier of (i) the same numeric day of the
next calendar month or (ii) the last day of the next calendar month.
Each Calendar Month shall end on the day immediately preceding the
beginning of the next succeeding Calendar Month.
"Cap Amount" shall have the meaning set forth in Section 2.3.10.
"Capital Raising Limitations" shall have the meaning set forth in
Section 6.5.1.
"Capitalization Schedule" shall have the meaning set forth in
Section 3.2.4, attached hereto as Exhibit K.
"Closing" shall mean one of (i) the Investment Commitment Closing
and (ii) each closing of a purchase and sale of Common Stock pursuant
to Section 2.
"Closing Bid Price" means, for any security as of any date, the last
closing bid price for such security on the O.T.C. Bulletin Board, or,
if the O.T.C. Bulletin Board is not the principal securities exchange
or trading market for such security, the last closing bid price of such
security on the principal securities exchange or trading market where
such security is listed or traded as reported by such principal
securities exchange or trading market, or if the foregoing do not
apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such
security, or, if no closing bid price is reported for such security,
the average of the bid prices of any market makers for such security as
reported in the "pink sheets" by the National Quotation Bureau, Inc. If
the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such
security on such date shall be the fair market value as mutually
determined by the Company and the Investor in this Offering. If the
Company and the Investor in this Offering are unable to agree upon the
fair market value of the Common Stock, then such dispute shall be
resolved by an investment banking firm mutually acceptable to the
Company and the Investor in this offering and any fees and costs
associated therewith shall be paid by the Company.
"Commitment Evaluation Period" shall have the meaning set forth in
Section 2.6.
"Commitment Warrants" shall have the meaning set forth in Section
2.4.1, the form of which is attached hereto as Exhibit U.
"Commitment Warrant Exercise Price" shall have the meaning set forth
in Section 2.4.1.
"Common Shares" shall mean the shares of Common Stock, $0.001 par
value, of the Company.
"Common Stock" shall mean the common stock of the Company.
"Company" shall mean The Hartcourt Companies, Inc., a corporation
duly organized and existing under the laws of the State of Utah.
"Company Designated Maximum Put Dollar Amount" shall have the
meaning set forth in Section 2.3.1(a).
"Company Designated Minimum Put Share Price" shall have the meaning
set forth in Section 2.3.1(a).
"Company Termination" shall have the meaning set forth in Section
2.3.12.
"Conditions to Investor's Obligations" shall have the meaning as set
forth in Section 2.2.2. "Delisting Event" shall mean any time during
the term of this Investment Agreement, that the Company's Common Stock
is not listed for and actively trading on the O.T.C. Bulletin Board,
the Nasdaq Small Cap Market, the Nasdaq National Market, the American
Stock Exchange, or the New York Stock Exchange or is suspended or
delisted with respect to the trading of the shares of Common Stock on
such market or exchange.
"Disclosure Documents" shall have the meaning as set forth in
Section 3.2.4.
"Due Diligence Review" shall have the meaning as set forth in
Section 2.5.
"Effective Date" shall have the meaning set forth in Section 2.3.1.
"Equity Securities" shall have the meaning set forth in Section
6.5.1.
"Evaluation Day" shall have the meaning set forth in Section
2.3.1(b).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Excluded Day" shall have the meaning set forth in Section 2.3.1(b).
"Extended Put Period" shall mean the period of time between the
Advance Put Notice Date until the Pricing Period End Date.
"Impermissible Put Cancellation" shall have the meaning set forth in
Section 2.3.1(e).
"Indemnified Liabilities" shall have the meaning set forth in
Section 9.
"Indemnities" shall have the meaning set forth in Section 9.
"Indemnitor" shall have the meaning set forth in Section 9.
"Individual Put Limit" shall have the meaning set forth in Section
2.3.1 (b).
"Ineffective Period" shall mean any period of time that the
Registration Statement or any Supplemental Registration Statement (each
as defined in the Registration Rights Agreement) becomes ineffective or
unavailable for use for the sale or resale, as applicable, of any or
all of the Registrable Securities (as defined in the Registration
Rights Agreement) for any reason (or in the event the prospectus under
either of the above is not current and deliverable) during any time
period required under the Registration Rights Agreement.
<PAGE>
"Initial Exercise Price" shall have the meaning set forth in Section
2.4.1.
"Intended Put Share Amount" shall have the meaning set forth in
Section 2.3.1(a).
"Investment Commitment Closing" shall have the meaning set forth in
Section 2.2.1.
"Investment Agreement" shall mean this Investment Agreement.
"Investment Commitment Opinion of Counsel" shall mean an opinion
from Company's independent counsel, substantially in the form attached
as Exhibit B, or such other form as agreed upon by the parties, as to
the Investment Commitment Closing.
"Investment Date" shall mean the date of the Investment Commitment
Closing. "Investor" shall have the meaning set forth in the preamble
hereto.
"Key Employee" shall have the meaning set forth in Section 5.17, as
set forth in Exhibit N.
"Late Payment Amount" shall have the meaning set forth in Section
2.3.8.
"Legend" shall have the meaning set forth in Section 4.7.
"Major Transaction" shall mean and shall be deemed to have occurred
at such time upon any of the following events:
(i) a consolidation, merger or other business combination or event
or transaction following which the holders of Common Stock of the
Company immediately preceding such consolidation, merger, combination
or event either (i) no longer hold a majority of the shares of Common
Stock of the Company or (ii) no longer have the ability to elect the
board of directors of the Company (a "Change of Control"); provided,
however, that if the other entity involved in such consolidation,
merger, combination or event is a publicly traded company with
"Substantially Similar Trading Characteristics" (as defined below) as
the Company and the holders of Common Stock are to receive solely
Common Stock or no consideration (if the Company is the surviving
entity) or solely common stock of such other entity (if such other
entity is the surviving entity), such transaction shall not be deemed
to be a Major Transaction (provided the surviving entity, if other than
the Company, shall have agreed to assume all obligations of the Company
under this Agreement and the Registration Rights Agreement). For
purposes hereof, an entity shall have Substantially Similar Trading
Characteristics as the Company if the average daily dollar trading
volume of the common stock of such entity is equal to or in excess of
$500,000 for the 90th through the 31st day prior to the public
announcement of such transaction;
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to the holders of
outstanding shares of Common Stock, such that following such purchase,
tender or exchange offer a Change of Control shall have occurred.
"Market Price" shall equal the lowest Closing Bid Price for the
Common Stock on the Principal Market during the Pricing Period for the
applicable Put.
<PAGE>
"Material Facts" shall have the meaning set forth in Section
2.3.6(a).
"Maximum Put Dollar Amount" shall mean the lesser of (i) the Company
Designated Maximum Put Dollar Amount, if any, specified by the Company
in a Put Notice, and (ii) $2 million.
"Maximum Offering Amount" shall mean Twenty Five Million Dollars
($25,000,000).
"Nasdaq 20% Rule" shall have the meaning set forth in Section
2.3.10.
"NASD" shall have the meaning set forth in Section 6.9.
"NYSE" shall have the meaning set forth in Section 6.9.
"Numeric Day" shall mean the numerical day of the month of the
Investment Date or the last day of the calendar month in question,
whichever is less.
"Offering" shall mean the Company's offering of Common Stock and
Warrants issued under this Investment Agreement.
"Officer's Certificate" shall mean a certificate, signed by an
officer of the Company, to the effect that the representations and
warranties of the Company in this Agreement required to be true for the
applicable Closing are true and correct in all material respects and
all of the conditions and limitations set forth in this Agreement for
the applicable Closing are satisfied.
"Opinion of Counsel" shall mean, as applicable, the Investment
Commitment Opinion of Counsel, the Put Opinion of Counsel, and the
Registration Opinion.
"Payment Due Date" shall have the meaning set forth in Section
2.3.8.
"Pricing Period" shall mean, unless otherwise shortened under the
terms of this Agreement, the period beginning on the Business Day
immediately following the Put Date and ending on and including the date
which is 20 Business Days after such Put Date.
"Pricing Period End Date" shall mean the last Business Day of any
Pricing Period.
"Principal Market" shall mean the O.T.C. Bulletin Board, the Nasdaq
Small Cap Market, the Nasdaq National Market, the American Stock
Exchange or the New York Stock Exchange, whichever is at the time the
principal trading exchange or market for the Common Stock.
"Proceeding" shall have the meaning as set forth Section 5.1.
"Purchase" shall have the meaning set forth in Section 2.3.7.
"Purchase Warrants" shall have the meaning set forth in Section
2.4.2, the form of which is attached hereto as Exhibit D.
"Purchase Warrant Exercise Price" shall have the meaning set forth
in Section 2.4.2.
<PAGE>
"Put" shall have the meaning set forth in Section 2.3.1(d).
"Put Cancellation" shall have the meaning set forth in Section
2.3.11(a).
"Put Cancellation Notice Confirmation" shall have the meaning set
forth in Section 2.3.11(c), the form of which is attached hereto as
Exhibit S.
"Put Cancellation Date" shall have the meaning set forth in Section
2.3.11(a).
"Put Cancellation Notice" shall have the meaning set forth in
Section 2.3.11(a), the form of which is attached hereto as Exhibit Q.
"Put Closing" shall have the meaning set forth in Section 2.3.8.
"Put Closing Date" shall have the meaning set forth in Section
2.3.8.
"Put Date" shall mean the date that is specified by the Company in
any Put Notice for which the Company intends to exercise a Put under
Section 2.3.1, unless the Put Date is postponed pursuant to the terms
hereof, in which case the "Put Date" is such postponed date.
"Put Dollar Amount" shall be determined by multiplying the Put Share
Amount by the respective Put Share Prices with respect to such Put
Shares, subject to the limitations herein.
"Put Notice" shall have the meaning set forth in Section 2.3.1(d),
the form of which is attached hereto as Exhibit G.
"Put Notice Confirmation" shall have the meaning set forth in
Section 2.3.1(d), the form of which is attached hereto as Exhibit H.
"Put Opinion of Counsel" shall mean an opinion from Company's
independent counsel, in the form attached as Exhibit I, or such other
form as agreed upon by the parties, as to any Put Closing.
"Put Share Amount" shall have the meaning as set forth Section
2.3.1(b).
"Put Share Price" shall have the meaning set forth in Section
2.3.1(c).
"Put Shares" shall mean shares of Common Stock that are purchased by
the Investor pursuant to a Put.
"Registrable Securities" shall have the meaning as set forth in the
Registration Rights Agreement.
"Registration Opinion" shall have the meaning set forth in Section
2.3.6(a), the form of which is attached hereto as Exhibit R.
"Registration Opinion Deadline" shall have the meaning set forth in
Section 2.3.6(a).
"Registration Rights Agreement" shall mean that certain registration
rights agreement entered into by the Company and Investor on even date
herewith, in the form attached hereto as Exhibit A, or such other form
as agreed upon by the parties.
<PAGE>
"Registration Statement" shall have the meaning as set forth in the
Registration Rights Agreement.
"Regulation D" shall mean Regulation D promulgated under the Act.
"Reporting Issuer" shall have the meaning set forth in Section 6.2.
"Required Put Documents" shall have the meaning set forth in Section
2.3.5.
"Risk Factors" shall have the meaning set forth in Section 3.2.4,
attached hereto as Exhibit J.
"Schedule of Exceptions" shall have the meaning set forth in Section
5, and is attached hereto as Exhibit C.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall mean this Investment Agreement, together with the
Common Stock of the Company, the Warrants and the Warrant Shares
issuable pursuant to this Investment Agreement.
"Semi-Annual Non-Usage Fee" shall have the meaning set forth in
Section 2.6.
"Share Authorization Increase Approval" shall have the meaning set
forth in Section 5.25. "Six Month Anniversary" shall mean the date that
is the same Numeric Day of the sixth (6th) calendar month after the
Investment Date, and the date that is the same Numeric Day of each
sixth (6th) calendar month thereafter, provided that if such date is
not a Business Day, the next Business Day thereafter.
"Stockholder 20% Approval" shall have the meaning set forth in
Section 6.11.
"Supplemental Registration Statement" shall have the meaning set
forth in the Registration Rights Agreement.
"Term" shall mean the term of this Agreement, which shall be a
period of time beginning on the date of this Agreement and ending on
the Termination Date.
"Termination Date" shall mean the earlier of (i) the date that is
three (3) years after the Effective Date, or (ii) the date that is
thirty (30) Business Days after the later of (a) the Put Closing Date
on which the sum of the aggregate Put Share Price for all Put Shares
equal the Maximum Offering Amount, (b) the date that the Company has
delivered a Termination Notice to the Investor, (c) the date of an
Automatic Termination, and (d) the date that all of the Warrants have
been exercised. Notwithstanding the above, if no Registration Statement
has been declared effective by the date that is one (1) year after the
date of this Agreement, the Termination Date shall be the date that is
one (1) year after the date of this Agreement.
"Termination Fee" shall have the meaning as set forth in Section
2.6.
"Termination Notice" shall have the meaning as set forth in Section
2.3.12.
"Third Party Report" shall have the meaning set forth in Section
3.2.4.
"Transaction Documents" shall have the meaning set forth in Section
9.
<PAGE>
"Transfer Agent Instructions" shall mean the Company's instructions
to its transfer agent, substantially in the form attached as Exhibit T,
or such other form as agreed upon by the parties.
"Trigger Price" shall have the meaning set forth in Section
2.3.1(b).
"Truncated Pricing Period" shall have the meaning set forth in
Section 2.3.11(d).
"Truncated Put Share Amount" shall have the meaning set forth in
Section 2.3.11(b).
"Unlegended Share Certificates" shall mean a certificate or
certificates (or electronically delivered shares, as appropriate) (in
denominations as instructed by Investor) representing the shares of
Common Stock to which the Investor is then entitled to receive,
registered in the name of Investor or its nominee (as instructed by
Investor) and not containing a restrictive legend or stop transfer
order, including but not limited to the Put Shares for the applicable
Put and Warrant Shares.
"Use of Proceeds Schedule" shall have the meaning as set forth in
Section 3.2.4, attached hereto as Exhibit L.
"Volume Limitations" shall have the meaning set forth in Section
2.3.1(b).
"Warrant Shares" shall mean the Common Stock issued or issuable upon
exercise of the Warrants.
"Warrants" shall mean Purchase Warrants and Commitment Warrants.
2. PURCHASE AND SALE OF COMMON STOCK.
2.1 OFFER TO SUBSCRIBE.
Subject to the terms and conditions herein and the satisfaction of the
conditions to closing set forth in Sections 2.2 and 2.3 below, Investor hereby
agrees to purchase such amounts of Common Stock and accompanying Warrants as the
Company may, in its sole and absolute discretion, from time to time elect to
issue and sell to Investor according to one or more Puts pursuant to Section 2.3
below.
2.2 INVESTMENT COMMITMENT.
2.2.1 INVESTMENT COMMITMENT CLOSING. The closing of this Agreement (the
"Investment Commitment Closing") shall be deemed to occur when this Agreement
and the Registration Rights Agreement have been executed by both Investor and
the Company, the Transfer Agent Instructions have been executed by both the
Company and the Transfer Agent, and the other Conditions to Investor's
Obligations set forth in Section 2.2.2 below have been met.
2.2.2 CONDITIONS TO INVESTOR'S OBLIGATIONS. As a prerequisite to the
Investment Commitment Closing and the Investor's obligations hereunder, all of
the following (the "Conditions to Investor's Obligations") shall have been
satisfied prior to or concurrently with the Company's execution and delivery of
this Agreement:
(a) the following documents shall have been delivered to the
Investor: (i) the Registration Rights Agreement (executed by the Company and
Investor), (ii) the Investment Commitment Opinion of Counsel (signed by the
Company's counsel), (iii) the Transfer Agent Instructions (executed by the
Company and the Transfer Agent), and (iv) a Secretary's Certificate as to (A)
the resolutions of the Company's board of directors authorizing this
transaction, (B) the Company's Certificate of Incorporation, and (C) the
Company's Bylaws;
<PAGE>
(b) this Investment Agreement, accepted by the Company, shall
have been received by the Investor;
(c) the Company's Common Stock shall be listed for trading and
actually trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the
Nasdaq National Market, the American Stock Exchange or the New York Stock
Exchange;
(d) other than continuing losses described in the Risk Factors
set forth in the Disclosure Documents (provided for in Section 3.2.4), as of the
Closing there have been no material adverse changes in the Company's business
prospects or financial condition since the date of the last balance sheet
included in the Disclosure Documents, including but not limited to incurring
material liabilities; and
(e) the representations and warranties of the Company in this
Agreement shall be true and correct in all material respects and the conditions
to Investor's obligations set forth in this Section 2.2.2 shall have been
satisfied as of such Closing; and the Company shall deliver an Officer's
Certificate, signed by an officer of the Company, to such effect to the
Investor.
2.3 PUTS OF COMMON SHARES TO THE INVESTOR.
2.3.1 PROCEDURE TO EXERCISE A PUT. Subject to the Individual Put Limit,
the Maximum Offering Amount and the Cap Amount (if applicable), and the other
conditions and limitations set forth in this Agreement, at any time beginning on
the date on which the Registration Statement is declared effective by the SEC
(the "Effective Date"), the Company may, in its sole and absolute discretion,
elect to exercise one or more Puts according to the following procedure,
provided that each subsequent Put Date after the first Put Date shall be no
sooner than five (5) Business Days following the preceding Pricing Period End
Date:
(a) DELIVERY OF ADVANCE PUT NOTICE. At least ten (10) Business
Days but not more than twenty (20) Business Days prior to any intended Put Date
(unless otherwise agreed in writing by the Investor), the Company shall deliver
advance written notice (the "Advance Put Notice," the form of which is attached
hereto as Exhibit E, the date of such Advance Put Notice being the "Advance Put
Notice Date") to Investor stating the Put Date for which the Company shall,
subject to the limitations and restrictions contained herein, exercise a Put and
stating the number of shares of Common Stock (subject to the Individual Put
Limit and the Maximum Put Dollar Amount) which the Company intends to sell to
the Investor for the Put (the "Intended Put Share Amount").
The Company may, at its option, also designate in any Advance
Put Notice (i) a maximum dollar amount of Common Stock, not to exceed
$2,000,000, which it shall sell to Investor during the Put (the "Company
Designated Maximum Put Dollar Amount") and/or (ii) a minimum purchase price per
Put Share at which the Investor may purchase Shares pursuant to such Put Notice
(a "Company Designated Minimum Put Share Price"). The Company Designated Minimum
Put Share Price, if applicable, shall be no greater than 80% of the Closing Bid
Price of the Company's common stock on the Advance Put Notice Date. The Company
may decrease (but not increase) the Company Designated Minimum Put Share Price
for a Put at any time by giving the Investor written notice of such decrease not
later than 12:00 Noon, New York City time, on the Business Day immediately
preceding the Business Day that such decrease is to take effect. A decrease in
the Company Designated Minimum Put Share Price shall have no retroactive effect
on the determination of Trigger Prices and Excluded Days for days preceding the
Business Day that such decrease takes effect.
<PAGE>
Notwithstanding the above, if, at the time of delivery of an
Advance Put Notice, more than two (2) Calendar Months have passed since the date
of the previous Put Closing, such Advance Put Notice shall provide at least
twenty (20) Business Days notice of the intended Put Date, unless waived in
writing by the Investor. In order to effect delivery of the Advance Put Notice,
the Company shall (i) send the Advance Put Notice by facsimile on such date so
that such notice is received by the Investor by 6:00 p.m., New York, NY time,
and (ii) surrender such notice on such date to a courier for overnight delivery
to the Investor (or two (2) day delivery in the case of an Investor residing
outside of the U.S.). Upon receipt by the Investor of a facsimile copy of the
Advance Put Notice, the Investor shall, within two (2) Business Days, send, via
facsimile, a confirmation of receipt (the "Advance Put Notice Confirmation," the
form of which is attached hereto as Exhibit F) of the Advance Put Notice to the
Company specifying that the Advance Put Notice has been received and affirming
the intended Put Date and the Intended Put Share Amount.
(b) PUT SHARE AMOUNT. The "Put Share Amount" is the number of
shares of Common Stock that the Investor shall be obligated to purchase in a
given Put, and shall equal the lesser of (i) the Intended Put Share Amount, and
(ii) the Individual Put Limit. The "Individual Put Limit" shall equal the lesser
of (i) 15% of the sum of the aggregate daily reported trading volumes in the
outstanding Common Stock on the Company's Principal Market, excluding any block
trades of 20,000 or more shares of Common Stock, for all Evaluation Days (as
defined below) in the Pricing Period, (ii) the number of Put Shares which, when
multiplied by their respective Put Share Prices, equals the Maximum Put Dollar
Amount, and (iii) the 9.9% Limitation, but in no event shall the Individual Put
Limit exceed 15% of the sum of the aggregate daily reported trading volumes in
the outstanding Common Stock on the Company's Principal Market, excluding any
block trades of 20,000 or more shares of Common Stock, for the twenty (20)
Business Days immediately preceding the Put Date (this limitation, together with
the limitation in (i) immediately above, are collectively referred to herein as
the "Volume Limitations"). Company agrees not to trade Common Stock or arrange
for Common Stock to be traded for the purpose of artificially increasing the
Volume Limitations.
For purposes of this Agreement:
"Trigger Price" for any Pricing Period shall mean the greater of (i) the
Company Designated Minimum Put Share Price, plus $.10, or (ii) the Company
Designated Minimum Put Share Price divided by .91.
An "Excluded Day" shall mean each Business Day during a Pricing Period
where the lowest intra-day trading price of the Common Stock is less than the
Trigger Price.
An "Evaluation Day" shall mean each Business Day during a Pricing Period
that is not an Excluded Day.
(c) PUT SHARE PRICE. The purchase price for the Put Shares
(the "Put Share Price") shall equal the lesser of (i) the Market Price for such
Put, minus $.10, or (ii) 91% of the Market Price for such Put, but shall in no
event be less than the Company Designated Minimum Put Share Price for such Put,
if applicable.
<PAGE>
(d) DELIVERY OF PUT NOTICE. After delivery of an Advance Put
Notice, on the Put Date specified in the Advance Put Notice the Company shall
deliver written notice (the "Put Notice," the form of which is attached hereto
as Exhibit G) to Investor stating (i) the Put Date, (ii) the Intended Put Share
Amount as specified in the Advance Put Notice (such exercise a "Put"), (iii) the
Company Designated Maximum Put Dollar Amount (if applicable), and (iv) the
Company Designated Minimum Put Share Price (if applicable). In order to effect
delivery of the Put Notice, the Company shall (i) send the Put Notice by
facsimile on the Put Date so that such notice is received by the Investor by
6:00 p.m., New York, NY time, and (ii) surrender such notice on the Put Date to
a courier for overnight delivery to the Investor (or two (2) day delivery in the
case of an Investor residing outside of the U.S.). Upon receipt by the Investor
of a facsimile copy of the Put Notice, the Investor shall, within two (2)
Business Days, send, via facsimile, a confirmation of receipt (the "Put Notice
Confirmation," the form of which is attached hereto as Exhibit H) of the Put
Notice to Company specifying that the Put Notice has been received and affirming
the Put Date and the Intended Put Share Amount.
(e) DELIVERY OF REQUIRED PUT DOCUMENTS. On or before the Put
Date for such Put, the Company shall deliver the Required Put Documents (as
defined in Section 2.3.5 below) to the Investor (or to an agent of Investor, if
Investor so directs). Unless otherwise specified by the Investor, the Put Shares
of Common Stock shall be transmitted electronically pursuant to such electronic
delivery system as the Investor shall request; otherwise delivery shall be by
physical certificates. If the Company has not delivered all of the Required Put
Documents to the Investor on or before the Put Date, the Put shall be
automatically cancelled, unless the Investor agrees to delay the Put Date by up
to three (3) Business Days, in which case the Pricing Period begins on the
Business Day following such new Put Date. If the Company has not delivered all
of the Required Put Documents to the Investor on or before the Put Date (or new
Put Date, if applicable), and the Investor has not agreed in writing to delay
the Put Date, the Put is automatically canceled (an "Impermissible Put
Cancellation") and, unless the Put was otherwise canceled in accordance with the
terms of Section 2.3.11, the Company shall pay the Investor $5,000 for its
reasonable due diligence expenses incurred in preparation for the canceled Put
and the Company may deliver an Advance Put Notice for the subsequent Put no
sooner than ten (10) Business Days after the date that such Put was canceled,
unless otherwise agreed by the Investor.
(f) LIMITATION ON INVESTOR'S OBLIGATION TO PURCHASE SHARES.
Notwithstanding anything to the contrary in this Agreement, in no event shall
the Investor be required to purchase, and an Intended Put Share Amount may not
include, an amount of Put Shares, which when added to the number of Put Shares
acquired by the Investor pursuant to this Agreement during the 31 days preceding
the Put Date with respect to which this determination of the permitted Intended
Put Share Amount is being made, would exceed 9.99% of the number of shares of
Common Stock outstanding (on a fully diluted basis, to the extent that inclusion
of unissued shares is mandated by Section 13(d) of the Exchange Act) on the Put
Date for such Pricing Period, as determined in accordance with Section 13(d) of
the Exchange Act (the "Section 13(d) Outstanding Share Amount"). Each Put Notice
shall include a representation of the Company as to the Section 13(d)
Outstanding Share Amount on the related Put Date. In the event that the Section
13(d) Outstanding Share Amount is different on any date during a Pricing Period
than on the Put Date associated with such Pricing Period, then the number of
shares of Common Stock outstanding on such date during such Pricing Period shall
govern for purposes of determining whether the Investor, when aggregating all
purchases of Shares made pursuant to this Agreement in the 31 calendar days
preceding such date, would have acquired more than 9.99% of the Section 13(d)
Outstanding Share Amount. The limitation set forth in this Section 2.3.1(f) is
referred to as the "9.9% Limitation."
2.3.2 TERMINATION OF RIGHT TO PUT. The Company's right to require the
Investor to purchase any subsequent Put Shares shall terminate permanently
(each, an "Automatic Termination") upon the occurrence of any of the following:
<PAGE>
(a) the Company shall not exercise a Put or any Put thereafter
if, at any time, either the Company or any director or executive officer of the
Company has engaged in a transaction or conduct related to the Company that has
resulted in (i) a Securities and Exchange Commission enforcement action, or (ii)
a civil judgment or criminal conviction for fraud or misrepresentation, or for
any other offense that, if prosecuted criminally, would constitute a felony
under applicable law;
(b) the Company shall not exercise a Put or any Put
thereafter, on any date after a cumulative time period or series of time
periods, including both Ineffective Periods and Delisting Events, that lasts for
an aggregate of four (4) months;
(c) the Company shall not exercise a Put or any Put thereafter
if at any time the Company has filed for and/or is subject to any bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings for
relief under any bankruptcy law or any law for the relief of debtors instituted
by or against the Company or any subsidiary of the Company;
(d) the Company shall not exercise a Put after the sooner of
(i) the date that is three (3) years after the Effective Date, or (ii) the Put
Closing Date on which the aggregate of the Put Dollar Amounts for all Puts equal
the Maximum Offering Amount; and
(e) the Company shall not exercise a Put after the Company has
breached any covenant in Section 2.6, Section 6, or Section 9 hereof.
2.3.3 PUT LIMITATIONS. The Company's right to exercise a Put shall be
limited as follows:
(a) notwithstanding the amount of any Put, the Investor shall
not be obligated to purchase any additional Put Shares once the aggregate Put
Dollar Amount paid by Investor equals the Maximum Offering Amount;
(b) the Investor shall not be obligated to acquire and pay for
the Put Shares with respect to any Put for which the Company has announced a
subdivision or combination, including a reverse split, of its Common Stock or
has subdivided or combined its Common Stock during the Extended Put Period;
(c) the Investor shall not be obligated to acquire and pay for
the Put Shares with respect to any Put for which the Company has paid a dividend
of its Common Stock or has made any other distribution of its Common Stock
during the Extended Put Period;
(d) the Investor shall not be obligated to acquire and pay for
the Put Shares with respect to any Put for which the Company has made, during
the Extended Put Period, a distribution of all or any portion of its assets or
evidences of indebtedness to the holders of its Common Stock;
(e) the Investor shall not be obligated to acquire and pay for
the Put Shares with respect to any Put for which a Major Transaction has
occurred during the Extended Put Period.
2.3.4 CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO DELIVER AN
ADVANCE PUT NOTICE OR A PUT NOTICE AND THE OBLIGATION OF THE INVESTOR TO
PURCHASE PUT SHARES. The right of the Company to deliver an Advance Put Notice
or a Put Notice and the obligation of the Investor hereunder to acquire and pay
for the Put Shares incident to a Closing is subject to the satisfaction, on (i)
the date of delivery of such Advance Put Notice or Put Notice and (ii) the
applicable Put Closing Date, of each of the following conditions:
<PAGE>
(a) the Company's Common Stock shall be listed for and
actively trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the
Nasdaq National Market or the New York Stock Exchange and the Put Shares shall
be so listed, and to the Company's knowledge there is no notice of any
suspension or delisting with respect to the trading of the shares of Common
Stock on such market or exchange;
(b) the Company shall have satisfied any and all obligations
pursuant to the Registration Rights Agreement, including, but not limited to,
the filing of the Registration Statement with the SEC with respect to the resale
of all Registrable Securities and the requirement that the Registration
Statement shall have been declared effective by the SEC for the resale of all
Registrable Securities and the Company shall have satisfied and shall be in
compliance with any and all obligations pursuant to this Agreement and the
Warrants;
(c) the representations and warranties of the Company are true
and correct in all material respects as if made on such date and the conditions
to Investor's obligations set forth in this Section 2.3.4 are satisfied as of
such Closing, and the Company shall deliver a certificate, signed by an officer
of the Company, to such effect to the Investor;
(d) the Company shall have reserved for issuance a sufficient
number of Common Shares for the purpose of enabling the Company to satisfy any
obligation to issue Common Shares pursuant to any Put and to effect exercise of
the Warrants;
(e) the Registration Statement is not subject to an
Ineffective Period as defined in the Registration Rights Agreement, the
prospectus included therein is current and deliverable, and to the Company's
knowledge there is no notice of any investigation or inquiry concerning any stop
order with respect to the Registration Statement; and
(f) if the Aggregate Issued Shares after the Closing of the
Put would exceed the Cap Amount, the Company shall have obtained the Stockholder
20% Approval as specified in Section 6.11, if the Company's Common Stock is
listed on the NASDAQ Small Cap Market or NMS, and such approval is required by
the rules of the NASDAQ.
2.3.5 DOCUMENTS REQUIRED TO BE DELIVERED ON THE PUT DATE AS CONDITIONS
TO CLOSING OF ANY PUT. The Closing of any Put and Investor's obligations
hereunder shall additionally be conditioned upon the delivery to the Investor of
each of the following (the "Required Put Documents") on or before the applicable
Put Date:
(a) a number of Unlegended Share Certificates (or freely
tradable electronically delivered shares, as appropriate) equal to the Intended
Put Share Amount, in denominations of not more than 50,000 shares per
certificate;
(b) the following documents: Put Opinion of Counsel, Officer's
Certificate, Put Notice, Registration Opinion, and any report or disclosure
required under Section 2.3.6 or Section 2.5;
(c) all documents, instruments and other writings required to
be delivered on or before the Put Date pursuant to any provision of this
Agreement in order to implement and effect the transactions contemplated herein.
<PAGE>
2.3.6 ACCOUNTANT'S LETTER AND REGISTRATION OPINION.
(a) The Company shall have caused to be delivered to the
Investor, (i) whenever required by Section 2.3.6(b) or by Section 2.5.3, and
(ii) on the date that is three (3) Business Days prior to each Put Date (the
"Registration Opinion Deadline"), an opinion of the Company's independent
counsel, in substantially the form of Exhibit R (the "Registration Opinion"),
addressed to the Investor stating, inter alia, that no facts ("Material Facts")
have come to such counsel's attention that have caused it to believe that the
Registration Statement is subject to an Ineffective Period or to believe that
the Registration Statement, any Supplemental Registration Statement (as each may
be amended, if applicable), and any related prospectuses, contain an untrue
statement of material fact or omits a material fact required to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. If a Registration Opinion cannot be delivered by the
Company's independent counsel to the Investor on the Registration Opinion
Deadline due to the existence of Material Facts or an Ineffective Period, the
Company shall promptly notify the Investor and as promptly as possible amend
each of the Registration Statement and any Supplemental Registration Statements,
as applicable, and any related prospectus or cause such Ineffective Period to
terminate, as the case may be, and deliver such Registration Opinion and updated
prospectus as soon as possible thereafter. If at any time after a Put Notice
shall have been delivered to Investor but before the related Pricing Period End
Date, the Company acquires knowledge of such Material Facts or any Ineffective
Period occurs, the Company shall promptly notify the Investor and shall deliver
a Put Cancellation Notice to the Investor pursuant to Section 2.3.11 by
facsimile and overnight courier by the end of that Business Day.
(b) (i) the Company shall engage its independent auditors to
perform the procedures in accordance with the provisions of Statement on
Auditing Standards No. 71, as amended, as agreed to by the parties hereto, and
reports thereon (the "Bring Down Cold Comfort Letters") as shall have been
reasonably requested by the Investor with respect to certain financial
information contained in the Registration Statement and shall have delivered to
the Investor such a report addressed to the Investor, on the date that is three
(3) Business Days prior to each Put Date.
(ii) in the event that the Investor shall have requested
delivery of an Agreed Upon Procedures Report pursuant to Section 2.5.3, the
Company shall engage its independent auditors to perform certain agreed upon
procedures and report thereon as shall have been reasonably requested by the
Investor with respect to certain financial information of the Company and the
Company shall deliver to the Investor a copy of such report addressed to the
Investor. In the event that the report required by this Section 2.3.6(b) cannot
be delivered by the Company's independent auditors, the Company shall, if
necessary, promptly revise the Registration Statement and the Company shall not
deliver a Put Notice until such report is delivered.
2.3.7 INVESTOR'S OBLIGATION AND RIGHT TO PURCHASE SHARES. Subject to
the conditions set forth in this Agreement, following the Investor's receipt of
a validly delivered Put Notice, the Investor shall be required to purchase (each
a "Purchase") from the Company a number of Put Shares equal to the Put Share
Amount, in the manner described below.
2.3.8 MECHANICS OF PUT CLOSING. Each of the Company and the Investor
shall deliver all documents, instruments and writings required to be delivered
by either of them pursuant to this Agreement at or prior to each Closing.
Subject to such delivery and the satisfaction of the conditions set forth in
Sections 2.3.4 and 2.3.5, the closing of the purchase by the Investor of Shares
shall occur by 5:00 PM, New York City Time, on the date which is five (5)
Business Days following the applicable Pricing Period End Date (or such other
time or later date as is mutually agreed to by the Company and the Investor)
<PAGE>
(the "Payment Due Date") at the offices of Investor. On each or before each
Payment Due Date, the Investor shall deliver to the Company, in the manner
specified in Section 8 below, the Put Dollar Amount to be paid for such Put
Shares, determined as aforesaid. The closing (each a "Put Closing") for each Put
shall occur on the date that both (i) the Company has delivered to the Investor
all Required Put Documents, and (ii) the Investor has delivered to the Company
such Put Dollar Amount and any Late Payment Amount, if applicable (each a "Put
Closing Date").
If the Investor does not deliver to the Company the Put Dollar
Amount for such Put Closing on or before the Payment Due Date, then the Investor
shall pay to the Company, in addition to the Put Dollar Amount, an amount (the
"Late Payment Amount") at a rate of X% per month, accruing daily, multiplied by
such Put Dollar Amount, where "X" equals one percent (1%) for the first month
following the date in question, and increases by an additional one percent (1%)
for each month that passes after the date in question, up to a maximum of five
percent (5%) per month; provided, however, that in no event shall the amount of
interest that shall become due and payable hereunder exceed the maximum amount
permissible under applicable law.
2.3.9 LIMITATION ON SHORT SALES. The Investor and its Affiliates shall
not engage in short sales of the Company's Common Stock; provided, however, that
the Investor may enter into any short exempt sale or any short sale or other
hedging or similar arrangement it deems appropriate with respect to Put Shares
after it receives a Put Notice with respect to such Put Shares so long as such
sales or arrangements do not involve more than the number of such Put Shares
specified in the Put Notice.
2.3.10 CAP AMOUNT. If the Company becomes listed on the Nasdaq Small
Cap Market or the Nasdaq National Market, then, unless the Company has obtained
Stockholder 20% Approval as set forth in Section 6.11 or unless otherwise
permitted by Nasdaq, in no event shall the Aggregate Issued Shares exceed the
maximum number of shares of Common Stock (the "Cap Amount") that the Company
can, without stockholder approval, so issue pursuant to Nasdaq Rule
4460(i)(1)(d)(ii) (or any other applicable Nasdaq Rules or any successor rule)
(the "Nasdaq 20% Rule").
2.3.11 PUT CANCELLATION.
(a) MECHANICS OF PUT CANCELLATION. If at any time during a
Pricing Period the Company discovers the existence of Material Facts or any
Ineffective Period or Delisting Event occurs, the Company shall cancel the Put
(a "Put Cancellation"), by delivering written notice to the Investor (the "Put
Cancellation Notice"), attached as Exhibit Q, by facsimile and overnight
courier. The "Put Cancellation Date" shall be the date that the Put Cancellation
Notice is first received by the Investor, if such notice is received by the
Investor by 6:00 p.m., New York, NY time, and shall be the following date, if
such notice is received by the Investor after 6:00 p.m., New York, NY time.
(b) EFFECT OF PUT CANCELLATION. Anytime a Put Cancellation
Notice is delivered to Investor after the Put Date, the Put, shall remain
effective with respect to a number of Put Shares (the "Truncated Put Share
Amount") equal to the Individual Put Limit for the Truncated Pricing Period.
(c) PUT CANCELLATION NOTICE CONFIRMATION. Upon receipt by the
Investor of a facsimile copy of the Put Cancellation Notice, the Investor shall
promptly send, via facsimile, a confirmation of receipt (the "Put Cancellation
Notice Confirmation," a form of which is attached as Exhibit S) of the Put
Cancellation Notice to the Company specifying that the Put Cancellation Notice
has been received and affirming the Put Cancellation Date.
<PAGE>
(d) TRUNCATED PRICING PERIOD. If a Put Cancellation Notice has
been delivered to the Investor after the Put Date, the Pricing Period for such
Put shall end at on the close of trading on the last full trading day on the
Principal Market that ends prior to the moment of initial delivery of the Put
Cancellation Notice (a "Truncated Pricing Period") to the Investor.
2.3.12 INVESTMENT AGREEMENT CANCELLATION. The Company may terminate (a
"Company Termination") its right to initiate future Puts by providing written
notice ("Termination Notice") to the Investor, by facsimile and overnight
courier, at any time other than during an Extended Put Period, provided that
such termination shall have no effect on the parties' other rights and
obligations under this Agreement, the Registration Rights Agreement or the
Warrants. Notwithstanding the above, any cancellation occurring during an
Extended Put Period is governed by Section 2.3.11.
2.3.13 RETURN OF EXCESS COMMON SHARES. In the event that the number of
Shares purchased by the Investor pursuant to its obligations hereunder is less
than the Intended Put Share Amount, the Investor shall promptly return to the
Company any shares of Common Stock in the Investor's possession that are not
being purchased by the Investor.
2.4 WARRANTS.
2.4.1 COMMITMENT WARRANTS. In partial consideration hereof, following
the execution of the Letter of Agreement dated on or about September 30, 1999
between the Company and the Investor, the Company issued and delivered to
Investor or its designated assignees, warrants (the "Commitment Warrants") in
the form attached hereto as Exhibit U, or such other form as agreed upon by the
parties, to purchase 400,000 shares of Common Stock. The Commitment Warrants
shall be exercisable at a price (the "Commitment Warrant Exercise Price") which
shall initially equal the lowest Closing Bid Price for the five (5) Business
Days immediately preceding September 30, 1999 ("Initial Exercise Price"), and
shall have reset provisions. Each Commitment Warrant shall be immediately
exercisable at the Commitment Warrant Exercise Price, and shall have a term
beginning on the date of issuance and ending on date that is five (5) years
thereafter. The Warrant Shares shall be registered for resale pursuant to the
Registration Rights Agreement. Concurrently with the issuance and delivery of
the Commitment Opinion to the Investor, or on the date that is six (6) months
after the date of this Agreement, whichever is sooner, the Company shall deliver
to the Investor a Commitment Warrant Opinion of Counsel (signed by the Company's
independent counsel), in the form of Exhibit ___ attached hereto.
2.4.2 PURCHASE WARRANTS. Within five (5) Business Days of the end of
each Pricing Period, the Company shall issue and deliver to the Investor a
warrant ("Purchase Warrant"), in the form attached hereto as Exhibit D, or such
other form as agreed upon by the parties, to purchase a number of shares of
Common Stock equal to 8% of the number of Put Shares issued to Investor in that
Put. Each Purchase Warrant shall be exercisable at a price (the "Purchase
Warrant Exercise Price") which shall initially equal 110% of the Market Price
for the applicable Put, and shall have semi-annual reset provisions. Each
Purchase Warrant shall be immediately exercisable at the Purchase Warrant
Exercise Price, and shall have a term beginning on the date of issuance and
ending on the date that is five (5) years thereafter. The Warrant Shares shall
be registered for resale pursuant to the Registration Rights Agreement.
2.5 DUE DILIGENCE REVIEW. The Company shall make available for inspection
and review by the Investor (the "Due Diligence Review"), advisors to and
representatives of the Investor (who may or may not be affiliated with the
Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of Common Stock on behalf of the Investor
pursuant to the Registration Statement, any Supplemental Registration Statement,
or amendments or supplements thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
<PAGE>
2.5.1 TREATMENT OF NONPUBLIC INFORMATION. The Company shall not
disclose nonpublic information to the Investor or to its advisors or
representatives unless prior to disclosure of such information the Company
identifies such information as being nonpublic information and provides the
Investor and such advisors and representatives with the opportunity to accept or
refuse to accept such nonpublic information for review. The Company may, as a
condition to disclosing any nonpublic information hereunder, require the
Investor and its advisors and representatives to enter into a confidentiality
agreement (including an agreement with such advisors and representatives
prohibiting them from trading in Common Stock during such period of time as they
are in possession of nonpublic information) in form reasonably satisfactory to
the Company and the Investor.
Nothing herein shall require the Company to disclose nonpublic
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate nonpublic information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
nonpublic information (whether or not requested of the Company specifically or
generally during the course of due diligence by and such persons or entities),
which, if not disclosed in the Prospectus included in the Registration
Statement, would cause such Prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading. Nothing contained in this Section 2.5 shall be construed to mean
that such persons or entities other than the Investor (without the written
consent of the Investor prior to disclosure of such information) may not obtain
nonpublic information in the course of conducting due diligence in accordance
with the terms of this Agreement; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any nonpublic information
discovered by such advisors or representatives in the course of their due
diligence without the written consent of the Investor prior to disclosure of
such information.
2.5.2 DISCLOSURE OF MISSTATEMENTS AND OMISSIONS. The Investor's
advisors or representatives shall make complete disclosure to the Investor's
counsel of all events or circumstances constituting nonpublic information
discovered by such advisors or representatives in the course of their due
diligence upon which such advisors or representatives form the opinion that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in the light of the circumstances in
which they were made, not misleading. Upon receipt of such disclosure, the
Investor's counsel shall consult with the Company's independent counsel in order
to address the concern raised as to the existence of a material misstatement or
omission and to discuss appropriate disclosure with respect thereto; provided,
however, that such consultation shall not constitute the advice of the Company's
independent counsel to the Investor as to the accuracy of the Registration
Statement and related Prospectus.
<PAGE>
2.5.3 PROCEDURE IF MATERIAL FACTS ARE REASONABLY BELIEVED TO BE UNTRUE
OR ARE OMITTED. In the event after such consultation the Investor or the
Investor's counsel reasonably believes that the Registration Statement contains
an untrue statement or a material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading,
(a) the Company shall file with the SEC an amendment to the
Registration Statement responsive to such alleged untrue statement or omission
and provide the Investor, as promptly as practicable, with copies of the
Registration Statement and related Prospectus, as so amended, or
(b) if the Company disputes the existence of any such material
misstatement or omission, (i) the Company's independent counsel shall provide
the Investor's counsel with a Registration Opinion and (ii) in the event the
dispute relates to the adequacy of financial disclosure and the Investor shall
reasonably request, the Company's independent auditors shall provide to the
Company a letter ("Agreed Upon Procedures Report") outlining the performance of
such "agreed upon procedures" as shall be reasonably requested by the Investor
and the Company shall provide the Investor with a copy of such letter.
2.6 COMMITMENT PAYMENTS.
On the last Business Day of each six (6) Calendar Month period
following the date of this Agreement (each such period a "Commitment Evaluation
Period"), if the Company has not Put at least $1,000,000 in aggregate Put Dollar
Amount during that Commitment Evaluation Period, the Company, in consideration
of Investor's commitment costs, including, but not limited to, due diligence
expenses, shall pay to the Investor an amount (the "Semi-Annual Non-Usage Fee ")
equal to the difference of (i) $100,000, minus (ii) 10% of the aggregate Put
Dollar Amount of the Put Shares put to Investor during that Commitment
Evaluation Period. In the event that the Company delivers a Termination Notice
to the Investor or an Automatic Termination occurs, the Company shall pay to the
Investor (the "Termination Fee") the greater of (i) the Semi-Annual Non-Usage
Fee for the applicable Commitment Evaluation Period, or (ii) the difference of
(x) $200,000, minus (y) 10% of the aggregate Put Dollar Amount of the Put Shares
put to Investor during all Puts to date, and the Company shall not be required
to pay the Semi-Annual Non-Usage Fee thereafter.
Each Semi Annual Non-Usage Fee or Termination Fee is payable, in cash,
within five (5) business days of the date it accrued. The Company shall not be
required to deliver any payments to Investor under this subsection until
Investor has paid all Put Dollar Amounts that are then due.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF INVESTOR. Investor hereby
represents and warrants to and agrees with the Company as follows:
3.1 ACCREDITED INVESTOR. Investor is an accredited investor ("Accredited
Investor"), as defined in Rule 501 of Regulation D, and has checked the
applicable box set forth in Section 10 of this Agreement.
3.2 INVESTMENT EXPERIENCE; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
3.2.1 ACCESS TO INFORMATION. Investor or Investor's professional
advisor has been granted the opportunity to ask questions of and receive answers
from representatives of the Company, its officers, directors, employees and
agents concerning the terms and conditions of this Offering, the Company and its
business and prospects, and to obtain any additional information which Investor
or Investor's professional advisor deems necessary to verify the accuracy and
completeness of the information received.
<PAGE>
3.2.2 RELIANCE ON OWN ADVISORS. Investor has relied completely on the
advice of, or has consulted with, Investor's own personal tax, investment, legal
or other advisors and has not relied on the Company or any of its affiliates,
officers, directors, attorneys, accountants or any affiliates of any thereof and
each other person, if any, who controls any of the foregoing, within the meaning
of Section 15 of the Act for any tax or legal advice (other than reliance on
information in the Disclosure Documents as defined in Section 3.2.4 below and on
the Opinion of Counsel). The foregoing, however, does not limit or modify
Investor's right to rely upon covenants, representations and warranties of the
Company in this Agreement.
3.2.3 CAPABILITY TO EVALUATE. Investor has such knowledge and
experience in financial and business matters so as to enable such Investor to
utilize the information made available to it in connection with the Offering in
order to evaluate the merits and risks of the prospective investment, which are
substantial, including without limitation those set forth in the Disclosure
Documents (as defined in Section 3.2.4 below).
3.2.4 DISCLOSURE DOCUMENTS. Investor, in making Investor's investment
decision to subscribe for the Investment Agreement hereunder, represents that
(a) Investor has received and had an opportunity to review (i) the Company's
Annual Report on Form 10-KSB for the year ended December 31, , 1999, (ii) the
Company's quarterly report on Form 10-QSB for the quarters ended March 31, 1999,
and June 30, 1999, (iii) the Risk Factors, attached as Exhibit J, (the "Risk
Factors") (iv) the Capitalization Schedule, attached as Exhibit K, (the
"Capitalization Schedule") and (v) the Use of Proceeds Schedule, attached as
Exhibit L, (the "Use of Proceeds Schedule"); (b) Investor has read, reviewed,
and relied solely on the documents described in (a) above, the Company's
representations and warranties and other information in this Agreement,
including the exhibits, documents prepared by the Company which have been
specifically provided to Investor in connection with this Offering (the
documents described in this Section 3.2.4 (a) and (b) are collectively referred
to as the "Disclosure Documents"), and an independent investigation made by
Investor and Investor's representatives, if any; (c) Investor has, prior to the
date of this Agreement, been given an opportunity to review material contracts
and documents of the Company which have been filed as exhibits to the Company's
filings under the Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and has had an opportunity to ask questions of and receive
answers from the Company's officers and directors; and (d) is not relying on any
oral representation of the Company or any other person, nor any written
representation or assurance from the Company other than those contained in the
Disclosure Documents or incorporated herein or therein. The foregoing, however,
does not limit or modify Investor's right to rely upon covenants,
representations and warranties of the Company in Sections 5 and 6 of this
Agreement. Investor acknowledges and agrees that the Company has no
responsibility for, does not ratify, and is under no responsibility whatsoever
to comment upon or correct any reports, analyses or other comments made about
the Company by any third parties, including, but not limited to, analysts'
research reports or comments (collectively, "Third Party Reports"), and Investor
has not relied upon any Third Party Reports in making the decision to invest.
3.2.5 INVESTMENT EXPERIENCE; FEND FOR SELF. Investor has substantial
experience in investing in securities and it has made investments in securities
other than those of the Company. Investor acknowledges that Investor is able to
fend for Investor's self in the transaction contemplated by this Agreement, that
Investor has the ability to bear the economic risk of Investor's investment
pursuant to this Agreement and that Investor is an "Accredited Investor" by
virtue of the fact that Investor meets the investor qualification standards set
forth in Section 3.1 above. Investor has not been organized for the purpose of
investing in securities of the Company, although such investment is consistent
with Investor's purposes.
<PAGE>
3.3 EXEMPT OFFERING UNDER REGULATION D.
3.3.1 NO GENERAL SOLICITATION. The Investment Agreement was not offered
to Investor through, and Investor is not aware of, any form of general
solicitation or general advertising, including, without limitation, (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
3.3.2 RESTRICTED SECURITIES. Investor understands that the Investment
Agreement is, the Common Stock and Warrants issued at each Put Closing will be,
and the Warrant Shares will be, characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction exempt from the registration requirements of the federal
securities laws and that under such laws and applicable regulations such
securities may not be transferred or resold without registration under the Act
or pursuant to an exemption therefrom. In this connection, Investor represents
that Investor is familiar with Rule 144 under the Act, as presently in effect,
and understands the resale limitations imposed thereby and by the Act.
3.3.3 DISPOSITION. Without in any way limiting the representations set
forth above, Investor agrees that until the Securities are sold pursuant to an
effective Registration Statement or an exemption from registration, they will
remain in the name of Investor and will not be transferred to or assigned to any
broker, dealer or depositary. Investor further agrees not to sell, transfer,
assign, or pledge the Securities (except for any bona fide pledge arrangement to
the extent that such pledge does not require registration under the Act or
unless an exemption from such registration is available and provided further
that if such pledge is realized upon, any transfer to the pledgee shall comply
with the requirements set forth herein), or to otherwise dispose of all or any
portion of the Securities unless and until:
(a) There is then in effect a registration statement under the
Act and any applicable state securities laws covering such proposed disposition
and such disposition is made in accordance with such registration statement and
in compliance with applicable prospectus delivery requirements; or
(b) (i) Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition to the extent relevant
for determination of the availability of an exemption from registration, and
(ii) if reasonably requested by the Company, Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of the Securities under the Act
or state securities laws. It is agreed that the Company will not require the
Investor to provide opinions of counsel for transactions made pursuant to Rule
144 provided that Investor and Investor's broker, if necessary, provide the
Company with the necessary representations for counsel to the Company to issue
an opinion with respect to such transaction.
The Investor is entering into this Agreement for its own
account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
<PAGE>
3.4 DUE AUTHORIZATION.
3.4.1 AUTHORITY. The person executing this Investment Agreement, if
executing this Agreement in a representative or fiduciary capacity, has full
power and authority to execute and deliver this Agreement and each other
document included herein for which a signature is required in such capacity and
on behalf of the subscribing individual, partnership, trust, estate, corporation
or other entity for whom or which Investor is executing this Agreement. Investor
has reached the age of majority (if an individual) according to the laws of the
state in which he or she resides.
3.4.2 DUE AUTHORIZATION. Investor is duly and validly organized,
validly existing and in good standing as a limited liability company under the
laws of Georgia with full power and authority to purchase the Securities to be
purchased by Investor and to execute and deliver this Agreement.
3.4.3 PARTNERSHIPS. If Investor is a partnership, the representations,
warranties, agreements and understandings set forth above are true with respect
to all partners of Investor (and if any such partner is itself a partnership,
all persons holding an interest in such partnership, directly or indirectly,
including through one or more partnerships), and the person executing this
Agreement has made due inquiry to determine the truthfulness of the
representations and warranties made hereby.
3.4.4 REPRESENTATIVES. If Investor is purchasing in a representative or
fiduciary capacity, the representations and warranties shall be deemed to have
been made on behalf of the person or persons for whom Investor is so purchasing.
4. ACKNOWLEDGMENTS. Investor is aware that:
4.1 RISKS OF INVESTMENT. Investor recognizes that an investment in the
Company involves substantial risks, including the potential loss of Investor's
entire investment herein. Investor recognizes that the Disclosure Documents,
this Agreement and the exhibits hereto do not purport to contain all the
information, which would be contained in a registration statement under the Act;
4.2 NO GOVERNMENT APPROVAL. No federal or state agency has passed upon the
Securities, recommended or endorsed the Offering, or made any finding or
determination as to the fairness of this transaction;
4.3 NO REGISTRATION, RESTRICTIONS ON TRANSFER. As of the date of this
Agreement, the Securities and any component thereof have not been registered
under the Act or any applicable state securities laws by reason of exemptions
from the registration requirements of the Act and such laws, and may not be
sold, pledged (except for any limited pledge in connection with a margin account
of Investor to the extent that such pledge does not require registration under
the Act or unless an exemption from such registration is available and provided
further that if such pledge is realized upon, any transfer to the pledgee shall
comply with the requirements set forth herein), assigned or otherwise disposed
of in the absence of an effective registration of the Securities and any
component thereof under the Act or unless an exemption from such registration is
available;
4.4 RESTRICTIONS ON TRANSFER. Investor may not attempt to sell, transfer,
assign, pledge or otherwise dispose of all or any portion of the Securities or
any component thereof in the absence of either an effective registration
statement or an exemption from the registration requirements of the Act and
applicable state securities laws;
<PAGE>
4.5 NO ASSURANCES OF REGISTRATION. There can be no assurance that any
registration statement will become effective at the scheduled time, or ever, or
remain effective when required, and Investor acknowledges that it may be
required to bear the economic risk of Investor's investment for an indefinite
period of time;
4.6 EXEMPT TRANSACTION. Investor understands that the Securities are being
offered and sold in reliance on specific exemptions from the registration
requirements of federal and state law and that the representations, warranties,
agreements, acknowledgments and understandings set forth herein are being relied
upon by the Company in determining the applicability of such exemptions and the
suitability of Investor to acquire such Securities.
4.7 LEGENDS. The certificates representing the Put Shares shall not bear a
Restrictive Legend. The certificates representing the Warrant Shares shall not
bear a Restrictive Legend unless they are issued at a time when the Registration
Statement is not effective for resale. It is understood that the certificates
evidencing any Warrant Shares issued at a time when the Registration Statement
is not effective for resale, subject to legend removal under the terms of
Section 6.8 below, shall bear the following legend (the "Legend"):
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities
laws, nor the securities laws of any other jurisdiction. They may not
be sold or transferred in the absence of an effective registration
statement under those securities laws or pursuant to an exemption
therefrom."
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the
following representations and warranties to Investor (which shall be true at the
signing of this Agreement, and as of any such later date as contemplated
hereunder) and agrees with Investor that, except as set forth in the "Schedule
of Exceptions" attached hereto as Exhibit C:
5.1 ORGANIZATION, GOOD STANDING, AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Utah, USA and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the business or properties of the Company and its subsidiaries taken
as a whole. The Company is not the subject of any pending, threatened or, to its
knowledge, contemplated investigation or administrative or legal proceeding (a
"Proceeding") by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, or the Securities and Exchange Commission, The
National Association of Securities Dealer, Inc., The Nasdaq Stock Market, Inc.
or any state securities commission, or any other governmental entity, which have
not been disclosed in the Disclosure Documents. None of the disclosed
Proceedings, if any, will have a material adverse effect upon the Company or the
market for the Common Stock. The Company has the following subsidiaries:
5.2 CORPORATE CONDITION. The Company's condition is, in all material
respects, as described in the Disclosure Documents (as further set forth in any
subsequently filed Disclosure Documents, if applicable), except for changes in
the ordinary course of business and normal year-end adjustments that are not, in
the aggregate, materially adverse to the Company. Except for continuing losses,
there have been no material adverse changes to the Company's business, financial
condition, or prospects since the dates of such Disclosure Documents. The
financial statements as contained in the 10-KSB and 10-QSB have been prepared in
accordance with generally accepted accounting principles, consistently applied
(except as otherwise permitted by Regulation S-X of the Exchange Act), subject,
in the case of unaudited interim financial statements, to customary year end
adjustments and the absence of certain footnotes, and fairly present the
financial condition of the Company as of the dates of the balance sheets
<PAGE>
included therein and the consolidated results of its operations and cash flows
for the periods then ended,. Without limiting the foregoing, there are no
material liabilities, contingent or actual, that are not disclosed in the
Disclosure Documents (other than liabilities incurred by the Company in the
ordinary course of its business, consistent with its past practice, after the
period covered by the Disclosure Documents). The Company has paid all material
taxes that are due, except for taxes that it reasonably disputes. There is no
material claim, litigation, or administrative proceeding pending or, to the best
of the Company's knowledge, threatened against the Company, except as disclosed
in the Disclosure Documents. This Agreement and the Disclosure Documents do not
contain any untrue statement of a material fact and do not omit to state any
material fact required to be stated therein or herein necessary to make the
statements contained therein or herein not misleading in the light of the
circumstances under which they were made. No event or circumstance exists
relating to the Company which, under applicable law, requires public disclosure
but which has not been so publicly announced or disclosed.
5.3 AUTHORIZATION. All corporate action on the part of the Company by its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder and the authorization, issuance and delivery of the Common
Stock being sold hereunder and the issuance (and/or the reservation for
issuance) of the Warrants and the Warrant Shares have been taken, and this
Agreement and the Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance with their terms,
except insofar as the enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or other similar laws affecting creditors' rights
generally or by principles governing the availability of equitable remedies. The
Company has obtained all consents and approvals required for it to execute,
deliver and perform each agreement referenced in the previous sentence.
5.4 VALID ISSUANCE OF COMMON STOCK. The Common Stock and the Warrants, when
issued, sold and delivered in accordance with the terms hereof, for the
consideration expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations of Investor in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Warrant Shares, when issued in accordance with the
terms of the Warrants, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Investor, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Put Shares, the Warrants and the Warrant Shares will
be issued free of any preemptive rights.
5.5 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or
default of any provisions of its Certificate of Incorporation or Bylaws, each as
amended and in effect on and as of the date of the Agreement, or of any material
provision of any material instrument or material contract to which it is a party
or by which it is bound or of any provision of any federal or state judgment,
writ, decree, order, statute, rule or governmental regulation applicable to the
Company, which would have a material adverse effect on the Company's business or
prospects, or on the performance of its obligations under this Agreement or the
Registration Rights Agreement. The execution, delivery and performance of this
Agreement and the other agreements entered into in conjunction with the Offering
and the consummation of the transactions contemplated hereby and thereby will
not (a) result in any such violation or be in conflict with or constitute, with
or without the passage of time and giving of notice, either a default under any
such provision, instrument or contract or an event which results in the creation
of any lien, charge or encumbrance upon any assets of the Company, which would
have a material adverse effect on the Company's business or prospects, or on the
performance of its obligations under this Agreement, the Registration Rights
Agreement, (b) violate the Company's Certificate of Incorporation or By-Laws or
(c) violate any statute, rule or governmental regulation applicable to the
Company which violation would have a material adverse effect on the Company's
business or prospects.
<PAGE>
5.6 REPORTING COMPANY. The Company is subject to the reporting requirements
of the Exchange Act, has a class of securities registered under Section 12 of
the Exchange Act, and has filed all reports required by the Exchange Act since
the date the Company first became subject to such reporting obligations. The
Company undertakes to furnish Investor with copies of such reports as may be
reasonably requested by Investor prior to consummation of this Offering and
thereafter, to make such reports available, for the full term of this Agreement,
including any extensions thereof, and for as long as Investor holds the
Securities. The Common Stock is duly listed on the O.T.C. Bulletin Board. The
Company is not in violation of the listing requirements of the O.T.C. Bulletin
Board and does not reasonably anticipate that the Common Stock will be delisted
by the O.T.C. Bulletin Board for the foreseeable future. The Company has filed
all reports required under the Exchange Act. The Company has not furnished to
the Investor any material nonpublic information concerning the Company.
5.7 CAPITALIZATION. The capitalization of the Company as of October 31,
1999, is, and the capitalization as of the Closing, subject to exercise of any
outstanding warrants and/or exercise of any outstanding stock options, after
taking into account the offering of the Securities contemplated by this
Agreement and all other share issuances occurring prior to this Offering, will
be, as set forth in the Capitalization Schedule as set forth in Exhibit K. There
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities. Except as disclosed in
the Capitalization Schedule, as of the date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its subsidiaries, and (ii) there are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of its or their securities under the Act
(except the Registration Rights Agreement).
5.8 INTELLECTUAL PROPERTY. The Company has valid, unrestricted and
exclusive ownership of or rights to use the patents, trademarks, trademark
registrations, trade names, copyrights, know-how, technology and other
intellectual property necessary to the conduct of its business. Exhibit M lists
all patents, trademarks, trademark registrations, trade names and copyrights of
the Company. The Company has granted such licenses or has assigned or otherwise
transferred a portion of (or all of) such valid, unrestricted and exclusive
patents, trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business as set forth in Exhibit M. The Company has been granted licenses,
know-how, technology and/or other intellectual property necessary to the conduct
of its business as set forth in Exhibit M. To the best of the Company's
knowledge after due inquiry, the Company is not infringing on the intellectual
property rights of any third party, nor is any third party infringing on the
Company's intellectual property rights. There are no restrictions in any
agreements, licenses, franchises, or other instruments that preclude the Company
from engaging in its business as presently conducted.
5.9 USE OF PROCEEDS. As of the date hereof, the Company expects to use the
proceeds from this Offering (less fees and expenses) for the purposes and in the
approximate amounts set forth on the Use of Proceeds Schedule set forth as
Exhibit L hereto. These purposes and amounts are estimates and are subject to
change without notice to any Investor.
<PAGE>
5.10 NO RIGHTS OF PARTICIPATION. No person or entity, including, but not
limited to, current or former stockholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the financing contemplated by this Agreement which has not been waived.
5.11 COMPANY ACKNOWLEDGMENT. The Company hereby acknowledges that Investor
may elect to hold the Securities for various periods of time, as permitted by
the terms of this Agreement, the Warrants, and other agreements contemplated
hereby, and the Company further acknowledges that Investor has made no
representations or warranties, either written or oral, as to how long the
Securities will be held by Investor or regarding Investor's trading history or
investment strategies.
5.12 NO ADVANCE REGULATORY APPROVAL. The Company acknowledges that this
Investment Agreement, the transaction contemplated hereby and the Registration
Statement contemplated hereby have not been approved by the SEC, or any other
regulatory body and there is no guarantee that this Investment Agreement, the
transaction contemplated hereby and the Registration Statement contemplated
hereby will ever be approved by the SEC or any other regulatory body. The
Company is relying on its own analysis and is not relying on any representation
by Investor that either this Investment Agreement, the transaction contemplated
hereby or the Registration Statement contemplated hereby has been or will be
approved by the SEC or other appropriate regulatory body.
5.13 UNDERWRITER'S FEES AND RIGHTS OF FIRST REFUSAL. The Company is not
obligated to pay any compensation or other fees, costs or related expenditures
in cash or securities to any underwriter, broker, agent or other representative
other than the Investor in connection with this Offering.
5.14 AVAILABILITY OF SUITABLE FORM FOR REGISTRATION. The Company is
currently eligible and agrees to maintain its eligibility to register the resale
of its Common Stock on a registration statement on a suitable form under the
Act.
5.15 NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under Regulation D of the Act or
would require the issuance of any other securities to be integrated with this
Offering under the Rules of Nasdaq. The Company has not engaged in any form of
general solicitation or advertising in connection with the offering of the
Common Stock or the Warrants.
5.16 FOREIGN CORRUPT PRACTICES. Neither the Company, nor any of its
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of its actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
as amended; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment to any foreign or domestic government official or
employee.
5.17 KEY EMPLOYEES. Each "Key Employee" (as defined in Exhibit N) is
currently serving the Company in the capacity disclosed in Exhibit N. No Key
Employee, to the best knowledge of the Company and its subsidiaries, is, or is
now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best knowledge of the Company and
its subsidiaries, any intention to terminate his employment with, or services
to, the Company or any of its subsidiaries.
<PAGE>
5.18 REPRESENTATIONS CORRECT. The foregoing representations, warranties and
agreements are true, correct and complete in all material respects, and shall
survive any Put Closing and the issuance of the shares of Common Stock thereby.
5.19 TAX STATUS. The Company has made or filed all federal and state income
and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject (unless and only to the extent that the Company has set
aside on its books provisions reasonably adequate for the payment of all unpaid
and unreported taxes) and has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and as set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
5.20 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Disclosure
Documents, none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
5.21 APPLICATION OF TAKEOVER PROTECTIONS. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under Utah law which is or could become
applicable to the Investor as a result of the transactions contemplated by this
Agreement, including, without limitation, the issuance of the Common Stock, any
exercise of the Warrants and ownership of the Common Shares and Warrant Shares.
The Company has not adopted and will not adopt any "poison pill" provision that
will be applicable to Investor as a result of transactions contemplated by this
Agreement.
5.22 OTHER AGREEMENTS. The Company has not, directly or indirectly, made
any agreements with the Investor under a subscription in the form of this
Agreement for the purchase of Common Stock, relating to the terms or conditions
of the transactions contemplated hereby or thereby except as expressly set forth
herein, respectively, or in exhibits hereto or thereto.
5.23 MAJOR TRANSACTIONS. There are no other Major Transactions currently
pending or contemplated by the Company.
5.24 Financings. There are no other financings currently pending or
contemplated by the Company.
5.25 SHAREHOLDER AUTHORIZATION. The Company shall, at its next annual
shareholder meeting following its listing on either the Nasdaq Small Cap Market
or the Nasdaq National Market, or at a special meeting to be held as soon as
practicable thereafter, use its best efforts to obtain approval of its
shareholders to (i) authorize the issuance of the full number of shares of
Common Stock which would be issuable under this Agreement and eliminate any
prohibitions under applicable law or the rules or regulations of any stock
<PAGE>
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or any of its securities with respect to the
Company's ability to issue shares of Common Stock in excess of the Cap Amount
(such approvals being the "20% Approval") and (ii) the increase in the number of
authorized shares of Common Stock of the Company (the "Share Authorization
Increase Approval") such that at least 25,000,000 shares can be reserved for
this Offering. In connection with such shareholder vote, the Company shall use
its best efforts to cause all officers and directors of the Company to promptly
enter into irrevocable agreements to vote all of their shares in favor of
eliminating such prohibitions. As soon as practicable after the 20% Approval and
the Share Authorization Increase Approval, the Company agrees to use its best
efforts to reserve 25,000,000 shares of Common Stock for issuance under this
Agreement.
5.26 ACKNOWLEDGMENT OF LIMITATIONS ON PUT AMOUNTS. The Company understands
and acknowledges that the amounts available under this Investment Agreement are
limited, among other things, based upon the liquidity of the Company's Common
Stock traded on its Principal Market.
6. COVENANTS OF THE COMPANY
6.1 INDEPENDENT AUDITORS. The Company shall, until at least the Termination
Date, maintain as its independent auditors an accounting firm authorized to
practice before the SEC.
6.2 CORPORATE EXISTENCE AND TAXES. The Company shall, until at least the
Termination Date, maintain its corporate existence in good standing and, once it
becomes a "Reporting Issuer" (defined as a Company which files periodic reports
under the Exchange Act), remain a Reporting Issuer (provided, however, that the
foregoing covenant shall not prevent the Company from entering into any merger
or corporate reorganization as long as the surviving entity in such transaction,
if not the Company, assumes the Company's obligations with respect to the Common
Stock and has Common Stock listed for trading on a stock exchange or on Nasdaq
and is a Reporting Issuer) and shall pay all its taxes when due except for taxes
which the Company disputes.
6.3 REGISTRATION RIGHTS. The Company will enter into a registration rights
agreement covering the resale of the Common Shares and the Warrant Shares
substantially in the form of the Registration Rights Agreement attached as
Exhibit A.
6.4 ASSET TRANSFERS. The Company shall not (i) transfer, sell, convey or
otherwise dispose of any of its material assets to any Subsidiary except for a
cash or cash equivalent consideration and for a proper business purpose or (ii)
transfer, sell, convey or otherwise dispose of any of its material assets to any
Affiliate, as defined below, during the Term of this Agreement. For purposes
hereof, "Affiliate" shall mean any officer of the Company, director of the
Company or owner of twenty percent (20%) or more of the Common Stock or other
securities of the Company.
6.5 RIGHTS OF FIRST REFUSAL.
6.5.1 CAPITAL RAISING LIMITATIONS. During the period from the date of
this Agreement until the date that is one year after the Termination Date, the
Company shall not issue or sell, or agree to issue or sell Equity Securities (as
defined below), for cash in private capital raising transactions without
obtaining the prior written approval of the Investor of the Offering (the
limitations referred to in this subsection 6.6.1 are collectively referred to as
the "Capital Raising Limitations"). For purposes hereof, the following shall be
collectively referred to herein as, the "Equity Securities": (i) Common Stock or
any other equity securities, (ii) any debt or equity securities which are
convertible into, exercisable or exchangeable for, or carry the right to receive
additional shares of Common Stock or other equity securities, or (iii) any
securities of the Company pursuant to an equity line structure or format similar
in nature to this Offering.
<PAGE>
6.5.2 INVESTOR'S RIGHT OF FIRST REFUSAL. For any private capital
raising transactions of Equity Securities which close after the date hereof and
on or prior to the date that is one (1) year after the Termination Date of this
Agreement, not including any warrants issued in conjunction with this Investment
Agreement, the Company agrees to deliver to Investor, at least ten (10) days
prior to the closing of such transaction, written notice describing the proposed
transaction, including the terms and conditions thereof, and providing the
Investor and its affiliates an option during the ten (10) day period following
delivery of such notice to purchase the securities being offered in such
transaction on the same terms as contemplated by such transaction.
6.5.3 EXCEPTIONS TO RIGHTS OF FIRST REFUSAL. Notwithstanding the above,
the Rights of First Refusal shall not apply to any transaction involving
issuances of securities in connection with a merger, consolidation, acquisition
or sale of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or in
connection with the disposition or acquisition of a business, product or license
by the Company or exercise of options by employees, consultants or directors.
6.6 FINANCIAL 10-KSB STATEMENTS, ETC. AND CURRENT REPORTS ON FORM 8-K. The
Company shall deliver to the Investor copies of its annual reports on Form
10-KSB, and quarterly reports on Form 10-QSB and shall deliver to the Investor
current reports on Form 8-K within two (2) days of filing for the Term of this
Agreement.
6.7 OPINION OF COUNSEL. Investor shall, concurrent with the Investment
Commitment Closing, receive an opinion letter from the Company's legal counsel,
in the form attached as Exhibit B, or in such form as agreed upon by the
parties, and shall, concurrent with each Put Date, receive an opinion letter
from the Company's legal counsel, in the form attached as Exhibit I or in such
form as agreed upon by the parties.
6.8 REMOVAL OF LEGEND. If the certificates representing any Securities are
issued with a restrictive Legend in accordance with the terms of this Agreement,
the Legend shall be removed and the Company shall issue a certificate without
such Legend to the holder of any Security upon which it is stamped, and a
certificate for a security shall be originally issued without the Legend, if (a)
the sale of such Security is registered under the Act, or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions (the reasonable
cost of which shall be borne by the Investor), to the effect that a public sale
or transfer of such Security may be made without registration under the Act, or
(c) such holder provides the Company with reasonable assurances that such
Security can be sold pursuant to Rule 144. Each Investor agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act.
6.9 LISTING. Subject to the remainder of this Section 6.9, the Company
shall ensure that its shares of Common Stock (including all Warrant Shares and
Put Shares) are listed and available for trading on the O.T.C. Bulletin Board.
Thereafter, the Company shall (i) use its best efforts to continue the listing
and trading of its Common Stock on the O.T.C. Bulletin Board or to become
eligible for and listed and available for trading on the Nasdaq Small Cap
Market, the NMS, or the New York Stock Exchange ("NYSE"); and (ii) comply in all
material respects with the Company's reporting, filing and other obligations
under the By-Laws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
<PAGE>
6.10 THE COMPANY'S INSTRUCTIONS TO TRANSFER AGENT. The Company will
instruct the Transfer Agent of the Common Stock, by delivering instructions in
the form of Exhibit T hereto, to issue certificates, registered in the name of
each Investor or its nominee, for the Put Shares and Warrant Shares in such
amounts as specified from time to time by the Company upon any exercise by the
Company of a Put and/or exercise of the Warrants by the holder thereof. Such
certificates shall not bear a Legend unless issuance with a Legend is permitted
by the terms of this Agreement and Legend removal is not permitted by Section
6.8 hereof and the Company shall cause the Transfer Agent to issue such
certificates without a Legend. Nothing in this Section shall affect in any way
Investor's obligations and agreement set forth in Sections 3.3.2 or 3.3.3 hereof
to resell the Securities pursuant to an effective registration statement and to
deliver a prospectus in connection with such sale or in compliance with an
exemption from the registration requirements of applicable securities laws. If
(a) an Investor provides the Company with an opinion of counsel, which opinion
of counsel shall be in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that the Securities to be sold
or transferred may be sold or transferred pursuant to an exemption from
registration or (b) an Investor transfers Securities, pursuant to Rule 144, to a
transferee which is an accredited investor, the Company shall permit the
transfer, and, in the case of Put Shares and Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates in such name and in such
denomination as specified by such Investor. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to an
Investor by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 6.10 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 6.10, that an Investor shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
6.11 STOCKHOLDER 20% APPROVAL. Prior to the closing of any Put that would
cause the Aggregate Issued Shares to exceed the Cap Amount, if required by the
rules of NASDAQ because the Company's Common Stock is listed on NASDAQ, the
Company shall obtain approval of its stockholders to authorize (i) the issuance
of the full number of shares of Common Stock which would be issuable pursuant to
this Agreement but for the Cap Amount and eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Company or any of its securities with respect to the Company's ability to
issue shares of Common Stock in excess of the Cap Amount (such approvals being
the "Stockholder 20% Approval").
6.12 PRESS RELEASE. The Company agrees that the Investor shall have the
right to review and comment upon any press release issued by the Company in
connection with the Offering which approval shall not be unreasonably withheld
by Investor.
6.13 CHANGE IN LAW OR POLICY. In the event of a change in law, or policy of
the SEC, as evidenced by a No-Action letter or other written statements of the
SEC or the NASD which causes the Investor to be unable to perform its
obligations hereunder, this Agreement shall be automatically terminated and no
further Commitment Fees shall be due.
7. INVESTOR COVENANT/MISCELLANEOUS.
7.1 REPRESENTATIONS AND WARRANTIES SURVIVE THE CLOSING; SEVERABILITY.
Investor's and the Company's representations and warranties shall survive the
Investment Date and any Put Closing contemplated by this Agreement
notwithstanding any due diligence investigation made by or on behalf of the
<PAGE>
party seeking to rely thereon. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, or is altered by a term required by the Securities
Exchange Commission to be included in the Registration Statement, this Agreement
shall continue in full force and effect without said provision; provided that if
the removal of such provision materially changes the economic benefit of this
Agreement to the Investor, this Agreement shall terminate.
7.2 SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable without
the Company's written consent, If assigned, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Investor may assign Investor's rights hereunder, in
connection with any private sale of the Common Stock of such Investor, so long
as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement in a form acceptable to the Company and provides an original copy of
such acknowledgment to the Company.
7.3 EXECUTION IN COUNTERPARTS PERMITTED. This Agreement may be executed in
any number of counterparts, each of which shall be enforceable against the
parties actually executing such counterparts, and all of which together shall
constitute one (1) instrument.
7.4 TITLES AND SUBTITLES; GENDER. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. The use in this Agreement of a
masculine, feminine or neither pronoun shall be deemed to include a reference to
the others.
7.5 WRITTEN NOTICES, ETC. Any notice, demand or request required or
permitted to be given by the Company or Investor pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally, or by facsimile or upon receipt if by overnight or two (2) day
courier, addressed to the parties at the addresses and/or facsimile telephone
number of the parties set forth at the end of this Agreement or such other
address as a party may request by notifying the other in writing; provided,
however, that in order for any notice to be effective as to the Investor such
notice shall be delivered and sent, as specified herein, to all the addresses
and facsimile telephone numbers of the Investor set forth at the end of this
Agreement or such other address and/or facsimile telephone number as Investor
may request in writing.
7.6 EXPENSES. Except as set forth in the Registration Rights Agreement,
each of the Company and Investor shall pay all costs and expenses that it
respectively incurs, with respect to the negotiation, execution, delivery and
performance of this Agreement.
7.7 ENTIRE AGREEMENT; WRITTEN AMENDMENTS REQUIRED. This Agreement,
including the Exhibits attached hereto, the Common Stock certificates, the
Warrants, the Registration Rights Agreement, and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and no party
shall be liable or bound to any other party in any manner by any warranties,
representations or covenants, whether oral, written, or otherwise except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
7.8 ACTIONS AT LAW OR EQUITY; JURISDICTION AND VENUE. The parties
acknowledge that any and all actions, whether at law or at equity, and whether
or not said actions are based upon this Agreement between the parties hereto,
shall be filed in any state or federal court sitting in Atlanta, Georgia.
Georgia law shall govern both the proceeding as well as the interpretation and
construction of the Transaction Documents and the transaction as a whole. In any
litigation between the parties hereto, the prevailing party, as found by the
court, shall be entitled to an award of all attorney's fees and costs of court.
Should the court refuse to find a prevailing party, each party shall bear its
own legal fees and costs.
8. SUBSCRIPTION AND WIRING INSTRUCTIONS; IRREVOCABILITY.
8.1 SUBSCRIPTION
(a) WIRE TRANSFER OF SUBSCRIPTION FUNDS. Investor shall deliver Put
Dollar Amounts (as payment towards any Put Share Price) by wire transfer, to the
Company pursuant to a wire instruction letter to be provided by the Company, and
signed by the Company.
(b) IRREVOCABLE SUBSCRIPTION. Investor hereby acknowledges and agrees,
subject to the provisions of any applicable laws providing for the refund of
subscription amounts submitted by Investor, that this Agreement is irrevocable
and that Investor is not entitled to cancel, terminate or revoke this Agreement
or any other agreements executed by such Investor and delivered pursuant hereto,
and that this Agreement and such other agreements shall survive the death or
disability of such Investor and shall be binding upon and inure to the benefit
of the parties and their heirs, executors, administrators, successors, legal
representatives and assigns. If the Securities subscribed for are to be owned by
more than one person, the obligations of all such owners under this Agreement
shall be joint and several, and the agreements, representations, warranties and
acknowledgments herein contained shall be deemed to be made by and be binding
upon each such person and his heirs, executors, administrators, successors,
legal representatives and assigns.
8.2 ACCEPTANCE OF SUBSCRIPTION. Ownership of the number of securities
purchased hereby will pass to Investor upon the Warrant Closing or any Put
Closing.
9. INDEMNIFICATION.
In consideration of the Investor's execution and delivery of the Investment
Agreement, the Registration Rights Agreement and the Warrants (the "Transaction
Documents") and acquiring the Securities thereunder and in addition to all of
the Company's other obligations under the Transaction Documents, the Company
shall defend, protect, indemnify and hold harmless Investor and all of its
stockholders, officers, directors, employees and direct or indirect investors
and any of the foregoing person's agents, members, partners or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorney's fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
documents contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
<PAGE>
(c) any cause of action, suit or claim, derivative or otherwise, by any
stockholder of the Company based on a breach or alleged breach by the Company or
any of its officers or directors of their fiduciary or other obligations to the
stockholders of the Company, or (d) claims made by third parties against any of
the Indemnitees based on a violation of Section 5 of the Securities Act caused
by the integration of the private sale of common stock to the Investor and the
public offering pursuant to the Registration Statement.
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which it
would be required to make if such foregoing undertaking was enforceable which is
permissible under applicable law.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 9, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 9, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 9 to the extent it is prejudicial.
[INTENTIONALLY LEFT BLANK]
<PAGE>
10. ACCREDITED INVESTOR. Investor is an "accredited investor" because (check all
applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3) of the
Internal Revenue Code, or a corporation, limited duration company, limited
liability company, business trust, or partnership not formed for the specific
purpose of acquiring the securities offered, with total assets in excess of
$5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person who has such knowledge and experience in
financial and business matters that he is capable of evaluating the merits and
risks of the prospective investment.
(c) [ ] a natural person, who
[ ] is a director, executive officer or general partner of the issuer
of the securities being offered or sold or a director, executive officer or
general partner of a general partner of that issuer.
[ ] has an individual net worth, or joint net worth with that person's
spouse, at the time of his purchase exceeding $1,000,000.
[ ] had an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in excess of
$300,000 in each of those years and has a reasonable expectation of reaching the
same income level in the current year.
(d) [ ] an entity each equity owner of which is an entity described in a -
b above or is an individual who could check one (1) of the last three (3) boxes
under subparagraph (c) above.
(e) [ ] other [specify] __________________________________________________.
The undersigned hereby subscribes the Maximum Offering Amount and
acknowledges that this Agreement and the subscription represented hereby shall
not be effective unless accepted by the Company as indicated below.
<PAGE>
IN WITNESS WHEREOF, the undersigned Investor does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Investor by the following signature(s) executed this Agreement.
Dated this 3rd day of November, 1999.
- ------------------------------------- -----------------------------------
Your Signature (PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED)
-----------------------------------
SECURITY DELIVERY INSTRUCTIONS:
Name:
- ------------------------------------- -----------------------------------
Please Print Please type or print address where
your security is to be delivered
- ------------------------------------- ATTN:------------------------------
Title/Representative Capacity (if applicable)
- ------------------------------------- -----------------------------------
Name of Company You Represent (if applicable) Street Address
- ------------------------------------- -----------------------------------
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code
NOTICE DELIVERY INSTRUCTIONS: WITH A COPY DELIVERED TO:
- ------------------------------------- -----------------------------------
- ------------------------------------- -----------------------------------
Please print address where any Notice Please print address where Copy is
is to be delivered to be delivered
ATTN:-------------------------------- ATTN:------------------------------
- ------------------------------------- -----------------------------------
Street Address Street Address
- ------------------------------------- -----------------------------------
City, State or Province, Country, City, State or Country, Offshore
Offshore Postal Code Postal Code
Telephone:--------------------------- Telephone:-------------------------
Facsimile:--------------------------- Facsimile:-------------------------
Facsimile:--------------------------- Facsimile:-------------------------
<PAGE>
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF THE MAXIMUM OFFERING
AMOUNT ON THE 3RD DAY OF NOVEMBER, 1999.
THE HARTCOURT COMPANIES, INC.
By: /s/ Alan Phan,
---------------------------------
Alan Phan, Chairman and CEO
Address:
Attn: Alan V. Phan
1196 E. Willow St.
Long Beach, CA 90806
Telephone: (562) 426-9796
Facsimile: (562) 426-8896
<PAGE>
ADVANCE PUT NOTICE
THE HARTCOURT COMPANIES, INC. (the "Company") hereby intends, subject to the
Individual Put Limit (as defined in the Investment Agreement), to elect to
exercise a Put to sell the number of shares of Common Stock of the Company
specified below, to _____________________________, the Investor, as of the
Intended Put Date written below, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about November ___, 1999.
Date of Advance Put Notice: ___________________
Intended Put Date :___________________________
Intended Put Share Amount: __________________
Company Designation Maximum Put Dollar Amount (Optional):
Company Designation Minimum Put Share Price (Optional):
THE HARTCOURT COMPANIES, INC.
By: /s/ Alan Phan,
---------------------------------
Alan Phan, Chairman and CEO
Address:
Attn: Alan V. Phan
1196 E. Willow St.
Long Beach, CA 90806
Telephone: (562) 426-9796
Facsimile: (562) 426-8896
<PAGE>
EXHIBIT E
CONFIRMATION OF ADVANCE PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of THE
HARTCOURT COMPANIES, INC.'S (the "Company") Advance Put Notice on the Advance
Put Date written below, and its intention to elect to exercise a Put to sell
shares of common stock ("Intended Put Share Amount") of the Company to the
Investor, as of the intended Put Date written below, all pursuant to that
certain Investment Agreement (the "Investment Agreement") by and between the
Company and Swartz Private Equity, LLC dated on or about November ___, 1999.
Date of Confirmation: ____________________
Date of Advance Put Notice: _______________
Intended Put Date: ________________________
Intended Put Share Amount: ________________
Company Designation Maximum Put Dollar Amount (Optional): ______________________
Company Designation Minimum Put Share Price (Optional): ________________________
INVESTOR(S)
____________________________________________________________________
Investor's Name
By:_________________________________________________________________
(Signature)
Address:____________________________________________________________
____________________________________________________________________
____________________________________________________________________
Telephone No.:______________________________________________________
Facsimile No.:______________________________________________________
<PAGE>
EXHIBIT F
PUT NOTICE
THE HARTCOURT COMPANIES, INC. (the "Company") hereby elects to exercise a Put to
sell shares of common stock ("Common Stock") of the Company to
_____________________________, the Investor, as of the Put Date, at the Put
Share Price and for the number of Put Shares written below, all pursuant to that
certain Investment Agreement (the "Investment Agreement") by and between the
Company and Swartz Private Equity, LLC dated on or about NOVEMBER ___, 1999.
Put Date :
Intended Put Share Amount (from Advance Put Notice):_________________
Common Shares
Company Designation Maximum Put Dollar Amount (Optional):__________________
Company Designation Minimum Put Share Price (Optional):____________________
Note: Capitalized terms shall have the meanings ascribed to them in this
Investment Agreement.
THE HARTCOURT COMPANIES, INC.
By: /s/ Alan Phan,
---------------------------------
Alan Phan, Chairman and CEO
Address:
Attn: Alan V. Phan
1196 E. Willow St.
Long Beach, CA 90806
Telephone: (562) 426-9796
Facsimile: (562) 426-8896
<PAGE>
EXHIBIT G
CONFIRMATION OF PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of THE
HARTCOURT COMPANIES, INC. (the "Company") Put Notice and election to exercise a
Put to sell ___________________________ shares of common stock ("Common Stock")
of the Company to Investor, as of the Put Date, all pursuant to that certain
Investment Agreement (the "Investment Agreement") by and between the Company and
Swartz Private Equity, LLC dated on or about November ___, 1999.
Date of this Confirmation: ________________
Put Date :_________________
Number of Put Shares of
Common Stock to be Issued: _____________
Volume Evaluation Period: _____ Business Days
Pricing Period: _____ Business Days
INVESTOR(S)
_____________________________________________
Investor's Name
By:__________________________________________
(Signature)
Address:_____________________________________
_____________________________________________
_____________________________________________
Telephone No.:_______________________________
Facsimile No.:_______________________________
<PAGE>
EXHIBIT H
PUT CANCELLATION NOTICE
THE HARTCOURT COMPANIES, INC. (the "Company") hereby cancels the Put specified
below, pursuant to that certain Investment Agreement (the "Investment
Agreement") by and between the Company and Swartz Private Equity, LLC dated on
or about November___, 1999, as of the close of trading on the date specified
below (the "Cancellation Date," which date must be on or after the date that
this notice is delivered to the Investor), provided that such cancellation shall
not apply to the number of shares of Common Stock equal to the Truncated Put
Share Amount (as defined in the Investment Agreement).
Cancellation Date: _____________________
Put Date of Put Being Canceled: __________
Number of Shares Put on Put Date: _________
Reason for Cancellation (check one):
[ ] Material Facts, Ineffective Registration Period.
[ ] Delisting Event
The Company understands that, by canceling this Put, it must give twenty (20)
Business Days advance written notice to the Investor before effecting the next
Put.
THE HARTCOURT COMPANIES, INC.
By: /s/ Alan Phan,
---------------------------------
Alan Phan, Chairman and CEO
Address:
Attn: Alan V. Phan
1196 E. Willow St.
Long Beach, CA 90806
Telephone: (562) 426-9796
Facsimile: (562) 426-8896
<PAGE>
EXHIBIT Q
PUT CANCELLATION NOTICE CONFIRMATION
The undersigned Investor to that certain Investment Agreement (the "Investment
Agreement") by and between The Hartcourt Companies, Inc.'s, and Swartz Private
Equity, LLC dated on or about November ___, 1999, hereby confirms receipt of The
Hartcourt Companies, Inc.'s (the "Company") Put Cancellation Notice, and
confirms the following:
DATE OF THIS CONFIRMATION: ________________
PUT CANCELLATION DATE : ___________________
INVESTOR(S)
_____________________________________________
Investor's Name
By:__________________________________________
(Signature)
Address:_____________________________________
_____________________________________________
_____________________________________________
Telephone No.:_______________________________
Facsimile No.:_______________________________
10.2 Amendment to Investment Agreement
AMENDMENT TO
THE HARTCOURT COMPANIES, INC.
INVESTMENT AGREEMENT DATED ON OR ABOUT NOVEMBER 3, 1999 AND RELATED AGREEMENTS
This Amendment (the "Amendment") to (i) the Investment Agreement (the
"Investment Agreement") the Registration Rights Agreement (the "Registration
Rights Agreement"), and Transfer Agent Instructions (the "Transfer Agent
Instructions"), each by and between The Hartcourt Companies, Inc., a corporation
duly organized and existing under the laws of the State of Utah (the "Company"),
and Swartz Private Equity, LLC (the "Investor") is entered into by and between
the Company and the Investor.
RECITALS
WHEREAS, the Company and the Investor entered into to the Investment Agreement,
the Registration Rights Agreement and the Transfer Agent Instructions
(collectively, the "Equity Line Agreements") on or about November 3, 1999; and
WHEREAS, the Company and the Investor believe that it is in the best interest of
the Company and the Holder to amend the terms of the Equity Line Agreements on
the terms and conditions described in this Amendment.
TERMS
NOW THEREFORE, in consideration of their mutual promises, and other good and
valuable consideration, the parties hereby agree as follows:
I. AMENDMENTS.
A. AMENDMENTS TO INVESTMENT AGREEMENT.
(a) MAXIMUM OFFERING AMOUNT. The definition of "Maximum Offering
Amount" is hereby amended to mean Thirty Five Million Dollars ($35,000,000).
(b) MAXIMUM PUT DOLLAR AMOUNT. The definition of "Maximum Put Dollar
Amount" is hereby deleted in its entirety and the following is hereby inserted
in its place:
"Maximum Put Dollar Amount" shall mean the lesser of (i) the Company
Designated Maximum Put Dollar Amount, if any, specified by the Company
in a Put Notice, and (ii) $X, where "X" shall equal $2 million if the
Closing Bid Price of the Company's Common Stock on the Business Day
immediately preceding the date of the applicable Advance Put Notice is
less than $10, and "X" shall equal $5 million if the Closing Bid Price
of the Company's Common Stock on the Business Day immediately preceding
the date of the applicable Advance Put Notice is greater than or equal
to $10.
(c) SECTION 2.3.1. In the Second Paragraph of Section 2.3.1, the phrase
"not to exceed $2,000,000" is hereby deleted in its entirety and the following
is hereby inserted in its place:
"not to exceed the applicable Maximum Put Dollar Amount."
<PAGE>
B. AMENDMENTS TO REGISTRATION RIGHTS AGREEMENT.
(a) MAXIMUM OFFERING AMOUNT. . In the first Recital paragraph, the
phrase "up to Twenty Five Million Dollars ($25,000,000)" is hereby deleted in
its entirety and the following is hereby inserted in its place:
"up to Thirty Five Million Dollars ($35,000,000)"
(b) SECTION 2.2. In Section 2.2, the phrase "at least Twenty Five
Million (25,000,000) shares" is hereby deleted in its entirety and the following
is hereby inserted in its place:
"at least Fifteen Million (15,000,000) shares"
C. TRANSFER AGENT INSTRUCTIONS. In the first paragraph, the phrase "up to
Twenty Five Million Dollars ($25,000,000)" is hereby deleted in its entirety and
the following is hereby inserted in its place:
"up to Thirty Five Million Dollars ($35,000,000)"
II. MISCELLANEOUS.
A. SUCCESSORS AND ASSIGNS. The terms and conditions of this Amendment shall
inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Amendment, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Amendment, except as expressly provided
in this Amendment.
B. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of Georgia without giving effect to the
principles of conflicts of laws, except for matters arising under the U.S.
Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, which
matters shall be governed by and construed in accordance with such laws.
C. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
D. TITLES AND SUBTITLES. The titles and subtitles used in this Amendment
are used for convenience only and are not to be considered in construing or
interpreting this Amendment.
E. AMENDMENT AND WAIVERS. Any term of this Amendment may be amended and the
observance of any term of this Amendment may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holder.
F. SEVERABILITY. If one or more provisions of this Amendment are held to be
unenforceable in accordance with applicable law, such provision shall be
excluded from this Amendment and the balance of the Amendment shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
III. REMAINDER OF AGREEMENTS. Other than as amended hereby or by any other
amendments to the Equity Line Agreements, the terms and provisions of the Equity
Line Agreements shall remain the same.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
THE HARTCOURT COMPANIES
By: /S/ Alan Phan
----------------------------
Name: Alan Phan
---------------------------
Title: CEO
-------------------------
SWARTZ PRIVATE EQUITY, LLC
By: /S/ Eric S. Swartz
----------------------------
Eric S. Swartz, Manager
23.1 Consent of Independent Auditors
We consent to the incorporation by reference in this Registration Statement of
The Hartcourt Companies Inc. Form S-8 of our report dated March 6, 1999,
appearing in the Annual Report on Form 10-KSB of The Hartcourt Companies Inc.
for the year ended December 31, 1998, and to the reference to us under the
heading "Experts" in the Prospectus which is part of this Registration
Statement.
/s/ Harlan & Boettger, LLP
- -------------------------------
Harlan & Boettger
San Diego, California
February 25, 2000
