Exhibit 10.1 Regulation D Subscription Agreement between PYR Management LLC
and The Hartcourt Companies, Inc.
THE HARTCOURT COMPANIES INC.
REGULATION D SUBSCRIPTION 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 SUBSCRIPTION 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. SUBSCRIBER MUST RELY ON THEIR OWN ANALYSIS OF THE
INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE
RISK FACTORS SET FORTH IN THE ATTACHED DISCLOSURE
DOCUMENTS AS EXHIBIT F.
SEE ADDITIONAL LEGENDS AT SECTIONS 3.7.
THIS REGULATION D SUBSCRIPTION AGREEMENT (this "Agreement") is
made as of the 26th day of January, 2000, by and between The Hartcourt Companies
Inc., a corporation duly incorporated and existing under the laws of the State
of Utah (the "Company"), and the undersigned subscriber executing this Agreement
("Subscriber").
THE PARTIES HEREBY AGREE AS FOLLOWS:
This Agreement is executed by Subscriber in connection with the offer
by the Company and the purchase by Subscriber of 189,538 Units (as defined
below) and a Class II Warrant (as defined below). Each "Unit" consists of one
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share of the Company's Common Stock (the "Unit Shares") and a warrant in the
form of Exhibit A hereto (the "Class I Warrant") entitling the holder thereof to
purchase Common Stock upon the terms set forth herein and therein. The Class II
Warrant in the form of Exhibit B hereto (the "Class II Warrant" and, together
with the Class I Warrant, collectively referred to as the "Warrants") entitles
the holder thereof to purchase Units (the "Reset Units") upon the terms set
forth herein and therein. The Units (the "Initial Units") are being offered at a
purchase price per Unit that is initially equal to the Unit Price (as defined in
Section 1.3 below), with an initial offering amount of Three Million Dollars
($3,000,000) (the "Initial Offering"). The solicitation of this subscription
and, if accepted by the Company, the offer and sale of the Units are being made
in reliance upon the provisions of Regulation D ("Regulation D") promulgated
under the Securities Act of 1933, as amended ("the Act"). The Unit Shares and
the Warrants, and the Common Stock issuable upon exercise of the Warrants (the
"Warrant Shares") are sometimes referred to herein singularly as "Security" and
collectively as the "Securities."
The Subscriber, at its option (the "Option"), may purchase, at the
greater of (x) the then effective Unit Price (as defined below) as it may be
reset from time to time as provided in this Agreement or (y) $10.55 per Unit, up
to an additional $5 million worth of Units (the "Additional Offering") and Class
II Warrant within five (5) trading days (the "Option Exercise Deadline") of the
date that the Registration Statement (as defined in Section 3.3 below) is
declared effective (the "Effective Date"), upon the same terms and conditions as
the Units and Class II Warrant being purchased pursuant to this Agreement,
except as provided in the next following paragraph, and provided that a separate
registration statement shall be filed pursuant to a separate registration rights
agreement to cover the Units issued in the Additional Offering (the Additional
Units"). The Option may be exercised by Subscriber by paying to the Company the
purchase price for such additional Units on or before the Option Exercise
Deadline. Concurrently with the Closing of the Additional Offering, the Company
and the Subscriber shall enter into a subscription agreement (the "Additional
Offering Agreement") equivalent to this Agreement (except as otherwise set forth
herein) with respect to the Additional Offering.
The Additional Offering Agreement shall provide that (i) the initial
Unit Price of the Additional Units shall equal the greater of (x) the Reset
Price of the Initial Units in effect at the time of the Closing of the
Additional Offering or (y) $10.55 per Unit, (ii) the Class II Warrant purchased
thereunder shall have the same term as the Class II Warrant purchased hereunder,
except that (x) the triggering events in Section 1(b) of such Class II Warrant
shall be based upon the registration statement filed for the Additional Units,
(y) the triggering events in Section 1(b) of such Class II Warrant shall be
based on the Closing Date of the Additional Offering, and (z) the aggregate
number of Units into which such Class II Warrant may be exercisable shall not
exceed twenty percent (20%) of the number of Units purchased by the Subscriber
upon exercise of the Option; (iii) the registration rights agreement entered
into pursuant to the Additional Offering Agreement shall have the same terms as
the Registration Rights Agreement, and (iv) the Company shall obtain approval of
its shareholders, if legally required, to authorize the issuance of a number of
shares in excess of the Cap Amount in connection with the Additional Offering.
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For purposes hereof, the "Initial Unit Amount" shall mean the number of
Units that are issued in the Initial Offering.
It is agreed as follows:
1. Offering
1.1 Offer to Subscribe; Purchase Price and Closing; and
Placement Fees.
Subject to satisfaction of the conditions to closing set forth in Section 1.2
below, Subscriber hereby agrees to subscribe for and purchase 227,445 Units and
the Class II Warrant for the aggregate purchase price in the amount set forth in
Section 10 of this Agreement in accordance with the terms and conditions of this
Agreement. The closing of a sale and purchase of Units and Class II Warrant as
to Subscriber (the "Closing") shall be deemed to occur when this Agreement has
been executed by both Subscriber and the Company, full payment for the Units and
Class II Warrant subscribed for shall have been made by Subscriber, and the
conditions to Subscriber's obligations set forth in Section 1.2 have been
satisfied. The date of any Closing of Units and Class II Warrant shall be
considered the "Closing Date" for such Units and Class II Warrant.
The parties hereto acknowledge that Dunwoody Brokerage Services, Inc. is acting
as placement agent (the "Placement Agent") for this Offering and will be
compensated by the Company in cash and warrants to purchase Common Stock of the
Company pursuant to the terms of a Placement Agent Agreement between the Company
and the Placement Agent (the "Placement Agent Agreement"). The Placement Agent
has acted solely as placement agent in connection with the Offering by the
Company of the Units pursuant to this Agreement. The information and data
contained in the Disclosure Documents (as defined in Section 2.2.4) have not
been subjected to independent verification by the Placement Agent, and no
representation or warranty is made by the Placement Agent as to the accuracy or
completeness of the information contained in the Disclosure Documents.
1.2 Conditions to Subscriber's Obligations. Subscriber's
obligations hereunder are conditioned upon all of the following:
(a) the following documents shall have been received by the
Subscriber: (i) the Registration Rights Agreement, in
the form attached hereto as Exhibit B (the
"Registration Rights Agreement") (executed by the
Company), (ii) an opinion of counsel, substantially in
the form attached hereto as Exhibit C (the "Opinion of
Counsel") (signed by the Company's counsel), (iii)
certificates representing the Unit Shares and Warrants
for which the Subscriber has subscribed issued in the
name of the Subscriber; 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 Articles of Incorporation, and (C) the
Company's Bylaws;
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(b) the Company's Common Stock shall be listed for and
actively trading on the O.T.C. Bulletin Board;
(c) other than as described in the Disclosure Documents (as
described in Section 2.2.4), 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 (defined in Section 2.2.4),
including but not limited to incurring material
liabilities;
(d) the representations and warranties of the Company are
true and correct at the Closing as if made on such date
and the conditions to Subscriber's obligations set
forth in this Section 1.2 are satisfied as of the
Closing, and the Company shall deliver a certificate,
signed by an officer of the Company, to such effect to
the Subscriber;
(e) the Company shall have reserved for issuance a
sufficient number of shares of Common Stock to effect
the issuance of the Unit Shares and the issuance of the
Common Stock upon exercise of the Warrants , which
number of shares shall initially be equal to 1,625,000
shares.
1.3 Terms of the Units. Each "Unit" shall consist of one share
of Common Stock and a Class I Warrant to purchase one share of Common Stock at
an exercise price equal to the Unit Price (as defined below), as it may be Reset
from time to time. The purchase price ("Unit Price") for each Unit shall
initially be $13.19 per Unit (85% of the Market Price, where "Market Price"
shall equal the average Closing Bid Price of the Company's Common Stock for the
five (5) trading days immediately preceding January 14, 2000). The terms of the
Warrants, including the terms on which the Class I Warrants may be exercised for
Common Stock and the terms on which the Class II Warrants may be exercised for
Units, are set forth in the form of the Warrant attached hereto as Exhibit A and
Exhibit B, respectively. For purposes hereof, "Closing Bid Price" shall mean (i)
the average of the closing bid price for the shares of Common Stock of the
Company as reported by the Nasdaq Small Cap Market for the five (5) trading days
immediately preceding, but not including, such date, or (ii) if The Nasdaq Small
Cap Market is not the principal trading market for the Common Stock, the average
of the last reported bid prices on the principal trading market for the Common
Stock during the same period, or, if there is no bid price for such period, the
last reported sales price for such period, or (iii) if the market value cannot
be calculated as of such date on any of the foregoing bases, the Closing Bid
Price shall be deemed to be equal the average fair market value as reasonably
determined by an investment banking firm selected by the Company and reasonably
acceptable to the Holder of a majority in interest of the Warrants, with the
cost of the appraisal to be borne by the Company.
1.4 Reset of Unit Price. The Unit Price shall be subject to
reset (each, a "Reset Event" or a "Reset") according to the following:
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(a) Effective Date Reset. If the average Closing Bid
Price (the "Effective Date Reset Price") of the Company's Common Stock for the
five (5) trading days immediately preceding the Effective Date is less than the
Unit Price, then the Unit Price shall be reset on the Effective Date to equal
the Effective Date Reset Price and the exercise price of the associated Class I
Warrant shall be reset to equal the new Unit Price, as reset.
(b) Three Month Reset. If the average Closing Bid Price
(the "Three Month Reset Price") of the Company's Common Stock for the five (5)
trading days immediately preceding the date that is three (3) months after the
Effective Date (the "Three Month Anniversary Date") is less than the Lowest
Reset Price, then the Unit Price for all Units shall be reset on the Three Month
Anniversary Date to equal the Three Month Reset Price and the exercise price of
the associated Class I Warrant shall be reset to equal the new Unit Price, as
reset.
(c) Nine Month Reset. If the average Closing Bid Price
(the "Nine Month Reset Price") of the Company's Common Stock for the five (5)
trading days immediately preceding the date that is Nine (9) months after the
Effective Date (the "Nine Month Anniversary Date") is less than the Lowest Reset
Price (as defined in Section 1.4(f) below), then the Unit Price for all Units
shall be reset on the Nine Month Anniversary Date to equal the Nine Month Reset
Price and the exercise price of the associated Class I Warrant shall be reset to
equal the new Unit Price, as reset.
(d) Late Registration Resets. If the Registration
Statement required by the Registration Rights Agreement has not been declared
effective by the date that is six (6) months after the Closing (the "Six Month
Closing Anniversary Date"), then the Six Month Closing Anniversary Date, and
each monthly anniversary of the Closing Date thereafter, until the Registration
Statement is declared effective, shall be referred to as a "Late Registration
Reset Date." If the average Closing Bid Price (the "Late Registration Reset
Price") of the Company's Common Stock for the five (5) trading days immediately
preceding any Late Registration Reset Date is less than the Lowest Reset Price,
then the Unit Price shall be reset on each such Late Registration Reset Date to
equal the Late Registration Reset Price and the exercise price of the associated
Class I Warrant shall be reset to equal the new Unit Price, as reset.
(e) MFN Resets. If, at any time during period beginning
on the Nine Month Anniversary and ending on the date that is two (2) years after
the date hereof, the Company issues any equity securities at a price that is
less than the Unit Price then in effect, then the Unit Price shall be reset (an
"MFN Reset") on the date of issuance of such other equity securities to equal
the issuance price of such other equity securities (the "MFN Reset Price") and
the exercise price of the associated Class I Warrants shall be reset to equal
the new Unit Price, as reset.
(f) Lowest Reset Price. For purposes hereof, the
"Lowest Reset Price" shall mean the lesser of (i) the Unit Price, (ii) the
Effective Date Reset Price (if it then exists), (iii) the Three Month Reset
Price (if it then exists), (iv) the Nine Month Reset Price (if it then exists),
(v) the lowest Late Registration Reset Price (of those that then exist) or (vi)
the lowest MFN Reset Price (of those that then exist).
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(g) Cap Amount and Adjustments. Notwithstanding the
terms of the Class II Warrant, the Company's obligation to issue Reset Units
upon the exercise of Class II Warrant issued in the Initial Offering shall be
subject to the Cap Amount as specified in Section 1.6(d) below; provided further
that the provisions of this Section 1.4 shall be subject to adjustment as
provided in Section 1.5 below; provided further that if on date of any Reset
(each, a "Reset Date") that occurs after the Effective Date, the Registration
Statement is subject to a Blackout Period or is otherwise ineffective, then for
purposes hereof, such Reset Date shall be the first Trading Day thereafter that
the Registration Statement becomes effective.
1.5 Adjustments to Reset of Unit Price.
(a) Adjustment Due to Stock Split or Combination. If,
at any time after the Closing Date but prior to either the Effective Date, the
Three Month Reset Date, the Nine Month Reset Date or any Late Registration Reset
Date, as the case may be, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, or other similar event, or decreased
by a combination or reclassification of shares, or other similar event, then the
Effective Date Reset Price, the Three Month Reset Price, the Nine Month Reset
Price or the Late Registration Reset Price, as the case may be, shall be
calculated giving appropriate effect to the stock split, stock dividend,
combination, reclassification or other similar event.
(b) Adjustment Due to Merger, Consolidation, Etc. If,
after the Closing Date but prior to either the Effective Date, the Three Month
Reset Date, the Nine Month Reset Date, or any Late Registration Reset Date, as
the case may be, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event (a "Reset
Transaction"), as a result of which shares of Common Stock of the Company shall
be changed into (or the shares of Common Stock become entitled to receive) the
same or a different number of shares of the same or another class or classes of
stock or securities of the Company or another entity, then, prior to the
consummation of any Reset Transaction, the Company will make appropriate
provision (in form and substance reasonably satisfactory to the Subscriber) to
insure that the Subscriber shall thereafter have the right to acquire and
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of or addition to (as the case may be) the shares of Common Stock
theretofore issuable upon such Effective Date, Three Month Reset Date, Nine
Month Reset Date or Late Registration Reset Date, as the case may be, such
stock, securities and/or other assets that would have been issued or payable in
such Reset Transaction with respect to or in exchange for the number of shares
of Common Stock which would have been acquirable or receivable on such Effective
Date, Three Month Reset Date, Nine Month Reset Date or Late Registration Reset
Date, as the case may be, had such Reset Transaction not taken place. In any
such case, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the Subscriber) with respect to the Subscriber's
rights and interests to insure that the provisions of this Section 1.5(b) and
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Section 1.4 will thereafter be enforceable and to give appropriate effect to the
reset provisions in Sections 1.4(a)-(c) (including, in the case of any such
Reset Transaction in which the successor entity or purchasing entity is other
than the Company, an immediate revision of the Unit Price and the exercise price
of the Warrants to reflect the price of the common stock of the surviving entity
and the market in which such common stock is traded). The Company shall not
effect any transaction described in this Section 1.5(b) unless the resulting
successor or acquiring entity (if not the Company) assumes by written instrument
the obligations of the Company under this Agreement including this Section
1.5(b).
1.6. Authorization and Reservation of Shares of Common Stock.
(a) Authorized and Reserved Amount. The Company shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock a sufficient number of shares of Common Stock to provide for (i)
the issuance of the Unit Shares and (ii) the full exercise of all outstanding
Warrants (including all associated Class I and Class II Warrants), and issuance
of the Warrant Shares in connection therewith, which number shall not be reduced
at any time prior to the Nine Month Anniversary Date; provided, however that the
Company shall use all authorized but unreserved shares as necessary to issue all
required Unit Shares and to honor exercises of the Warrants.
(b) Increases to Reserved Amount. Without limiting any
other provision of this Section 1.6, if at any time prior to the Nine Month
Anniversary Date the Company is notified by a Holder that the Reserved Amount,
based upon the average of the 5 lowest Five Day Average Prices (as defined
below) during any 30 consecutive trading days prior to the providing of such
notice shall be less than One Hundred Fifty percent (150%) of the number of
shares of Common Stock that would be issuable to such Holder if the date of such
notice by the Holder were a Reset Date and the Class II Warrant was exercised in
full on such date (without regard to the conversion limitations contained
herein, and including shares of Common Stock issuable upon exercise of the Class
II Warrant with respect to additional Units in connection with such Reset Date)
(a "Share Reservation Failure"), the Company shall within five (5) business days
notify all Holders of such occurrence and shall take action as soon as possible,
but in any event within five (5) days after such Holder's notice if such action
can be accomplished by the Board of Directors and within 120 days of such
Holder's notice if such action requires the approval of the Company's
shareholders, to increase the Reserved Amount for each Holder to Two Hundred
percent (200%) of the number of shares of Common Stock then issuable to such
Holder if the date of such notice by the Holder were a Reset Date (without
regard to the conversion limitations contained herein, and including shares of
Common Stock issuable upon exercise of the Class II Warrant with respect to
additional Units in connection with such Reset Date). Any notice with respect to
a particular Share Reservation Failure by a Holder shall be given within ten
(10) business days of such particular Share Reservation Failure. For purposes
hereof, "Five Day Average Price" means the average Closing Bid Price for the 5
trading days ending on the date in question.
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(c) Reduction of Reserved Amount Under Certain
Circumstances. Prior to the Nine Month Anniversary Date, the Company shall not
reduce the number of shares required to be reserved for issuance under this
Section 1.6 without the written consent of the Holder except for a reduction
proportionate to a combination, reverse stock split, or other similar action
effected for a valid business purpose other than affecting the obligations of
Company under this Section 1.6, which action affects all shares of Common Stock
equally; provided, however that in no event shall the Reserved Amount be reduced
below one hundred and fifty percent (150%) of the number of shares of Common
Stock then issuable to such Holder if the date of such reduction were a Reset
Date (without regard to the conversion limitations contained herein, and
including shares of Common Stock issuable upon exercise of the Class II Warrant
with respect to additional Units in connection with such Reset Date), without
that Holder's written consent.
(d) Cap Amount; Shareholder Approval.
(i) [Intentionally Left Blank].
(ii) Effect of Cap Amount on Initial Offering Units.
In no event shall the total number of shares of Common Stock issued as Unit
Shares (including Reset Shares) and as Warrant Shares upon exercise of the
Warrants exceed the maximum number of shares of Common Stock (the "Cap Amount")
that the Company can, without shareholder approval, so issue pursuant to Nasdaq
Rule 4460(i)(1)(d)(ii) (the "Nasdaq 20% Rule"), if applicable, or any applicable
rule requiring shareholder approval of an issuance of Common Stock in excess of
20% of the outstanding capital stock of the Company (in each case unless
otherwise agreed by Nasdaq to the extent their rules apply). To the extent
applicable, the Cap Amount shall be 1,625,000 Shares of Common Stock. For
purposes hereof, "Reset Shares" shall mean shares of Common Stock that are part
of a Reset Unit or are issued or issuable unon exercise of a Reset Warrant,
where "Reset Units" shall mean any Units issued or issuable upon exercise of the
Class II Warrant and "Reset Warrants" shall mean any Class I Warrants that are
part of a Reset Unit.
1.7. Limitation on Sales. Notwithstanding anything to the
contrary contained in this Agreement, the Company may not sell and Subscriber
may not purchase (whether pursuant hereto or pursuant to the exercise of any
Warrant) any shares of Common Stock of the Company pursuant to this Agreement
and the transactions contemplated hereby to the extent that such sale and
purchase would result in Subscriber at the time of such sale and purchase
beneficially owning in excess of 4.9% of the Company's total shares of Common
Stock outstanding at the time of such sale and purchase. For the purposes of
this paragraph, beneficial ownership and all determinations and calculations,
including without limitation, with respect to calculations of percentage
ownership, shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D and G
thereunder. No prior inability to sell and purchase the Unit Shares pursuant to
this paragraph shall have any effect on the applicability of the provisions of
this paragraph with respect to any subsequent determination as to whether any
sale and purchase could be made. This Section 1.7 may not be waived by
Subscriber unless such waiver has been voted upon and approved by a majority of
the Company's shareholders.
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1.8 Closing. The Closing of the Initial Offering shall occur
no later than January 26, 2000.
2. Representations, Warranties and Covenants of Subscriber. Subscriber
hereby represents and warrants to and agrees with the Company as follows:
2.1 Accredited Investor. Subscriber is an accredited investor,
as defined in Rule 501 of Regulation D, and has checked the applicable box set
forth in Section 10 of this Agreement.
2.2 Investment Experience; Access to Information; Independent
Investigation.
2.2.1 Access to Information. Subscriber or Subscriber'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 and to obtain any additional information which Subscriber
or Subscriber's professional advisor deems necessary concerning the terms and
conditions of this Offering, the Company and its business and prospects.
2.2.2 Reliance on Own Advisors. Subscriber has relied
completely on the advice of, or has consulted with, Subscriber'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 Acts for any tax or legal
advice (other than reliance on information in the Disclosure Documents as
defined in Section 2.2.4 and on the Opinion of Counsel).
2.2.3 Capability to Evaluate. Subscriber has such
knowledge and experience in financial and business matters so as to enable such
Subscriber 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 2.2.4 below).
2.2.4 Disclosure Documents. Subscriber, in making
Subscriber's investment decision to subscribe for the Securities hereunder,
represents that (a) Subscriber has received and had an opportunity to review (i)
the Company's Annual Report on Form 10-K for the year ended December 31, 1999
(ii) the Company's quarterly reports on Form 10-Q for the quarters ended March
31, June 30, and September 30, 1999, (iii) the Risk Factors, attached as Exhibit
F-1, (iv) the Capitalization Schedule, attached as Exhibit F-2 (the
"Capitalization Schedule"), and (v) the Use of Proceeds Schedule, attached as
Exhibit G (the "Use of Proceeds Schedule"), (b) Subscriber 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, any other written information prepared by the Company
which has been specifically provided to Subscriber in connection with this
Offering and is designated in writing by the Company as a Disclosure Document
(the documents described in Section 2.2.4 (a) and (b) are collectively referred
to as the "Disclosure Documents"), and an independent investigation made by
Subscriber and Subscriber's representatives, if any; (c) Subscriber has, prior
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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. Subscriber
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 Subscriber has not relied upon any
Third Party Reports, including any provided by the Placement Agent or ▇▇▇▇▇▇
Investments, LLC, in making the decision to invest.
2.2.5 Investment Experience; Fend for Self. Subscriber has
substantial experience in investing in securities and he, she or it has made
investments in securities other than those of the Company. Subscriber
acknowledges that Subscriber is able to fend for Subscriber's self in the
transaction contemplated by this Agreement, that Subscriber has the ability to
bear the economic risk of Subscriber's investment pursuant to this Agreement and
that Subscriber is an "Accredited Investor" by virtue of the fact that
Subscriber meets the investor qualification standards set forth in Section 2.1
above. Subscriber has not been organized for the purpose of investing in
securities of the Company, although such investment is consistent with
Subscriber's purposes.
2.3 Exempt Offering Under Regulation D.
2.3.1 Investment; No Distribution. Subscriber is acquiring
the Securities to be issued and sold hereunder for his, her or its own account
(or a trust account if such Subscriber is a trustee) for investment and not as a
nominee and not with a present view to the distribution thereof. Subscriber is
aware that there are legal limits on Subscriber's ability to sell or dispose of
the Securities and, therefore, that Subscriber may be required to bear the
economic risk of the investment for an indefinite period of time and has
adequate means of providing for Subscriber's current needs and possible personal
contingencies. Subscriber's commitment to illiquid investments is reasonable in
relation to Subscriber's net worth. By making the representations in this
Section 2.3.1, the Subscriber does not agree to hold the Securities for any
minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption from registration under the Act, except as otherwise
limited or required by the terms hereof.
2.3.2 [Intentionally Omitted]
2.3.3 Restricted Securities. Subscriber understands that
the Unit Shares and Warrants issued at Closing are, 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
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resold without registration under the Act or pursuant to an exemption therefrom.
In this connection, Subscriber represents that Subscriber is familiar with Rule
144 under the Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
2.3.4 Disposition. Without in any way limiting the
representations set forth above, Subscriber further agrees not to sell,
transfer, assign, pledge (except for any limited pledge in connection with a
margin account of Subscriber 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
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; or
(b) (i) Subscriber shall have notified the Company of the
proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed
disposition, and (ii) if reasonably requested by the Company,
Subscriber 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
Subscriber to provide opinions of counsel for transactions made
pursuant to Rule 144 provided that Subscriber and Subscriber'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.
2.4 Due Authorization.
2.4.1 Authority. The person executing this Subscription
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 Subscriber is executing
this Agreement. Subscriber has reached the age of majority (if an individual)
according to the laws of the state in which he or she resides.
2.4.2 Due Authorization. If Subscriber is a corporation,
Subscriber is duly and validly organized, validly existing and in good corporate
standing as a corporation under the laws of the jurisdiction of its
incorporation with full power and authority to purchase the Securities to be
purchased by Subscriber and to execute and deliver this Agreement.
2.4.3 [Intentionally Omitted]
13
2.4.4 Representatives. If Subscriber 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
Subscriber is so purchasing.
3. Acknowledgments Subscriber is aware that:
3.1 Risks of Investment. Subscriber recognizes that an investment in
the Company involves substantial risks, including the potential loss of
Subscriber's entire investment herein. Subscriber 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;
3.2 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;
3.3 Securities Are Not Yet Registered. The Securities and any
component thereof have not yet 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 Subscriber 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. The Company agrees
to file a registration statement (the "Unit Deal Registration Statement" or the
"Registration Statement") covering the resale of the Securities as required in
the Registration Rights Agreement. The parties agree that, notwithstanding
anything to the contrary in this Agreement or the Registration Rights Agreement,
the Company shall be allowed to file, concurrently with the Unit Deal
Registration Statement, a registration statement covering the securities issued
and issuable to ▇▇▇▇▇▇ Private Equity, LLC ("SPE") pursuant to that certain
Equity Line Investment Agreement (the "Equity Line Investment Agreement"), dated
on or about November __, 1999, by and between the Company and SPE, including but
not limited to the Put Shares and Warrant Shares (as defined in the Equity Line
Subscription Agreement) issuable upon exercise of the Purchase Warrants and the
Commitment Warrants (as each is defined in the Equity Line Subscription
Agreement).
3.4 [Intentionally Omitted].
3.5 No Assurances of Registration. There can be no assurance that
any registration statement will become effective at the scheduled time, or ever.
Subscriber acknowledges that it may be required to bear the economic risk of
Subscriber's investment for an indefinite period of time;
14
3.6 Exempt Transaction. Subscriber 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 Subscriber to acquire such Securities;
3.7 Legends. It is understood that the certificates evidencing the
Unit Shares, the Warrants, and the Warrant Shares, subject to legend removal
under the terms of Section 5.9 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 an exemption therefrom."
3.8 [Intentionally Left Blank].
4. Representations and Warranties of the Company . The Company hereby
makes the following representations and warranties to Subscriber (which shall be
true at the signing of this Agreement and as of Closing) and agrees with
Subscriber that:
4.1 Organization, Good Standing, and Qualification. The Company is a
corporation duly incorporated, 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 by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, the Securities and Exchange Commission ("SEC"), The
National Association of Securities Dealers, 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. The Company does not have any
subsidiaries.
4.2 Corporate Condition. The Company's condition is, in all material
respects, as described in the Disclosure Documents, 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. There have been no material
adverse changes in the Company's business, prospects or financial condition
since December 31, 1999, including but not limited to incurring material
liabilities, of which any officer of the Company is aware of or should be aware
of after due inquiry. The financial statements contained in the Disclosure
Documents have been prepared in accordance with generally accepted accounting
principles, consistently applied (except as otherwise permitted by Regulation
S-X of the Exchange Act), and fairly present the financial condition of the
15
Company as of the dates of the balance sheets 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 which are due, except for
taxes which 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 or its officers and directors in their capacity
as such, except as disclosed in the Disclosure Documents. 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 necessary to make the
statements contained therein 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, would require disclosure in a registration
statement for the primary issuance by the Company of its Common Stock but which
has not been so publicly announced or disclosed.
4.3 Authorization. All corporate action on the part of the Company
by its officers, directors and shareholders 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 Unit
Shares and Warrants being sold hereunder and the issuance (and the reservation
for issuance) of the Warrant Shares have been taken, and this Agreement, the
Irrevocable Instructions to Transfer Agent, and the Registration Rights
Agreement and the Warrants 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.
4.4 Valid Issuance of Securities. The Unit Shares 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 Subscriber in this
Agreement and of the Placement Agent in the Placement Agent 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 Subscriber in this
Agreement and of the Placement Agent in the Placement Agent Agreement, will be
issued in compliance with all applicable U.S. federal and state securities laws.
The Unit Shares and the Warrants will be issued free of any preemptive rights.
The Company currently has 125,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants.
4.5 Compliance with Other Instruments. The Company is not in
violation or default of any provisions of its Articles of Incorporation or
Bylaws each as amended, and in effect on and as of the date of this Agreement or
of any provision of any instrument or 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
16
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, and the Irrevocable Instructions to Transfer
Agent, except as described in the Disclosure Documents. 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 and the Irrevocable
Instructions to Transfer Agent, except as described in the Disclosure Documents,
(b) violate the Company's Articles 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.
4.6 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 is not in violation of the listing requirements of the
O.T.C. Bulletin Board.
4.7 Capitalization. As of January 20, 2000, the Company has the
authority to issue 110,001,000 shares, consisting 100,000,000 shares of Common
Stock, $.001 par value, of which 25,346,519 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.
4.8 Intellectual Property. The Company has no intellectual property.
4.9 Use of Proceeds. As of the date hereof, the Company expects to
use the net 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 G hereto. These purposes and amounts are estimates
and are subject to change without notice to any Subscriber.
4.10 No Rights of Participation. No person or entity, including, but
not limited to, current or former shareholders 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.
4.11 Company Acknowledgment. The Company hereby acknowledges that
Subscriber may elect to hold the Securities for an indefinite period of time, as
permitted by the terms of this Agreement and other agreements contemplated
hereby, and the Company further acknowledges that Subscriber and the Placement
Agent have made no representations or warranties, either written or oral, as to
how long the Securities will be held by Subscriber or regarding Subscriber's
trading history or investment strategies.
17
4.12 Termination Date of Offering. There shall only be one Closing
of the purchase and sale of the Units for the Initial Offering and the date of
such Closing shall be referred to as the "Closing Date").
4.13 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 Placement Agent in connection with this Offering.
4.14 Availability of Form S-3. The Company is currently eligible and
agrees to maintain its eligibility to register the resale of its Common Stock on
a registration statement on Form S- 3 under the Act.
4.15 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 the Act pursuant to the
provisions of Regulation D 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 Units.
4.16 Acknowledgment of Dilution. The number of Unit Shares issuable
may increase substantially in certain circumstances, including the circumstance
in which the trading price of the Common Stock declines prior to a Reset Event.
The Company's executive officers and directors have studied and fully understand
the nature of the Securities being sold hereunder and recognize that they have a
potential dilutive effect. The board of directors of the Company has concluded
in its good faith business judgment that such issuance is in the best interests
of the Company. The Company acknowledges that its obligation to issue Reset
Shares upon the occurrence of a Reset Event is binding upon it and enforceable
regardless of the dilution that such issuance may have on the ownership
interests of the other shareholders.
4.17 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 unlawful bribe, rebate, payoff, influence payment,
kickback or other unlawful payment to any foreign or domestic government
official or employee.
18
4.18 Key Employees. Each Key Employee (as defined below) is
currently serving the Company in the capacity disclosed in Exhibit I. 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,
any intention to terminate his employment with, or services to, the Company.
"Key Employee" means ▇▇▇▇ ▇▇▇▇.
4.19 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.
4.20 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.
4.21 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 Subscriber as a result of the transactions contemplated by
this Agreement, including, without limitation, the issuance of the Units and any
exercise of the Warrants and ownership of the Warrant Shares.
4.22 Other Agreements. The Company has not, directly or indirectly,
made any agreements with the Subscriber, or any other subscriber under a
subscription in the form of this Agreement for the purchase of Units, relating
to the terms or conditions of the transactions contemplated hereby or thereby
except as expressly set forth herein or therein, respectively, or in exhibits
hereto or thereto.
19
5. Covenants of the Company
5.1 Independent Auditors. The Company shall, until at least three
(3) years after the Closing Date, maintain as its independent auditors an
accounting firm authorized to practice before the SEC.
5.2 Corporate Existence and Taxes. The Company shall, until at least
the later of (i) the date that is three (3) years after the Closing Date or (ii)
the exercise of a Warrants issued pursuant to this Agreement, maintain its
corporate existence in good standing and remain a "Reporting Issuer" (defined as
a Company which files periodic reports under the Exchange Act) (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 Warrants 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.
5.3 Registration Rights. The Company will enter into a
registration rights agreement (the "Registration Rights Agreement") covering the
resale of the Unit Shares and the Warrant Shares in the form of the Registration
Rights Agreement attached as Exhibit C.
5.4 [Intentionally Left Blank].
5.5 Asset Transfers. The Company shall not transfer, sell,
convey or otherwise dispose of any of its material assets to any Subsidiary or
affiliate except for a cash or cash equivalent consideration and for a proper
business purpose, prior to December 31, 2000 without the consent of the
Subscriber.
5.6 Capital Raising Limitations; Rights of First Refusal.
5.6.1 Future Offerings Lockup. The Company shall not issue or
sell, or agree to issue or sell, any debt or equity securities (or any security
convertible into or exercisable or exchangeable, directly or indirectly, for
equity or debt securities of the Company) for a period beginning on the date
hereof and ending Ninety (90) days after the effectiveness of the registration
statement required to be filed under the Registration Rights Agreement without
obtaining the prior written approval of Subscriber (the "Future Offerings Lock
Up").
5.6.2 Right of First Refusal. The Company agrees that, during
the period beginning on the date hereof and terminating one year following the
Closing Date, the Company will not, without the prior written consent of
Subscriber and ▇▇▇▇▇▇ Private Equity, LLC ("SPE")(which shall be deemed given
20
for the warrants to purchase Common Stock issued or to be issued to the
Placement Agent in consideration of its services in connection with this
Agreement and the transactions contemplated hereby) issue or sell, or agree to
issue or sell any equity or debt securities of the Company (or any security
convertible into or exercisable or exchangeable, directly or indirectly, for
equity or debt securities of the Company) ("Future Offerings") unless the
Company shall have first delivered to Subscriber and to SPE, at least ten (10)
business days prior to the closing of such Future Offering, written notice
describing the proposed Future Offering, including the terms and conditions
thereof, and providing Subscriber and its affiliates and SPE (based on the
Allocation specified in Section 5.6.3 below) an option for such ten (10)
business day period following delivery of such notice to purchase, for their own
investment purposes (not as brokers or agents for others) up to the amount of
the securities, as designated in Section 5.6.3 below, being offered in the
Future Offering on the same terms as contemplated by such Future Offering (the
limitations referred to in this section 5.6.2 are collectively referred to as
the "Rights of First Refusal").
5.6.3 Amount of Subscriber's Right of First Refusal. Subscriber
and SPE shall each be entitled to purchase up to 50% of such a Future Offering
(the "Allocation"), provided that if either Subscriber or SPE waives its right
to participate in a given offering, then the other of Subscriber or SPE shall be
entitled to purchase the waiving party's Allocation..
5.6.4 Exceptions to the Future Offering Lockup and Rights of
First Refusal. Notwithstanding anything to the contrary in this Agreement, the
Future Offerings Lock Up and Rights of First Refusal shall not apply to the
Equity Line Investment Agreement (as defined in Section3.3 above) or to any
securities issued or issuable thereunder or to any securities issued or issuable
upon the exercise of warrants issued or issuable pursuant to the Equity Line
Investment Agreement, provided, however, in case the registration statement
covering the securities issuable to SPE (the "SPE Registration Statement") is
declared effective by the SEC prior to the effectiveness of the Unit Deal
Registration Statement, the Company may not initiate any "Puts" (as defined in
the Equity Line Investment Agreement) pursuant to such Equity Line until the
earlier of (x) the date on which the Unit Deal Registration Statement is
declared effective or (y) the date which is 15 months after the Closing Date;
provided, further, notwithstanding anything to the contrary in this Agreement or
in any agreement referenced in this Agreement, nothing herein or therein shall
prohibit SPE from (i) exercising any or all of its "Commitment Warrants" (as
defined in the Equity Line Investment Agreement) at any time allowed under the
terms of the Commitment Warrants and (ii) selling the common stock issued upon
exercise of the Commitment Warrants under the SPE Registration Statement once it
is declared effective, regardless of whether or not the Unit Deal Registration
Statement is declared effective prior to the date of such sale. The Future
Offerings Lock Up and Capital Raising Limitations shall not apply to any
transaction involving issuances of securities as consideration for a merger,
consolidation, acquisition or purchase of assets, or, in connection with any of
the foregoing transactions with an industry partner (a "Strategic Alliance"), 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; provided, however, that no registration statement covering the resale
of Common Stock issued in connection with a Strategic Alliance, or upon
conversion, exercise or exchange of securities issued in connection with such
transactions, shall be declared effective prior to the date that is one year
after the Closing Date. The Capital Raising Limitations also shall not apply to
21
(a) the issuance of securities pursuant to a firm commitment underwritten public
offering, (b) the issuance of securities upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof, (c) the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option or restricted
stock plan for the benefit of the Company's employees, directors or consultants,
or (d) the issuance of debt securities, with no equity feature, incurred solely
for working capital purposes.
5.7 Financial 10-K Statements, Etc. and Current Reports on
Form 8-K. The Company shall make available, upon request, to the Subscriber
copies of its annual reports on Form 10-K, and quarterly reports on Form 10-Q
and shall deliver to the Subscriber current reports on form 8-K within two (2)
days of filing for two (2) years from the Initial Closing. The Company shall
file a current report on form 8-K disclosing the terms of this Offering and the
Securities within two (2) business days of the date of Closing.
5.8 Opinion of Counsel. Subscriber shall, concurrently with
the purchase of the Units pursuant to this Agreement, receive an opinion letter
from ▇▇▇▇▇▇▇ ▇. ▇▇▇▇ ("Counsel"), counsel to the Company, in the form attached
as Exhibit D.
5.9 Removal of Legend. The Legend shall be removed and the
Company shall issue a certificate without any legend to the holder of any Unit
Shares and Warrant Shares upon which such Legend is stamped, and a certificate
for a Unit Share or Warrant Shares shall be originally issued without any
legend, if, unless otherwise required by applicable state securities laws, (a)
the sale of such Unit Shares and Warrant Shares is registered under the
Securities Act, and (b) the holder thereof makes the representations necessary
for counsel to the Company to issue a legal opinion to the effect that a public
sale or transfer of such Unit Shares or Warrant Shares may be made without
registration under the Securities Act pursuant to Rule 144.
If the Company fails to remove any Legend as required by this Section
5.9 (a "Legend Removal Failure"), then beginning on the tenth (10th) day
following such failure, if the Company continues to fail to remove such legend,
the Company shall pay to holders holding shares subject to a Legend Removal
Failure an amount equal to one percent (1%) of the fair market value of the Unit
Shares and Warrant Shares then held by such holder per day that such failure
continues. For purposes hereof, the number of Warrant Shares held by a holder
shall be calculated as though all Warrants held by such holder were fully
exercised, without regard to any limitations on the exercise thereof. If during
any twelve (12) month period, the Company fails to remove any legend as required
by this Section 5.9 for an aggregate of thirty (30) days, each holder holding
shares subject to a Legend Removal Failure may, at its option, require the
Company to purchase all or any portion of the Unit Shares and Warrant Shares
held by such holder at a price per share equal to the greater of (i) one hundred
fifty percent (150%) of the Unit Price and (ii) the then fair market value of
such Unit Shares.
5.10 Listing. The Company shall (i) continue the listing and
trading of its Common Stock on the O.T.C. Bulletin Board, the Nasdaq Small Cap
Market ("Nasdaq"), or on the Nasdaq National Market System ("NMS"), the New York
Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX"); 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.
22
5.11 The Company's Instructions to Transfer Agent. The Company
shall use its best efforts to, within ten (10) business days of the Closing
Date, enter into an agreement with the Company's transfer agent (the "Transfer
Agent") substantially in the form attached hereto as Exhibit E (the "Irrevocable
Instructions to Transfer Agent"), with such modifications as are necessary to
reflect the terms of this Offering. The Company will issue to its Transfer Agent
the Irrevocable Instructions to Transfer Agent in the form of Exhibit E
instructing the Transfer Agent to issue certificates, registered in the name of
Subscriber or its nominee, for the Reset Shares and the Warrant Shares in such
amounts as specified from time to time by such Subscriber to the Company upon
the occurrence of any Reset Event and upon the exercise of the Warrants. The
Company warrants that no instruction, other than such instructions referred to
in Section 5.9 hereof will be given by the Company to its Transfer Agent with
respect to the Units, the Reset Units, or the Warrant Shares. Nothing in this
Section shall affect in any way Subscriber's obligations and agreement set forth
in Sections 2.3.3 or 2.3.4 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. The Company hereby agrees that it will not
unilaterally terminate its relationship with the Transfer Agent for any reason
prior to the date which is two years and one month after the Closing Date of the
Initial Offering or one (1) month after the Nine Month Anniversary Date,
whichever is earlier (the "Ending Date") without the consent of the Subscriber.
In the event the Company's agency relationship with the Transfer Agent should be
terminated for any other reason prior to the date which is three (3) years after
the Closing Date, the Company's Transfer Agent shall continue acting as transfer
agent pursuant to the terms of the Irrevocable Instructions to Transfer Agent
until such time that a successor transfer agent (i) is appointed by the Company;
(ii) is approved by the Subscriber; and (iii) executes and agrees to be bound by
the terms of the Irrevocable Instructions to Transfer Agent.
6. Miscellaneous
6.1 Representations and Warranties Survive the Closing;
Severability. The Subscriber's and the Company's representations and warranties
shall survive the Closing of the transactions contemplated by this Agreement
notwithstanding any due diligence investigation made by or on behalf of the
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, this Agreement shall continue in full force and effect
without said provision.
6.2 Successors and Assigns. 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. Subscriber may assign Subscriber's rights hereunder, in
connection with any private sale of the Warrants of such Subscriber, 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.
23
6.3 Governing Law; Jurisdiction; Jury Trial. This Agreement shall be
governed by and construed under the laws of the State of New York without regard
to conflict of laws principles. Each party to this Agreement hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
6.4 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.
6.5 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.
6.6 Written Notices, Etc. Any notice, demand or request required or
permitted to be given by the Company or Subscriber 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.
6.7 Expenses. The Company shall pay to Subscriber at the Closing
reimbursement for the expenses incurred by it and its affiliates and advisors in
connection with the negotiation, preparation, execution, and delivery of this
Agreement and the other agreements and documents to be executed in connection
herewith, including, without limitation, due diligence and attorney's fees and
expenses (the "Expenses"). In addition, from time to time thereafter, upon
Subscriber's written request, the Company shall pay to Subscriber such Expenses,
if any, not so paid at Closing and/or covered by such payment,in each case to
the extent incurred by Subscriber. The Company shall not be required to
reimburse Expenses to the extent such Expenses exceed fifty thousand dollars
($50,000) in the aggregate.
24
6.8 Entire Agreement; Written Amendments Required. This Agreement,
including the Exhibits attached hereto, the Warrants, the Registration Rights
Agreement, the Escrow Agreement, the Irrevocable Instructions to Transfer Agent
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 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. Officer and Director Transactions. If any officer (as defined in
Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended)
or director of the Company, directly or indirectly, including through family
members, trusts or other entities related to such executive officer or director,
disposes, or provides or files any public notice, including pursuant to Rule 144
of the Securities Act, of a bona fide intent to dispose of, any Common Stock
beneficially owned by him during the period beginning on the Closing Date and
ending on the date which is six (6) months after the Unit Deal Registration
Statement is declared effective by the SEC, the Company shall pay to Subscriber
an amount equal to (x) the number of Unit Shares and Warrant Shares (without
giving effect to any exercise or limitation on exercise thereof) then held by
Subscriber times (y) the difference between (m) the Closing Bid Price of the
Common Stock on the trading day (the "Announcement Date") immediately preceding
the day on which such disposal was publicly announced and (n) the lowest Closing
Bid Price of the Common Stock during the thirty (30) trading day period
beginning on the Announcement Date; provided, however, that an officer or
director ( and all such entities for the benefit of any member of his/her
family, collectively) may transfer during the six (6) month period following the
effectiveness of the Unit Deal Registration Statement up to ten percent (10%) of
his/her total holdings as of the date hereof without triggering the Company's
payment obligations pursuant to this Section 7.
8. Indemnification. In consideration of each Buyer's execution and
delivery of the Subscription Agreement, Registration Rights Agreement,
Irrevocable Instructions to Transfer Agent (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 Subscriber 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
25
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, or
(c) any cause of action, suit or claim, derivative or otherwise, by any
shareholder 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
shareholders of the Company.
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 8, 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
26
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 8, 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 8 to the extent it is prejudicial.
9. [Intentionally Left Blank].
10. Number of Units and Purchase Price. Subscriber subscribes for
227,445 Units (in the amount of $13.19 per Unit (the "Initial Unit Amount")) and
the Class II Warrant against payment by wire transfer in the amount of
$3,000,000 (the "Aggregate Purchase Price").
11. Accredited Investor. Subscriber 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) [X] 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]__________________________________________________
27
The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.
IN WITNESS WHEREOF, the undersigned Subscriber does represent and
certify under penalty of perjury that the foregoing statements are true and
correct and that Subscriber by the following signature(s) executed this
Agreement.
Dated this _____ day of January, 2000.
PYR MANAGEMENT, LLC PYR MANAGEMENT, LLC
PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
By: Pyramid Trading Limited Partnership
Its: Sole Member
DELIVERY INSTRUCTIONS:
Please type or print address where
By: ___________________ your security is to be delivered
Name: ▇▇▇▇ ▇▇▇▇▇▇▇
Title: Authorized Individual ATTN.: ▇▇▇▇ ▇▇▇▇▇▇▇
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇. ▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Tel: (▇▇▇)▇▇▇-▇▇▇▇
Fax: (▇▇▇)▇▇▇-▇▇▇▇
WITH A COPY TO:
Please type or print address where copies are to be delivered
ATTN.: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
▇▇▇▇▇▇▇▇▇ & ▇▇▇▇
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇. ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Tel: (▇▇▇)▇▇▇-▇▇▇▇
Fax: (▇▇▇)▇▇▇-▇▇▇▇
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF
$_________________ ON THE ____ DAY OF JANUARY, 2000.
The Hartcourt Companies Inc.
By:____________________________________
Name:__________________________________
Title:_________________________________
(555088.8)
28
EXHIBIT A
to Subscription Agreement
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT
AND ASSESSMENT OF THE RISKS INVOLVED.
Warrant to Purchase
227,445 shares
Class I Warrant to Purchase Common Stock
of
THE HARTCOURT COMPANIES, INC.
THIS CERTIFIES that PYR MANAGEMENT, LLC or any subsequent holder hereof
("Holder"), has the right to purchase from THE HARTCOURT COMPANIES, INC., a Utah
corporation (the "Company"), up to 227,445 fully paid and nonassessable shares
of the Company's common stock, $.001 par value per share ("Common Stock"),
subject to adjustment as provided herein, at a price equal to the Exercise Price
as defined in Section 3 below, at any time beginning on the Date of Issuance
(defined below) and ending at 5:00 p.m., New York, New York time, on January 26,
2005 (the "Exercise Period").
Holder agrees with the Company that this Warrant to Purchase Common
Stock of The Hartcourt Companies, Inc. (this "Warrant") is issued and all rights
hereunder shall be held subject to all of the conditions, limitations and
provisions set forth herein.
1. Date of Issuance.
This Warrant shall be deemed to be issued on January 26, 2000 ("Date of
Issuance").
2. Exercise.
(a) Manner of Exercise. During the Exercise Period, this Warrant may
be exercised as to all or any lesser number of full shares of Common Stock
covered hereby upon surrender of this Warrant, with the Exercise Form attached
hereto as Exhibit A (the "Exercise Form") duly completed and executed, together
with the full Exercise Price (as defined below) for each share of Common Stock
as to which this Warrant is exercised, at the office of the Company, at the
address, telephone number and fax number set forth on the signature page hereof,
or at such other office or agency as the Company may designate in writing, by
overnight mail, with an advance copy of the Exercise Form sent to the Company
and its Transfer Agent by facsimile (such surrender and payment of the Exercise
Price hereinafter called the "Exercise of this Warrant").
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any Warrant for
shares of Common Stock is issued shall, for all purposes, be deemed to be the
Holder of record of such shares on the Date of Exercise of this Warrant,
irrespective of the date of delivery of the Common Stock purchased upon the
Exercise of this Warrant. Nothing in this Warrant shall be construed as
conferring upon Holder any rights as a stockholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price shall initally equal $13.19 per share ("Exercise
Price"). Anytime a Reset Event occurs pursuant to Section 1.4 of the Regulation
D Subscription Agreement (the "Subscription Agreement") by and between PYR
MANAGEMENT, LLC and the Company, dated January 26, 2000, the Exercise Price of
this Warrant shall be reset to equal the Lowest Reset Price, where "Reset
Event," and "Lowest Reset Price" shall have the meanings ascribed to them in the
Subscription Agreement.
Payment of the Exercise Price may be made by either of the following,
or a combination thereof, at the election of Holder:
(i) Cash Exercise: cash, bank or cashiers check or wire transfer; or
(ii) Cashless Exercise: The Holder, at its option, may exercise this
Warrant in a cashless exercise transaction under this subsection (ii) if and
only if, on the Date of Exercise, there is not then in effect a current
registration statement that covers the resale of the shares of Common Stock to
be issued upon exercise of this Warrant. In order to effect a Cashless Exercise,
the Holder shall, surrender this Warrant at the principal office of the Company
together with notice of cashless election, in which event the Company shall
issue Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to
Holder;
Y = the number of shares of Common Stock for which this
Warrant is being exercised;
A = the Market Price of one (1) share of Common Stock (for
purposes of this Section 3(ii), the "Market Price" shall be
defined as the average closing price of the Common Stock for
the five (5) trading days prior to the Date of Exercise of
this Warrant (the "Average Closing Price"), as reported by the
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") Small Cap Market, or if the Common Stock is
not traded on the Nasdaq Small Cap Market, the Average Closing
Price in any other over-the-counter market; provided, however,
that if the Common Stock is listed on a stock exchange, the
Market Price shall be the Average Closing Price on such
exchange for the five (5) trading days prior to the date of
exercise of the Warrants. If the Common Stock is/was not
traded during the five (5) trading days prior to the Date of
Exercise, then the closing price for the last publicly traded
day shall be deemed to be the closing price for any and all
(if applicable) days during such five (5) trading day period;
and
B = the Exercise Price.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon exercise of this
Warrant in a cashless exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon exercise
of this Warrant in a cashless exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.
4. Transfer and Registration.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
(b) Registrable Securities. The Common Stock issuable upon the
exercise of this Warrant constitutes "Registrable Securities" under that certain
Registration Rights Agreement dated January 26, 2000 between the Company and
certain investors and, accordingly, has the benefit of the registration rights
pursuant to that agreement.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a
dividend payable in shares of Common Stock, then Holder, upon Exercise of this
Warrant after the record date for the determination of holders of Common Stock
entitled to receive such dividend, shall be entitled to receive upon Exercise of
this Warrant, in addition to the number of shares of Common Stock as to which
this Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) Recapitalization or Reclassification. If the Company shall at
any time effect a recapitalization, reclassification or other similar
transaction of such character that the shares of Common Stock shall be changed
into or become exchangeable for a larger or smaller number of shares, then upon
the effective date thereof, the number of shares of Common Stock which Holder
shall be entitled to purchase upon Exercise of this Warrant shall be increased
or decreased, as the case may be, in direct proportion to the increase or
decrease in the number of shares of Common Stock by reason of such
recapitalization, reclassification or similar transaction, and the Exercise
Price shall be, in the case of an increase in the number of shares,
proportionally decreased and, in the case of decrease in the number of shares,
proportionally increased. The Company shall give Holder the same notice it
provides to holders of Common Stock of any transaction described in this Section
5(b).
(c) Distributions. If the Company shall at any time distribute for
no consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding year) then, in
any such case, Holder shall be entitled to receive, upon Exercise of this
Warrant, with respect to each share of Common Stock issuable upon such exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which Holder would have been entitled to receive with respect to each such share
of Common Stock as a result of the happening of such event had this Warrant been
exercised immediately prior to the record date or other date fixing shareholders
to be affected by such event (the "Determination Date") or, in lieu thereof, if
the Board of Directors of the Company should so determine at the time of such
distribution, a reduced Exercise Price determined by multiplying the Exercise
Price on the Determination Date by a fraction, the numerator of which is the
result of such Exercise Price reduced by the value of such distribution
applicable to one share of Common Stock (such value to be determined by the
Board of Directors of the Company in its discretion) and the denominator of
which is such Exercise Price.
(d) Dilutive Issuance. If, at any time during the term of this
Warrant, the Company issues or is deemed to issue any equity securities at a
price that is less than the Unit Price then in effect, then the Exercise Price
of this Warrant shall be readjusted on the date of such issuance of such other
equity securities to equal the issuance price of such other equity securities.
(e) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the Company or another entity or there
is a sale of all or substantially all the Company's assets (a "Corporate
Change"), then this Warrant shall be exerciseable into such class and type of
securities or other assets as Holder would have received had Holder exercised
this Warrant immediately prior to such Corporate Change; provided, however, that
Company may not affect any Corporate Change unless it first shall have given
thirty (30) days notice to Holder hereof of any Corporate Change.
(f) Exercise Price Adjusted. As used in this Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in Section 3
of this Warrant, until the occurrence of an event stated in subsection (a), (b),
(c) or (d) of this Section 5, and thereafter shall mean said price as adjusted
from time to time in accordance with the provisions of said subsection. No such
adjustment under this Section 5 shall be made unless such adjustment would
change the Exercise Price at the time by $.01 or more; provided, however, that
all adjustments not so made shall be deferred and made when the aggregate
thereof would change the Exercise Price at the time by $.01 or more. No
adjustment made pursuant to any provision of this Section 5 shall have the net
effect of increasing the Exercise Price. The number of shares of Common Stock
subject hereto shall increase proportionately with each decrease in the Exercise
Price.
(g) Adjustments: Additional Shares, Securities or Assets. In the
event that at any time, as a result of an adjustment made pursuant to this
Section 5, Holder shall, upon Exercise of this Warrant, become entitled to
receive shares and/or other securities or assets (other than Common Stock) then,
wherever appropriate, all references herein to shares of Common Stock shall be
deemed to refer to and include such shares and/or other securities or assets;
and thereafter the number of such shares and/or other securities or assets shall
be subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. Fractional Interests.
No fractional shares or scrip representing fractional shares shall be
issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for the Exercise of
this Warrant and payment of the Exercise Price. The Company covenants and agrees
that upon the Exercise of this Warrant, all shares of Common Stock issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to preemptive rights, rights of first refusal or similar rights of
any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant has been issued
in a transaction exempt from the registration requirements of the Act by virtue
of Regulation D and exempt from state registration under applicable state laws.
The Warrant and the Common Stock issuable upon the Exercise of this Warrant may
not be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.
(b) Assignment. If Holder can provide the Company with reasonably
satisfactory evidence that the conditions of (a) above regarding registration or
exemption have been satisfied, Holder may sell, transfer, assign, pledge or
otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a
written notice to Company, substantially in the form of the Assignment attached
hereto as Exhibit B, indicating the person or persons to whom the Warrant shall
be assigned and the respective number of warrants to be assigned to each
assignee. The Company shall effect the assignment within ten (10) days, and
shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of
like tenor and terms for the appropriate number of shares.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any person
other than the Company and Holder any legal or equitable right, remedy or claim
under this Warrant and this Warrant shall be for the sole and exclusive benefit
of the Company and Holder.
10. Applicable Law.
This Warrant is issued under and shall for all purposes be governed by
and construed in accordance with the laws of the state of Utah, without giving
effect to conflict of law provisions thereof.
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft, destruction
or mutilation of this Warrant, and (in the case of loss, theft or destruction)
of indemnity or security reasonably satisfactory to the Company, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by
Holder to or on the Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the Company, to the
address, telephone number and facsimile number set forth on the signature page
hereof. Notices or demands pursuant to this Warrant to be given or made by the
Company to or on Holder shall be sufficiently given or made if sent by certified
or registered mail, return receipt requested, postage prepaid, and addressed, to
the address of Holder set forth in the Company's records, until another address
is designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
26th day of January, 2000.
THE HARTCOURT COMPANIES, INC.
By:____________________________________
---------------, --------
Address:
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Phone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
35
EXHIBIT A
EXERCISE FORM FOR CLASS I WARRANT
TO: THE HARTCOURT COMPANIES, INC.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock (the "Common Stock") of THE HARTCOURT
COMPANIES, INC., a Utah corporation (the "Company"), evidenced by the attached
warrant (the "Warrant"), and herewith makes payment of the exercise price with
respect to such shares in full, all in accordance with the conditions and
provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated: _____________________
-------------------------------------------------------------------------------
Signature
-------------------------------------------------------------------------------
Print Name
-------------------------------------------------------------------------------
Address
-------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-------------------------------------------------------------------------------
36
EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of THE HARTCOURT
COMPANIES, INC., evidenced by the attached Warrant and does hereby irrevocably
constitute and appoint _______________________ attorney to transfer the said
Warrant on the books of the Company, with full power of substitution in the
premises.
Dated:___________ _______________________________________
Signature
Fill in for new registration of Warrant:
-----------------------------------------
Name
-----------------------------------------
Address
-----------------------------------------
Please print name and address of assignee
(including zip code number)
-------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the of the attached Warrant in every particular, without alteration
or or any change whatsoever.
-------------------------------------------------------------------------------
(555088.8)
37
EXHIBIT B
to the Subscription Agreement
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT
AND ASSESSMENT OF THE RISKS INVOLVED.
Warrant to Purchase Units
Class II Warrant to Purchase Units
of
THE HARTCOURT COMPANIES, INC.
THIS CERTIFIES that PYR MANAGEMENT, LLC or any subsequent holder hereof
("Holder"), has the right to purchase from THE HARTCOURT COMPANIES, INC., a Utah
corporation (the "Company"), that number (if any) of Units(as defined below),
subject to adjustment as provided herein, at a price equal to the Exercise Price
as defined in Section 3 below, at any time beginning on the Date of Issuance
(defined below) and ending at 5:00 p.m., New York, New York time, on January 26,
2005 (the "Exercise Period"). Each Unit consists of one fully paid and
nonassessable share of the Company's Common Stock, $.001 par value per share (
the "Common Stock") and a Class I Warrant entitling the holder thereof to
purchase one share of Common Stock of the Company at the price and upon the
terms set forth therein. Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to them in the Regulation D Subscription
Agreement entered by and between the Company and PYR MANAGEMENT, LLC on January
26, 2000 (the "Subscription Agreement").
This Warrant shall be deemed to be issued on January 26, 2000 ("Date of
Issuance").
38
Holder agrees with the Company that this Class II Warrant to Purchase
Units of The Hartcourt Companies, Inc. (the "Warrant") is issued and all rights
hereunder shall be held subject to all of the conditions, limitations and
provisions set forth herein.
1. (a)Number of Units Into Which This Warrant is Exercisable. Subject
to adjustment as provided herein, on and after any Effective Date (as defined
herein), this Warrant shall become exercisable into additional Units. For
purposes hereof, the number of additional units into which this Warrant becomes
exercisable on and after an Effective Date shall be determined according to the
following formula, where N represents such number:
P
N = ------ - U
M
where: P = the Aggregate Purchase Price (as defined in
the Subscription Agreement);
M = the Market Price (as defined below) on the
applicable Effective Date;
U = the Initial Unit Amount (as defined in the
Subscription Agreement) plus the number of
Units issued upon previous exercises of this
Class II Warrant, if any.
For purposes of this Warrant, "Market Price," as of any Effective Date
(as defined below), shall mean the Lowest Reset Price (as defined in the
Subscription Agreement) in effect on that Effective Date.
(b) Time of Exercise. Notwithstanding the foregoing, this Warrant shall
not become exercisable for additional Units pursuant to this Section 1(a) if
such exercise would violate NASDAQ Rule 4460(i) (or any successor rule). To the
extent that the immediately preceding sentence is applicable, the Company shall
pay to Holder an amount equal to (x) "N" times the Market Price on the
applicable Effective Date. An "Effective Date" shall mean any Reset Date (as
defined in the Subscription Agreement).
2. Exercise.
(a) Manner of Exercise. During the Exercise Period, this Warrant may
be exercised as to all or any lesser number of full Units covered hereby upon
surrender of this Warrant, with the Exercise Form attached hereto as Exhibit A
(the "Exercise Form") duly completed and executed, together with the full
Exercise Price (as defined below) for each Unit as to which this Warrant is
exercised, at the office of the Company, at the address, telephone number and
fax number set forth on the signature page hereof, or at such other office or
agency as the Company may designate in writing, by overnight mail, with an
advance copy of the Exercise Form sent to the Company and its Transfer Agent by
facsimile (such surrender and payment of the Exercise Price hereinafter called
the "Exercise of this Warrant").
39
Notwithstanding anything contained herein to the contrary, if, prior to
the final Effective Date, this Warrant is exercised for all Units for which it
is then exercisable, this Warrant shall remain outstanding, and may, pursuant to
the terms hereof, become exercisable for additional Units on one or more
subsequent Effective Dates.
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled upon the
full Exercise of this Warrant, and Holder shall be entitled to receive the Unit
Shares and Class I Warrants for the number of Units purchased upon such Exercise
of this Warrant within a reasonable time, not exceeding three (3) business days,
after this Warrant shall have been so exercised (the "Delivery Period"), and if
this Warrant is not exercised in full, Holder shall be entitled to receive a new
Warrant (containing terms identical to this Warrant) representing any
unexercised portion of this Warrant in addition to such Units.
(d) Holder of Record. Each person in whose name any Warrant for
Units is issued shall, for all purposes, be deemed to be the Holder of record of
the Unit Shares and Class I Warrants on the Date of Exercise of this Warrant,
irrespective of the date of delivery of the Unit Shares and Class I Warrants
purchased upon the Exercise of this Warrant. Nothing in this Warrant shall be
construed as conferring upon Holder any rights as a stockholder of the Company.
(e) Buy-In. If (i) the Company fails for any reason (other than
Holder's failure to pay to the Company the Exercise Price or to deliver to the
Company a duly executed notice to exercise a Cashless Exercise) to deliver
during the Delivery Period Units to Holder upon an exercise of this Warrant and
(ii) after the applicable Delivery Period with respect to such an exercise,
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to make delivery upon a sale by Holder of the shares of Common Stock (the
"Sold Shares") which Holder was entitled to receive upon such exercise (a
"Buy-in"), the Company shall pay Holder (in addition to any other remedies
available to Holder) the amount by which (x) Holder's total purchase price
(including brokerage commission, if any) for the shares of Common Stock so
purchased exceeds (y) the lesser of (A) the Exercise Price or (B) the net
proceeds received by Holder from the sale of the Sold Shares. Holder shall
provide the Company written notification indicating any amounts payable to
Holder pursuant to this subsection.
40
3. Payment of Warrant Exercise Price.
The Exercise Price shall initally equal $.001 per Unit ("Exercise
Price").
Payment of the Exercise Price may be made by either of the following,
or a combination thereof, at the election of Holder:
(i) Cash Exercise: cash, bank or cashiers check or wire transfer; or
(ii) Cashless Exercise: The Holder, at its option, may exercise this
Warrant in a cashless exercise transaction under this subsection (ii) if and
only if, on the Date of Exercise, there is not then in effect a current
registration statement that covers the resale of the shares of Common Stock to
be issued upon exercise of this Warrant. In order to effect a Cashless Exercise,
the Holder shall, surrender this Warrant at the principal office of the Company
together with notice of cashless election, in which event the Company shall
issue Holder a number of Units computed using the following formula:
X = Y (A-B)/A
where: X = the number of Units to be issued to Holder.
Y = the number of Units for which this Warrant is being exercised.
A = the Market Price of one (1) share of Common Stock (for purposes of
this Section 3(ii), the "Market Price" shall be defined as the average
closing price of the Common Stock for the five (5) trading days prior
to the Date of Exercise of this Warrant (the "Average Closing Price"),
as reported by the National Association of Securities Dealers Automated
Quotation System ("Nasdaq") Small Cap Market, or if the Common Stock is
not traded on the Nasdaq Small Cap Market, the Average Closing Price in
any other over-the-counter market; provided, however, that if the
Common Stock is listed on a stock exchange, the Market Price shall be
the Average Closing Price on such exchange for the five (5) trading
days prior to the date of exercise of the Warrants. If the Common Stock
is/was not traded during the five (5) trading days prior to the Date of
Exercise, then the closing price for the last publicly traded day shall
be deemed to be the closing price for any and all (if applicable) days
during such five (5) trading day period.
B = the Exercise Price.
41
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon exercise of this
Warrant in a cashless exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon exercise
of this Warrant in a cashless exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.
4. Transfer and Registration.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
(b) Registrable Securities. The Common Stock issuable upon the
exercise of this Warrant constitutes "Registrable Securities" under the
Registration Rights Agreement and, accordingly, has the benefit of the
registration rights pursuant to that agreement.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a
dividend payable in shares of Common Stock, then Holder, upon Exercise of this
Warrant after the record date for the determination of holders of Common Stock
entitled to receive such dividend, shall be entitled to receive upon Exercise of
this Warrant, in addition to the number of shares of Common Stock as to which
this Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant (including the Class I Warrants issuable
upon exercise of this Warrant) been exercised immediately prior to such record
date.
(b) Recapitalization or Reclassification. If the Company shall at
any time effect a recapitalization, reclassification or other similar
transaction of such character that the shares of Common Stock shall be changed
into or become exchangeable for a larger or smaller number of shares, then upon
the effective date thereof, the number of shares of Common Stock which Holder
shall be entitled to purchase upon Exercise of this Warrant shall be increased
or decreased, as the case may be, in direct proportion to the increase or
decrease in the number of shares of Common Stock by reason of such
recapitalization, reclassification or similar transaction. The Company shall
give Holder the same notice it provides to holders of Common Stock of any
transaction described in this Section 5(b).
42
(c) Distributions. If the Company shall at any time distribute for
no consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding year) then, in
any such case, Holder shall be entitled to receive, upon Exercise of this
Warrant, with respect to each share of Common Stock issuable upon such exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which Holder would have been entitled to receive with respect to each such share
of Common Stock as a result of the happening of such event had this Warrant
(including the Class I Warrants issuable upon the exercise of this Warrant) the
been exercised immediately prior to the record date or other date fixing
shareholders to be affected by such event (the "Determination Date").
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the Company or another entity or there
is a sale of all or substantially all the Company's assets (a "Corporate
Change"), then this Warrant shall be exerciseable into such class and type of
securities or other assets as Holder would have received had Holder exercised
this Warrant (including the Class I Warrants issuable upon exercise of this
Warrant) immediately prior to such Corporate Change; provided, however, that
Company may not affect any Corporate Change unless it first shall have given
thirty (30) days notice to Holder hereof of any Corporate Change.
(e) Adjustments: Additional Shares, Securities or Assets. In the
event that at any time, as a result of an adjustment made pursuant to this
Section 5, Holder shall, upon Exercise of this Warrant, become entitled to
receive shares and/or other securities or assets (other than Common Stock) then,
wherever appropriate, all references herein to shares of Common Stock shall be
deemed to refer to and include such shares and/or other securities or assets;
and thereafter the number of such shares and/or other securities or assets shall
be subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. Fractional Interests.
No fractional shares or scrip representing fractional shares shall
be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.
43
7. Reservation of Shares.
The Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for the Exercise of
this Warrant (including the Class I Warrants issuable upon the exercise of this
Warrant) and payment of the Exercise Price. The Company covenants and agrees
that upon the Exercise of this Warrant (including the Class I Warrants issuable
upon the exercise of this Warrant), all shares of Common Stock issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to preemptive rights, rights of first refusal or similar rights of
any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant has been issued
in a transaction exempt from the registration requirements of the Act by virtue
of Regulation D and exempt from state registration under applicable state laws.
The Warrant and the Common Stock issuable upon the Exercise of this Warrant may
not be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.
(b) Assignment. If Holder can provide the Company with reasonably
satisfactory evidence that the conditions of (a) above regarding registration or
exemption have been satisfied, Holder may sell, transfer, assign, pledge or
otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a
written notice to Company, substantially in the form of the Assignment attached
hereto as Exhibit B, indicating the person or persons to whom the Warrant shall
be assigned and the respective number of warrants to be assigned to each
assignee. The Company shall effect the assignment within ten (10) days, and
shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of
like tenor and terms for the appropriate number of shares.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any person
other than the Company and Holder any legal or equitable right, remedy or claim
under this Warrant and this Warrant shall be for the sole and exclusive benefit
of the Company and Holder.
10. Applicable Law.
This Warrant is issued under and shall for all purposes be governed
by and construed in accordance with the laws of the state of [New York], without
giving effect to conflict of law provisions thereof.
44
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by
Holder to or on the Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the Company, to the
address, telephone number and facsimile number set forth on the signature page
hereof. Notices or demands pursuant to this Warrant to be given or made by the
Company to or on Holder shall be sufficiently given or made if sent by certified
or registered mail, return receipt requested, postage prepaid, and addressed, to
the address of Holder set forth in the Company's records, until another address
is designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
26th day of January, 2000.
THE HARTCOURT COMPANIES, INC.
By:____________________________________
Address:
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Phone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
45
EXHIBIT A
EXERCISE FORM FOR CLASS II WARRANT
TO: THE HARTCOURT COMPANIES, INC.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the Units of THE HARTCOURT COMPANIES, INC., a Utah corporation
(the "Company"), evidenced by the attached warrant (the "Warrant"), and herewith
makes payment of the exercise price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares of Common
Stock be issued free of any restrictive legend, if appropriate, and a warrant
representing any unexercised portion hereof be issued, pursuant to the Warrant
in the name of the undersigned and delivered to the undersigned at the address
set forth below:
Dated: _____________________
-------------------------------------------------------------------------------
Signature
-------------------------------------------------------------------------------
Print Name
-------------------------------------------------------------------------------
Address
-------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-------------------------------------------------------------------------------
46
EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of THE HARTCOURT
COMPANIES, INC., evidenced by the attached Warrant and does hereby irrevocably
constitute and appoint _______________________ attorney to transfer the said
Warrant on the books of the Company, with full power of substitution in the
premises.
Dated:___________ _______________________________________
Signature
Fill in for new registration of Warrant:
-----------------------------------------
Name
-----------------------------------------
Address
-----------------------------------------
Please print name and address of assignee
(including zip code number)
-----------------------------------------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-------------------------------------------------------------------------------
(555088.8)
48
Exhibit C
to Subscription Agreement
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
January 26, 2000, by and among The Hartcourt Companies Inc., a corporation duly
incorporated and existing under the laws of the State of Utah ("Company"),
Dunwoody Brokerage Services, Inc. ("Dunwoody"), a Georgia limited liability
company, and the subscriber (hereinafter referred to as "Subscriber") to the
Company's Offering ("Offering") of up to Three Thousand Dollars ($3,000,000) of
Units (the "Units," as defined below), and a "Class II Warrant" (as defined in
the Subscription Agreement). Each Unit consisting of one share of Common Stock
(the "Unit Shares") and a "Class I Warrant" (as defined in the Subscription
Agreement) to purchase one share of Common Stock, all pursuant to the Regulation
D Subscription Agreement between the Company and the Subscriber ("Subscription
Agreement").
1. Definitions. For purposes of this Agreement:
(a) The terms "register," "registered," and "registration" refer to
a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933 (the "Act"), and
pursuant to Rule 415 under the Act or any successor rule, and the declaration or
ordering of effectiveness of such registration statement or document;
(b) For purposes hereof, the term "Registrable Securities" means the
shares of the Company's Common Stock together with any capital stock issued in
replacement of, in exchange for or otherwise in respect of such Common Stock,
issuable or issued (i) as Unit Shares (including but not limited to any Reset
Shares, as defined in the Subscription Agreement), (ii) upon exercise of the
Class I Warrants (including but not limited to any Reset Warrants, as defined in
the Subscription Agreement) and (iii) upon exercise of the Warrants to purchase
Common stock issued to Dunwoody in connection with the Offering (the "Placement
Agent Warrants", together with the Class I Warrants, the Class II Warrant and
any Reset Warrants, collectively referred to as the "Warrants"), by Dunwoody or
any subsequent Holder of the Warrant or portion thereof.
Notwithstanding the above:
1. Common Stock which would otherwise be deemed to be Registrable
Securities shall not constitute Registrable Securities if and to the
extent that those shares of Common Stock may be resold in a public
transaction pursuant to Rule 144(k) under the Act; and
49
2. any Registrable Securities resold in a public transaction shall
cease to constitute Registrable Securities.
(c) [Intentionally Left Blank].
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities;
(e) The term "Filing Date" means the date which is ten (10) days
after the Closing Date (as defined in the Subscription Agreement) and the term
"Due Date" means either (i) the date which is one hundred twenty (120) days
after such Closing Date, if the Registration Statement (as defined in Section
2(a) below) is filed by the Filing Date, or (ii) the date which is ninety (90)
days after such Closing Date, if the Registration Statement is not filed by the
Filing Date.
2. Required Registration.
(a) The Company shall use its best efforts to file, by the Filing
Date, a registration statement ("Registration Statement") on Form S-3 (or other
suitable form, at the Company's discretion, but subject to the reasonable
approval of the Holders), covering no more than 1,625,000 shares for holders of
piggyback rights at the time of this Agreement, plus covering the resale of all
of the Registrable Securities, which Registration Statement, to the extent
allowable under the Securities Act and the Rules promulgated thereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable to prevent dilution resulting from stock splits, stock dividends or
similar transactions. Such Registration Statement shall initially cover the
number of shares issuable upon exercise of the Placement Agent Warrants plus at
least One Million (1,000,000) shares of Common Stock. The Company shall use its
best efforts to have the Registration Statement declared effective as soon as
possible. In the event that the Company is notified (which notice may be given
only within sixty (60) days of a Reset Date (as defined in the Subscription
Agreement)) by a Holder of Registrable Securities relating to the Units that the
Registration Statement does not cover a sufficient number of shares of Common
Stock to effect the resales of a number of shares of Common Stock equal to at
least (i) one hundred fifty percent (150%) of the sum (the "Maximum Amount") of
(a) the number of Unit Shares issued to Holder, plus (b) the number of shares of
Common Stock that would be issuable to such Holder upon exercise of all of its
Class II Warrant, and all of its Class I Warrants, including the Reset Warrants,
if such Warrant were exercised on the date of such notice by the Holder (a
"Registration Shortfall"), the Company shall, within seven (7) business days,
amend the Registration Statement or file a new Registration Statement (an
"Amended" or "New" Registration Statement, respectively), as appropriate, to add
such number of additional shares as would be necessary to effect the resales of
a number of shares of Common Stock equal to at least two hundred percent (200%)
of the Maximum Amount . If for any reason or for no reason, the Registration
Statement is not declared effective under the Securities Act on or prior to the
50
Due Date or is not available for resales of all Registrable Securities at
anytime thereafter ("Registration Failure Period"), the Company shall make
payments to each Holder ("Registration Failure Payments") which shall accrue at
the rate of 2% per month, accruing daily, on the principal amount of $2,500,000
until the later of (a) the end of such Registration Failure Period or (b) the
first Late Registration Reset Date (as defined in the Subscription Agreement),
payable, at the option of the Holder (i) in shares of Common Stock ("Additional
Shares"), valued at the closing bid price of the Common Stock on the business
day immediately prior to the delivery of the Additional Shares or (ii) in cash,
in each case payable within 5 business days of the last day of the calendar
month in which they accrue
Notwithstanding the above, no Registration Failure Payments shall
accrue prior to the Due Date.
Such Additional Shares shall also be deemed "Registrable Securities"
as defined herein. The Company covenants to use its best efforts to use Form S-3
for the registration required by this Section during all applicable times
contemplated by this Agreement.
(b) The Registration Statement shall be prepared as a "shelf"
registration statement under Rule 415, and shall be maintained effective until
all Registrable Securities cease to exist.
(c) The Company represents that it is presently eligible to effect
the registration contemplated hereby on Form S-3 and will use its best efforts
to continue to take such actions as are necessary to maintain such eligibility.
(d) Notwithstanding anything contained herein to the contrary, the
Company shall not be required to register additional shares hereunder if such
shares are not available for issuance as a result of the unavailability of
authorized but unreserved shares of Common Stock.
3. Piggyback Registration. If the Registration Statement described in
Section 2 is not effective and if (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) any of its Common Stock
under the Act in connection with the public offering of such securities solely
for cash (other than a registration relating solely for the sale of securities
to participants in a Company stock plan or a registration on Form S-4
promulgated under the Act or any successor or similar form registering stock
issuable upon a reclassification, upon a business combination involving an
exchange of securities or upon an exchange offer for securities of the issuer or
another entity), the Company shall, at such time, promptly give each Holder
written notice of such registration (a "Piggyback Registration Statement"). Upon
51
the written request of each Holder given by fax within ten (10) days after
mailing of such notice by the Company, the Company shall cause to be included in
such registration statement under the Act all of the Registrable Securities that
each such Holder has requested to be registered ("Piggyback Registration") to
the extent such inclusion does not violate the registration rights of any other
security holder of the company granted prior to the date hereof; nothing herein
shall prevent the Company from withdrawing or abandoning the registration
statement prior to its effectiveness. The election of initiating Holders to
participate in a Piggyback Registration Statement shall not impact the amount
payable to investors pursuant to Section 2(a) herein except that the Late
Registration Payment shall cease to accrue as of the date of effectiveness of
the Piggyback Registration Statement. Notwithstanding anything to the contrary
in this Agreement, the Holders shall have no right to have the Registrable
Securities included in the registration statement (the "Equity Line Registration
Statement") to be filed pursuant to that certain Equity Line Investment
Agreement (the "Equity Line Investment Agreement"), dated on or about November
__, 1999, by and between the Company and ▇▇▇▇▇▇ Private Equity, LLC and the
associated registration rights agreement.
4. Limitation on Obligations to Register.
(a) In the case of a Piggyback Registration involving an
underwritten public offering by the Company, if the managing underwriter
determines and advises in writing that the inclusion in the registration
statement of all Registrable Securities proposed to be included would interfere
with the successful marketing of the securities proposed to be registered by the
Company, then the number of such Registrable Securities to be included in the
registration statement, to the extent such Registrable Securities may be
included in such Piggyback Registration Statement, shall be allocated among all
Holders who had requested Piggyback Registration pursuant to the terms hereof,
in the proportion that the number of Registrable Securities which each such
Holder, including Dunwoody, seeks to register bears to the total number of
Registrable Securities sought to be included by all Holders, including Dunwoody.
If required by the managing underwriter of such an underwritten public offering,
the Holders shall enter into a reasonable agreement limiting the number of
Registrable Securities to be included in such Piggyback Registration Statement
and the terms, if any, regarding the future sale of such Registrable Securities.
(b) In the event the Company believes that shares sought to be
registered under Section 2 or Section 3 by Holders do not constitute
"Registrable Securities" by virtue of Section 1(b) of this Agreement, and the
status of those shares as Registrable Securities is disputed, the Company shall
provide, at its expense, an Opinion of Counsel, reasonably acceptable to the
Holders of the Securities at issue (and satisfactory to the Company's transfer
agent to permit the sale and transfer) that those securities may be sold
immediately, without volume limitation without registration under the Act, by
virtue of Rule 144 or similar provisions.
52
5. Obligations of the Company. Whenever required under this Agreement
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the Securities and Exchange Commission
("SEC") a registration statement with respect to such Registrable Securities and
use its best efforts to cause such registration statement to become effective
and to remain effective for the applicable period.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders of
the Registrable Securities covered by such registration statement, provided that
the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) As promptly as practicable after becoming aware of such event,
notify each Holder of Registrable Securities of the happening of any event of
which the Company has knowledge, as a result of which the prospectus included in
the registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and promptly prepare and file a supplement
or amendment to the registration statement to correct such untrue statement or
omission, and deliver a number of copies of such supplement or amendment to each
Holder as such Holder may reasonably request.
53
(g) Provide Holders with written notice within one (1) business day
of the date that a registration statement and any amendment thereto registering
the resale of the Registrable Securities is declared effective by the SEC, and
the date or dates when the Registration Statement is no longer effective.
(h) Provide Holders and their representatives the opportunity to
conduct a reasonable due diligence inquiry of Company's pertinent financial and
other records and make available its officers, directors and employees for
questions regarding such information as it relates to information contained in
the registration statement.
(i) Provide Holders and their representatives the opportunity to
review the registration statement and all amendments thereto a reasonable period
of time prior to their filing with the SEC if so requested by Holder in writing.
(j) Provide each Holder with prompt notice of the issuance by the
SEC or any state securities commission or agency of any stop order suspending
the effectiveness of the registration statement or the initiation of any
proceeding for such purpose. The Company shall use its best efforts to prevent
the issuance of any stop order, and, if any is issued, to obtain the removal
thereof at the earliest possible date.
(k) Use its best efforts to list the Registrable Securities covered
by the registration statement with all securities exchanges or markets on which
the Common Stock is then listed and prepare and file any required filing with
the NASD or any such exchange or market.
(i) The parties agree that, notwithstanding anything to the contrary
in this Agreement, the Company shall be allowed to file the Equity Line
Registration Statement concurrently with the Registration Statement.
6. Black Out. In the event that, during the time that the Registration
Statement is effective, the Company reasonably determines, based upon advice of
counsel, that due to the existence of material non-public information,
disclosure of such material non-public information would be required to make the
statements contained in the Registration Statement not misleading, and the
Company has a bona fide business purpose for preserving as confidential such
material non-public information, the Company shall have the right to suspend the
use of the Registration Statement (a "Registration Black Out"), and no Holder
shall be permitted to sell any Registrable Securities pursuant thereto, until
such time as such suspension is no longer required hereunder; provided, however,
that such time shall not exceed a period of sixty (60) days. As soon as such
suspension is no longer required hereunder, the Company shall, if required,
promptly, but in no event later than the date the Company files any documents
with the Securities and Exchange Commission ("SEC") referencing such material
information, file with the SEC an amendment to the Registration Statement
disclosing such information and use its best efforts to have such amendment
declared effective as soon as possible.
54
In the event that the use of the Registration Statement is suspended by
the Company, the Company shall promptly notify all Holders whose securities are
covered by the Registration Statement of such suspension, and shall promptly
notify each such Holder as soon as use of the Registration Statement may be
resumed. Notwithstanding anything to the contrary, the Company shall cause the
Transfer Agent to deliver unlegended shares of Common Stock to a transferee of a
Holder in accordance with the terms of the Subscription Agreement in connection
with any sale of Registrable Securities with respect to which such Holder has
entered into a contract for sale prior to receipt of notice of such Registration
Black Out and for which such Holder has not yet settled. The Company shall be
entitled to effect no more than one Registration Black Out during any twelve
(12) month period.
7. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
regard to each selling Holder that such selling Holder shall timely furnish to
the Company such information regarding Holder, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of its Registrable Securities or to
determine that registration is not required pursuant to Rule 144 or other
applicable provision of the Act.
8. Expenses. All expenses other than underwriting discounts and
commissions and fees and expenses of counsel to the selling Holders incurred in
connection with registrations, filings or qualifications pursuant hereto,
including (without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company, shall be borne by the Company.
9. Indemnification. In the event any Registrable Securities are
included in a Registration Statement or a Piggyback Registration Statement under
this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers, directors and agents of each Holder,
any underwriter (as defined in the Act) for such Holder and each person, if any,
who controls such Holder or underwriter within the meaning of the Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements or
omissions: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, and the Company will reimburse each such Holder, officer
or director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
55
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 9(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a statement which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, officer, director, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder,
severally and not jointly, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the registration statement,
each person, if any, who controls the Company within the meaning of the Act, any
underwriter and any other Holder selling securities in such registration
statement or any of its directors or officers or any person who controls such
Holder, against any losses, claims, damages, or liabilities (joint or several)
to which the Company or any such director, officer, controlling person, or
underwriter or controlling person, or other such Holder or director, officer or
controlling person may become subject, under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any statement or
omission in each case to the extent (and only to the extent) that such statement
or omission is made in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration
statement; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company and any such director, officer, controlling
person, underwriter or controlling person, other Holder, officer, director, or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 9(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses of one such counsel to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
56
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
9, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 9.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 9 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and each Holder agree to
contribute to the aggregate claims, losses, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and one or more of
the Holder may be subject in such proportion as is appropriate to reflect the
relative fault of the Company and the Holders in connection with the statements
or omissions which resulted in such Losses. Relative fault shall be determined
by reference to whether any alleged untrue statement or omission relates to
information provided by the Company or by the Holders. The Company and the
Holders agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation which does
not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no person guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 9,
each person who controls a Holder of Registrable Securities within the meaning
of either the Securities Act or the Exchange Act and each director, officer,
partner, employee and agent of a Holder shall have the same rights to
contribution as such holder, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each director of the Company,
and each officer of the Company who has signed the registration statement, shall
have the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
(e) The obligations of the Company and Holders under this Section 9
shall survive the completion of any offering of Registrable Securities in a
Registration Statement under this Agreement, and otherwise.
10. Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration, the
Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144; and
(b) use its best efforts to file with the SEC in a timely manner
all reports and other documents required of the Company under the Act and the
1934 Act.
57
11. Amendment of Registration Rights. Any provision of this Agreement
may be amended and the observance thereof 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 Holders of a majority of the Registrable
Securities provided that the amendment treats all Holders equally. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon each
Holder, each future Holder, and the Company.
12. Notices. All notices required or permitted under this Agreement
shall be made in writing signed by the party making the same, shall specify the
section under this Agreement pursuant to which it is given, and shall be
addressed if to (i) the Company at the address, telephone number and facsimile
number set forth on the signature pages of this Agreement and (ii) the Holders
at their respective last address and facsimile number of the party as shown on
the records of the Company. Any notice, except as otherwise provided in this
Agreement, shall be made by fax and shall be deemed given at the time of
transmission of the fax.
13. Termination. This Agreement shall terminate on the date all
Registrable Securities cease to exist; but without prejudice to (i) the parties'
rights and obligations arising from breaches of this Agreement occurring prior
to such termination (ii) other indemnification obligations under this Agreement.
14. Assignment. The rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, together with or prior to such
transferee's request to have such Registrable Securities included in a Piggyback
Registration, a writing executed by such transferee agreeing to be bound as a
Holder by the terms of this Agreement), and the Company hereby agrees to file a
new registration statement or an amended registration statement including such
transferee or a selling security holder thereunder.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
in and wholly to be performed in that jurisdiction, except for matters arising
under the Act or the Securities Exchange Act of 1934, which matters shall be
construed and interpreted in accordance with such laws.
16. 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.
17. Specific Performance. The Holder shall be entitled to the remedy of
specific performance in the event of the Company's breach of this Agreement, the
parties agreeing that a remedy at law would be inadequate.
58
18. Entire Agreement. This Agreement, including the Exhibits attached
hereto, the Subscription Agreement, the Placement Agent Agreement, the Placement
Agent's Warrant, the Irrevocable Instructions to Transfer Agent, 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.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this 26thday of January, 2000.
THE HARTCOURT COMPANIES INC.
By:____________________________________
------------------, ---------
Address:
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Phone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
DUNWOODY BROKERAGE SERVICES, INC.
By:____________________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President
Address: ▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
INVESTOR
PYR MANAGEMENT, LLC
By: Pyramid Trading Limited Partnership
By:____________________________________
▇▇▇▇ ▇▇▇▇▇▇▇,
Authorized Person
Address: ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇. ▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Tel: (▇▇▇)▇▇▇-▇▇▇▇
Fax: (▇▇▇)▇▇▇-▇▇▇▇
59
EXHIBIT D
to Subscription Agreement
January ___, 2000
Ladies and Gentlemen:
We regularly represent and have acted as counsel to Hartcourt Companies
Inc., a Utah corporation (the "Company"), in connection with that certain
Regulation D Subscription Agreement dated as of January ___, 2000 (the "Purchase
Agreement") between you and the Company and the transactions contemplated
therein. This opinion is delivered to you pursuant to Section 5.8 of the
Purchase Agreement. Capitalized terms used herein and not otherwise defined
herein have the meanings assigned to such terms in the Purchase Agreement. The
Purchase Agreement, the Initial Warrants, the Reset Warrants and the
Registration Rights Agreement are sometimes hereinafter called collectively the
"Transaction Documents."
In so acting, we have examined (i) certified copies of the Certificate
of Incorporation (the "Charter") and By-Laws (the "By-Laws") of the Company,
each as amended to date; (ii) a certificate issued by the Secretary of State for
the State of Utah certifying that the Company is in good standing and has a
legal existence in the State of Utah; (iii) a certificate issued by the
Secretary of State of the jurisdictions set forth on Exhibit B hereto as to the
qualification of the Company and its subsidiaries to do business as a foreign
corporation; (iv) the records of meetings of the directors and stockholders and
consents of the directors and stockholders filed therewith; (v) the Transaction
Documents; (vi) the other documents delivered by the Company at the Closing;
(vii) a certificate of the Company with respect to certain factual matters; and
(viii) such other documents and certificates as we have deemed necessary to
enable us to the opinions expressed below.
We have assumed the authenticity and completeness of all documents
furnished to us as originals, the genuineness of all signatures (other than on
behalf of the Company), the conformity to the originals of all documents
furnished to us as copies, and the accuracy and completeness of all corporate
records made available to us by the Company.
When herein a matter is stated to be our knowledge, such knowledge is
limited to the awareness of facts or other information of the individual lawyers
in our firm who have been involved in representation of the Company.
For the purposes of this opinion, we have assumed that each Purchaser
has all requisite power and authority to enter into the Purchase Agreement and
the Registration Rights Agreement and to effect all of the transactions
thereunder, and that each of those instruments constitutes the legal, valid and
binding obligation of each Purchaser.
60
We have made such examination of U.S. federal law and the law of the
State of Utah as we deemed necessary for the purposes of this opinion, and our
opinion is based on and limited to those laws.
The opinions herein expressed are qualified to the extent that (a) the
validity or enforceability of any provisions of any agreement or instrument may
be subject to or affected by any bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally the
enforcement of, creditors' rights or remedies of creditors generally, or by
other equitable principles of general application, and (b) the enforcement of
any rights or remedies is or may be subject to an implied duty on the part of
the party seeking to enforce such rights to take action and make determinations
on a reasonable basis and in good faith.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized and existing in
good standing under the laws of the State of Utah and has the requisite
corporate power to own its properties and to carry on its business as
described in the Filed SEC Documents. Each subsidiary of the Company is
a corporation duly organized and existing in good standing under the
laws of the jurisdiction in which it is incorporated, and has the
requisite corporate power to own its properties and to carry on its
business as described in the Filed SEC Documents. The Company and each
of its subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in all of the jurisdictions indicated
on Exhibit B hereto.
2. The Company has the requisite power and authority to enter
into and perform each of the Purchase Agreement, the Warrants and the
Registration Rights Agreement, to issue, sell and perform its
obligations with respect to the Warrants in accordance with the terms
thereof and with the terms of the Purchase Agreement and to issue the
Shares and the Warrant Shares in accordance with the terms and
conditions of the Transaction Documents. The execution, delivery and
performance of the Purchase Agreement, the Class I Warrant, the Class
II Warrant and the Registration Rights Agreement, including without
limitation the issuance of the Shares and the Warrant Shares and the
listing for trading thereof on the OTCBB, by the Company and the
consummation of the transactions contemplated thereby have been duly
authorized by all necessary corporate action, and no further consent or
authorization of the Company, its board of directors, or its
stockholders or any other person, body or agency is required with
respect to any of the transactions contemplated thereby (whether under
rules of Nasdaq, the National Association of Securities Dealers or
otherwise). Without limiting the foregoing, Nasdaq Rule 4460(i) and
Nasdaq Rule 4310(c)(25)(H)(i)(b) are not applicable to the issuance of
the Shares or the Warrant Shares and no approval of shareholders is
required in connection therewith.
61
3. Each Transaction Document has been duly executed and
delivered by the Company and each constitutes the legal, valid and
binding obligation of the Company enforceable against the Company in
accordance with its terms.
4. The authorized capital stock of the Company is as stated in
Schedule 3.3 of the Purchase Agreement. All of outstanding shares of
the Company's stock have been validly issued, fully paid and
nonassessable.
5. Except as set forth on Schedule 3.3 of the Purchase
Agreement, no shares of the Company's stock are subject to preemptive
rights or any other similar rights of the stockholders of the Company.
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, any shares of capital stock of
the Company or any of its subsidiaries, or contracts, commitments,
understandings, 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. The Company
has no share purchase agreements, rights plans or agreements containing
similar provisions and no agreements containing anti-dilution
provisions. In addition, the Company has no subsidiaries, except as
provided on such Schedule 3.3. All such subsidiaries included on
Schedule 3.3 are one hundred percent (100%) owned by the Company.
6. The Shares and the Warrant Shares when issued in accordance
with the Purchase Agreement and the Warrants, respectively, will be
validly issued, fully paid and nonassessable. A number of shares of
Common Stock sufficient to meet the Company's obligations to issue
Common Stock upon full exercise of the Warrants has been duly
authorized and reserved for issuance.
7. The offer, issuance, sale and delivery of the Class I
Warrant, the Class II Warrant, the Shares and the Warrant Shares in
accordance with the terms of the Transaction Documents constitute or
will constitute transactions exempt from registration under the
Securities Act. The Shares and the Warrant Shares may be registered for
resale by the Purchasers as a secondary offering (and not as an
offering by or on behalf of the Company) under General Instruction B3
of Form S-3 on a registration statement on Form S-3 under the
Securities Act promptly following the Closing in accordance with
Section 2.1(a) of the Registration Rights Agreement.
8. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (a) result in a
violation of the Charter or By-Laws or (b) to our knowledge, conflict
with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
62
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party (except for such conflicts, defaults,
terminations, amendments, accelerations and cancellations as would not,
individually or in the aggregate, have a Material Adverse Effect), or
result in a violation of any law, rule, regulation, order, judgment or
decree (including U.S. federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries
is bound or affected. To our knowledge, the business of the Company is
not being conducted in violation of any law, ordinance or regulations
of any governmental entity, except for possible violations the
sanctions for which either singly or in the aggregate do not and will
not have a Material Adverse Effect. The Company is not required under
any law, rule or regulation to obtain any consent, authorization or
order of, or make any filing or registration with, any court or
governmental agency or authority or any regulatory or self-regulatory
agency in order for it to execute, deliver or perform any of its
obligations under the Purchase Agreement, the Class I Warrant, the
Class II Warrant or the Registration Rights Agreement or issue and sell
the Securities in accordance with the terms of the Transaction
Documents. The purchase and acquisition of the Securities by the
Purchasers does not violate any law, rule, regulation, order, judgment
or decree applicable to the Company, or require further filing by the
Company or Purchaser under such law, rule, regulation, order, judgment
or decree, by virtue of the Company's business or assets.
9. Except as disclosed in Schedule 3.8 to the Purchase
Agreement, there is, to our knowledge, no action, suit, proceeding,
inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending against
the Company, any of its subsidiaries, or any of their respective
directors or officers in their capacities as such, wherein an
unfavorable decision, ruling or finding would have a Material Adverse
Effect or which would adversely affect the validity or enforceability
of, or the authority or ability of the Company to perform its
obligations under the Transaction Documents.
10. The Common Stock, including the Shares and the Warrant
Shares, is authorized for trading on OTCBB and, to our knowledge, no
suspension of such trading is in effect or threatened.
11. We have reviewed the Filed SEC Documents and do not
believe that any of such Filed SEC Documents contains any untrue
statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of
circumstances under which they were made, not misleading, as of its
filing date. In addition, to our knowledge, no material fact (within
the meaning of the federal securities laws of the United States) exists
with respect to the Company or any of its subsidiaries which has not
been publicly disclosed.
63
These opinions are limited to the matters expressly stated herein,
speak only as of the date hereof, and are rendered solely for your benefit and
may not be quoted or relied upon for any other purpose or by any other person.
Very truly yours,
64
EXHIBIT E
to Subscription Agreement
Irrevocable Instructions to Transfer Agent
January __, 2000
Attn:
------------------
-----------------------
-----------------------
-----------------------
Telephone:
-------------
Facsimile:
-------------
Dear __________________:
I. Subscription Agreement. Reference is made to that certain Regulation
D Subscription Agreement (the "Subscription Agreement"), dated as of even date
herewith, by and among The Hartcourt Companies Inc., a corporation duly
incorporated and existing under the laws of the State of Utah (the "Company"),
and ____________________ (the "Holder") pursuant to which the Company is issuing
to the Holder Units (the "Units"), each Unit consisting of one share of Common
Stock, par value $.__ per share (the "Unit Shares"), and a Warrant ("Investor
Warrant") to acquire one share of Common Stock (such shares of Common Stock, the
"Investor Warrant Shares"), and is issuing to Dunwoody Brokerage Services, Inc.
(the "Placement Agent") warrants to acquire shares of Common Stock of the
Company (such shares of Common Stock, the "Placement Agent Warrant Shares,"
together with the Investor Warrant Shares, collectively referred to as the
"Warrant Shares"). The "Unit Shares," together with the Warrant Shares, are
collectively referred to herein as the "Subject Shares." The Units are subject
to certain Resets as described in the Subscription Agreement, potentially
resulting in the issuance of additional Units. The definitions of Units, Unit
Shares, Investor Warrants, and Investor Warrant Shares herein include Reset
Units and Reset Shares (as each is defined in the Subscription Agreement).
II. Legends. This letter shall serve as our irrevocable authorization
and direction to you with respect to the issuance of Subject Shares.
Certificates for the Subject Shares shall not bear any legend restricting their
transfer and shall not be subject to any stop-transfer restriction; provided,
however, if the Subject Shares are not registered for resale under the
Securities Act of 1933, as amended, then, subject to section __ of the
Subscription Agreement, the certificates for the Subject Shares shall bear the
following legend:
65
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF ANY STATE OF THE UNITED
STATES. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR AN OPINION OF COUNSEL,
IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT
OF 1933, AS AMENDED.
III. Issuance Of Unlegended Common Stock Upon Resale. Unless otherwise
required by state securities laws, if Holder executes or has executed a sale of
any Unit Shares or Warrant Shares, and provided that either:
(A)(i) at the time of such sale, Transfer Agent has received an opinion
of ________________________ (or other counsel acting on behalf of the Company)
stating that a registration statement covering the resale of the Subject Shares
has been declared effective and that the Subject Shares may be issued without a
restrictive legend, which opinion shall be provided following the effectiveness
of a registration statement covering the resale of the Subject Shares (the
"Registration Statement"), and (ii) the Transfer Agent has verified with the
counsel to the Company that the Registration Statement remains effective and
that its use has not been suspended, or
(B) the Company, Holder or a proposed transferee of Holder provides the
Transfer Agent with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security may be made without registration
under the Act, or
(C) the Company provides the Transfer Agent with a legal opinion that
the Conversion Shares are eligible for resale pursuant to Rule 144(k),
then Transfer Agent shall issue Common Stock, without restrictive legends, in
the name of the purchaser of such Common Stock pursuant to the instructions
received from the Holder. The Company agrees to cause its legal counsel to issue
the legal opinion in (A) above promptly upon the effectiveness of the
Registration Statement and the opinion in (B) or (C) above if the Holder or
transferee makes the representations necessary for counsel to the Company to
issue a legal opinion to that effect.
66
IV. Reliance by Holder.
Please be advised that Holder is relying upon this letter as an
inducement to enter into the Subscription Agreement and, accordingly, it is
agreed that Holder is a third party beneficiary to these instructions. Moreover,
the Company cannot revoke or modify these instructions without the prior written
consent of Holder. Please execute this letter in the space indicated to
acknowledge your agreement to act in accordance with these instructions. Should
you have any questions concerning this matter, please contact me at (----)
---------.
Very truly yours,
THE HARTCOURT COMPANIES INC.
By:____________________________________
Name:__________________________________
Title:_________________________________
Agreed and Acknowledged as of January __, 2000.
TRANSFER AGENT
-----------------------------------
By: _______________________________
Name: _____________________________
Title: ____________________________
Enclosure
cc: Holder
67
EXHIBIT F
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks not presently known to us or that
we currently deem immaterial may also impair our business operations. Our
business, financial condition and results of operations could be materially
adversely affected by any of the following risks. The trading price of shares of
our common stock could decline due to any of these risks, and you may lose all
or part of your investment. This prospectus also contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors, including the risks faced by us described below or
elsewhere.
We Currently Have Negative Working Capital, Limited Funds, And Limited Sources
Of Liquidity We require substantial capital to pursue our operating strategy and
currently have limited cash for operations. Until we can obtain revenues
sufficient to fund working capital needs, we will be dependent upon external
sources of financing, which may not be available on favorable terms, if at all.
To date, we have no internal sources of liquidity and we do not expect to
generate any internal cash flow for the foreseeable future, if at all. For the
foreseeable future, we expect our source of working capital to be from this
offering and our three Internet joint ventures.
However, the foregoing are estimates and we can provide no assurance that the
proceeds from the Internet joint ventures or any proceeds raised in this
offering, if any, will be sufficient to cover cash requirements and if it
appears that at any time that we are approaching a condition of cash deficiency,
we will be required to seek additional equity or debt refinancing, curtail
operations or otherwise bring cash flow in balance.
Moreover, we can provide no assurance that a new business development or other
unforeseen events will not occur, resulting in the need to raise additional
funds. If we raise additional funds through the issuance of equity,
equity-related or convertible debt securities, these securities may have rights,
preferences or privileges senior to those rights of our common stock. The
failure to raise any needed additional funds will likely have a material adverse
effect on our business.
We Have Not Paid Any Dividends And We Do Not Anticipate Doing So In The Near
Future We have paid no dividends on our common stock and we cannot assure you
that we will achieve sufficient earnings to pay cash dividends on our common
stock in the near future. Further, we intend to retain earnings to fund our
operations. Therefore, we do not anticipate paying any cash dividends on our
common stock in the foreseeable future.
We Lack Disinterested, Independent Directors. Our directors have a direct
financial interest in Hartcourt. 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.
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Certain Beneficial Ownership Of Hartcourt Common Stock May Subject Hartcourt to
Continued Control By Current Officers, Directors and Affiliates.
Following completion of this offering, Hartcourt's current executive officers
and directors, ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇ and ▇▇▇▇ ▇▇▇▇ will beneficially own in the
aggregate 18% of Hartcourt's outstanding common stock. If they were to act
together, these stockholders may be able to substantially control all matters
requiring approval by Hartcourt's stockholders, including election of directors
and approval of mergers or other business combination transactions. This
concentration of ownership could prevent a change in control of Hartcourt which
may be beneficial to Hartcourt growth.
We Need To Attract Qualified Personnel. Our future success depends, in
significant part, on our ability to attract qualified, motivated local
independent contractors. If our management is unable to hire and retain
qualified independent contractors in these key positions, our business could be
materially and adversely affected.
We Have Not Been Operating Very Long And Have A History Of Incurring Losses
Which May Make It Difficult To Fund Our Future Operations. We have a limited
operating history in the area of joint ventures and no history in the area of
Internet joint ventures. Our ability to achieve and sustain profitable
operations depends on many circumstances, including market demand, pricing and
competition in trying to successfully attract and maintain profitable joint
ventures with established companies. Our failure to perform could have a
material adverse effect on our business, results of operations and financial
condition and the market price of our common stock.
Continued Growth Of Our Business Depends On Our Ability To Manage Expansion And
Development Effectively. Our ability to manage our expansion effectively will
require us to continue to implement and improve our operating, financial and
accounting systems and to hire train and manage new employees. Among other
things, the continued expansion and development of our business will also depend
on our ability to attract and acquire or enter into joint ventures with
established operating companies with a history of growth and profitability. In
addition, we must perform these tasks in a timely manner, at a reasonable costs
and on satisfactory terms and conditions. Failure to effectively manage our
planned expansion could have a material adverse effect on our business, growth,
financial condition, results of operations and the market price of our common
stock. Our expansion may involve acquiring other companies and assets. These
acquisitions could divert our resources and management attention and require
integration with our existing operations. We cannot assure you that these
acquisitions will be successful. We further cannot assure you that we will be
successful or timely in developing and marketing service enhancements or new
services that respond to technological change, changes in customer requirements
and emerging industry standards. Even if we are successful, we cannot assure you
that our lack of significant experience with respect to a new service or market
will not hinder our ability to successfully capitalize on any such opportunity.
69
We May Require Additional Financing The proceeds of this offering are expected
to be sufficient to meet our cash requirements for at least 12 months, if
certain conditions are met. However, we may need to raise additional funds in
order to: (1) acquire complementary businesses, technologies, content or
products; (2) finance working capital requirements; (3) develop or enhance
existing services of products; or (4) respond to competitive pressures.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available at acceptable terms, our ability to fund our expansion, take advantage
of available opportunities, develop or enhance services or products or otherwise
respond to competitive pressures would be significantly limited. If we raise
additional funds by issuing equity or convertible debt securities, the
percentage ownership of our shareholders will be reduced, and these securities
may have rights, preferences or privileges senior to those of our shareholders.
Our Business Operations Could Be Significantly Disrupted If We Lose Key
Personnel Or Fail To Integrate Our Management Team. Our future performance will
be substantially dependent on the continued services of our management team and
our ability to retain and motivate them. The loss of the services of any of our
officers could harm our business, as we may not be able to find suitable
replacements. Hartcourt faces competition for such personnel from other
companies and organizations and there can be no assurance that Hartcourt will be
successful in hiring and retaining qualified personnel. Hartcourt does not have
written employment agreements with its officers providing for specific terms of
employment, and officers and other key personnel could leave Hartcourt's employ
with little or no prior notice. Hartcourt's loss of key personnel, especially if
the loss is without advance notice, or Hartcourt's inability to hire and retain
key personnel, could have a material adverse effect on Hartcourt's business,
financial condition and results of operations. Hartcourt does not carry any key
man life insurance.
Any Potential Acquisitions We Make Could Disrupt Our Business And Harm Our
Financial Condition. Acquisitions entail a number of risks that could materially
and adversely affect our business and operating results, including:
(1) problems integrating the acquired operations, technologies or products, (2)
diversion of management' time and attention from our core business; (3)
difficulties in retaining business relations with suppliers and customers of the
acquired company-, (4) risks associated with entering markets in which we lack
prior experience; and (5) potential loss of key employees from the acquired
company.
Hartcourt May Lack The Ability To Manage Growth. Hartcourt will expand its
operations rapidly which may create significant demands on Hartcourt's
administrative, operational, developmental and financial personnel and other
resources. Additional expansion by Hartcourt may further strain Hartcourt's
management, financial personnel and other resources. If Hartcourt's management
is unable to manage growth effectively, its business, financial condition and
results of operations could be materially adversely affected. There can be no
70
guarantee that Hartcourt's systems, procedures, controls and existing space will
be adequate to support expansion of Hartcourt's operations. Hartcourt's future
operating results will depend, among other things, on its ability to manage
changing business conditions and to continue to improve its operational,
financial control and reporting systems.
Hartcourt's ability to manage growth depends in part upon Hartcourt's ability to
attract, train and retain a sufficient number of qualified personnel or
independent contractors. A heightened turnover rate among Hartcourt's employees
would increase Hartcourt's recruiting and training costs, and if Hartcourt were
unable to recruit and retain a sufficient number of employees or independent
contractors, it could be forced to limit its growth or possibly curtail its
operations.
71
EXHIBIT F
CAPITALIZATION OF THE HARTCOURT COMPANIES, INC.
As of January 20, 2000, the Company has the authority to issue 110,001,000
shares, consisting of 100,000,000 shares of Common Stock, $.001 par value, of
which 25,346,519 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.
In connection with the Investment Agreement between Hartcourt and ▇▇▇▇▇▇,
Hartcourt issued a Commitment Warrant to ▇▇▇▇▇▇ that grants ▇▇▇▇▇▇ the 5 year
right to purchase up to 400,000 shares of Hartcourt common stock at $.86 per
share.
Further, under the Investment Agreement between Hartcourt and ▇▇▇▇▇▇, Hartcourt
obligated itself to issue to ▇▇▇▇▇▇ certain Purchase Warrants that ▇▇▇▇▇ ▇▇▇▇▇▇
the 5 year right to purchase an amount of shares equal to 8% of the Put Shares
at a price equal to 110% of the Market Price under the Investment Agreement. For
example, if ▇▇▇▇▇▇ were to purchase $5,000,000 worth of common stock (@300,000
shares at $16.67) from Hartcourt under the Investment Agreement, then ▇▇▇▇▇▇
would also be entitled to a Purchase Warrant. The terms of the Purchase Warrant
would be such that ▇▇▇▇▇▇ could purchase up to 24,000 shares at $18.33 per
share.
72
EXHIBIT G
USE OF PROCEEDS
Working capital for expansion plans of UAC (20%), FTL (20%), and Innostar (25%),
▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇ (5%), Shangdi Network (20%) and Gua Mao (10%)
73
EXHIBIT I
KEY EMPLOYEES
▇▇▇▇ ▇. ▇▇▇▇. ▇▇. ▇▇▇▇ ▇. ▇▇▇▇ is the founder of the Company and has been
Chairman, President, Chief Executive Officer and Chief Financial Officer since
November 1993. He also is the founder of Harcourt Investments and Hartcourt Pen.
From 1986 to October 1993, ▇▇. ▇▇▇▇ was the owner of Hartcourt Consulting, an
export management firm and, from 1980 to 1986, he was the Executive Vice
President of ▇▇ ▇▇▇ Group (which owned Magic Marker Industries). In addition to
his activities in the export and writing instrument business, ▇▇. ▇▇▇▇ has been
involved in gold mining operations, as manager in the Philippines (1971-1972)
for ▇▇▇▇▇▇▇▇▇ Group, a company located in Israel. He was active in the real
estate industry from 1976 until 1982 as owner of Alpha Development, a California
real estate company. ▇▇. ▇▇▇▇ received his academic training and degrees at
Pennsylvania State University (1967), and Sussex College of Technology, Sussex
England (1975).
74