U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Utah Clay Technology, Inc.
(Name of small business issuer in its charter)
Commission File No. 333-34308
Utah 1400 87-0520575
---------- ---------- ------------
(state of (Primary Standard Industrial (IRS Employer
incorporation) Classification Code Number) I.D. Number)
3985 South 2000 East
Salt Lake City, UT 84124
801-424-0223
------------------------------
(Address and telephone number of registrant's principal
executive offices and principal place of business)
Dennis S. Engh
3985 South 2000 East
Salt Lake City, UT 84124
801-424-0223
------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Thomas J. Kenan, Esq., Fuller, Tubb, Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Approximate date of proposed sale to the public: As soon as practicable
after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
Calculation of Registration Fee
Title of Proposed Proposed
each class maximum maximum
of securities Amount offering aggregate Amount of
to be to be price offering registration
registered registered per unit price fee
------------- ------------ -------- --------- ------------
Common Stock 33,900,119(1) (2) (2) $507(2)
(1) In accordance with Rule 416 promulgated under the Securities Act of
1933, this registration statement also covers such indeterminate
number of additional shares of common stock as may become issuable
upon stock splits, stock dividends or similar transactions.
(2) These 33,900,119 shares are to be offered by selling shareholders from
time to time at fluctuating market prices. The registration fee for
these shares is based on the average of a bid price of $0.06 and an ask
price of $0.065 on December 21, 2001 on the OTC Bulletin Board.
Reg. 230.457(c).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission acting pursuant to said
section 8(a) may determine.
PROSPECTUS
UTAH CLAY TECHNOLOGY, INC.
33,900,119 Shares of Common Stock
Up to 33,900,119 shares of common stock are being offered by certain
persons who are, or will become, stockholders of Utah Clay Technology. Please
refer to Selling Stockholders beginning on page 8. Of that total, two
stockholders will sell up to 20,000,000 shares of common stock in this offering
that they received pursuant to an Equity Line of Credit, and nine stockholders
will sell up to 10,678,571 shares of common stock in this offering that they
received through conversion of convertible debentures. Utah Clay Technology is
not selling any shares of common stock in this offering; therefore, none of the
proceeds of sale from this offering will go to us. We will, however, receive
proceeds from our sale of common stock under the Equity Line of Credit to the
two stockholders whose shares are registered for their resale. All costs
associated with this registration will be borne by us. We have agreed to pay
May Davis Group, Inc. and Dutchess Advisors, Ltd. fees aggregating 5 percent of
the proceeds raised by us under the Equity Line of Credit.
The selling stockholders will offer the shares for sale on a best-efforts
basis from time to time in the over-the-counter market through brokers at
prevailing and fluctuating prices and at customary brokers' commissions.
The selling stockholders consist of:
* DRH Investment Company, LLC and Dutchess Private Equities Fund, L.P.,
who intend to sell up to 20,000,000 shares of common stock to be
purchased under the Equity Line of Credit,
* nine selling stockholders who intend to sell up to 10,678,571 shares of
common stock obtained through the conversion of convertible debentures
we recently sold to them, and
* other selling stockholders, who intend to sell up to 3,221,548 shares
of common stock purchased in private offerings.
DRH Investment Company, LLC; Dutchess Private Equities Fund, L.P.;
Dutchess Advisors, Ltd. and May Davis Group, Inc. are underwriters within the
meaning of the Securities Act of 1933 in connection with the sale of common
stock under the Equity Line of Credit agreement. DRH Investment Company, LLC
and Dutchess Private Equities Fund, L.P. will pay us 85 percent of the average
of the lowest three closing bid prices of our common stock during the 10-day
period after we give notice to them of our demand - called a "put notice" -
that they purchase a certain amount of our stock. This discount from our
market price to be received by them will be an underwriting discount.
Dutchess Advisors, Ltd. and May Davis Group, Inc. will receive an aggregate of
i
5 percent of each payment made to us under the Equity Line of Credit, which 5
percent will be an underwriting commission.
Utah Clay had a net loss of $388,750, or $0.01 a share on no sales for
the nine months ended September 30, 2001. For the year ended December 31,
2000 Utah Clay Technology had a net loss of $429,586 or $0.02 a share on no
sales.
_________________________
Our common stock trades on the OTC Bulletin Board. Its trading
symbol is "UTCL".
On December 19, 2001, the last reported sale price of our common stock
was $0.06 a share.
_________________________
With the exception of DRH Investment Company, LLC; Dutchess Private
Equities Fund, L.P.; Dutchess Advisors, Ltd.; and May Davis Group, Inc., who
are underwriters within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. The offering will terminate for the 20,000,000
shares to be issued under the Equity Line of Credit 24 months after the
accompanying registration statement is declared effective by the Securities and
Exchange Commission and will terminate for all other shares in December 2004.
None of the proceeds from the sale of stock by the selling stockholders will be
placed in escrow, trust or similar account.
_________________________
The purchase of these shares involves Neither the Securities and Exchange
a high degree of risk. See "Risk Commission nor any state securities
Factors," beginning on page 1. commission has approved or disapproved
these securities or determined if this
offering memorandum is truthful or
complete. Any representation to the
contrary is a criminal offense.
Utah Clay Technology, Inc.
3985 South 2000 East
Salt Lake City, UT 84124
Telephone 801-424-0223
December ___, 2001
ii
TABLE OF CONTENTS
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Page
------
Summary ............................................................ 1
The Offering ............................................................ 1
Risk Factors ............................................................ 3
Risks Related to Our Business ...................................... 3
No commercially viable deposits of kaolin have been found.
We may never have revenues, in which event we
will have to stop all operations. ........................ 3
We require, but do not have, the funds needed to conduct
an exploration program that would determine
whether our properties do or do not contain
reserves of kaolin. If we do not obtain these
funds, we may have to shut down all operations. .......... 4
We may lose the mining leases and mining claims we
own or have the right to acquire if we fail to
make required, annual, rental payments. ................. 4
We may need to raise additional capital to finance operations. 4
We have been the subject of a going concern opinion from
our independent auditors, which means that we
may not be able to continue operations unless
we obtain additional funding. ............................ 5
We have been subject to a working capital deficit and
accumulated deficit. ..................................... 5
Our common stock may be affected by limited trading
volume and may fluctuate significantly. .................. 5
The market for our common stock is poorly developed.
Purchasers of our securities should anticipate
a thin and volatile market. Investors that purchase
our common stock may not be able to sell
their securities. ........................................ 5
We could fail to attract or retain key personnel. ............. 6
Risks Related to This Offering
Future sales by our stockholders may adversely affect
our stock price and our ability to raise funds in
new stock offerings. ..................................... 6
Existing shareholders will experience significant dilution
from our sale of shares under the Equity Line of
Credit and the conversion of the convertible
debentures to stock. ..................................... 6
iii
The holders of the convertible debentures will be able to
convert their debentures to shares of common
stock at conversion values less than the then-prevailing
market price of our common stock. And, investors
under the Equity Line of Credit will pay less than
the then-prevailing market price of our common
stock. ................................................... 7
The selling stockholders intend to sell their shares of common
stock in the market, which sales may cause our stock
price to decline. ........................................ 7
Our common stock has been relatively thinly traded and
we cannot predict the extent to which a trading
market will develop. ..................................... 7
The price you pay in this offering will fluctuate. ............ 7
We may not be able to access sufficient funds under the
Equity Line of Credit when needed. ....................... 7
Forward-Looking Statements ............................................. 8
Selling Stockholders ................................................... 8
Use of Proceeds ......................................................... 10
Dilution ................................................................ 11
Capitalization .......................................................... 12
Equity Line of Credit ................................................... 13
Puts .............................................................. 13
Mechanics .......................................................... 13
Open Period ........................................................ 13
Purchase Price ..................................................... 13
Maximum Put Amount ................................................. 14
Maximum Amount Subject to Each Put Notice .......................... 14
Number of Shares to Be Issued ...................................... 14
Registration Rights ................................................ 15
Net Proceeds ....................................................... 15
Use of Proceeds .................................................... 15
Placement and Advisory Fees ........................................ 15
Plan of Distribution .................................................... 15
Legal Proceedings ....................................................... 16
Directors, Executive Officers, Promoters and Control Persons ............ 17
iv
Significant Consultants and Other Personnel ........................ 18
Securities Ownership of Certain Beneficial Owners and Management ........ 19
Description of Securities ............................................... 19
Common Stock ...................................................... 20
Voting Rights ................................................. 20
Dividend Rights .............................................. 20
Liquidation Rights ............................................ 20
Preemptive Rights ............................................. 20
Registrar and Transfer Agent .................................. 20
Dissenters' Rights ............................................ 20
Preferred Stock .................................................... 20
Series A Preferred Stock ...................................... 21
Series B Preferred Stock ...................................... 21
Convertible Debentures ............................................. 21
Warrants ........................................................... 23
Stock Options ...................................................... 23
Interest of Named Experts and Counsel ................................... 23
Indemnification ......................................................... 24
Description of Business ................................................. 25
Business Development ............................................... 25
Competition ........................................................ 26
Distribution Methods ............................................... 26
Patents ............................................................ 26
Government Approval of Principal Products .......................... 26
Government Regulations ............................................. 27
Costs and Effects of Complying with Environmental Laws ............. 27
Employees .......................................................... 27
Working Capital Requirements ....................................... 27
Product Research and Development During the Next Twelve Months ..... 27
Additional Employees ............................................... 28
Description of Property ................................................. 28
Location and Means of Access to the Properties ..................... 28
Description of Our Title ........................................... 29
History of Mineral Exploration ..................................... 34
Plant and Equipment ................................................ 35
Plan of Operations for the Next Twelve Months ...................... 35
Rock Formations and Mineralization ................................. 36
Geology ............................................................ 38
v
Certain Relationships and Related Transactions .......................... 38
Market for Common Equity and Related Stockholder Matters ................ 39
Penny Stock Regulations ................................................. 40
The Penny Stock Suitability Rule ................................... 41
The Penny Stock Disclosure Rule .................................... 42
Effects of the Rule ................................................ 42
Potential De-Listing of Common Stock ............................... 42
Reports to Security Holders ........................................ 42
Executive Compensation .................................................. 43
Stock Options ...................................................... 43
Directors .......................................................... 43
Employment Contracts ............................................... 43
Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure ............................................... 43
Additional Information .................................................. 44
Financial Statements .................................................... 44
vi
SUMMARY
Our Company. Our company, Utah Clay Technology, Inc., is an exploration-
stage corporation organized to explore, define and test kaolin clay from our
White Mountain and Oro Blanco leases and three other properties under option to
lease to us. Subject to our obtaining the necessary funds, we propose to
continue to explore our properties and to develop our properties if the
exploration and tests should indicate that development is warranted. All
properties are in the State of Utah.
There is no assurance that there is a commercially viable mineral deposit
on any of the properties. Laboratory tests conducted by independent
laboratories have determined that our properties, to some extent, contain a
mineral composition of hydrothermal kaolin that has met industry standards for
fillers in paint. We must conduct further exploration before we can make a
final evaluation as to the economic and legal feasibility of developing our
properties.
Our principal office is located at 3985 South 2000 East, Salt Lake City,
Utah 84124. Our telephone number is (801) 424-0223.
Plan of Distribution. The selling stockholders will offer their shares
of common stock from time to time in the over-the-counter market through
brokers at prevailing, fluctuating market prices. The brokers will receive no
more than ordinary and customary commissions.
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are, or will become, shareholders of Utah Clay Technology. The selling
stockholders consist of:
* DRH Investment Company, LLC and Dutchess Private Equities Fund, L.P.,
who intend to sell up to 20,000,000 shares of common stock to be
purchased under an Equity Line of Credit,
* nine selling stockholders who intend to sell up to 10,678,571 shares
of common stock obtained through the conversion of convertible
debentures we recently sold to them, and
* other selling stockholders, who intend to sell up to 3,221,548 shares
of common stock purchased in private offerings.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to DRH Investment Company, LLC and Dutchess Private
Equities Fund, L.P., shares of our common stock for a total purchase price of
$6.0 million. They will pay us 85 percent of the average of the lowest three
closing bid prices of our common stock during the 10 trading days after we give
notice to them of our demand - called a "put notice" - that they purchase a
certain amount of our stock. They intend to resell any shares purchased under
1
the equity line of credit at the then prevailing market price. Among other
things, this Prospectus relates to the shares of common stock to be issued
under the Equity Line of Credit.
This Prospectus also relates to 10,678,571 shares of our common stock
that we have reserved for possible issuance to the nine holders of 3-Year 5%
Convertible Debentures in the principal amount of $195,000. The holders of
these convertible debentures have the right to convert the debentures, with
accrued interest, into shares of our common stock at the lesser of 120 percent
of the closing bid price of our common stock on the date the debentures were
issued (which 120 percent is $0.084 for $100,000 of the debentures and $0.072
for $95,000 of the debentures) or 75 percent of the average of the three lowest
closing bid prices for our common stock during the ten trading days prior to
the dates the holders give us their notices of conversion.
Common Stock Offered Up to 33,900,119 shares by selling stockholders.
Offering Price Prevailing market prices.
Common Stock Outstanding
Before This Offering 31,241,801 shares.
Use of Proceeds We will not receive any proceeds of the shares
sold by the selling stockholders. Any proceeds
we receive from the sale of common stock under
the Equity Line of Credit will be used for
rentals on mining properties, exploration
expenses on our mining properties, management
compensation, working capital and possibly for
construction costs of a processing facility for
kaolin, should exploration on our mining
properties justify such construction.
Risk Factors The securities offered involve a high decree of
risk and immediate substantial dilution. See
"Risk Factors" and "Dilution."
OTC Bulletin Board Common
Stock Symbol UTCL
2
Summary Consolidated Financial Information
For the Nine Months For the Year Ended
Ended September 30, 2001 December 31, 2000
------------------------ ------------------
Statement of Operations Data:
Revenues $ 0 $ 0
Total expenses 338,675 429,486
Loss before income taxes 338,675 429,486
Net loss 338,750 429,586
Net loss a share -
basic and diluted $ 0.01 $ 0.02
September 30, 2001 December 31, 2000
------------------------ ------------------
Balance Sheet Data:
Cash $ 0 $ 0
Accounts receivable 350 350
Total current assets 66,350 350
Total assets 196,834 146,266
Accounts payable 62,771 94,102
Accrued expenses 116,323 -
Loans payable - officers
and directors 291,937 410,678
Notes payable 168,311 178,482
Total current liabilities 639,342 683,262
Total liabilities 639,342 683,262
Total shareholders' deficit (442,508) (536,996)
RISK FACTORS
------------
The following principal factors make the offering described herein
speculative and one of high risk. An investment in the shares should not be
made by persons who cannot afford the loss of their entire investment.
RISKS RELATED TO OUR BUSINESS
No commercially viable deposits of kaolin have been found. We may never
have revenues, in which event we will have to stop all operations.
The efforts of our founders and then of our company after its
incorporation in 1994 have been to locate the principal kaolin deposits in
Utah, place them under lease, and conduct exploratory drilling for property
appraisal purposes.
3
Our limited exploratory drilling to date has outlined a potential product
slate of small particle size calcined and uncalcined clays. Calcined clays are
clays that have been heated to such a high temperature that the clays'
molecular structure has been modified. The extracted minerals have been tested
both in the laboratory and with commercial buyers, but our limited exploratory
drilling has been insufficient in scope to outline commercially viable reserves.
Since we have no reserves, we cannot estimate how long we will be able to
provide marketable kaolin from our properties. We may never have revenues, in
which event we will have to stop all operations.
We require, but do not have, the funds needed to conduct an exploration
program that would determine whether our properties do or do not contain
reserves of kaolin. If we do not obtain these funds, we may have to shut down
all operations.
A proper drilling and testing program on our Oro Blanco and White
Mountain leases will cost approximately $500,000. We lack this capital. We
believe we have identified a source for this capital need - an Equity Line of
Credit, but there is no assurance this will prove to be the case. Unless the
trading volume in our common stock increases, we may not obtain this amount of
capital from the Equity Line of Credit.
We have options to acquire three other properties that are owned by
the persons that manage our company. The exercise prices of these three
options have not been set but are to be the fair market values of the
properties as determined by an independent engineer. We do not have the funds
needed to conduct a proper drilling and testing program on these three,
optioned properties, and we cannot assure investors that we can get the funds
for these programs from our Equity Line of Credit.
We may lose the mining leases and mining claims we own or have the right
to acquire if we fail to make required, annual, rental payments.
We are required to make annual payments of approximately $50,000 to
retain the mining leases and claims we own or have an option to acquire. We
have no income yet, so we are dependent each year on raising the funds needed
to make these payments.
We may need to raise additional capital to finance operations.
We have relied on significant external financing to fund our
operations. Such financing has historically come from a combination of
borrowings, the sale of common stock from third parties, and funds provided by
certain officers and directors. We will need to raise additional capital to
fund our anticipated operating expenses and possible expansion. Among other
things, external financing may be required to cover our operating costs. We
cannot assure you that financing, whether from external sources or related
parties, will be available if needed or on favorable terms. Our inability to
obtain adequate financing would result in the need to curtail operations, would
be materially harmful to our business, and may result in a lower stock price.
4
We have been the subject of a going concern opinion from our independent
auditors, which means that we may not be able to continue operations unless we
obtain additional funding.
Our independent auditors have added an explanatory paragraph to
their audit opinions, issued in connection with our financial statements, which
states that our ability to continue as a going concern is uncertain due to our
continued operating losses, the excess of our liabilities over our assets and
uncertain conditions we face in our day-to-day operations. Our financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
We have been subject to a working capital deficit and accumulated deficit.
We had a working capital deficit of $572,992 at September 30, 2001.
We had an accumulated deficit of $2.9 million at September 30, 2001.
Our common stock may be affected by limited trading volume and may
fluctuate significantly.
Prior to this offering, there has been a limited public market for
our common stock. There can be no assurance that an active trading market for
our common stock will develop. This could adversely affect our shareholders'
ability to sell our common stock in short time periods, or possibly at all.
Our common stock has experienced, and is likely to experience in the future,
significant price and volume fluctuations which could adversely affect the
market price of our common stock without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially.
The market for our common stock is poorly developed. Purchasers of our
securities should anticipate a thin and volatile market. Investors that
purchase our common stock may not be able to sell their securities.
There are many days when our common stock does not trade at all in
the over-the-counter market. The spread between the quoted bid and ask prices
is usually great. The stock has never traded above $5, the price required to
remove certain trading requirements imposed on Bulletin Board "penny stocks."
Until these trading requirements are removed, many brokerage firms will not
allow their brokers to recommend our stock for purchase by their customers.
Investors that purchase our common stock may not be able to sell their
securities.
5
We could fail to attract or retain key personnel.
Success for our company will depend upon the efforts and abilities of
key executives and consultants, including our president, Dennis S. Engh.
Should our mining properties prove to be worthy of development, we will have to
attract many executives and personnel that are experienced in mining and
processing kaolin and able to develop our company from an exploration company
to a mining, processing and product distribution company. We do not have these
personnel now, and there is no assurance that we can attract such personnel to
move from wherever they now live to a relatively remote area of Utah.
RISKS RELATED TO THIS OFFERING
Future sales by our stockholders may adversely affect our stock price and
our ability to raise funds in new stock offerings.
Sales of our common stock in the public market following this
offering could lower the market price of our common stock. Sales may also
make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that our management deems
acceptable or at all. Of the 31,241,801 shares of common stock outstanding as
of December 21, 2001, 24,961,874 shares are, or will be, freely tradable
without restriction, unless held by our affiliates. The remaining 6,279,927
shares of common stock held by existing stockholders are restricted securities
and may be resold in the public market only if registered or pursuant to an
exemption from registration. Some of these shares may be resold under Rule
144. Immediately following the effective date of this prospectus, and not
including the shares to be issued under the Equity Line of Credit or the shares
to be issued upon conversion of the convertible debentures, 28,183,422 shares
of common stock would be freely tradable without restriction, unless held by
our affiliates.
Upon completion of this offering, and assuming all shares registered
in this offering are resold in the public market, there will be an additional
30,678,571 shares of common stock outstanding. All of these additional shares
of common stock may be immediately resold in the public market upon
effectiveness of the accompanying registration statement and the sale to the
two investors under the terms of the Equity Line of Credit Agreement and the
conversion of the convertible debentures to shares of common stock.
Existing shareholders will experience significant dilution from our sale
of shares under the Equity Line of Credit and the conversion of the
convertible debentures to stock.
The sale of shares pursuant to the Equity Line of Credit and the
conversion of the convertible debentures to shares of common stock will have
a dilutive impact on our shareholders. As a result, our net income per share
could decrease in future periods, and the market price of our common stock
could decline. In addition, the lower our stock price is, the more shares of
common stock we will have to issue through conversion of our convertible
debentures to common stock and under the Equity Line of Credit to draw down
the full amount. The lower our stock price, the greater the dilution will be
for our existing shareholders. The higher our stock price, the greater the
dilution will be for new shareholders.
6
The holders of the convertible debentures will be able to convert their
debentures to shares of common stock at conversion values less than the then-
prevailing market price of our common stock. And, investors under the Equity
Line of Credit will pay less than the then-prevailing market price of our
common stock.
The common stock to be issued upon conversion of our convertible
debentures will be issued at values at least 25 percent lower than the average
closing bid price for our common stock during the 10 trading days prior to the
date we get notice of a conversion. The common stock to be issued under the
Equity Line of Credit will be issued at a 15-percent discount to the average
of the lowest three closing bid prices for the 10 trading days immediately
following the notice date of our "put." These discounted conversion prices
and sales could cause the price of our common stock to decline.
The selling stockholders intend to sell their shares of common stock in
the market, which sales may cause our stock price to decline.
The selling shareholders intend to sell in the public market the
shares of common stock being registered in this offering. That means that up
to 33,900,119 of common stock, the number of shares being registered in this
offering, may be sold. Such sales may cause our stock price to decline.
Our common stock has been relatively thinly traded and we cannot predict
the extent to which a trading market will develop.
Before this offering, our common stock has traded on the OTC
Bulletin Board. Our common stock is thinly traded compared to larger, more
widely known companies in our industry. Thinly traded common stock can be
more volatile than common stock trading in an active public market. We
cannot predict the extent to which an active public market for the common
stock will develop or be sustained after this offering.
The price you pay in this offering will fluctuate.
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the OTC Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices
paid by other people participating in this offering.
We may not be able to access sufficient funds under the Equity Line of
Credit when needed.
We are dependent on external financing to fund our operations. Our
financing needs are expected to be provided from the Equity Line of Credit, in
large part. No assurances can be given that such financing will be available
in sufficient amounts or at all when needed, in part because the amount of
financing available will fluctuate with the market price and volume of our
common stock. As the market price and volume decline, then the amount of
financing available under the Equity Line of Credit will decline.
7
FORWARD-LOOKING STATEMENTS
Forward-looking statements
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words may, will, should, expect,
anticipate, estimate, believe, intend or project or the negative of these words
or other variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under Management's Discussion and Analysis or Plan of
Operations and Business, as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under Risk Factors and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this prospectus will
in fact occur.
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. Pursuant to the Equity Line of Credit, DRH Investment Company,
LLC and Dutchess Private Equities Fund, L.P. have each agreed to purchase up
to $3.0 million of common stock from us. None of the selling stockholders has
held a position or office, or had any other material relationship, with us
except as follows:
* DRH Investment Company, LLC is an investor under the Equity Line of
Credit. All its investment decisions are made by Hunter Singer, Alfred
Hahnfeldt, and David Danovitch. Neither DRH Investment Company, LLC
nor its agents has a short position or has had a short position at any
time since the Equity Line of Credit agreement was executed on November
30, 2001.
* Dutchess Private Equities Fund, L.P. is an investor under the Equity
Line of Credit. All its investment decisions are made by Dutchess
Capital Management, LLC of which Michael A. Novielli and Douglas H.
Leighton are the managing members. Neither Dutchess Private Equities
Fund, L.P. nor its agents has a short position or has had a short
position at any time since the Equity Line of Credit agreement was
executed on November 30, 2001.
* May Davis Group, Inc. acted as an underwriter for the placement of our
$195,000 3-Year, 5% Convertible Debenture and for the placement of the
Equity Line of Credit. It received 1,285,700 shares of our common
8
stock as a placement fee with regard to DRH Investment Company, LLC's
agreeing to purchase up to $3 million worth of our common stock in the
Equity Line of Credit. It will also receive 5 percent of the amount
of all such stock purchases by DRH Investment Company. All investment
decisions of May Davis Group, Inc. are made by Michael Jacobs.
* Duchess Advisors Ltd. received 964,428 shares of our common stock as a
placement fee with regard to Dutchess Private Equities Fund, L.P.'s
agreeing to purchase up to $3 million worth of our common stock in the
Equity Line of Credit. It will also receive 5 percent of the amount
of all such stock purchases by Dutchess Private Equities, L.P. All its
investment decisions are made by Michael A. Novielli and Douglas H.
Leighton.
The table follows:
Percentage of
Outstanding
Percentage of Percentage of Shares To Be Shares To Be Percentage of
Outstanding Outstanding Acquired Acquired Outstanding
Shares Shares Shares To Be Shares To Be Through Through Shares
Selling Beneficially Beneficially Acquired Acquired Under Conversion of Conversion of Shares To Be Beneficially
Security Owned Before Owned Before Under Equity Equity Line of Convertible Convertible Sold In The Owned After
Holder Offering Offering Line of Credit Credit Debentures Debentures Offering Offering
- -------- ------------- ------------ -------------- -------------- -------------- ------------- ------------ -------------
DRH Investment
Company, LLC 0 0 10,000,000 16.1% 0 0 10,000,000 0
Dutchess
Private
Equities
Fund, L.P. 321,420 1.0% 10,000,000 16.1% 0 0 10,321,420 0
May Davis
Group, Inc. 1,485,700 4.1% 0 0 0 0 1,485,700(1) 0
Dutchess
Advisors,
Ltd. 964,428 3.1% 0 0 0 0 964,428 0
Joseph B.
LaRocco 450,000 1.4% 0 0 0 0 450,000 0
Keyway Holding
Company 0 0 0 0 1,369,047 2.2% 1,369,074 0
Michael E.
Jassen 0 0 0 0 1,369,047 2.2% 1,369,047 0
Robert L.
Anoff 0 0 0 0 821,428 1.3% 821,428 0
Ralph Glasgal 0 0 0 0 547,618 0.9% 547,618 0
David F. Miller 0 0 0 0 1,369,047 2.2% 1,369,047 0
Marvin Ecloff 0 0 0 0 1,369,047 2.2% 1,369,047 0
John S. McNeil 0 0 0 0 1,095,238 1.8% 1,095,238 0
William A.
Murphy 0 0 0 0 1,369,047 2.2% 1,369,047 0
Anand Dhanda 0 0 0 0 1,369,047 2.2% 1,369,047 0
_________________________
(1) This figure also includes the exercise of 200,000 Common Stock Purchase
Warrants at $0.0707 a warrant and the sale of the stock obtained.
9
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from our sale of shares of common stock
to DRH Investment Company, LLC and Dutchess Private Equities Fund, L.P. under
the Equity Line of Credit. The purchase price of the shares purchased under
the Equity Line of Credit will be equal to 85 percent of the average of the
lowest three closing bid prices of our common stock on the OTC Bulletin Board
during the 10-day period immediately following the date we give notice of a
demand - a "put notice" - that they purchase a certain amount of stock.
For illustrative purposes, we set forth below our intended use of proceeds
for the range of net proceeds indicated below to be received under the Equity
Line of Credit. The table assumes estimated offering expenses of $25,000 and
consulting fees of 5.0 percent of the gross proceeds raised under the Equity
Line of Credit.
Gross Proceeds $1,000,000 $2,000,000 $4,000,000 $6,000,000
Net Proceeds $ 925,000 $1,875,000 $3,775,000 $5,675,000
Use of Proceeds: Amount Amount Amount Amount
- ---------------- ------ ------ ------ ------
Mining Properties Rentals $ 60,000 $ 60,000 $ 60,000 $ 60,000
Exploration and Coring $ 500,000 $ 500,000 $ 500,000 $ 500,000
Construction of Processing
Facility $ 65,000 $ 990,000 $2,840,000 $4,740,000
Management Compensation $ 150,000 $ 150,000 $ 150,000 $ 150,000
Debt Payment(1) $ 75,000 $ 75,000 $ 75,000 $ 75,000
Working Capital $ 75,000 $ 100,000 $ 150,000 $ 50,000
Total $ 925,000 $1,875,000 $3,775,000 $5,675,000
========== ========== ========== ==========
(1) The debt to be repaid with the net proceeds to be received under the
Equity Line of Credit consists of the current liabilities of Utah Clay
Technology substantially as they appear on the September 30, 2001
balance sheet in the financial statements herein.
DILUTION
10
The net tangible book value of Utah Clay Technology as of September 30,
2001 was ($0.02) a share of common stock. Net tangible book value is
determined by dividing the tangible book value - total tangible assets less
total liabilities, or ($636,858) - by the number of outstanding shares of our
common stock. This offering is being made solely by the selling stockholders,
and none of the proceeds will be paid to us. Our net tangible book value,
however, will be impacted positively by the funds we will receive in the
private placement that precedes each issuance of stock by us to the two
investors in the Equity Line of Credit and negatively by the amount of common
stock issued under the Equity Line of Credit and through the conversion of
the convertible debentures. The following example shows the dilution to new
investors at an offering price of $0.09 a share, the asking price for our
common stock in the OTC Bulletin Board on November 30, 2001, the day we
executed the Equity Line of Credit Agreement and sole the convertible
debentures.
If we assume that Utah Clay Technology issues 20,000,000 shares under the
Equity Line of Credit and that the shares are sold at 85 percent of a $0.07 bid
price of our common stock (the bid price on November 30, 2001), we will receive
$1,190,000 gross from the two investors, less 5 percent aggregate commissions
to May Davis Group, Inc. and Dutchess Advisors, Inc., and less $25,000 offering
expenses, or a net of $1,105,500. If we also assume that the holders of the
$195,000 in convertible debentures convert their debentures when the effective
bid price of our common stock is the same $0.07 a share, they will convert them
at 75 percent of this bid price, or $0.0525 a share, for a total of 3,714,286
shares. We will also assume that May Davis Group, Inc. exercises its 200,000
cashless warrants at $0.0707. These assumed transactions would increase our
tangible book value by $1,105,500 from ($636,858) to $468,642 and our
outstanding number of shares of common stock from 31,241,801 shares immediately
before these transactions to approximately 55,156,087 shares. The following
table shows the dilution per share of our common stock to persons buying our
common stock in the open market at the assumed price of $0.09 a share (the
asking price when the bid price was $0.07 a share):
Assumed offering price on the OTC Bulletin Board $ 0.09
Net tangible book value a share before this offering $(0.02)
Increase attributable to new investors .03
-------
Net tangible book value a share after this offering .01
------
Dilution per share to new shareholders $ 0.08
The offering price of our common stock on the OTC Bulletin Board is based
on the then-existing market price. In order to give prospective investors an
idea of the dilution per share they may experience, the following table shows
the dilution a share at various assumed offering prices:
11
Assumed No. of Shares Dilution per Share
Offering price To Be Issued To New Investors
- -------------- --------------- --------------------
$0.09 23,914,286 $0.08
$0.15 22,521,429 $0.12
$0.25 22,521,429 $0.19
$0.50 18,207,703 $0.40
$1.00 10,364,566 $0.88
CAPITALIZATION
The following table sets forth the total capitalization of Utah Clay
Technology as of September 30, 2001.
Stockholders' deficit:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, 84,817 shares issued and outstanding $ 85
Common stock, $0.001 par value; 30,000,000 shares authorized,
28,220,253 issued and outstanding 28,220
Additional paid-in capital 2,492,984
Stock subscription receivable (59,880)
Deficit (2,903,917)
-----------
Total stockholders' deficit (442,508)
-----------
Total capitalization (442,508)
===========
12
EQUITY LINE OF CREDIT
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell shares of our common stock to two investors for a
possible maximum purchase price of $6.0 million. If we issue a "put notice"
under the Equity Line of Credit, DRH Investment Company, LLC and Dutchess
Private Equities Fund, L.P. must purchase a definable number of shares of our
common stock at a per-share purchase price equal to 85 percent of the average
of the three lowest closing bid prices on the OTC Bulletin Board, or other
principal market on which our common stock is traded, for the 10 trading days
immediately following the notice date. DRH Investment Company, LLC and
Dutchess Private Equities Fund, L.P. intend to sell any shares purchased
under the Equity Line of Credit at the market price. This prospectus
primarily relates to the shares of common stock to be issued to DRH Investment
Company, LLC and Dutchess Private Equities Fund, L.P. under the Equity Line of
Credit. DRH Investment Company, LLC and Dutchess Private Equities Fund, L.P.
cannot transfer their interest in the Equity Line of Credit to any other
person.
Using our recent trading volume and stock price information, we would be
able to draw down approximately $198 every thirteen trading days from the
effective date of the accompanying registration statement during the next 24
months. This would result in an aggregate of approximately $8,000 received by
us under the Equity Line of Credit. As such, unless our average trading
volume or stock price increases significantly and thereby increases the amount
available under the Equity Line of Credit, we will be able to draw down only a
small portion of the $6.0 million available under the Equity Line of Credit.
The effectiveness of the sale of the shares under the Equity Line of
Credit is conditioned upon our registering the shares of common stock with the
Securities and Exchange Commission.
Puts. Pursuant to the Equity Line of Credit, we may periodically sell shares
of common stock to DRH Investment Company, LLC and Dutchess Private Equities
Fund, L.P. to raise capital to fund our working capital needs. The periodic
sale of shares is known as a "put." We may issue a "put notice" every 13
trading days.
Mechanics. We may, at our discretion, issue written put notices to DRH
Investment Company, LLC and Dutchess Private Equities Fund, L.P., specifying
the dollar amount up to the maximum put amount. A closing will be held 13
trading days after each such written put notice at which time we will deliver
shares of common stock and DRH Investment Company, LLC and Dutchess Private
Equities Fund, L.P. will pay the put notice amount. We have the ability to
determine when and if we desire to issue a put notice.
Open Period. We may issue a put notice at any time during the open period but
not more frequently than every 13 trading days. The open period begins on the
date the Securities and Exchange Commission first declares the accompanying
registration statement effective. The open period expires on the earlier to
occur of (i) the date on which DRH Investment Company, LLC and Dutchess
Private Equities Fund, L.P. have made advances totaling $6.0 million or (ii)
24 months later.
13
Purchase Price. For each 10-day purchase period commencing with our issuance
of a put notice, the two investors will purchase shares of common stock from
us at a price equal to 85 percent of the average of the three lowest closing
bid prices for our common stock during such 10-day period.
Maximum Put Notice Amount. We may not issue put notices in excess of a total
of $6.0 million. In addition, each individual put notice is subject to a
maximum amount based on an average daily volume of our common stock. The
maximum amount of each put notice is equal to 150 percent of the average
daily volume of our common stock for the 40 trading days prior to the date of
a put notice multiplied by the average of the closing bid prices of our
common stock for the 3 trading days immediately preceding the put notice date.
Maximum Amount Subject to Each Put Notice. Regardless of the amount stated in
a Put Notice, the maximum amount of our common stock that the two investors
are required to purchase is determined by a different formula. They are
required to purchase the lesser of the amount stated in the put notice or an
amount equal to 15 percent of the aggregate trading volume of our stock during
the 10 days commencing with the date of delivery of the put notice times the
average of the three lowest closing bid prices for our common stock during
such 10-day period.
By way of illustration only, let us assume that the 40-day average trading
volume a day in our common stock is 2,200 shares during the 40 trading days
prior to our issuing a put notice and that the average closing bid price for
our common stock is $0.07 during the three trading days prior to our issuing
this put notice. Let us also assume that the aggregate trading volume is
22,000 shares during the 10 trading days after we issue the put notice and that
the three lowest closing bid prices for our common stock average $0.06 during
this 10-day period. The result would be that our put notice would be in the
amount of $231 (1.5 x 2,200 x $.07 = $231) but the maximum amount of stock the
two investors would have to buy at $0.051 a share (.85 x $.06) is that amount
that would equal $198 (.15 x 22,000 x $.06 = $198), or 3,882 shares.
Number of Shares To Be Issued. We cannot predict the actual number of shares
of common stock that will be issued pursuant to the Equity Line of Credit, in
part, because the purchase price of the shares will fluctuate based on
prevailing market conditions and we have not determined the total amount we
intend to draw. Nonetheless, we can estimate the number of shares of common
stock that would be issued using certain assumptions. Assuming we drew down
the entire $6.0 million available under the Equity Line of Credit and the
purchase price was equal to $0.10 per share (which would be 85 percent of the
average of the lowest three closing bid prices during the 10 days commencing
with our issuance of a put notice), then we would issue 60,000,000 shares of
common stock to DRH Investment Company, LLC and Dutchess Private Equities
Fund, L.P. These shares would represent 27.7 percent of our outstanding
capital stock upon issuance. To assist our stockholders in evaluating the
number of shares of common stock that could be issued to DRH Investment
Company, LLC and Dutchess Private Equities Fund, L.P. at various prices, we
have prepared the following table. This table shows the number of shares of
our common stock that would be issued at various prices.
14
Purchase Price: $0.10 $0.25 $0.50 $1.00 $1.25
Number of Shares(1): 60,000,000 24,000,000 12,000,000 6,000,000 4,800,000
Total Outstanding(2): 91,241,801 55,241,801 43,241,801 37,241,801 36,041,801
Percent Outstanding(3): 65.8% 43.4% 27.8% 16.1% 13.3%
(1) Represents the number of shares of common stock to be issued to DRH
Investment Company, LLC and Dutchess Private Equities Fund, L.P. at the
prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to DRH Investment Company, LLC and Dutchess
Private Equities Fund, L.P.
(3) Represents the shares of common stock to be issued as a percentage of
the total number of shares outstanding.
Registration Rights. We granted to DRH Investment Company, LLC and Dutchess
Private Equities Fund, L.P. certain registration rights. The registration
statement accompanying this prospectus will register such shares upon
effectiveness. The cost of this registration will be borne by us.
Net Proceeds. We cannot predict the total amount of proceeds to be raised in
this transaction, in part, because we have not determined the total amount of
put notices we intend to issue. However, we expect to incur expenses of
approximately $25,000 consisting primarily of professional fees incurred in
connection with registering 20,000,000 shares in this offering. In addition,
we are obligated to pay a cash fee equal to 5 percent of each put amount we
receive.
Use of Proceeds. We intend to use the net proceeds received under the Equity
Line of Credit for general corporate purposes. Please see Use of Proceeds.
Placement and Advisory Fees. In connection with the Equity Line of Credit, we
are obligated to pay placement fees to May Davis Group, Inc., equal to 5
percent of the gross purchase of our common stock by DRH Investment Company,
LLC, and an advisory fee to Dutchess Advisors, Ltd., equal to 5 percent of the
gross purchase of our common stock by Private Equities Fund, L.P.
PLAN OF DISTRIBUTION
The selling stockholders have each advised us that the sale or
distribution of our common stock owned by them may be effected from time to
time on the over-the-counter market, or in any other market on which the price
of our shares of common stock are quoted. The selling stockholders and any
brokers, dealers or agents that participate in the distribution of the common
stock may be deemed to be underwriters, and any profit on the sale of common
stock by them and any discounts, concessions or commissions received by any
such underwriters, brokers, dealers or agents may be deemed to be underwriting
discounts and commissions under the Securities Act.
15
DRH Investment Company, LLC and Dutchess Private Equities Fund, L.P. are
underwriters within the meaning of the Securities Act of 1933 in connection
with the sale of common stock under the Equity Line of Credit agreement. DRH
Investment Company, LLC and Dutchess Private Equities Fund, L.P. will purchase
stock from us at a purchase price of 85 percent of the average of the three
lowest closing bid prices of our common stock on the OTC Bulletin Board or
other principal trading market on which our common stock is traded for the 20
trading days immediately following each put notice date. The 15-percent
discount on the purchase of the common stock to be received by DRH Investment
Company, LLC and Dutchess Private Equities Fund, L.P. will be an underwriting
discount.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. We will inform the selling stockholders that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders must be registered to sell securities in all fifty states. In
addition, in certain states the shares of common stock may not be sold unless
the shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied
with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and
agents. We have agreed to indemnify the selling stockholders and their
controlling persons against certain liabilities, including liabilities under
the Securities Act. We estimate that the expenses of the offering to be
borne by us will be approximately $25,000 as well as placement and advisory
fees of 5.0 percent of the gross proceeds received under the Equity Line of
Credit. We will not receive any proceeds from the sale of any of the shares
of common stock by the selling stockholders. We will, however, receive
proceeds from the sale of common stock under the Equity Line of Credit.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders and that there are
restrictions on market-making activities by persons engaged in the
distribution of the shares. Under Regulation M, the selling stockholders or
their agents may not bid for, purchase, or attempt to induce any person to bid
for or purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. DRH Investment
Company, LLC and Dutchess Private Equities Fund, L.P. can cover any short
positions only with shares received from us under the Equity Line of Credit.
We will advise the selling stockholders that if a particular offer of common
stock is to be made on terms constituting a material change from the
information set forth above with respect to the Plan of Distribution, then to
the extent required, a post-effective amendment to the accompanying
registration statement must be filed with the Securities and Exchange
Commission.
16
LEGAL PROCEEDINGS
Neither Utah Clay Technology nor any of its property is a party to or the
subject of a pending legal proceeding.
We are unaware of any proceeding that a governmental authority is
contemplating that would involve us or any of our property.
We are unaware of any material proceeding to which any director, officer
or affiliate of the company, any owner of record or beneficially of more than
five percent of any class of voting securities of the company, or security
holder is a party adverse to the company or has a material interest adverse to
the company.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
A list of the current officers, directors and significant consultants
appears below. The directors of the company are elected annually by the
shareholders. The officers serve at the pleasure of the board of directors.
The directors do not receive fees or other remuneration for their services.
Position Held
Person Office Since
----------------------- --------------------------- -------------
Dennis S. Engh, 60 President and Director 1994
Thomas F. Harrison, 49 Vice President and Director 1994
Daniel H. Engh, 49 Vice President and Director 1994
Darin D. Engh, 29 Secretary, Treasurer
and Director 1994
Daniel H. Engh, listed in the above table, is the brother of Dennis S.
Engh. Darin D. Engh is the son of Dennis S. Engh and the nephew of Daniel H.
Engh.
Dennis S. Engh. Mr. Engh studied botanical science and business at the
University of Utah. After college he became the manager for Engh Floral
Corporation, a family-owned business, advancing to president over a ten-year
period. In 1981 he became president of Dienco Oil Development, Inc., an oil
well development company later purchased by a company in Texas. In 1986 he
became president of The Clothes Link, a seven-store women's clothing store
system in Utah. From 1985 to 1990 he also supervised all land acquisition for
industrial minerals for Pioneer Minerals, Inc., a Utah corporation. He then
became president of that company. During that same period he also organized
and operated a landscape and grounds maintenance business which performed
contract work in Utah, Idaho and Nevada. He organized Utah Clay Technology in
1994 and has served as its president since its organization.
Thomas F. Harrison. Mr. Harrison received a bachelor of science degree
in biology in 1972 and a master's of business administration degree from the
University of Utah in 1988. He was a microfilming supervisor for Mineral
17
Records, Inc. from 1976 to 1979. He served as the executive vice president
and the director of program development for CompHealth, Inc. from 1980 to
1992. In this capacity he supervised the operations of 200 persons in three
offices. There were approximately 300 physicians working for the company at
any one time. Since 1995 Mr. Harrison has been president of Buffalo Energy
Corp., which develops energy projects for Indian Nations.
Daniel H. Engh. Mr. Engh received a bachelor of science degree in
accounting from the University of Utah in 1973. Upon graduation he joined the
Engh Floral Corporation where he managed the accounts, payroll, receivables
and handled tax matters. He trained personnel in numerous phases of
accounting and supervised a staff of 130 persons in this $3 million-a-year
business. In 1984 he became controller and buyer for Della's Flower & Gifts,
Inc. He than joined the staff of The Clothes Link where he was responsible for
lease negotiations, personnel and overseeing various store operations. In 1988
he became the secretary and treasurer for Pioneer Minerals, Inc. and was in
charge of all accounting costs, controls, lease procurement and title
operations. Since the formation of that organization Mr. Engh has been active
in the field work, exploration and assessment of industrial minerals in the
State of Utah. Mr. Engh has served since 1985 as a tax audit manager for the
Utah Tax Commission.
Darin D. Engh. Darin D. Engh is President of Engh Flowers, Inc., a
retail and wholesale garden center and nursery stock outlet which was organized
in 1990, expanded to four locations along the Wasach Front of Utah, has 40
employees, and has gross annual sales today of approximately $1 million. Mr.
Engh has received a bachelor of science in political geography at the
University of Utah.
No executive officer, director, person nominated to become a director,
promoter or control person of our company has been involved in legal
proceedings during the last five years such as
* bankruptcy,
* criminal proceedings (excluding traffic violations and other minor
offenses), or
* proceedings permanently or temporarily enjoining, barring, suspending
or otherwise limiting his involvement in any type of business,
securities or banking activities.
* Nor has any such person been found by a court of competent jurisdiction
in a civil action, or the Securities and Exchange Commission or the
Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table below sets forth the beneficial ownership of securities of the
company by the officers and directors, individually, and as a group, and each
person who is known to the company to be the beneficial owner of more than five
percent of any class of the company's voting securities:
18
Shares of
Shares of Series A
Common Stock Percent Preferred Stock Percent
-------------- ------- --------------- -------
Dennis S. Engh 5,363,923 17.2 27,180 32.0
Thomas F. Harrison 4,815,538 15.4 51,037 60.2
Daniel H. Engh 4,736,307 15.1 - -
Darin D. Engh 970,000 3.1 - -
Officers and Directors
as a group (4 persons) 15,885,768 50.8 84,817 92.2
There are no arrangements which may result in a change in control of the
company.
DESCRIPTION OF SECURITIES
The company is authorized to issue 100 million shares of common stock,
$0.001 par value, and 10 million shares of preferred stock, $0.001 par value.
The presently outstanding 31,241,801 shares of common stock and 84,817 shares
of Series A Preferred Stock are fully paid and nonassessable.
Common Stock
- ------------
Voting Rights. Holders of shares of common stock are entitled to one
vote a share on all matters submitted to a vote of the shareholders. Shares
of common stock do not have cumulative voting rights, which means that the
holders of a majority of the shareholder votes eligible to vote and voting
for the election of the board of directors can elect all members of the
board of directors.
Dividend Rights. Holders of record of shares of common stock are
entitled to receive dividends when and if declared by the board of directors
out of funds of the company legally available therefor.
Liquidation Rights. Upon any liquidation, dissolution or winding up of
the company, holders of shares of common stock are entitled to receive pro
rata all of the assets of the company available for distribution to
shareholders after distributions are made to the holders of the company's
preferred stock.
Preemptive Rights. Holders of common stock do not have any preemptive
rights to subscribe for or to purchase any stock, obligations or other
securities of the company.
Registrar and Transfer Agent. The company's registrar and transfer agent
is Interwest Transfer Company, Inc., 1981 East Murray Holladay Road, Suite 100,
Salt Lake City, Utah 84117.
19
Dissenters' Rights. Under current Utah law, a shareholder is afforded
dissenters' rights which, if properly exercised, may require the company to
purchase his shares. Dissenters' rights commonly arise in extraordinary
transactions such as
* mergers,
* consolidations,
* reorganizations,
* substantial asset sales,
* liquidating distributions, and
* certain amendments to the company's certificate of incorporation.
Preferred Stock
- ---------------
The company is also authorized to issue 10 million shares of preferred
stock, $0.001 par value.
The preferred stock or any series of preferred stock has no qualities or
preferences over the common stock until the board of directors acts. The
board can designate discreet series of the preferred stock. By board
resolution it can carve out a series of preferred stock with specific
qualities or preferences.
Series A Preferred Stock
- ------------------------
We have authorized and issued 84,817 shares of Series A Preferred Stock
at $5.00 a share for a total of $424,085, which stock -
* is entitled to annual dividends of $0.50 a share payable only from
earnings of the company and cumulative if payable but missed,
* is non-voting,
* does not carry preemption rights and
* is preferred over the company's common stock in the event of the
liquidation and dissolution of the company.
The Series A Preferred Stock is neither convertible into Common Stock nor
redeemable at the option of the holder. It is redeemable at the option of the
company.
Series B Preferred Stock
- ------------------------
20
We are authorized to issue 300 shares of Series B Convertible Preferred
Stock. None of these shares have been issued. This stock, when issued, -
* is to be issued for a purchase price of $1,000 a share,
* is convertible by the holder at any time into shares of common stock
of the company, or, if not earlier converted, is automatically converted
five years after issuance, the conversion rate to be the lesser of (a)
80 percent of the lowest closing bid price for the company's common
stock, as reported by Bloomberg LP, during the five trading days
immediately preceding the date of conversion or (b) 120 percent of the
closing bid price, as reported by Bloomberg LP, for the company's common
stock on the date the Series B Preferred Stock is issued,
* is entitled to annual dividends of $60 a share, payable in arrears at
the time of conversion, in cash or in common stock of the company at the
company's option, and
* is redeemable at the company's option on ten days' notice, at 125
percent of the face amount of the shares plus accrued but unpaid
dividends.
Convertible Debentures
- ----------------------
On November 30, 2001, we issued to five persons $100,000 worth of $5,000
face-amount convertible debentures, and on December 28, 2001 we issued to
four persons an additional $95,000 worth of these convertible debentures.
These debentures -
* pay a 5 percent cumulative interest, payable in arrears at the time of
each conversion, in cash or in common stock of the company at the
company's option,
* are convertible by the holder into shares of common stock of the
company at any time at the earlier of (a) 90 calendar days after
issuance of the debentures or (b) the effective date of the
registration statement that accompanies this Prospectus,
* are convertible automatically three years after issuance,
* are convertible at the lesser of (a) 120 percent of the closing bid
price of the company's common stock, as reported by Bloomberg, on the
date the debentures are issued (which 120 percent is $0.084 for the
first $100,000 worth of debentures sold and $0.072 for the second
$95,000 worth of debentures sold), or (b) 75 percent of the average of
the three lowest closing bid prices, as reported by Bloomberg, during
the ten trading days immediately prior to the date of conversion,
* are secured by 12 million shares of common stock pledged by three of
the officers and directors of Utah Clay Technology - Dennis S. Engh,
Daniel H. Engh and Thomas F. Harrison,
21
* are redeemable by the company at any time on ten days written notice at
125 percent of the principal amount being redeemed plus an additional
one percent for each 30-day period after 90 days after issuance of the
debentures, and
* require the registration of the shares of common stock into which the
debentures may be converted. The registration statement accompanying
this prospectus will register such shares upon effectiveness.
Of the 33,900,119 shares of common stock covered by this Prospectus, some
11 million are registered to possibly underlie the $195,000 worth of
convertible debentures. Because of the uncertainty of the future market price
of our common stock, it is possible either -
* that as few as approximately 2,350,446 shares would be issuable should
the convertible debentures be converted or should we redeem the
convertible debentures by the 90th day following the issuance of the
debentures, or
* more than 11 million shares would be issuable should the closing bid
price of our common stock average less than $0.11 a share for three days
during the ten trading days prior to conversion of the convertible
debentures.
Should fewer than 11 million shares be required, we will deregister the
unneeded shares. Should more than 11 million be required, we will amend our
registration statement and this Prospectus to add the additional needed shares
of common stock.
Warrants
- --------
In connection with the sale of the $195,000 worth of convertible
debentures, we paid May Davis Group, Inc. a commission equal to ten percent of
the proceeds of the offering plus 200,000 common stock purchase warrants. Each
warrant -
* is exercisable at any time for five years at 101 percent of the closing
bid price of our common stock on the date of the closing of the offering
of the convertible debentures.
This Prospectus registers for resale by May Davis Group, Inc. the 200,000
shares of common stock reserved for issuance upon May Davis Group's exercise of
the common stock purchase warrants.
22
Stock Options
- -------------
We granted common stock purchase options as follows to the three officers
and directors that pledged 12 million shares of their common stock holdings to
secure the repayment of the $195,000 worth of convertible debentures. The
options are exercisable at $0.09, and may be exercised only to replace pledged
shares that may be sold by the holders of the convertible debentures.
No. of Options
--------------
Dennis Engh 4,000,000
Daniel Engh 4,000,000
Thomas F. Harrison 4,000,000
There are no provisions in the company's charter or bylaws that would
delay, defer or prevent a change in control of the company.
INTEREST OF NAMED EXPERTS AND COUNSEL
Thomas J. Kenan is named in the registration statement of which this
prospectus is a part as having given an opinion on the validity of the offered
securities. He is the record and beneficial owner of 608,773 shares of common
stock of our company. His spouse, Marilyn C. Kenan, is the trustee and sole
beneficiary of the Marilyn C. Kenan Trust, which is the record owner of 764,194
shares of common stock of the company. Mr. Kenan disavows any beneficial
interest in the shares owned of record by such trust.
INDEMNIFICATION
Under Utah corporation law, a corporation is authorized to indemnify
officers, directors, employees and agents who are parties or threatened to be
made parties to any civil, criminal, administrative or investigative suit or
proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the corporation or are or were acting in the same capacity
for another entity at the request of the corporation. Such indemnification
includes reasonable expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation.
With respect to any criminal action or proceeding, these same
indemnification authorizations apply if these persons had no reasonable cause
to believe their conduct was unlawful.
In the case of any action by the corporation against such persons, the
corporation is authorized to provide similar indemnification. But, if any such
persons should be adjudged to be liable for negligence or misconduct in the
performance of duties to the corporation, the court conducting the proceeding
must determine that such persons are nevertheless fairly and reasonably
entitled to indemnification.
23
To the extent any such persons are successful on the merits in defense of
any such action, suit or proceeding, Utah law provides that they shall be
indemnified against reasonable expenses, including attorney fees. A
corporation is authorized to advance anticipated expenses for such suits or
proceedings upon an undertaking by the person to whom such advance is made to
repay such advances if it is ultimately determined that such person is not
entitled to be indemnified by the corporation.
Indemnification and payment of expenses provided by Utah law are not
deemed exclusive of any other rights by which an officer, director, employee or
agent may seek indemnification or payment of expenses or may be entitled to
under any bylaw, agreement, or vote of stockholders or disinterested directors.
In such regard, a Utah corporation behalf of any person who is or was a
director, officer, employee or agent of the corporation.
As a result of such corporation law, Utah Clay may, at some future time,
be legally obligated to pay judgments (including amounts paid in settlement)
and expenses in regard to civil or criminal suits or proceedings brought
against one or more of its officers, directors, employees or agents, as such.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the company pursuant to the foregoing provisions or otherwise, the company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable.
DESCRIPTION OF BUSINESS
Business Development
Utah Clay Technology, Inc. was incorporated on March 1, 1994 in the State
of Utah. Since our organization we have been engaged in the process of -
* locating kaolin deposits in Utah,
* obtaining the legal rights to these deposits,
* conducting exploratory operations,
* testing the extracted minerals in the laboratory, and
* selling samples of the processed form of our kaolin to a commercial
company for market evaluation.
We have financed these activities by the sale of capital stock for money,
advances by shareholders and by the exchange of capital stock for services
rendered to our company.
24
Utah Clay is held together by the day-to-day services of Dennis S. Engh,
our chief executive officer, Thomas F. Harrison, a vice president and chief
financial officer, and Matthew Rich, marketing director. They serve without
receiving a regular monthly salary check. It will be difficult to replace any
of them unless we obtain the liquid resources to pay salaries.
Kaolin
Kaolin is a mineral term for a hydrated aluminum silicate with the
general formula, AL2 SI2 O5 (OH)4. It occurs in a broad range of particle
sizes from 200 microns down to about 0.2 microns. It also occurs in a variety
of crystal structures and shapes. The Utah kaolin is quite white in the
ground. Dry processing retains that whiteness.
The Market for Kaolin
Kaolin is commonly known as "China clay" and is used extensively as a
mineral filler in paint, plastics, paper, ceramics, pharmaceuticals and
cosmetics, because it does not react chemically. It also has a white color
and smoothness after grinding. Industrial users of kaolin combine it with
other raw materials, called formulations, and have developed over 600
different applications. The largest single application is for coating paper
to hide the pulp strands and to give the paper a gloss finish. Another major
use is in the paint industry as an extender to reduce the amount of titanium
dioxide needed to reflect light. Kaolin is also used in refractory clays,
plastics, ceramics, rubber and fiberglass.
Results of Tests on the Utah Clay Deposits
The kaolin taken from our White Mountain site in the test runs shows
that the mineral can be removed by a ripper on a caterpillar tractor and
loaded on trucks with a front end loader.
The kaolin must be processed to bring it to industry standards. Utah
Clay has tested the stages of the processing that are needed for these
industry standards. These tests include:
* grinding to small particle sizes
* calcination - a process of heating the clay to about 1800 degrees
Fahrenheit for a time, which changes its molecular structure, and
* paint formulation tests.
These tests have outlined two classes of products that can fit into established
markets. These are an uncalcined kaolin clay and a calcined kaolin clay, each
in various small particle sizes.
25
Competition
The United States is the largest single producer of kaolin in the world.
Currently, ninety percent of the U.S. production comes from deposits in Georgia
and South Carolina. It has been mined from this area for over 90 years. There
are several companies located in this area that provide this kaolin to the U.S.
and world markets, companies against whom we will have to compete should we
obtain production of kaolin. Most of the standards for the world industry are
based on the kaolin from this area.
Distribution Methods
There are numerous companies in the U.S. whose business is the
distribution of industrial minerals and chemicals. These companies normally
have specific regions where they operate.
We anticipate that any sale of kaolin products by us, should we encounter
commercial quantities of kaolin and obtain the capital to develop them, would
be done through these third-party distributors of industrial minerals.
Patents
Utah Clay has no patents.
Government Approval of Principal Products
There is no need to obtain government approval to sell kaolin and kaolin
products. The mining leases of the company, owned or under option to lease,
are mining claims or leases of lands owned by the U.S. Government or the State
of Utah. Annual rentals of $100 per claim for the federal mining claims must
be paid to the Bureau of Land Management. The annual lease payment to the
State of Utah totals $2,106 for the four state leases.
Government Regulations
The permitting of exploration work we have on U.S. Government leases in
Utah is subject to federal regulations that are co-administered by the Utah
State Division of Oil, Gas and Mining and the Bureau of Land Management. We
have obtained a small miner's permit for the White Mountain site from the
Bureau of Land Management and the State of Utah's Division of Oil, Gas and
Mining. This permit allows us to continue to remove tonnage of kaolin from
the site for commercial testing.
The White Mountain and Oro Blanco sites have been surveyed for sensitive
plant species. The survey was conducted by a certified environmental firm
retained by the company. No sensitive species were found on either site.
26
Costs and Effects of Complying with Environmental Laws
There are costs involved in complying with environmental laws in the
exploration for kaolin. Disturbances to the land caused by our exploratory
drilling will have to be reclaimed to a state typical of the surrounding area.
Employees
We have two full time employees and two part time employees. The full
time employees are Dennis S. Engh, president, and Thomas F. Harrison, vice
president and chief financial officer. The part time employees are Matthew
Rich, marketing director, and Daniel H. Engh, vice president. We estimate that
our part-time employees work for us approximately fifteen hours a week.
Working Capital Requirements
We need approximately $500,000 to conduct a proper drilling and testing
exploration program on our White Mountain and Oro Blanco leases during the
next twelve months. However, we need little working capital to survive
day-to-day. Our full-time and part-time employees and consultants will accept
stock in lieu of cash for their personal services, as they have mainly done in
the past.
We recently received, after offering expenses, a net of $163,500 from the
sale of $195,000 in three-year, 5-percent, convertible debentures. These funds
will be sufficient to pay our administrative overhead and property rentals for
the next twelve months but insufficient to conduct a drilling and testing
exploration program on our White Mountain and Oro Blanco leases.
Product Research and Development During the Next Twelve Months
From the proceeds of the recent sale of $195,000 of convertible
debentures, we propose to perform approximately $50,000 in research and
development during the next twelve months in an effort to determine the best
calcination parameters for processing kaolin for use in cement. We have been
and are working with an industry partner with regard to the use of partially
calcined kaolin in cement.
Additional Employees
We have no plans to hire additional employees until we should establish
that we have commercial reserves of kaolin and obtain the funds to develop
them.
DESCRIPTION OF PROPERTY
We have mining leases to extract minerals from mining claims in the White
Mountain area and the Oro Blanco area in western Utah. We have options to
acquire mining leases to extract minerals from mining claims in the Koosharem
area and the Kimberly area in central Utah and in the Topaz area in western
27
Utah. The properties are near the Union Pacific rail lines and interstate
tracking routes I-70 and I-15.
Location and Means of Access to the Properties
White Mountain Claims. The White Mountain claims are located in Beaver
County, Utah approximately 25 miles west of Milford, Utah. Forty-one federal
placer and overlapping lode claims are located in Sections 4-10 in Township
29 South, Range 13 West and in Sections 1 and 12 in Township 29 South, Range
14 West.
Access to the area is provided by county gravel roads and 1.6 miles of
unimproved, Bureau of Land Management ("BLM") roads. Limited upgrade of the
BLM roads would be necessary to bring mining equipment to the White Mountain
site.
Oro Blanco Claims. The Oro Blanco claims are located six miles west of
the White Mountain claims in Beaver County, Utah. Ninety-one federal placer
and overlapping lode claims and four Utah State mineral leases covering
these deposits are located in Sections 13-15, 21-24, 25-28, 32 and 34-36 in
Township 29 South, Range 15 West and in Sections 1-3 and 10, 11 and 18 in
Township 30 South, Range 15 West.
Access to the property is provided by county roads and unimproved BLM
roads. Limited upgrades of the BLM roads would be necessary to bring mining
equipment to the Oro Blanco site.
Koosharem Claims. The Koosharem claims are located in Piute and Sevier
Counties, Utah. Twelve unpatented federal placer and overlapping lode claims
are located on lands managed by the National Forest Service in Townships 26
and 27 South, Ranges 1 and 2 West.
Access to the area is provided by BLM roads. The road is currently used
by another mining operation adjacent to our claims.
Kimberly Claims. The Kimberly claims are located in Sevier County, Utah.
Twenty-six unpatented federal placer and overlapping lode claims are located
on lands managed by the National Forest Service in Township 26 South, Range 4.5
West.
Access to the site is provided by unimproved Forest Service roads.
Limited upgrade of the roads would be necessary to bring mining equipment to
the site.
Topaz Claims. The Topaz claims are located in Juab County, Utah
approximately 40 miles west of Delta, Utah. Twenty-six federal placer and
overlapping lode claims are located on lands managed by the National Forest
Service in Township 13 South, Ranges 10, 11 and 12 West and Township 14
South, Range 11 West.
Access to the area is provided by county gravel roads and unimproved BLM
roads. Limited upgrades to the BLM roads would be required to bring mining
equipment to the site.
28
Description of Our Title
White Mountain Claims. The lode mining claims are reserved from the BLM
in the name of Don and Anola Fullmer, who are unaffiliated with our company.
The Fullmers have granted a mining lease to Dennis S. Engh and Daniel H.
Engh. Dennis Engh is president and a director of Utah Clay, and Daniel Engh
is a vice president and director of Utah Clay.
* This lease from the Fullmers provides for -
* an annual $5,000 minimum lease payment,
* a minimum production requirement of 6,000 tons a year starting in
2005,
* a $2.50 a ton production royalty payment with a Consumer Price Index
annual escalator clause on the royalty, and
* the payment of all annual fees to the BLM to maintain the claims.
The lease expires March 15, 2005, unless commercial production of at least
5,000 tons a year is being obtained from any or all of the claims subject to
the lease. The lease extends perpetually thereafter if the production minimums
are met. The Engh family has incorporated the Fullmer lease with their own
placer claims into one lease assigned to Utah Clay as described below.
The White Mountain placer claims are held by the Engh family, who have
granted a mining lease to Utah Clay. These persons include Dennis and Judith
Engh, husband and wife; Daniel H. and Connie Engh, husband and wife; Darin D.
Engh, and Holly Engh Kingdon (the "Engh Family"). Dennis Engh is president
and a director of Utah Clay, the brother of Daniel Engh and the father of
Darin Engh and Holly Engh Kingdon. Daniel Engh is a vice president and a
director of Utah Clay. Darin Engh is a director of Utah Clay.
The Engh family lease provides for -
* a $5,000 minimum annual lease payment to the Enghs or a $2.50 a ton
production royalty payment with a Consumer Price Index escalation
clause, whichever is greater,
* a three percent royalty payment on the gross value of all ores taken
from the property,
* the payment of all fees required to maintain the claims with the
BLM, and
* all the terms of the Engh lease with the Fullmers for the lode
claims to be met by Utah Clay.
29
The term of the Engh family lease is March 27, 2004 and thereafter as
long as commercial production is obtained.
There appears on the next page a detailed map of Utah Clay's White
Mountain property. There is shown on the map outlines of -
* the claims area,
* the Blue Placer claims,
* the Julie White placer claims, and
* the Julie White lode claims.
30
(Detailed map of Utah Clay's
White Mountain property
included in courtesy copies
[not filed electronically])
There is shown on the map outlines of -
* the claims area,
* the Blue Placer claims,
* the Julie White placer claims, and
* the Julie White lode claims.
31
Oro Blanco Claims. These 91 federal lode and placer claims and four Utah
State mineral leases are all held by the Engh family. A 5.5 percent
production royalty on ores taken from the four state leases must be paid to
the State of Utah.
The Engh family has granted a lease on these properties to Utah Clay. Utah
Clay is to pay -
* all fees to the BLM to maintain the claims,
* and a $5,000 minimum annual lease payment to the Enghs or a $2.50 a
ton production royalty payment with a Consumer Price Index escalation
clause, whichever is greater, and
* a production royalty of three percent on the gross value of the ores
taken from the property.
The term of the lease is March 27, 2004, and as long thereafter as
commercial production is maintained.
There appears on the next page a detailed map of Utah Clay's Oro Blanco
property. There is shown on the map outlines of -
* the mining area of interest,
* the Engh Family lode claims,
* the Engh Family placer claims, and
* the State of Utah mineral leases.
32
(Detailed map of Utah Clay's
Oro Blanco property
included in courtesy copies
[not filed electronically])
There is shown on the map outlines of -
* the mining area of interest,
* the Engh Family lode claims,
* the Engh Family placer claims, and
* the State of Utah mineral leases.
33
Koosharem, Kimberly and Topaz Claims. These claims are all reserved from
the BLM in the name of Don and Anola Fullmer, who are unaffiliated with our
company. The Fullmers have granted leases on the claims to Daniel and Dennis
Engh, whose affiliation with Utah Clay is described above. Daniel and Dennis
Engh have granted options to Kaolin of the West, LLC, for it to obtain an
assignment of the leases. The members and owners of Kaolin of the West, LLC,
are Dennis S. Engh, Daniel H. Engh, Thomas F. Harrison and Carmen J. (Tony)
Lotito.
The royalty payments for the leases are identical to those of the White
Mountain mining claims, including the royalty payments to the Enghs and the
Fullmers.
Each of the three options expires March 27, 2004. A payment of $10,000
for each option - $5,000 to the Fullmers and $5,000 to the Enghs - must be
paid by June 10 of each year to extend the options past that date as well as
the payment of all federal and state rentals, taxes and other payments
associated with the mining claims. To exercise each option, Utah Clay must
pay to the owners of Kaolin of the West, LLC, in cash or in common stock of
the company, an amount of cash or common stock equal to the fair market value
of the premises subject to the optioned leases. The fair market value will be
determined by reference to an evaluation of any kaolin reserves as determined
by an independent engineer.
The mining claims of the three leases under option to the company expire
on March 27, 2004 unless by such date commercial production of at least 5,000
tons a year is being obtained from any or all of the claims subject to each of
the leases. Once the required level of commercial production has been obtained,
the term of each lease is extended for so long as the production requirement
is met.
History of Mineral Exploration
Both White Mountain and Oro Blanco have a history of mineral exploration.
The following descriptions concern areas on the leases of Utah Clay.
White Mountain. Earth Sciences conducted some exploratory drilling on
property that is now under our control in White Mountain in the late 1960s and
early 1970s. Earth Sciences was a consortium of companies that was looking for
commercial deposits of alunite. They found alunite and associated deposits of
kaolin by rotary percussion drilling. Data for these holes is not available.
An overview of the geology and a summary of their drilling results is outlined
in the published Final Environmental Statement date stamped August 26, 1977 by
the BLM and signed by Curt Berklund, Director, Bureau of Land Management.
Buena Vista Mining drilled seven holes on the White Mountain lease in
1992. Buena Vista was a company controlled by the Engh Family. The Enghs have
made that information accessible to Utah Clay. The cores were stored and are
available for chemical and brightness analysis.
Utah Clay has an open test pit that reveals high brightness kaolin exposed
at the surface. Samples have been taken from the pit to test the kaolin for
use in paints and other industries.
34
Neither proven nor probable reserves have been established.
Oro Blanco. Earth Sciences conducted extensive exploration for
molybdenum, uranium, gold and fluorite in the Oro Blanco region of the Wah Wah
Mountains in the late 1960s and early 1970s. Earth Sciences drilled 241 core
and rotary holes in the area subject to our claims. They found deposits of
both kaolin and alunite. This information is outlined in a report by Joseph
Shearer, a registered geologist. He was retained by Fire Clay Minerals, Inc.,
a company controlled by the Engh Family.
Fire Clay Minerals, Inc. next drilled 104 core holes in the area subject
to our placer claims. The holes total 10,982 feet and outline a deposit of
high brightness kaolin and alunite. This drilling was done in 1989 and is
outlined in a report by R.R. Culpert, Ph.D.
An area of 130 by 300 feet was stripped of overburden to expose a kaolin
deposit. Samples have been taken from this area to test for brightness and
chemistry.
Neither proven nor probable reserves have been established.
Koosharem and Kimberly Claims. There have been no significant operations
on these claims other than the annual assessment work on the perceived
deposits.
Topaz Claims. Utah Clay conducted a limited drilling program on the Topaz
claims property in 1995. Evidence of a certain form of kaolite, called
halloysite, was found. Drilling was not sufficient to prove any reserves.
Plant and Equipment
There is no plant or equipment at any of the sites of the mining claims.
Power can be supplied to the White Mountain site from Utah Power & Light's
grid four miles to the east. Power can be supplied to the Oro Blanco site
from Utah Power & Light's grid ten miles to the east.
Plan of Operations for the Next Twelve Months
During the next twelve months we propose to re-analyze the seven core
holes that were drilled on the White Mountain property by Buena Vista Mining in
1992. This analysis will cover the brightness, alteration minerals, percent of
alteration and color along with other tests. Then, subject to the availability
of approximately $500,000, which we hope to obtain from our Equity Line of
Credit financing, we will conduct a new drilling program. Our plan provides
that holes will be drilled on 200-foot spacing to define the areas of greatest
shallow, high brightness kaolinite. The drilling will commence outward from
the test pit where a previous hole encountered 136 feet of white kaolin. The
next phase of drilling will concentrate on the highest potential areas found in
the first holes. The spacing will be 100 feet. The holes will be drilled to
150 feet. The drilling will produce cores. Samples from these cores will be
tested for brightness, color, specific gravity, chemical composition and
contaminates. The goal of this drilling and analysis of the cores is to
35
establish the presence of mineralized material. We will then combine this
information with the requirements of industry standards, prices of marketable
kaolin and recovery costs to determine the degree of legal and economic
feasibility of further activities.
Should this determination be favorable for further activities, we will
seek the funds to construct a processing facility. The engineering and design
work that has been completed thus far indicates that we will need
approximately $20 million to construct a processing facility. We will pursue
a loan backed by the U.S. Department of Agriculture that would include 80
percent of the construction costs of such a facility. In order to qualify for
such a loan, we will have to demonstrate that we have, or will have, 20
percent of the cost of the processing facility, which 20 percent would be
approximately $4 million. In an effort to obtain such funds, we entered into
the Equity Line of Credit agreement described earlier in this prospectus.
We estimate it will take approximately one year after the funds are
committed to the facility to complete its design and construction and to make
it operational. Only then would we first obtain revenues for our company.
Oro Blanco.
A drilling and testing program similar to that planned for White Mountain
is contemplated. There was an indication from the previous program that a
promising trend of kaolin continues to the east past where the previous
drilling program stopped. This trend will be explored in the new drilling
program.
Koosharem, Kimberly and Topaz Claims. We have no present proposed program
of exploration on these properties that are subject to our options to acquire.
They are without known reserves.
Rock Formations and Mineralization
White Mountain: Kaolin, hydrated silica and alunite occur as a mixed
mineral system in the White Mountain region of Utah in the lower and upper tuff
members of an unnamed geological formation. These minerals vary in their
percentages throughout the deposits and have formed where acid-rich,
hydrothermal fluids have strongly altered the tuffs. "Tuff" is a geological
term for rock composed of finer kinds of volcanic detritus commonly fused
together by heat.
The percentages of the three primary components vary depending upon the
composition of the tuff and the heat and character of the hydrothermal fluids.
Kaolin, for example can occur from 99% down to 25%. Alunite typically occurs
in the range 2% to 12%. Hydrated silica in the form of opal and opal CT make
up the major portion of the remainder. Because these three components are
all white and all insoluble in water, their combination makes a good, non-
reactive white pigment for incorporation in paint, plastics, paper and other
products. When the mixtures are calcined at high temperatures, the products
are virtually indistinguishable from 100% kaolin calcined at the same
temperature, except that the hydrothermal materials are whiter.
36
Strong alteration of the tuff to kaolin, alunite and hydrated silica
occurs for about two miles along east-west faults. Local centers for high
kaolin and alunite occur where north-northwest faults intersect the main east-
west structural feature. Individual centers range in size from 250 to 500
feet in width and extend 2000 feet in length along the principal feeder fault.
In these alteration zones, the kaolin and alunite grade outward in
composition. At their termination, bands of high iron oxide, red in color,
occur, usually followed by hard silica.
Chemical analyses of the whitest regions within the deposit suggest small
amounts of iron oxide (as hematite and goethite) of 0.3%, occasional calcium
sulfate (0.5%) and some jarosite (0.5%), a mineral similar in character to
alunite but containing iron structurally substituted for aluminum. The
remainder of the impurities, as Mg, Ca, K, Na, and Ti, are less than 2% total
and are similar to impurities in commercial kaolins from Georgia and South
Carolina.
These impurities are not separated during the commercial processing and
have no deleterious effect on pigment properties in the end products.
Numerous chemical analyses of the kaolinite have been done. They
uniformly show low amounts of contaminants, specifically iron.
Typical amounts of other minerals are:
Fe 0.172%
Na2O 0.296%
K2O 1.48%
CaO 0.505%
MgO 0.118%
Oro Blanco. The geology is similar to that at White Mountain, but the
alteration is more complex.
Koosharem, Kimberly and Topaz Claims. Each of these areas shows the
hydrothermal alteration of volcanic tuffs. The geology has not been studied
in sufficient detail to describe it accurately.
Geology
Drilling and testing which has been conducted to date on our properties
suggest that the cap rock (mineralization which occurs on top of the kaolin)
is shallow in many locales, often less than 25 feet in thickness. The veins of
mineralized kaolin (and associated minerals) under this cap rock are often
quite wide and of a consistent color and composition, especially after the
calcination process is employed. Further drilling and analyses and required to
evaluate the usable volume and grade as well as to develop the initial mining
plan.
37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998 the company issued 2,100,774 shares of its common stock at
$0.18 a share to the following officers and directors of the company, persons
owning more than five percent of any class of security of the company, or to
members of their immediate family:
Relationship No. of Shares Value of
Person to the Company Issued Consideration
- ------------------ --------------------- ---------------- --------------
Della Engh Mother of Dennis and 823,333 $148,200
Daniel Engh
Dennis S. Engh President and Director 581,900 104,742
Carmen J. (Tony)
Lotito Director of Marketing 332,659 59,879
and Director
Thomas F. Harrison Vice President, Chief 135,872 24,467
Financial Officer and
Director
Daniel H. Engh Vice President and 227,010 40,862
Director --------- --------
2,100,774 $378,150
The consideration we received from Della Engh for the above shares was
the cancellation of loan indebtedness in the indicated amount owed by Utah
Clay to her. The consideration we received from the other persons named
above was the cancellation of debt in the indicated amounts arising from
unpaid compensation for their services as officers of Utah Clay.
On December 27, 1999 we issued 17,739,500 shares of our common stock as
the purchase price for an assignment of the Oro Blanco mining lease. The
shares were valued at $0.001 a share for a total purchase price of $17,739.50.
At the time of the purchase, our common stock had not traded in the over-the-
counter market for several weeks, and the stockholders' capital in Utah Clay
was impaired. The seller of the Oro Blanco lease was Utah Kaolin Corporation,
an affiliate of Utah Clay by reason of common directors of the two companies
and by reason of common control of the two companies through majority
ownership of the voting stock of each company by the directors of the two
companies.
Utah Kaolin Corporation subsequently distributed the 17,739,500 shares
to its shareholders. One of those shareholders, Thomas J. Kenan, who is legal
counsel to Utah Clay and to Utah Kaolin, transferred 650,194 shares to a trust
under the control of his spouse, Marilyn C. Kenan, who also is the primary
beneficiary of the trust. He donated remaining 10,000 shares to his legal
assistant, Sherie S. Adams. The complete distribution of the 17,739,500 shares
of Utah Clay stock by Utah Kaolin was as follows:
No. of
Shares
Person Relationship to the Company Issued
- -------------------------- ---------------------------- --------
Dennis S. Engh President and Director 3,979,297
Daniel H. Engh Vice President and Director 3,979,297
Thomas F. Harrison Vice President and Director 3,869,666
Carmen J. (Tony) Lotito Director of Marketing 1,984,833
and Director
38
Marilyn C. Kenan, Trustee Spouse of Thomas J. Kenan, 650,194
of the Marilyn C. securities law counsel to
Kenan Trust the company
Dorcas Ardella Engh Mother of Dennis S. Engh and 850,000
Daniel H. Engh
Sherie S. Adams Legal Assistant to Thomas J. 10,000
Kenan, securities law counsel
to the company
Robert N. Nelson and Brother-in-law and sister of 1,300,000
Jeanette E. Nelson, TTEE Dennis S. Engh and Daniel H.
FBO Nelson Family Revocable Engh, and uncle and aunt to
Trust UAD 2-28-91 Darin Engh
Raymond and Olga Nelson Son and daughter-in-law of 200,000
Robert N. Nelson and Jeanette
E. Nelson
Jack Nelson Son of Robert N. and Jeanette 100,000
E. Nelson
Kendrick O. Morrison None (non-affiliated shareholder) 816,213
On February 27, 2001, we issued 1,687,606 shares of our common stock at
$0.10 a share to the following officers, directors and members of the
immediate family of officers and directors:
No. of Shares Value of
Person Relationship to the Company Issued Consideration
- ----------------- --------------------------- ------------- -------------
Ryan Engh Son of Daniel H. Engh 10,000 $ 1,000
Thomas F. Harrison Vice President, Chief 465,000 46,500
Financial Officer and
Director
Dennis S. Engh President and Director 1,162,606 116,260
--------- -------
1,637,606 $ 163,760
The nature of the consideration given for the issuance of the shares was
executive services provided to the corporation by Mr. Harrison and Mr. Engh
and non-executive services performed by Ryan Engh.
On August 9, 2001, we issued 167,000 shares of our common stock at $0.09
a share to Dorcas Engh, the mother of Dennis Engh and Daniel Engh,
respectively the president and vice president of our company and directors of
our company. The nature of the consideration given for the issuance of the
shares was cancellation of debt owed by the company to Mrs. Engh.
39
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was earlier quoted on the OTC Bulletin Board under the
stock symbol "UTCL". The high and low bid information for the stock during
1999, 2000 and the first three quarters of 2001 is set forth below. The
information was obtained from the OTC Bulletin Board and reflects inter-
dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions:
Calendar
Quarter High Low
-------- ------ -----
1999:
1st Qtr 0.3438 0.1600
2nd Qtr 0.8438 0.1875
3rd Qtr 0.6250 0.1300
4th Qtr 0.5000 0.1875
2000:
1st Qtr 1.125 0.25
2nd Qtr * *
3rd Qtr * *
4th Qtr * *
2001:
1st Qtr * *
2nd Qtr 0.5000 0.1300
3rd Qtr 0.3200 0.1400
____________________
* Data is not available for the selected date range.
During the period from May 3, 2000 to January 16, 2001, our common stock
was removed from the Bulletin Board and was quoted only in the "Pink Sheets".
Our common stock was once again admitted to quotation privileges on the
Bulletin Board on January 17, 2001.
Holders. There are approximately 200 holders of record of our common stock.
There are three holders of record of our Series A Preferred Stock, for which
there is no trading market.
Dividends. No cash dividends have been declared during the last two years for
either the common stock or the Series A Preferred Stock. There are no
restrictions that limit the ability of the company to pay dividends on the
common stock or that are likely to do so in the future other than the
requirement that dividends be paid first to the holders of the company's
preferred stock.
40
PENNY STOCK REGULATIONS
Our common stock has always traded at a price less than $5 a share and is
subject to the rules governing "penny stocks."
A "penny stock" is any stock that:
* sells for less than $5 a share,
* is not listed on an exchange or authorized for quotation on The
Nasdaq Stock Market, and
* is not a stock of a "substantial issuer." Utah Clay Technology is
not now a "substantial issuer" and cannot become one until it has
net tangible assets of at least $5 million, which it does not now
have.
There are statutes and regulations of the Securities and Exchange
Commission that impose a strict regimen on brokers that recommend penny stocks.
The Penny Stock Suitability Rule
Before a broker-dealer can recommend and sell a penny stock to a new
customer who is not an institutional accredited investor, the broker-dealer
must obtain from the customer information concerning the person's financial
situation, investment experience and investment objectives. Then, the
broker-dealer must "reasonably determine" (1) that transactions in penny
stocks are suitable for the person and (2) that the person, or his advisor,
is capable of evaluating the risks in penny stocks.
After making this determination, the broker-dealer must furnish the
customer with a written statement setting forth the basis for this
suitability determination. The customer must sign and date a copy of the
written statement and return it to the broker-dealer.
Finally the broker-dealer must also obtain from the customer a written
agreement to purchase the penny stock, identifying the stock and the number
of shares to be purchased.
The above exercise delays a proposed transaction. It causes many
broker-dealer firms to adopt a policy of not allowing their representatives
to recommend penny stocks to their customers.
The Penny Stock Suitability Rule, described above, and the Penny Stock
Disclosure Rule, described below, do not apply to the following:
* transactions not recommended by the broker-dealer,
* sales to institutional accredited investors,
41
* sales to "established customers" of the broker-dealer - persons who
either have had an account with the broker-dealer for at least a
year or who have effected three purchases of penny stocks with the
broker-dealer on three different days involving three different
issuers, and
* transactions in penny stocks by broker-dealers whose income from
penny stock activities does not exceed five percent of their total
income during certain defined periods.
The Penny Stock Disclosure Rule
Another Commission rule - the Penny Stock Disclosure Rule - requires a
broker-dealer, who recommends the sale of a penny stock to a customer in a
transaction not exempt from the suitability rule described above, to furnish
the customer with a "risk disclosure document." This document includes a
description of the penny stock market and how it functions, its inadequacies
and shortcomings, and the risks associated with investments in the penny stock
market. The broker-dealer must also disclose the stock's bid and ask price
information and the dealer's and salesperson's compensation related to the
proposed transaction. Finally, the customer must be furnished with a monthly
statement including prescribed information relating to market and price
information concerning the penny stocks held in the customer's account.
Effects of the Rule
The above penny stock regulatory scheme is a response by the Congress and
the Commission to known abuses in the telemarketing of low-priced securities by
"boiler shop" operators. The scheme imposes market impediments on the sale and
trading of penny stocks. It has a limiting effect on a stockholder's ability
to resell a penny stock.
Our common stock likely will continue to trade below $5 a share and be,
for some time at least, a "penny stock" subject to the trading market
impediments described above.
Potential De-Listing of Common Stock
NASD Eligibility Rule 6530 issued on January 4, 1999, states that issuers
that do not make current filings pursuant to Sections 13 and 15(d) of the
Securities Exchange Act of 1934 are ineligible for listing on the OTC Bulletin
Board. Issuers who are not current with such filings are subject, first, to
having an "E" appended to their trading symbol and, then, to de-listing if they
fail to become current within a short period of time. Our common stock was
delisted on May 3, 2000, because we were not a reporting company. We became a
reporting company on January 17, 2001, and our Bulletin Board trading
privileges, under our previous stock trading symbol of "UTCL", were restored.
Even so, we will remain subject to delisting at any time that we are not
current in filing reports in the future.
42
Reports to Security Holders
We file reports with the Securities and Exchange Commission. These
reports are annual 10-KSB, quarterly 10-QSB and periodic 8-K reports. We will
furnish stockholders with annual reports containing financial statements
audited by independent public or certified accountants and such other periodic
reports as we may deem appropriate or as required by law. The public may read
and copy any materials we file with the SEC at the Public Reference Room of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Utah Clay is an electronic filer, and the SEC maintains
an Internet Web site that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
The address of such site is http://www.sec.gov.
EXECUTIVE COMPENSATION
No executive officer of the company has received total compensation in any
of the last three fiscal years that exceeds $100,000. The table below sets
forth all compensation awarded to, earned by, or paid to Dennis S. Engh, the
president of the company during 1998, 1999 and 2000:
Long Term Compensation
----------------------------
Awards
-------------
Annual Compensation Payouts
- ------------------------------------------ Securities ------------------
Underlying All Other
Other Annual Restricted Options/LTIP ---------
Year Salary Bonus Compensation Stock Awards SARS Payouts Compensation
- ---- ------- ----- ------------ ------------ ------------ ------- ------------
2000 $72,000 0 0 0 0 0 0
1999 $72,000 0 0 0 0 0 0
1998 $72,000 0 0 0 0 0 0
Stock Options. We have adopted a 2000 Stock Option Plan, the major provisions
of which Plan are as follows:
Options granted under the plan may be "employee incentive stock options"
as defined under Section 422 of the Internal Revenue Code or non-qualified
stock options, as determined by the option committee of the board of directors
at the time of grant of an option. The plan enables the option committee of
the board of directors to grant up to 500,000 stock options to employees and
consultants from time to time. The option committee has granted no options.
Directors. There are no arrangements pursuant to which directors of the
company are compensated for their services as a director.
Employment Contracts. The company has no employment contracts with any person
or any compensatory plan or arrangement with any person that would result from
the resignation, retirement or any other termination of a person's employment
with the company or its subsidiaries or from a change in control of the company
or a change in a person's responsibilities following a change in control of the
company.
43
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The principal independent accountant of the company or any significant
subsidiary has not resigned, declined to stand for re-election, or been
dismissed by the company during the periods for which financial statements
are included herein.
ADDITIONAL INFORMATION
The company will furnish its shareholders with annual reports containing
audited financial information, reported upon by independent public
accountants. The company shall also furnish quarterly reports for the first
three quarters of each year containing unaudited financial information.
FINANCIAL STATEMENTS
Page
Independent Auditors' Report ........................................... F-1
Balance Sheets December 31, 2000 and 1999 .............................. F-2
Statement of Operations Years Ended
December 31, 2000 and 1999 ............................................. F-4
Statements of Changes in Stockholders' Deficit
From Inception (March 1, 1994) to December 31, 2000 .................... F-5
Statements of Cash Flows Periods Ended December 31,
2000 and 1999, and Cumulative From Inception
(March 1, 1994) to December 31, 2000 ................................... F-8
Notes to Financial Statements .......................................... F-10
Balance Sheet September 30, 2001 (Unaudited) ........................... F-19
Statement of Operations (Unaudited) Nine-Month Period
Ended September 30, 2001 and 2000, and Cumulative
From Inception (March 1, 1994) to September 30, 2001 ................... F-20
Statements of Changes in Stockholders' Equity (Deficit)
From Inception (March 1, 1994) to September 30, 2001 ................... F-21
Statements of Cash Flows (Unaudited) Nine-Month Period
Ended September 30, 2001 and 2000, and Cumulative
From Inception (March 1, 1994) to September 30, 2001 ................... F-24
Notes to Financial Statements (Unaudited) .............................. F-26
44
INDEPENDENT AUDITORS' REPORT
--------------------------------
To the Stockholders and Board of Directors
Utah Clay Technology, Inc.
We have audited the accompanying balance sheets of Utah Clay Technology,
Inc. (An Exploration stage company) as of December 31, 2000 and 1999 and the
related statements of operations, stockholders' deficit and cash flows for the
years ended December 31, 2000 and 1999, and for the period from inception
(March 1, 1994) to December 31, 2000. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
singnificant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Utah Clay
Technology, Inc. (An Exploration Stage company) as of December 31, 2000 and
1999 and the results of its operations and its cash flows for the years then
ended, and for the period from inception (March 1, 1994) to December 31, 2000,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. As discussed in Note 12 to the
financial statements, the company has suffered losses from operations and
remains in the Exploration stage. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 12. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainly.
/s/ Kabani & Company, Inc.
------------------------------
Kabani & Company, Inc.
Fountain Valley, California
April 3, 2001
F-1
Utah Clay Technology, Inc.
(An Exploration Stage Company)
BALANCE SHEETS
December 31, 2000 & 1999
ASSETS
----------
2000 1999
---------- ----------
Current Assets
Cash $ - $ 640
Receivables 350 350
---------- ----------
Total Current Assets 350 990
Properties & Equipment
Laboratory equipment 2,484 2,484
Machine design & configuration 128,000 128,000
Mining Leases 15,432 45,073
---------- ----------
Total Properties & Equipment 145,916 175,557
---------- ----------
$ 146,266 $ 176,547
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
Utah Clay Technology, Inc.
( An Exploration Stage Company )
BALANCE SHEETS
December 31, 2000 & December 31, 1999
LIABILITIES AND STOCKHOLDERS' DEFICIT
--------------------------------------------
2000 1999
------------ ------------
Current Liabilities
Accounts payable $ 94,102 $ 358,839
Advances payable- officers and directors 410,678 328,712
Notes payable 178,482 149,469
------------ ------------
Total Current Liabilities 683,262 837,020
Stockholders' Equity Deficit
Preferred stock, par value $0.001;
10,000,000 shares authorized;
84, 817 shares issued and outstanding 85 85
Common stock, par value $0.001;
30,000,000 shares authorized; 24,961,874
shares at September 30, 2000 and 23,331,874 at
December 31, 1999, issued and Outstanding 24,962 23,332
Additional paid-in capital 2,063,004 1,451,691
Stock subscription receivable (59,880) -
Deficit accumulated from inception (2,565,167) (2,135,581)
------------ ------------
Total Stockholders' Deficit (536,996) (660,473)
------------ ------------
$ 146,266 $ 176,547
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
Utah Clay Technology, Inc
(An Exploration Stage Company )
STATEMENTS OF OPERATIONS
Year ended December 31
----------------------
2000 1999
----------- -----------
Revenues $ - $ -
Expenses:
Mineral lease rentals 71,857 64,531
Inventory value adjustment
General and administrative 346,373 185,052
Interest Expense 11,256 12,109
------------ -----------
Loss before income taxes (429,486) (261,692)
Income taxes 100 100
------------ -----------
NET LOSS $ (429,586) $ (261,792)
============ ===========
Basic and diluted Loss per
common share $ (0.02) $ (0.04)
============ ===========
Basic and diluted weighted average
number of common shares outstanding 24,610,093 5,835,381
============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
Utah Clay Technology, Inc.
( An Exploration Stage Company )
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
From Inception (March 1, 1994) to December 31, 2000
Deficit
Additional accumulated
Preferred Stock Common Stock Paid-In from
Shares Amount Shares Amount Capital inception Total
--------- -------- ---------- ---------- ----------- ------------ -------------
Shares issued for
cash March 1, 1994 -- $ -- 5,600,000 $ 56,000 $ $ $ 56,000
Shares issued for
services March 1,
1994 -- -- 14,400,000 144,000 -- -- 144,000
Net loss for period
March 1, 1994 to
December 31, 1994 -- -- -- -- -- (105,573) (105,573)
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December
31, 1994 -- -- 20,000,000 200,000 -- (105,573) 94,427
Net loss for the year
ended December 31
1995 -- -- -- -- -- (672,267) (672,267)
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December
31, 1995 -- -- 200,000 -- (777,840) (577,840)
1 for 10 reverse split
September 30, 1996 20,000,000 (180,000) 180,000
Change of par value
to $0.001 -- -- -- ( 18,000) 18,000 -- --
Preferred stock
issued to related
parties for
cancellation of debt
September 30, 1996 84,817 85 -- -- 424,000 -- 424,085
Shares issued for
services in 1996 265,000 265 48,200 -- 48,465
Net loss for the year
ended December 31
1996 -- -- -- -- -- (153,669) (153,669)
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December
31, 1996 84,817 $ 85 2,265,000 $ 2,265 $ 670,200 $ (931,509) $ (258,959)
The accompanying notes are an integral part of these financial statements.
F-5
Utah Clay Technology, Inc.
(An Exploration Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (CONTINUE)
From Inception (March 1, 1994) to December 31, 2000
Deficit
Additional accumulated
Preferred Stock Common Stock Paid-In from
Shares Amount Shares Amount Capital inception Total
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December
31, 1996 84,817 $ 85 2,265,000 $ 2,265 $ 670,200 (931,509) $ (258,959)
Shares issued for
cash in 1997 -- -- 100,000 100 199,900 -- 200,000
Shares issued for
debt cancellation
in 1997 -- -- 165,000 165 (165) -- --
Net loss for the year
ended December
31, 1997 -- -- -- -- -- (378,929) (378,929)
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December
31, 1997 84,817 85 2,530,000 2,530 869,935 (1,310,438) (437,888)
Shares issued for
outstanding
Warrants -- -- 389,600 389 103,634 -- 104,023
Shares issued for
debt cancellation
In 1998 -- -- 2,100,774 2,101 376,049 -- 378,150
Shares issued for
services in 1998 572,000 572 102,073 -- 102,645
Net loss for the year
ended December
31, 1998 -- -- -- -- -- (563,351) (563,351)
--------- -------- ---------- ---------- ----------- ------------ --------------
Balance December
31, 1998 84,817 85 5,592,374 5,592 1,451,691 (1,873,789) (416,421)
Shares issued for
mining lease -- -- 17,739,500 17,740 -- -- 17,740
Net loss for the year
ended December
31, 1999 -- -- -- -- -- (261,792) (261,792)
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December
31, 1999 84,817 $ 85 23,331,874 $ 23,332 $ 1,451,691 $(2,135,581) $ (660,473)
The accompanying notes are an integral part of these financial statements.
F-6
Utah Clay Technology, Inc.
(An Exploration Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (CONTINUE)
From Inception (March 1, 1994) to December 31, 2000
Deficit
Additional accumulated
Preferred Stock Common Stock Paid-In from
Shares Amount Shares Amount Capital inception Total
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December 31, 1999 84,817 $ 85 23,331,874 $ 23,332 $ 1,451,691 $(2,135,581) $ (660,473)
Shares issued for
cash in 2000 -- -- 260,000 260 89,740 -- 90,000
Shares issued for
debt cancellation
In 2000 100,000 100 24,900 -- 25,000
Shares issued for
services in 2000 -- -- 1,070,000 1,070 366,873 -- 367,943
Stock issued for
Subscription receivable -- -- 200,000 200 129,800 -- 130,000
Net loss for the
Period ended
December 31, 2000 -- -- -- -- -- (429,586) (429,586)
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance 84,817 85 24,961,874 24,962 2,063,004 (2,565,167) (477,116)
Stock subscription receivable -- -- -- -- -- -- (59,880)
--------- -------- ---------- ---------- ----------- ------------ -------------
Balance December
31, 2000 84,817 $ 85 24,961,874 $ 24,962 $ 2,063,004 $(2,565,167) $ (536,996)
--------- -------- ---------- ---------- ----------- ------------ -------------
The accompanying notes are an integral part of these financial statements.
F-7
Utah Clay Technology, Inc.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
from inception
Period ended Period ended (March 1, 1994)
December 31, December 31, to December 31,
2000 1999 2000
------------ ------------ ---------------
Cash flows from operating activities:
Net loss $ (429,586) $ (261,792) $ (2,565,167)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services 392,943 -- 688,053
(Increase) in receivables & other current
assets -- (250) (350)
Increase (decrease) in accounts payable (264,737) 164,298 242,302
------------ ------------ ---------------
Net cash used in operating activities (301,380) (97,744) (1,635,162)
Cash flows from investing activities:
Mining leases 29,641 -- 2,308
Machine design & configuration -- (128,000) (130,484)
------------ ------------ ---------------
Net cash provided by (used in) investing
Activities 29,641 (128,000) (128,176)
Cash flows from financing activities:
Net proceeds from advances by
officers/directors 81,966 102,318 1,064,713
Proceeds from notes payable 29,013 123,858 178,482
Proceeds from issuance of shares 160,120 -- 520,143
------------ ------------ ---------------
Net cash provided by financing activities: 271,099 226,176 1,763,338
Net increase (decrease) in cash & cash equivalent 640 432 --
Cash & cash equivalent - beginning of period 640 208 --
------------ ------------ ---------------
Cash at end of period $ -- $ 640 $ --
============ ============ ===============
The accompanying notes are an integral part of these financial statements.
F-8
Utah Clay Technology, Inc.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUE)
Cumulative
from inception
Period ended Period ended (March 1, 1994)
December 31, December 31, to December 31,
2000 1999 2000
------------ ------------ ---------------
Supplemental disclosures:
Cash paid during the period for:
Interest $ 3,256 $ 4,802 $ 10,207
============ ============= ==============
Income tax $ 100 $ 300 $ 950
============ ============= ==============
Non-cash investing and financing activities:
Issuance of common stock for services $ 367,943 $ -- $ 688,053
============ ============= ==============
Issuance of preferred stock for debt $ -- $ -- $ 424,085
============ ============= ==============
Issuance of common stock for acquisition
of Mining rights $ -- $ 17,740 $ 17,740
============ ============= ==============
Issuance of common stock against
Cancellation of debt - Prepaid, Advances
and accrued expenses $ 25,000 $ -- $ 827,235
============ ============= ==============
Subscription receivable $ 130,000 $ -- $ 130,000
============ ============= ==============
The accompanying notes are an integral part of these financial statements.
F-9
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Audited Financial Statements
December 31, 2000 and 1999
Note 1- Summary of significant accounting policies
Organization and nature of operations
Utah Clay Technology, Inc. (the "Company"), a Utah corporation, was
incorporated on March 1, 1994. The planned operations of the Company are to
engage in mining, processing and marketing of minerals. For the period from
inception (March 1, 1994) to December 31, 2000 the Company had no revenues.
The Company is classified as an exploration stage company because its
principal activities involve obtaining the capital necessary to execute its
strategic business plan.
Cash and cash equivalents
The Company considers all liquid investments with a maturity of three
months or less from the date of purchase that are readily convertible into
cash to be cash equivalents.
Issuance of share for services
Valuation of shares for services is based on the fair market value of
services.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Equipment and mining properties
Equipment is recorded at cost. The Company has adopted the straight-
line method in computing depreciation for financial reporting purposes and
generally uses accelerated methods for income tax purposes. The annual
provision for depreciation will be computed principally in accordance with
the following ranges of asset lives: laboratory equipment- 3 to 5 years;
processing equipment- 3 to 10 years. Equipment was acquired and set up in
late, 1997. No depreciation expense has been recorded in the financial
statements, as the company is yet to use any of its equipment and mining
properties.
F-10
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Audited Financial Statements
December 31, 2000 and 1999
Reclassifications
Certain items in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current period's presentation. These reclassifications have no effect on the
previously reported income (loss).
Income taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statements and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted laws and rates applicable to the periods in which the
differences are expected to affect taxable income (loss). Valuation allowance
is established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Basic and diluted net loss per share
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per share".
SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15).
Net loss per share for all periods presented has been restated to reflect the
adoption of SFAS No. 128. Basic net loss per share is based upon the weighted
average number of common shares outstanding. Diluted net loss per share is
based on the assumption that all dilutive convertible shares and stock options
were converted or exercised. Dilution is computed by applying the treasury
stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if
later), and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.
Stock-based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation". SFAS No. 123 prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock
appreciation rights. SFAS No. 123 requires compensation expense to be
recorded (i) using the new fair value method or (ii) using the existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for stock issued to employees" (APB 25) and related
interpretations with pro forma disclosure of what net income and earnings per
share would have been had the company adopted the new fair value method.
The company adopted this standard in 1998 and the implementation of this
standard did not have any impact on its financial statements.
F-11
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Audited Financial Statements
December 31, 2000 and 1999
Fair value of financial instruments
Statement of financial accounting standard No. 107, Disclosures about
fair value of financial instruments, requires that the company disclose
estimated fair values of financial instruments. The carrying amounts reported
in the statements of financial position for current assets and current
liabilities qualifying as financial instruments are a reasonable estimate of
fair value.
Comprehensive income
Statement of financial accounting standards No. 130, Reporting
comprehensive income (SFAS No. 130), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity, except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statements that is displayed with the same
prominence as other financial statements. The company adopted this standard in
1998 and the implementation of this standard did not have a material impact on
its financial statements.
Reporting segments
Statement of financial accounting standards No. 131, Disclosures about
segments of am enterprise and related information (SFAS No. 131), which
superceded statement of financial accounting standards No. 14, Financial
reporting for segments of a business enterprise, establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial statements regarding products
and services, geographic areas and major customers. SFAS No. 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performances. The company adopted this standard in 1998 and the
implementation of this standard did not have a material impact on its
financial statements.
Pension and other benefits
In February 1998, the Financing accounting standards board issued
statement of financial accounting standards No. 132, Employers' disclosures
about pension and other post-retirement benefits (SFAS No. 132), which
standardizes the disclosures requirements for pension and other post-retirement
benefits. The company adopted this standard in 1998 and the implementation of
this standard did not have any impact on its financial statements.
F-12
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Audited Financial Statements
December 31, 2000 and 1999
Accounting for the costs of computer software developed or obtained for
internal use
In March 1998, the Accounting standards executive committee of the
American institute of certified public accountants (ASEC of AICPA) issued
Statement of position (SOP) No. 98-1, "Accounting for the costs of computer
software developed or obtained for internal use", effective for fiscal years
beginning after December 15, 1998. SOP N0. 98-1 requires that certain costs of
computer software developed or obtained for internal use be continued
capitalized and amortized over the useful life of the related software. The
company adopted this standard in fiscal 1999 and the implementation of this
standard did not have a material impact on its financial statements.
Costs of start-up activities
In April 1998, the ASEC of AICPA issued SOP No. 98-5, "Reporting on the
costs of start-up activities", effective for fiscal years beginning after
December 15, 1998. SOP 98-5 requires the costs of start-up activities and
organization costs to be expensed as incurred. The company adopted this
standard in fiscal 1999 and the implementation of this standard did not have a
material impact on its financial statements.
Accounting developments
In June 1998, the FASB issued SFAS No. 133, "Accounting for derivative
instruments and hedging activities", effective for fiscal years beginning
after June 15, 1999, which has deferred to June 30, 2000 by publishing of
SFAS No. 137. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This statement requires that an entity recognizes all derivative
as either assets or liabilities in the statement of financial condition and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative instrument depends on its intended use and the
resulting designation. The company does not expect that the adoption of this
standard will have a material impact on its financial statements.
Note 2- Income taxes
Since the Company has not generated taxable income since inception, no
provision for income taxes has been provided (other than minimum franchise
taxes paid to the State of Utah). Differences between income tax benefits
computed at the federal statutory rate and reported income taxes for 2000 and
1999 are primarily attributable to the valuation allowance for net operating
losses (NOL) and other permanent differences.
F-13
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
The net deferred tax (benefit) due to NOL carried forward, as of December
31, 2000 and 1999, consisted of the following:
2000 1999
------------ ------------
Deferred tax asset $ 502,459 $ 418,389
Deferred tax asset valuation allowance (502,459) (418,389)
------------ ------------
Balance as of December 31 $ -- $ --
============ ============
A summary of Net operating losses carried forward and their expiration
date is as follows:
Year of Expiration Net Operating Losses
------------------ --------------------
2009 $ 105 ,573
2010 79,963
2011 112,380
2012 199,733
2013 286,532
2014 261,792
2015 210,174
--------------------
Total $ 1,256,147
====================
Note 3- An exploration stage company
An exploration stage company is one for which principal operations of
mining have not commenced or principal operations have generated an
insignificant amount of revenue. Management of an exploration stage company
devotes most of its activities in conducting exploratory mining operations.
The company expenses all exploration costs as incurred. Operating losses
have been incurred through December 31, 2000, and the Company continues to
use, rather than provide, working capital in this operation. Although
management believes that it is pursuing a course of action that will provide
successful future operations, the outcome of these matters is uncertain.
Note 4- Mining lease and related expenditures
Management and other shareholders formed the Company to obtain the
necessary financing to mine, explore, develop, operate and sell kaolin.
The Company has two mining lease and has options to acquire three other mining
leases held by officers of the Company. The Company expenses all acquisition,
exploration and development costs that relate to specific mineral properties.
F-14
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
The realization of the costs of mining properties and deferred expenses is
dependent upon sales of kaolin on a commercial basis from the reserves of ore
bodies. For the period from inception (March 1, 1994) to December 31, 2000
the Company had no revenues. To commence operations, the Company's management
believes significant additional equity and debt financing will be required.
Note 5- Accounts payable and accrued expenses
Accounts payable and accrued expenses as of December 31, 2000 and 1999,
consist of the following:
2000 1999
------------- -------------
Lease rentals payable $ 15,432 $ 82,571
Consulting fees 11,346 --
Legal fees 46,072 66,249
Machine design & configuration -- 128,000
Health Insurance -- 12,343
Interest payable 8,000 --
Miscellaneous 13,252 69,676
------------- -------------
$ 94,102 $ 358,839
============= =============
Note 6-Advances payable - Officers & Directors
Advances payable represents amount payable to officers or directors of
the company in lieu of their services or for advances made to the company.
In 1998, the company issued common stock against a portion of advances
outstanding. The advances payable to officers and directors are unsecured,
interest free and due on demand.
Following is a summary of Advances payable to officers and directors of the
company, as of December 31, 2000 and 1999:
Balance as of December 31, 1998 $ 226,394
Advances from officers and directors during 1999 127,000
Less: Repayment of advances in 1999 (24,682)
------------
Balance as of December 31, 1999 $ 328,712
Advances from officers and directors during 2000 81,966
------------
Balance as of December 31, 2000 $ 410,678
============
F-15
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
Note 7-Notes payable
Notes payable as on December 31, 2000 and 1999 comprised of following:
2000 1999
----------- ----------
Note payable-Bank, bearing an interest rate of 4 percent over
the prime rate (12.5% on 12/31/99 and 13.5% on 12/31/00)
and due on demand. $ 24,005 $ 24,005
Note payable-Bank, bearing an interest rate of 4 percent over
the prime rate (13.5% on 12/31/00) and due on demand. 21,799 --
Note payable to an affiliated company, unsecured, interest
free and due on demand. 18,878 30,464
Notes payable to individuals related to officers of the
company, bearing an interest rate of 10% per annum, unsecured
and due on demand. Interest expense was $5,000 for each year. 50,000 50,000
Note payable to an officer of the company, unsecured, interest
free and due on demand 33,800 --
Notes payable to others, bearing an interest rate of 10% per
annum, unsecured and due on demand 30,000 20,000
Notes payable to others, interest free, unsecured and due on
demand -- 25,000
----------- ----------
Total $ 178,482 $ 149,469
=========== ==========
Note 8- Preferred Stock
Effective September 30, 1996, the Company authorized the following
transactions:
(a) Authorization of 10,000,000 shares of preferred Stock at par value
of $ 0.001.
(b) The Company issued to the following officers, directors and
shareholders in exchange for the cancellation of the debt represented by
$ 424,085 in advances, 84,817 shares of Series A Preferred Stock at $ 5.00 a
share, which stock is entitled to annual dividends of $0.50 a share payable
from the earnings of the Company and cumulative if missed, is non-voting and
is preferred over the company's common Stock in the event of the liquidation
and dissolution of the Company. The Series A Preferred Stock is neither
convertible into common Stock nor redeemable at the option of the holder but
is redeemable at the option of the company.
F-16
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
Amount of Number of
Debt Price / Preferred
Name Converted Share Shares
- ------------------ ----------- ----------- ---------
Thomas F. Harrison $ 255,185 $ 5.00 51,037
Dennis S. Engh 168,900 $ 5.00 33,780
----------- ---------
Total $ 424,085 84,817
Note 9- Stock Option
During the year ended December 31, 2000 the company has adopted a stock
option plan, under which options granted may be "employee incentive stock
options" as defined under Section 422 of the Internal revenue code or non-
qualified stock options, as determined by the option committee of the board of
directors at the time of grant of an option. The plan enables the option
committee of the board of directors to grant up to 500,000 stock options to
employees and consultants from time to time. The option committee has granted
no options. The date of grant of an Option shall, for all purposes, be the
date on which the Option Committee makes the determination granting such
Option, or such other date as is determined by the Option Committee.
Note 10- Litigation
Utah Clay was a defendant in a lawsuit brought for the recovery of
$ 50,000, interest and attorney fees by Six Way, Inc. and Daniel W. Jacksons
Trustee of the MJB Trust. The Company acknowledged the loan made to it by the
plaintiffs, which was the basis for the civil action. The claim was settled
for $60,000, including interest and litigation costs of $10,000. By December
31, 1999, the whole amount was paid off.
Note 11- Acquisition of mining lease
The company entered into a mining lease agreement of Kaolin mineral from
an affiliated company for $17,740 on December 27, 1999. The Company issued
17,739,500 shares of common stock @$0.001 per share in lieu of consideration
of mining lease. During the year 2000, the Company entered into two separate
lease addendum agreements for mining leases on five properties that extended
their leases to the years 2004 and 2005. The company also is required to pay
to the Bureau of land management, US Department of interior, an amount of
$24,100 per year pursuant to their mining lease and option agreement.
F-17
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
Note 12-Going Concern uncertainty
The company's financial statements have been presented on the basis that
it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The company
incurred a net loss of $2,565,167 for the period from inception (March 1,
1994) to December 31, 2000. The company's current liabilities exceeded its
current assets by $682,912 and $836,030 as of December 31, 2000 and December
31, 1999, respectively. The company's total liabilities exceeded its total
assets by $536,996 and $660,473 as of December 31, 2000 and 1999,
respectively. These factors, as well as the uncertain conditions that the
company faces in its day-to-day operations, create an uncertainty as to the
company's ability to continue as a going concern. The financial statements do
not include any adjustments that might be necessary should the company be
unable to continue as a going concern.
The company plans to finance the continued operations for the next year
through private funding and funding from officers of the company.
Note 13- Subsequent events & Commitments
Issuance of shares
Subsequent to year ended December 31, 2000 the company entered in to
various agreements with several parties, whereby, the company issued
2,131,379 shares for $213,138 in consideration for services during the quarter
ended March 31, 2001.
F-18
UTAH CLAY TECHNOLOGY, INC.
(An Exploration Stage Company)
BALANCE SHEET
SEPTEMBER 30, 2001
(Unaudited)
ASSETS
CURRENT ASSETS:
Receivables 350
Prepaid expenses 66,000
-------
Total current assets 66,350
PROPERTY AND EQUIPMENT
Laboratory Equipment 2,484
Machine Design & Configuration 128,000
-------
Total Properties & Equipment 130,484
----------
$ 196,834
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 62,771
Accrued expenses 116,323
Loans payable-officers and directors 258,137
Notes payable-officer 33,800
Notes payable-others 168,311
----------
Total current liabilities 639,342
COMMITMENTS
STOCKHOLDERS' DEFICIT
Preferred stock, par value $0.001;10,000,000
shares authorized; 84,817 shares issued
and outstanding 85
Common stock, par value $0.001; 30,000,000
shares authorized; 28,220,253 shares
issued and outstanding 28,220
Additional paid-in capital 2,492,984
Stock subscription receivable (59,880)
Deficit accumulated from inception (2,903,917)
------------
Total stockholders' deficit (442,508)
------------
$ 196,834
============
The accompanying notes are an integral part of these financial statements.
F-19
UTAH CLAY TECHNOLOGY, INC.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
Nine months period From Inception
ended September 30, (March 1, 1994) to
2001 2000 September 30, 2001
-------- -------- ------------------
Revenues $ - $ - $ -
Expenses:
Mineral lease rentals 73,009 94,862 523,698
General and Administrative 265,666 179,622 2,379,352
----------- ----------- -------------
Loss before income taxes (338,675) (274,484) (2,903,050)
Income taxes 75 50 867
----------- ----------- -------------
Net Loss $ (338,750) $ (274,534) $ (2,903,917)
=========== =========== =============
Basic and diluted loss
per common share $ (0.012) $ (0.011)
=========== ===========
Basic and diluted weighted
average number of common
shares outstanding 27,212,848 24,491,544
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-20
UTAH CLAY TECHNOLOGY, INC.
(An exploration stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (MARCH 1, 1994) TO SEPTEMBER 30, 2001
Preferred Stock Common Stock Deficit
-------------------------------------------------- Additional Stock accumulated
Number of Number of Paid-In subscription from Total
Shares Amount Shares Amount Capital receivable inception
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Shares issued for
cash March 1, 1994 - $ - 5,600,000 $ 56,000 $ - $ - $ - $ 56,000
Shares issued for
services March 1, 1994 - - 14,400,000 144,000 - - - 144,000
Net loss for period
March 1, 1994 to
December 31, 1994 - - - - - - (105,573) (105,573)
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1994 - - 20,000,000 200,000 - - (105,573) 94,427
Net loss for the year
ended December 31, 1995 - - - - - - (672,267) (672,267)
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1995 - - 20,000,000 200,000 - - (777,840) (577,840)
1 for 10 reverse split
September 30, 1996 - - 2,000,000 (180,000) 180,000 - - -
Change of par value
to $0.001 - - - (18,000) 18,000 - - -
Preferred stock issued to
related parties for
cancellation of debt
September 30, 1996 84,817 85 - - 424,000 - - 424,085
Shares issued for service
in 1996 - - 265,000 265 48,200 - - 48,465
Net loss for the year ended
December 31, 1996 - - - - - - (153,669) (153,669)
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1996 84,817 $ 85 2,265,000 $ 2,265 $ 670,200 $ - $ (931,509) $ (258,959)
The accompanying notes are an integral part of these financial statements.
F-21
UTAH CLAY TECHNOLOGY, INC.
(An exploration stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (MARCH 1, 1994) TO SEPTEMBER 30, 2001
Preferred Stock Common Stock Deficit
-------------------------------------------------- Additional Stock accumulated
Number of Number of Paid-In subscription from Total
Shares Amount Shares Amount Capital receivable inception
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1996 84,817 85 2,265,000 2,265 670,200 - (931,509) (258,959)
Share issued for cash
in 1997 - - 100,000 100 199,900 - - 200,000
Share issued for debt
cancellation in 1997 - - 165,000 165 (165) - - -
Net loss for the year
ended December 31, 1997 - - - - - - (378,929) (378,929)
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1997 84,817 85 2,530,000 2,530 869,935 - (1,310,438) (437,888)
Shares issued for
outstanding warrants - - 389,600 389 103,634 - - 104,023
Share issued for debt
cancellation in 1998 - - 2,100,774 2,101 376,049 - - 378,150
Shares issued for
service in 1998 - - 572,000 572 102,073 - - 102,645
Net loss for the year ended
December 31, 1998 - - - - - - (563,351) (563,351)
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1998 84,817 85 5,592,374 5,592 1,451,691 - (1,873,789) (416,421)
Shares issued for
mining lease - - 17,739,500 17,740 - - - 17,740
Net loss for the year ended
December 31, 1999 - - - - - - (261,792) (261,792)
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1999 84,817 $ 85 23,331,874 $ 23,332 $ 1,451,691 $ - $ (2,135,581) $(660,473)
The accompanying notes are an integral part of these financial statements.
F-22
UTAH CLAY TECHNOLOGY, INC.
(An exploration stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (MARCH 1, 1994) TO SEPTEMBER 30, 2001
Preferred Stock Common Stock Deficit
-------------------------------------------------- Additional Stock accumulated
Number of Number of Paid-In subscription from Total
Shares Amount Shares Amount Capital receivable inception
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 1999 84,817 $ 85 23,331,874 $ 23,332 $ 1,451,691 $ - $(2,135,581) $(660,473)
Share issued for cash
in 2000 - - 260,000 260 89,740 - - 90,000
Share issued for debt
cancellation in 2000 - - 100,000 100 24,900 - - 25,000
Shares issued for service
in 2000 - - 1,070,000 1,070 366,873 - - 367,943
Shares issued for Subscription
Receivable - - 200,000 200 129,800 - - 130,000
Net loss for the year ended
December 31, 2000 - - - - - - (429,586) (429,586)
Stock Subscription
Receivable - - - - - (130,000) - (130,000)
Cash received - - - - - 70,120 - 70,120
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 2000 84,817 85 24,961,874 24,962 2,063,004 (59,880) (2,565,167) (536,996)
Share issued for debt
cancellation in 2001 - - 2,131,379 2,131 211,007 - - 213,138
Shares issued for service
and prepaid expenses - - 1,127,000 1,127 218,973 - - 220,100
Net loss for the period ended
September 30, 2001 - - - - - - (338,750) $(338,750)
------------- -------- ---------- ---------- ----------- ----------- ----------- ---------
Balance September 30, 2001 84,817 $ 85 28,220,253 $ 28,220 $ 2,492,984 $ (59,880) $(2,903,917) $(442,508)
============= ======== ========== ========== =========== =========== =========== =========
The accompanying notes are an integral part of these financial statements.
F-23
UTAH CLAY TECHNOLOGY, INC.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative
Nine months period from inception
ended September 30, (March 1, 1994) to
2001 2000 September 30, 2001
------------ ------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (338,750) $ (274,534) $ (2,903,917)
Adjustments to reconcile net loss to net cash used in
operating activities:
Issuance of common stock for services 154,100 367,943 842,153
Increase in receivable - - (350)
Decrease in prepaid expenses - (82,595) -
Increase / (decrease) in accounts payable & accrued expenses 84,992 (170,895) 327,294
------------ ------------ ------------------
Total Adjustments 239,092 114,453 1,169,097
Net cash used in operating activities (99,658) (160,081) (1,734,820)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in mining leases 15,432 27,904 17,740
Machine design & configuration - - (130,484)
------------ ------------ ------------------
Net cash provided by (used in) investing activities 15,432 27,904 (112,744)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans from officers/directors 33,800 3,600 1,098,513
Proceeds from (payments of) notes payable 50,426 (26,586) 228,908
Issuance of shares - 155,420 520,143
------------ ------------ ------------------
Net cash provided by financing activities 84,226 132,434 1,847,564
Net Increase (decrease) in cash & cash equivalents - 257 -
CASH & CASH EQUIVALENTS, BEGINNING BALANCE - 640 -
------------ ------------ ------------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ - $ 897 $ -
============ ============ ==================
The accompanying notes are an integral part of these financial statements.
F-24
UTAH CLAY TECHNOLOGY, INC.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Cumulative
Nine months period from inception
ended September 30, (March 1, 1994) to
2001 2000 September 30, 2001
------------ ------------ ------------------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest $ 902 $ - $ 11,109
Income tax $ 272 $ - $ 1,222
Non-cash investing and financing activities:
Issuance of common stock for service $ 154,100 $ 367,943 $ 842,153
Issuance of preferred stock for debt $ - $ - $ 424,085
Issuance of common stock for acquisition $ - $ - $ 17,740
of mining rights
Issuance of common stock against
cancellation of debt, Prepaid, Advances
and accrued expenses $ 279,138 $ 25,000 $ 1,106,373
Subscription receivable $ - $ 130,000 $ 130,000
F-25
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Unaudited Financial Statements
Note 1- Summary of significant accounting policies
Organization and nature of operations
Utah Clay Technology, Inc. (the "Company"), a Utah corporation, was
incorporated on March 1, 1994. The planned operations of the Company are to
engage in mining, processing and marketing of minerals. For the period from
inception (March 1, 1994) to September 30, 2001, the Company had no revenues.
The Company is classified as an exploration stage company because its principal
activities involve obtaining the capital necessary to execute its strategic
business plan.
Cash and cash equivalents
The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be
cash equivalents.
Issuance of share for services
Valuation of shares for services is based on the fair market value of services.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Equipment and mining properties
Equipment is recorded at cost. The Company has adopted the straight-line
method in computing depreciation for financial reporting purposes and generally
uses accelerated methods for income tax purposes. The annual provision for
depreciation will be computed principally in accordance with the following
ranges of asset lives: laboratory equipment- 3 to 5 years, processing
equipment- 3 to 10 years. Equipment was acquired and set up in late 1997. No
depreciation expense has been recorded in the financial statements, as the
company is yet to use any of its equipment and mining properties.
Income taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statements and tax basis of assets and
liabilities that will result in taxable or
F-26
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Unaudited Financial Statements
deductible amounts in the future based on enacted laws and rates applicable to
the periods in which the differences are expected to affect taxable income
(loss). Valuation allowance is established when necessary to reduce deferred
tax assets to the amount expected to be realized.
Basic and diluted net loss per share
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average
number of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average
market price during the period.
Stock-based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation rights.
SFAS No. 123 requires compensation expense to be recorded (i) using the new
fair value method or (ii) using the existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for stock issued to
employees" (APB 25) and related interpretations with proforma disclosure of
what net income and earnings per share would have been had the company
adopted the new fair value method. The company uses the intrinsic value
method prescribed by APB25 and has opted for the disclosure provisions of
SFAs No.123. The implementation of this standard did not have any impact on
its financial statements.
Fair value of financial instruments
Statement of financial accounting standard No. 107, Disclosures about fair
value of financial instruments, requires that the company disclose estimated
fair values of financial instruments. The carrying amounts reported in the
statements of financial position for current assets and current liabilities
qualifying, as financial instruments are a reasonable estimate of fair value.
Accounting developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
F-27
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Unaudited Financial Statements
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal
quarters of fiscal years beginning after June 15, 2000. The impact of adopting
this statement is not material to the financial statements of the Company.
In June 2000, the FASB issued Financial Accounting Standards (SFAS) No. 138,
"Accounting for Certain Instruments and Certain Hedging Activities." The
impact of adopting this statement is not material to the financial statements
of the Company.
In June 2000, the FASB issued Financial Accounting Standards (SFAS) No. 139,
"Rescission of FASB Statement No. 53 and Amendments to Statements No. 63, 89,
and 121." The impact of adopting this statement is not material to the
financial statements of the Company.
In September 2000, the FASB issued Financial Accounting Standards SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and a replacement of FASB Statement No. 125."
The impact of adopting this statement is not material to the financial
statements of the Company.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC's views on the application of
GAAP to revenue recognition. In June 2000, the SEC released SAB No. 101B that
delays the implementation date of SAB 101 until no later than the fourth
fiscal quarter of fiscal year beginning after December 15, 1999. The Company
has reviewed SAB No. 101 and believes that it is in compliance with the SEC's
interpretation of Revenue recognition.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." This Interpretation clarifies (a)
the definition of employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a no compensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. The adoption of this
Interpretation has not had a material impact on the Company's financial
position or operating results.
In January 2001, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 00-27 effective for convertible debt instruments issued after
November 16, 2000. This pronouncement requires the use of the intrinsic value
method for recognition of the detachable and imbedded equity features included
with indebtedness, and requires amortization of the amount associated with the
convertibility feature over the life of the debt instrument rather than the
period for which the instrument first becomes convertible. The adoption of this
pronouncement has not had a material impact on the Company's financial position
or operating results.
F-28
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Unaudited Financial Statements
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets.
SFAS No. 141 establishes new standards for accounting and reporting
requirements for business combinations and will require that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Use of the pooling-of-interests method will be prohibited. This
statement is effective for business combinations completed after June 30, 2001.
SFAS No. 142 establishes new standards for goodwill acquired in a business
combination and eliminates amortization of goodwill and instead sets forth
methods to periodically evaluate goodwill for impairment. Intangible assets
with a determinable useful life will continue to be amortized over that period.
This statement becomes effective January 1, 2002.
Management is in the process of evaluating the requirements of SFAS No. 141 and
142, but does not expect these pronouncements will materially impact the
Company's financial position or results of operations.
Note 2- Income taxes
Since the Company has not generated taxable income since inception, no
provision for income taxes has been provided (other than minimum franchise
taxes paid to the state of Utah). The company has provided a 100% valuation
allowance against the deferred income tax assets arisen due to net operating
losses carried forward.
Note 3- An exploration stage company
An exploration stage company is one for which principal operations of mining
have not commenced or principal operations have generated an insignificant
amount of revenue. Management of an exploration stage company devotes most of
its activities in conducting exploratory mining operations. Operating losses
have been incurred through September 30, 2001, and the Company continues to
use, rather than provide, working capital in this operation. Although
management believes that it is pursuing a course of action that will provide
successful future operations, the outcome of these matters is uncertain.
Note 4-Going Concern uncertainty
The company's financial statements have been presented on the basis that it is
a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The company incurred a net
loss of $2,903,917 for the period from inception (March 1, 1994) to September
30, 2001. The company's current liabilities exceeded its current assets by
$572,992 as of September 30, 2001. These factors, as well as the uncertain
conditions that the company faces in its day-to-day operations, create an
uncertainty as to the company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should the company be unable to continue as a going concern. The company plans
to finance the continued operations for the next year through private funding
and funding from officers of the company.
F-29
Utah Clay Technology, Inc.
(An Exploration Stage Company)
Notes to Unaudited Financial Statements
Note 5- Issuance of stock
The Company issued 2,131,379 shares of common stock in exchange for debts to
shareholders amounting $213,138 in the first quarter, 530,000 shares of common
stock for services in the amount of $100,700 in the second quarter and 597,000
shares of common stock for services and prepaid expenses, in the amount of
$119,400 in the third quarter of 2001.
Note-6 Basis of preparation
The accompanying unaudited condensed interim financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial information, but
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The audited financial
statements for the two years ended December 31, 2000 and 1999 was filed on
April 13, 2001 with the Securities and Exchange Commission and is hereby
referenced. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the nine-
month period ended September 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.
Note 7- Commitments
On April 1, 2001, the Company entered into an agreement with certain officers
of the Company whereby the Company will pay $13,000 per month in aggregate, to
these officers for their services through December 31, 2001.
F-30
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The general corporation law of Utah and the bylaws of the Registrant
provide certain indemnification rights for directors, officers and agents of
the Registrant. These indemnification provisions are set forth in the
Prospectus under "Indemnification."
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses of this offering, other than brokers' commissions,
are as follows:
Estimated
Item Amount
----------------------- -------------
Registration fees $ 3,500
Transfer agent's fees 1,500
Printing 2,000
Legal 10,000
Accounting 5,000
EDGAR provider fees 3,000
-------------
$25,000
The Registrant will pay all the above expenses. The selling stockholders
will pay none of them.
Item 26. Recent Sales of Unregistered Securities
The following information is provided for all securities sold by the
Registrant within the past three years without registering the securities under
the Securities Act of 1933. All securities were shares of common stock. There
were no underwriters involved in the sales.
Dollar Value of
No. of Cash Other Type of
Date Shares Sold Purchasers Consideration Consideration
- ----------- ---------------- -------------------------- ----------------- -----------------
12-99 17,739,500(1) Utah Kaolin Corporation - 17,740
03-20-00 to
04-03-00(2):
04-03-00 80,000(3) McKay, Burton & Thurman - 48,305
04-03-00 10,000(4) James Groscost - 6,038
45
03-20-00 10,000(5) Roger Huber - 3,200
03-20-00 10,000(6) J. W. Patterson - 3,200
03-20-00 500,000(7) E. G. Marchi - 160,000
03-20-00 60,000(8) Robert J. Conley - 19,200
03-20-00 400,000(9) Precision Systems - 128,000
Engineering, Inc.
03-20-00 100,000(10) Ron Ostler - 25,000
03-20-00 460,000(11) Investors Advocate - 220,000
02-27-01 10,000(12) Ryan Engh - 1,000
02-27-01 443,773(12) Thomas J. Kenan - 44,380
02-27-01 465,000(12) Thomas F. Harrison - 46,500
02-27-01 1,162,606(12) Dennis S. Engh - 116,260
04-10-01 530,000(13) Securities Capital - 53,000
Corporation
08-09-01 165,000(12) Thomas J. Kenan - 14,850
08-09-01 165,000(14) Marilyn C. Kenan Trust - 14,850
08-09-01 100,000(15) Kenneth Morrison - 9,000
08-09-01 167,000(16) Dorcas Engh - 15,030
11-30-01 321,420(17) Dutchess Private Equities - 22,500
Fund, L.P.
11-30-01 1,285,700(17) May Davis Group, Inc. - 90,000
11-30-01 964,428(17) Dutchess Advisors, Ltd. - 67,500
11-30-01 450,000(18) Joseph B. LaRocco - 31,500
________________________
(1) These shares were issued to purchase the Oro Blanco mining lease. See
"Certain Relationships and Related Transactions" in the Prospectus.
The shares were issued pursuant to the exemption from registration
provided by Regulation D, Rule 506. No public solicitation or public
advertising was employed. The purchaser of the shares, Utah Kaolin
Corporation, is an affiliate of the Registrant. Utah Kaolin's
management is also the management of Utah Clay Technology. Utah Kaolin
is owned by members of the Engh family - who are the majority
shareholders of Utah Clay; Carmen J. (Tony) Lotito, an officer and
director of Utah Clay; Dr. Kenneth Morrison, an accredited investor;
and Thomas J. Kenan, an accredited investor. Each shareholder of Utah
Kaolin Corporation was an accredited investor at the time of this
transaction.
(2) During this period Utah Clay approached seven creditors of the company,
listed below, and offered and sold them restricted common stock in
exchange for the cancellation of indebtedness owed to them by the
company. Two of the creditors were accredited, and five were non-
accredited investors. The sales were made in reliance upon the Rule
46
506 exemption from registration. All five non-accredited investors
were sophisticated persons who had sufficient knowledge and experience
in financial and business matters to allow them to evaluate the merits
and risks of the investment. The offering materials provided each
investor were current and contained what the company believed was all
material information about the company required by Rule 502(b)(2) of
Regulation D, which information had been prepared for an offering
circular used in an unsuccessful Rule 506 offering attempted in
December 1999. The financial statements provided were audited
statements of 1998 and 1999.
(3) These shares were issued in exchange for legal services provided to
Utah Clay during the period of March 1994 to September 1999 and were
issued pursuant to the exemption from registration provided by
Regulation D, Rule 506. No public solicitation or public advertising
was employed. The beneficial owner of these shares is William H.
Thurman, one of the partners of the law firm and an accredited
investor. He was provided a copy of an offering circular that had been
prepared for an unsuccessful Rule 506 offering conducted in December
1999 as well as financial statements for 1999 and 1998. He was given
an opportunity to ask questions of management concerning Utah Clay's
affairs.
(4) These shares were issued in exchange for the cancellation of
indebtedness of Utah Clay that arose with regard to ore hauling
services provided by a company owned by Mr. Groscost, an accredited
investor. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public
solicitation or public advertising was employed. He was provided a
copy of an offering circular that had been prepared for an
unsuccessful Rule 506 offering conducted in December 1999 as well as
financial statements for 1999 and 1998. He was given an opportunity to
ask questions of management concerning Utah Clay's affairs.
(5) These shares were issued to this non-accredited investor to cancel
indebtedness owed to this person for services rendered with regard to
Utah Clay's mining properties. The shares were issued pursuant to the
exemption from registration provided by Regulation D, Rule 506. No
public solicitation or public advertising was employed. He was
provided a copy of an offering circular that had been prepared for an
unsuccessful Rule 506 offering conducted in December 1999 as well as
financial statements for 1999 and 1998. He was given an opportunity to
ask questions of management concerning Utah Clay's affairs. This
investor was sophisticated and had sufficient knowledge and experience
in financial and business matters to allow him to evaluate the merits
and risks of the investment.
(6) These shares were issued to this non-accredited investor to cancel
indebtedness owed to this person for his marketing services. The
shares were issued pursuant to the exemption from registration
provided by Regulation D, Rule 506. No public solicitation or public
advertising was employed. He was provided a copy of an offering
circular that had been prepared for an unsuccessful Rule 506 offering
conducted in December 1999 as well as financial statements for 1999 and
1998. He was given an opportunity to ask questions of management
concerning Utah Clay's affairs. This investor was sophisticated and
47
had sufficient knowledge and experience in financial and business
matters to allow him to evaluate the merits and risks of the investment.
(7) These shares were issued to this non-accredited investor to cancel
indebtedness owed to this person for business planning consulting
services rendered for one year. The shares were issued pursuant to the
exemption from registration provided by Regulation D, Rule 506. No
public solicitation or public advertising was employed. He was
provided a copy of an offering circular that had been prepared for an
unsuccessful Rule 506 offering conducted in December 1999 as well as
financial statements for 1999 and 1998. He was given an opportunity to
ask questions of management concerning Utah Clay's affairs. This
investor was sophisticated and had sufficient knowledge and experience
in financial and business matters to allow him to evaluate the merits
and risks of the investment.
(8) These shares were issued to this non-accredited investor to cancel
indebtedness owed to this person for technical services with regard to
product development. The shares were issued pursuant to the exemption
from registration provided by Regulation D, Rule 506. No public
solicitation or public advertising was employed. He was provided a
copy of an offering circular that had been prepared for an unsuccessful
Rule 506 offering conducted in December 1999 as well as financial
statements for 1999 and 1998. He was given an opportunity to ask
questions of management concerning Utah Clay's affairs. This investor
was sophisticated and had sufficient knowledge and experience in
financial and business matters to allow him to evaluate the merits and
risks of the investment.
(9) These shares were issued to this non-accredited investor to cancel
indebtedness owed to this person for technical engineering services
with regard to planning for processing plants. The shares were issued
pursuant to the exemption from registration provided by Regulation D,
Rule 506. No public solicitation or public advertising was employed.
He was provided a copy of an offering circular that had been prepared
for an unsuccessful Rule 506 offering conducted in December 1999 as
well as financial statements for 1999 and 1998. He was given an
opportunity to ask questions of management concerning Utah Clay's
affairs. This investor was sophisticated and had sufficient knowledge
and experience in financial and business matters to allow him to
evaluate the merits and risks of the investment.
(10) These shares were issued to this non-accredited investor to cancel
indebtedness owed to this person for a $25,000 loan he made to the
company in November 1999. The shares were issued pursuant to the
exemption from registration provided by Regulation D, Rule 506. No
public solicitation or public advertising was employed. He was
provided a copy of an offering circular that had been prepared for
an unsuccessful Rule 506 offering conducted in December 1999 as well
as financial statements for 1999 and 1998. He was given an
opportunity to ask questions of management concerning Utah Clay's
affairs. This investor was sophisticated and had sufficient
48
knowledge and experience in financial and business matters to allow
him to evaluate the merits and risks of the investment.
(11) These shares were issued to this non-accredited investor for
subscriptions aggregating $220,000 to be paid in cash by December
31, 2000. As of September 30, 2000 Utah Clay had received $155,420
of the subscribed amount and had a subscription receivable of
$64,580. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public
solicitation or public advertising was employed. It was provided a
copy of an offering circular that had been prepared for an unsuccessful
Rule 506 offering conducted in December 1999 as well as financial
statements for 1999 and 1998. It was given an opportunity to ask
questions of management concerning Utah Clay's affairs. This investor
was sophisticated and had sufficient knowledge and experience in
financial and business matters to allow it to evaluate the merits and
risks of the investment.
(12) These shares were issued to these persons for personal services
provided to the issuer - non-executive services by Ryan Engh, legal
services by Thomas J. Kenan, legal counsel to the issuer, and executive
services by Thomas Harrison and Dennis Engh, officers and directors of
the issuer. They were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506.
(13) These shares were issued in exchange for financial public relations
services pursuant to the exemption from registration provided by
Regulation D, Rule 506.
(14) These shares were issued to this person by way of a gift from Thomas J.
Kenan, legal counsel to the issuer, to his spouse's trust. The shares
were issued in lieu of cash payment for Mr. Kenan's legal services.
The shares were issued pursuant to the exemption from registration
provided by Regulation D, Rule 506.
(15) These shares were issued in exchange for Mr. Morrison's facilitating a
loan to the issuer by guaranteeing the loan. The shares were issued
pursuant to the exemption from registration provided by Regulation D,
Rule 506.
(16) These shares were issued to Mrs. Engh in consideration of her
cancelling $15,030 of indebtedness of the company to her, which
indebtedness represented a loan of money earlier made by her to the
company. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506.
(17) These shares were issued in exchange for services rendered as a
consultant to an investor in the issuer's Equity Line of Credit. The
shares were issued pursuant to the exemption from registration provided
by Regulation D, Rule 506.
49
(18) These shares were issued in exchange for legal services performed in
connection with the issuer's Equity Line of Credit and $195,000 worth
of 3-year, 5% convertible debentures. The shares were issued pursuant
to the exemption from registration provided by Regulation D, Rule 506.
Exhibits
The following exhibits are filed as part of this Registration Statement:
Exhibit
Number Description of Exhibit
- ------- -----------------------
3(i) - Articles of Incorporation of Utah Clay Technology, Inc. and
amendments thereto.*
3(i).1 - Amended Articles of Incorporation of Utah Clay Technology,
Inc.***
3(ii) - Bylaws of Utah Clay Technology, Inc.*
5 - Opinion of Thomas J. Kenan on the legality of the securities
being registered.
9 - 2000 Stock Option Plan.*
10 - White Mountain mining lease, consisting of Amendment Agreement
of November 9, 1992; Mining Lease dated March 1, 1994;
Addendum to Mining Lease dated March 15, 2000; and Addendum to
Mining Lease dated March 27, 2000.*
10.1 - Oro Blanco mining lease, consisting of Mining Lease dated
December 31, 1999.*
10.2 - Kimberly claims: Mining Lease Agreement (Fullmer-Engh), dated
June 19, 1993; Addendum to Fullmer-Engh Mining Lease, dated
50
March 15, 2000; Option (Engh-Kaolin of the West)to Enter Into
Mining Lease, dated September 30, 1996; Option (Kaolin of the
West-Utah Clay) to Enter Into Mining Lease, dated September 30,
1996, to which is attached an unexecuted Mining Lease;
Addendum to Engh-Kaolin of the West Option to Enter Into Mining
Lease, dated March 27, 2000; and Addendum to Kaolin of the
West-Utah Clay Option to Enter Into Mining Lease dated March
27, 2000.*
10.3 - Koosharem claims: Mining Lease Agreement (Fullmer-Engh), dated
June 19, 1993; Addendum to Fullmer-Engh Mining Lease, dated
March 15, 2000; Option (Engh-Kaolin of the West)to Enter Into
Mining Lease, dated September 30, 1996; Option (Kaolin of the
West-Utah Clay) to Enter Into Mining Lease, dated September 30,
1996, to which is attached an unexecuted Mining Lease; Addendum
to Engh-Kaolin of the West Option to Enter Into Mining Lease,
dated March 27, 2000; and Addendum to Kaolin of the West-Utah
Clay Option to Enter Into Mining Lease dated March 27, 2000.*
10.4 - Topaz claims: Mining Lease Agreement (Fullmer-Engh), dated June
19, 1993; Addendum to Fullmer-Engh Mining Lease, dated March 15,
2000; Option (Engh-Kaolin of the West)to Enter Into Mining
Lease, dated September 30, 1996; Option (Kaolin of the West-Utah
Clay) to Enter Into Mining Lease, dated September 30, 1996, to
which is attached an unexecuted Mining Lease; Addendum to
Engh-Kaolin of the West Option to Enter Into Mining Lease, dated
March 27, 2000; and Addendum to Kaolin of the West-Utah Clay
Option to Enter Into Mining Lease dated March 27, 2000.*
10.7 - Small Miner's Permit for White Mountain lease issued by Bureau
of Land Management and Utah State Division of Oil, Gas and
Mining.**
10.8 - Subscription Agreement of November 30, 2001 between Utah Clay
Technology, Inc. and the Purchasers of $200,000 of Convertible
Debentures of Utah Clay Technology, Inc.
10.9 - Form of Debenture of the convertible debentures described in
Exhibit 10.8.
51
10.10 - Security Agreement (Stock Pledge) of November 30, 2001 between
Dennis S. Engh, Daniel Engh, Thomas Harrison (as Pledgors) and
the Purchasers of the convertible debentures described in
Exhibit 10.8.
10.11 - Registration Rights Agreement of November 30, 2001 between Utah
Clay Technology, Inc. and the Purchasers of the convertible
debentures described in Exhibit 10.8.
10.12 - Investment Agreement (Equity Line Financing) of November 30,
2001 between Utah Clay Technology, Inc. and the Investors bound
by the equity line financing.
10.13 - Registration Rights Agreement of November 30, 2001 between Utah
Clay Technology, Inc. and the Investors described in Exhibit
10.12.
10.14 - Escrow Agreement of November 30, 2001 among First Union
National Bank of New York, New York; Utah Clay Technology,
Inc.; and May Davis Group, Inc.
23 - Consent of Thomas J. Kenan, to the reference to him as an
attorney who has passed upon certain information contained in
the Registration Statement.
23.1 - Consent of Kabani & Company, Certified Public Accountants,
independent auditors of the Registrant.
*Previously filed with Amendment No. 1 to Form SB-2 Commission file number
333-34308; incorporated herein.
**Previously filed with Amendment No. 2 to Form SB-2 Commission file number
333-34308; incorporated herein.
***Previously filed with Form 10-QSB Current Report for the Period Ended
September 30, 2001 Commission file number 333-34308; incorporated herein.
Item 28. Undertakings
The Registrant will -
52
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in the volume and price represent
no more than a twenty percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the company pursuant to the foregoing provisions, or otherwise, the
company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
53
In the event that a claim for indemnification against such liabilities
(other than the payment by the company of expenses incurred or paid by a
director, officer or controlling person of the company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
54
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Salt Lake City, Utah.
Date: December 21, 2001 UTAH CLAY TECHNOLOGY, INC.
By/s/Dennis S. Engh
-----------------
Dennis S. Engh, President, and
individually as a Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates indicated.
Date: December 21, 2001 /s/ Darin D. Engh
-------------------
Darin D. Engh, Treasurer,
Secretary and Director
Date: December 21, 2001 /s/ Thomas F. Harrison
-------------------------
Thomas F. Harrison, Vice President,
Chief Financial Officer, Principal
Accounting Officer and Director
Date: December 21, 2001 /s/ Daniel H. Engh
----------------------
Daniel H. Engh, Vice President
and Director
55
PROSPECTUS DELIVERY OBLIGATION. Until ________, 2002 (90 days after the
effective date of this Prospectus), all dealers effecting transactions in these
securities may be required to deliver a Prospectus. Further, all dealers or
brokers that effect transactions in these securities for the selling
stockholders are required to deliver a Prospectus.
56
Utah Clay Technology, Inc.
Commission File 333-34308
Exhibits to Form SB-2 Registration Statement
--------------------------------------------
Number Description of Exhibit
- ------ ----------------------
3(i) - Articles of Incorporation of Utah Clay Technology, Inc. and
amendments thereto.*
3(i).1 - Amended Articles of Incorporation of Utah Clay Technology,
Inc.***
3(ii) - Bylaws of Utah Clay Technology, Inc.*
5 - Opinion of Thomas J. Kenan on the legality of the securities
being registered.
9 - 2000 Stock Option Plan.*
10 - White Mountain mining lease, consisting of Amendment Agreement
of November 9, 1992; Mining Lease dated March 1, 1994;
Addendum to Mining Lease dated March 15, 2000; and Addendum to
Mining Lease dated March 27, 2000.*
10.1 - Oro Blanco mining lease, consisting of Mining Lease dated
December 31, 1999.*
10.2 - Kimberly claims: Mining Lease Agreement (Fullmer-Engh), dated
June 19, 1993; Addendum to Fullmer-Engh Mining Lease, dated
March 15, 2000; Option (Engh-Kaolin of the West)to Enter Into
Mining Lease, dated September 30, 1996; Option (Kaolin of the
West-Utah Clay) to Enter Into Mining Lease, dated September
1
30, 1996, to which is attached an unexecuted Mining Lease;
Addendum to Engh-Kaolin of the West Option to Enter Into
Mining Lease, dated March 27, 2000; and Addendum to Kaolin of
the West-Utah Clay Option to Enter Into Mining Lease dated
March 27, 2000.*
10.3 - Koosharem claims: Mining Lease Agreement (Fullmer-Engh), dated
June 19, 1993; Addendum to Fullmer-Engh Mining Lease, dated
March 15, 2000; Option (Engh-Kaolin of the West)to Enter Into
Mining Lease, dated September 30, 1996; Option (Kaolin of the
West-Utah Clay) to Enter Into Mining Lease, dated September
30, 1996, to which is attached an unexecuted Mining Lease;
Addendum to Engh-Kaolin of the West Option to Enter Into
Mining Lease, dated March 27, 2000; and Addendum to Kaolin of
the West-Utah Clay Option to Enter Into Mining Lease dated
March 27, 2000.*
10.4 - Topaz claims: Mining Lease Agreement (Fullmer-Engh), dated
June 19, 1993; Addendum to Fullmer-Engh Mining Lease, dated
March 15, 2000; Option (Engh-Kaolin of the West)to Enter Into
Mining Lease, dated September 30, 1996; Option (Kaolin of the
West-Utah Clay) to Enter Into Mining Lease, dated September
30, 1996, to which is attached an unexecuted Mining Lease;
Addendum to Engh-Kaolin of the West Option to Enter Into
Mining Lease, dated March 27, 2000; and Addendum to Kaolin of
the West-Utah Clay Option to Enter Into Mining Lease dated
March 27, 2000.*
10.7 - Small Miner's Permit for White Mountain lease issued by Bureau
of Land Management and Utah State Division of Oil, Gas and
Mining.**
2
10.8 - Subscription Agreement of November 30, 2001 between Utah Clay
Technology, Inc. and the Purchasers of $200,000 of Convertible
Debentures of Utah Clay Technology, Inc.
10.9 - Form of Debenture of the convertible debentures described in
Exhibit 10.8.
10.10 - Security Agreement (Stock Pledge) of November 30, 2001 between
Dennis S. Engh, Daniel Engh, Thomas Harrison (as Pledgors) and
the Purchasers of the convertible debentures described in
Exhibit 10.8.
10.11 - Registration Rights Agreement of November 30, 2001 between
Utah Clay Technology, Inc. and the Purchasers of the
convertible debentures described in Exhibit 10.8.
10.12 - Investment Agreement (Equity Line Financing) of November 30,
2001 between Utah Clay Technology, Inc. and the Investors
bound by the equity line financing.
10.13 - Registration Rights Agreement of November 30, 2001 between
Utah Clay Technology, Inc. and the Investors described in
Exhibit 10.12.
10.14 - Escrow Agreement of November 30, 2001 among First Union
National Bank of New York, New York; Utah Clay Technology,
Inc.; and May Davis Group, Inc.
23 - Consent of Thomas J. Kenan, to the reference to him as an
attorney who has passed upon certain information contained in
the Registration Statement.
23.1 - Consent of Kabani & Company, Certified Public Accountants,
independent auditors of the Registrant.
*Previously filed with Amendment No. 1 to Form SB-2 Commission file number
333-34308; incorporated herein.
3
** Previously filed with Amendment No. 2 to Form SB-2 Commission file number
333-34308; incorporated herein.
*** Previously filed with Form 10-QSB Current Report for the Period Ended
September 30, 2001 Commission file number 333-34308; incorporated herein.
4
FULLER, TUBB, POMEROY & STOKES
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
201 ROBERT S. KERR AVENUE, SUITE 1000
OKLAHOMA CITY, OK 73102
G. M. FULLER (1920-1999) TELEPHONE 405-235-2575
JERRY TUBB FACSIMILE 405-232-8384
DAVID POMEROY
TERRY STOKES
_____
OF COUNSEL:
MICHAEL A. BICKFORD
THOMAS J. KENAN
ROLAND TAGUE
BRADLEY D. AVEY
December 10, 2001
Dennis Engh, President
Utah Clay Technology, Inc.
3985 South 2000 East
Salt Lake City, UT 84124
Re: Utah Clay Technology, Inc.
Dear Mr. Engh:
I have reviewed the Form SB-2 Registration Statement of Utah Clay
Technology, Inc. and am of the opinion that the securities being registered on
the Form SB-2 have been legally issued, are fully paid, and are non-assessable.
Sincerely,
/s/ Thomas J. Kenan
Thomas J. Kenan
Exhibit 5
Page 1 of 1 Page
____________________
UTAH CLAY TECHNOLOGY, INC.
____________________
This offering consists of up to $200,000 of the Company's Convertible
Debentures convertible into the
Company's Common Stock.
____________________
SUBSCRIPTION AGREEMENT
____________________
Exhibit 10.8
Page 1 of 42 Pages
SUBSCRIPTION PROCEDURES
Convertible Debentures of Utah Clay Technology, Inc. (the "Company") are
being offered (the "Debentures"). This offering is being made in accordance
with the exemptions from registration provided for under Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act") and Rule 506 of
Regulation D promulgated under the 1933 Act.
In order to purchase Debentures, each subscriber must complete and
execute a questionnaire (the "Questionnaire") and a subscription agreement
(the "Subscription Agreement"). In addition, the subscriber must make a
payment to an escrow fund for the amount being purchased. All subscriptions
are subject to acceptance by the Company, which shall not occur until the
Company has returned the signed Company Signature Page.
The Questionnaire is designed to enable the Purchaser to demonstrate
the minimum legal requirements under federal and state securities laws to
purchase the Debentures. The Signature Page for the Questionnaire and the
Subscription Agreement contain representations relating to the subscription
and should be reviewed carefully by each subscriber.
If you are a foreign person or foreign entity, you may be subject to a
withholding tax equal to 30% of any dividends paid by the Company. In order
to eliminate or reduce such withholding tax you must submit a properly
executed I.R.S. Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States) or I.R.S. Form 1001 (Ownership Exemption or Reduced Trade
Certificate), claiming exemption from withholding or eligibility for treaty
benefits in the form of a lower rate of withholding tax on interest or
dividends.
Payment must be made by wire transfer to First Union National Bank
(the "Escrow Agent") per the wire instructions that will be established. In
the event of a termination of the offering or the rejection of a subscription,
subscription funds will be returned by the Escrow Agent without interest or
charges.
Exhibit 10.8
Page 2 of 42 Pages
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND
SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH
LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS
PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED
UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF
THE OFFERING MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
SUBSCRIPTION AGREEMENT
------------------------
To: UTAH CLAY TECHNOLOGY, INC.
--------------------------
This Subscription Agreement is made between UTAH CLAY TECHNOLOGY, INC., a
Utah corporation, (the "Company"), and the undersigned prospective purchaser
("Purchaser") who is subscribing hereby for the Company's convertible
debentures (the "Debentures"). This subscription is submitted to you in
accordance with and subject to the terms and conditions described in this
Subscription Agreement, together with any Exhibits thereto, relating to an
offering (the "Offering") of up to $200,000 of Debentures. The Offering is
limited to accredited investors and is made in accordance with the exemptions
from registration provided for under Section 4(2) of the 1933 Act and Rule 506
of Regulation D promulgated under the 1933 Act ("Regulation D").
1. SUBSCRIPTION.
-------------
(a) The Purchaser hereby irrevocably subscribes for and agrees to
purchase that amount of Debentures as stated on the signature page upon the
terms set forth in this Subscription Agreement. The Debentures shall pay a 5%
cumulative interest, payable in arrears at the time of each conversion, in
cash or in common stock of the Company, $.001 par value ("Common Stock"), at
the Company's option. If paid in Common Stock, the number of shares of the
Company's Common Stock to be received shall be determined pursuant to the
conversion terms of the Debenture. If the dividend is to be paid in cash, the
Company shall make such payment within five (5) business days of the
conversion date. If the dividend is to be paid in Common Stock, said Common
Stock shall be delivered to the Purchaser, or per Purchaser's instructions,
within five (5) business days of the conversion date. The Debentures are
subject to automatic conversion at the end of three (3) years from the date of
issuance at which time all Debentures outstanding will be automatically
converted based upon the terms set forth in the Debenture. The closing shall
be deemed to have occurred on the date funds, less placement fees, escrow fees
Exhibit 10.8
Page 3 of 42 Pages
and attorney fees, are received by the Company (the "Closing Date"). Funds
shall be disbursed from escrow as follows: $100,000 to be paid from escrow
upon the execution and delivery of all Transaction Documents, including a
Security Agreement and Escrow Agreement for 12,000,000 shares of Common Stock
securing the debenture loan. Delivery may be made of the Transaction
Documents by e-mail, and execution may be evidenced by faxed signature pages.
Up to an additional $100,000 shall be paid from escrow upon the filing of a
registration statement covering the common stock underlying the Debentures.
(b) Upon receipt by the Company of the requisite payment for the
Debentures being purchased, the Debentures so purchased will be forwarded by
the Escrow Agent to the Purchaser or its broker, as listed on the signature
page, and the name of such Purchaser will be registered on the Debenture
transfer books of the Company as the record owner of such Debentures. The
Escrow Agent shall not be liable for any action taken or omitted by him in
good faith and in no event shall the Escrow Agent be liable or responsible
except for the Escrow Agent's own gross negligence or willful misconduct.
The Escrow Agent has made no representations or warranties in connection with
this transaction and has not been involved in the negotiation of the terms of
this Agreement or any matters relative thereto. The Company and Purchaser
each agree to indemnify and hold harmless the Escrow Agent from and with
respect to any suits, claims, actions or liabilities arising in any way out
of this transaction including the obligation to defend any legal action
brought which in any way arises out of or is related to this Agreement.
(c) As long as the Purchaser owns the Debenture, the Purchaser shall
have the right to change the terms for the balance of the Debenture it then
holds, to match the terms of any other debenture offering made by the Company.
(d) Conditions Precedent. The following shall be conditions
precedent to closing and release of funds from escrow: (i) the Company and an
investor(s) have signed documentation for an $6,000,000 equity credit line
financing; (ii) the Company arranges to have 12,000,000 shares of its Common
Stock placed into escrow as a stock pledge and the majority of the shares were
issued not less then one (1) year ago; and (iv) the Company has increased its
authorized shares to not less than 100,000,000.
2. REPRESENTATIONS AND WARRANTIES.
-------------------------------
The Purchaser hereby represents and warrants to, and agrees with, the
Company as follows:
(a) The Purchaser has been furnished with, and has carefully read the
applicable form of Registration Rights Agreement annexed hereto as Exhibit B
(the "Registration Rights Agreement"), and the Debenture annexed hereto as
Exhibit C and is familiar with and understands the terms of the Offering.
With respect to tax and other economic considerations involved in his
investment, the Purchaser is not relying on the Company. The Purchaser has
carefully considered and has, to the extent the Purchaser believes such
discussion necessary, discussed with the Purchaser 's professional legal, tax,
Exhibit 10.8
Page 4 of 42 Pages
accounting and financial advisors the suitability of an investment in the
Company, by purchasing the Debentures, for the Purchaser 's particular tax and
financial situation and has determined that the investment being made by the
Purchaser is a suitable investment for the Purchaser.
(b) The Purchaser acknowledges that all documents, records, and books
pertaining to this investment which the Purchaser has requested have been made
available for inspection or the Purchaser has had access thereto.
(c) The Purchaser has had a reasonable opportunity to ask questions
of and receive answers from a person or persons acting on behalf of the
Company concerning the Offering and if such opportunity was taken, all such
questions have been answered to the full satisfaction of the Purchaser.
(d) The Purchaser will not sell or otherwise sell the Debentures or
the Common Stock issued upon conversion of the Debentures without registration
under the 1933 Act or applicable state securities laws or compliance with an
exemption therefrom. The Debentures have not been registered under the 1933
Act or under the securities laws of any state. Resales of the Common Stock
underlying the Debentures or issued in payment of accrued interest on the
Debentures are to be registered by the Company pursuant to the terms of the
Registration Rights Agreement attached hereto as Exhibit B and incorporated
herein and made a part hereof. The Purchaser represents that the Purchaser is
purchasing the Debentures for the Purchaser's own account, for investment and
not with a view to resale or distribution except in compliance with the 1933
Act. The Purchaser has not offered or sold any portion of the Debentures
being acquired nor does the Purchaser have any present intention of dividing
the Debentures with others or of selling, distributing or otherwise disposing
of any portion of the Debentures either currently or after the passage of a
fixed or determinable period of time or upon the occurrence or non-occurrence
of any predetermined event or circumstance in violation of the 1933 Act.
Except as provided in the Registration Rights Agreement, the Company has no
obligation to register the Common Stock underlying Debentures and the Common
Stock that may be issued in lieu of cash dividends.
(e) The Purchaser recognizes that an investment in the Debentures
involves substantial risks, including loss of the entire amount of such
investment. Further, the Purchaser has carefully read and considered the
schedule entitled Pending Litigation matters attached hereto as Schedule 3(h).
(f) The Purchaser acknowledges that each certificate representing the
Debentures (and the shares of Common Stock issued upon conversion of the
Debentures, unless registered) or in payment of dividends on the Debentures
shall be stamped or otherwise imprinted with a legend substantially in the
following form:
Exhibit 10.8
Page 5 of 42 Pages
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED
OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO
THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR
ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF
SECURITIES), OR (iii) PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER SUCH ACT.
If Purchaser sends a Notice of Conversion and indicates on said notice
that the conversion is for an immediate sale, then in such event the Company
shall have its transfer agent send Purchaser the appropriate number of shares
of Common Stock without restrictive legends and not subject to stop transfer
instructions.
(g) The Purchaser acknowledges and agrees that it shall not be
entitled to seek any remedies with respect to the Offering from any party
other than the Company.
(h) If this Subscription Agreement is executed and delivered on
behalf of a corporation: (i) such corporation has the full legal right and
power and all authority and approval required (a) to execute and deliver, or
authorize execution and delivery of, this Subscription Agreement and all other
instruments (including, without limitation, the Registration Rights Agreement)
executed and delivered by or on behalf of such corporation in connection with
the purchase of the Debentures and (b) to purchase and hold the Debentures;
and (ii) the signature of the party signing on behalf of such corporation is
binding upon such corporation.
(i) The Purchaser is not subscribing for the Debentures as a result
of, or pursuant to, any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or meeting.
(j) The Purchaser is purchasing the Debentures for its own account
for investment, and not with a view toward the resale or distribution thereof,
except pursuant to sales registered or exempted from registration under the
1933 Act; provided, however, that by making the representations herein,
Purchaser does not agree to hold any of the Debentures for any minimum or
other specific term and reserves the right to dispose of the Debentures at any
time in accordance with or pursuant to a registration statement or an exemption
under the 1933 Act. Purchaser is neither an underwriter of, nor a dealer in,
the Debentures or the Common Stock issuable upon conversion thereof or upon the
Exhibit 10.8
Page 6 of 42 Pages
payment of dividends thereon and is not participating in the distribution or
resale of the Debentures or the Common Stock issuable upon conversion or
exercise thereof.
(k) The Purchaser or the Purchaser's representatives, as the case may
be, has such knowledge and experience in financial, tax and business matters
so as to enable the Purchaser to utilize the information made available to the
Purchaser in connection with the Offering to evaluate the merits and risks of
an investment in the Debentures and to make an informed investment decision
with respect thereto. Thomas J. Kenan, Esq. has acted as attorney for the
Company and Joseph B. LaRocco has acted as attorney for May Davis Group, Inc.
and neither has acted as counsel to the Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
Except as set forth in the Schedules attached hereto, the Company
represents and warrants to the Purchaser that:
a. Organization and Qualification. The Company and its
"SUBSIDIARIES" (which for purposes of this Subscription Agreement means any
entity in which the Company, directly or indirectly, owns capital stock or
holds an equity or similar interest) (a complete list of which is set forth in
Schedule 3(a)) are corporations duly organized and validly existing in good
standing under the laws of the respective jurisdictions of their
incorporation, and have the requisite corporate power and authorization to own
their properties and to carry on their business as now being conducted. Each of
the Company and its Subsidiaries is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which its
ownership of property or the nature of the business conducted by it makes such
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a Material Adverse Effect. As
used in this Subscription Agreement, "MATERIAL ADVERSE EFFECT" means any
material adverse effect on the business, properties, assets, operations,
results of operations, financial condition or prospects of the Company and its
Subsidiaries, if any, taken as a whole, or on the transactions contemplated
hereby or by the agreements and instruments to be entered into in connection
herewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents (as defined in Section 3(b)below).
b. Authorization; Enforcement; Compliance with Other Instruments.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Subscription Agreement, the Registration Rights Agreement and
the Escrow Agreement, and each of the other agreements entered into by the
parties hereto in connection with the transactions contemplated by this
Subscription Agreement (collectively, the "TRANSACTION DOCUMENTS"), and to
Exhibit 10.8
Page 7 of 42 Pages
issue the Debentures in accordance with the terms hereof and thereof, (ii) the
execution and delivery of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including without limitation the reservation for issuance and the issuance of
the Debentures pursuant to this Subscription Agreement, have been duly and
validly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors, or its
shareholders, (iii) the Transaction Documents have been duly and validly
executed and delivered by the Company, and (iv) the Transaction Documents
constitute the valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 100,000,000 shares of Common Stock, of
which as of the date hereof approximately 28,220,253 shares are issued and
outstanding, 10,000,000 shares of Preferred Stock, of which as of the date
hereof 84,817 shares of non-voting, non-convertible Series A Preferred Stock
are issued and outstanding. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except
as disclosed in Schedule 3(c) which is attached hereto and made a part hereof,
(i) no shares of the Company's capital stock are subject to preemptive rights
or any other similar rights or any liens or encumbrances suffered or permitted
by the Company, (ii) there are no outstanding debt securities, (iii) there are
no outstanding shares of capital stock, options, warrants, scrip, rights to
subscribe to, 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 or options, warrants, scrip, rights to subscribe to, 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, (iv) there are no agreements or arrangements under which
the Company or any of its Subsidiaries is obligated to register the sale of
any of their securities under the 1933 Act (except the Registration Rights
Agreement), (v) there are no outstanding securities of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and
there are no contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to redeem a
security of the Company or any of its Subsidiaries, (vi) there are no
securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities as described in this
Subscription Agreement, (vii) the Company does not have any stock
appreciation rights or "phantom stock" plans or agreements or any similar
plan or agreement and (viii) there is no dispute as to the class of any shares
of the Company's capital stock. The Company has furnished to the Purchaser, or
the Purchaser has had access through EDGAR to, true and correct copies of the
Company's Articles of Incorporation, as in effect on the date hereof (the
"ARTICLES OF INCORPORATION"), and the Company's By-laws, as in effect on the
date hereof (the "BY-LAWS '), and the terms of all securities convertible into
or exercisable for Common Stock and the material rights of the holders thereof
in respect thereto.
d. Issuance of Debentures. A sufficient number of Debentures
Exhibit 10.8
Page 8 of 42 Pages
issuable pursuant to this Subscription Agreement, but not more than 19.99% of
the shares of Common Stock outstanding as of the date hereof (if the Company
becomes listed on Nasdaq or the American Stock Exchange), has been duly
authorized and reserved for issuance pursuant to this Subscription Agreement.
Upon issuance in accordance with this Subscription Agreement, the Debentures
will be validly issued, fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof. In the event the Company
cannot register a sufficient number of shares of Common Stock, due to the
remaining number of authorized shares of Common Stock being insufficient, the
Company will use its best efforts to register the maximum number of shares it
can based on the remaining balance of authorized shares and will use its best
efforts to increase the number of its authorized shares as soon as reasonably
practicable.
e. No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby will not (i) result in a
violation of the Articles of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws or (ii) conflict with, or constitute a material
default (or an event which with notice or lapse of time or both would become
a material default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, contract,
indenture mortgage, indebtedness or instrument to which the Company or any of
its Subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree, including United States federal and
state securities laws and regulations and the rules and regulations of the
principal securities exchange or trading market on which the Common Stock is
traded or listed (the "Principal Market"), 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. Except as disclosed in Schedule 3(e),
neither the Company nor its Subsidiaries is in violation of any term of, or in
default under, the Articles of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws or their organizational charter or by-laws,
respectively, or any contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or order or any statute, rule or regulation
applicable to the Company or its Subsidiaries, except for possible conflicts,
defaults, terminations, amendments, accelerations, cancellations and
violations that would not individually or in the aggregate have a Material
Adverse Effect. The business of the Company and its Subsidiaries is not
being conducted, and shall not be conducted, in violation of any law, statute,
ordinance, rule, order or regulation of any governmental authority or agency,
regulatory or self-regulatory agency, or court, except for possible violations
the sanctions for which either individually or in the aggregate would not have
a Material Adverse Effect. Except as specifically contemplated by this
Subscription Agreement and as required under the 1933 Act, the Company is not
required to obtain any consent, authorization, permit or order of, or make any
filing or registration (except the filing of a registration statement) with,
any court, governmental authority or agency, regulatory or self-regulatory
agency or other third party in order for it to execute, deliver or perform any
of its obligations under, or contemplated by, the Transaction Documents in
accordance with the terms hereof or thereof. All consents, authorizations,
Exhibit 10.8
Page 9 of 42 Pages
permits, orders, filings and registrations which the Company is required to
obtain pursuant to the preceding sentence have been obtained or effected on or
prior to the date hereof and are in full force and effect as of the date
hereof. Except as disclosed in Schedule 3(e), the Company and its Subsidiaries
are unaware of any facts or circumstances which might give rise to any of the
foregoing. The Company is not, and will not be, in violation of the listing
requirements of the Principal Market as in effect on the date hereof and on
each of the Closing Dates and is not aware of any facts which would reasonably
lead to delisting of the Common Stock by the Principal Market in the
foreseeable future.
f. SEC Documents; Financial Statements. Since January 1, 2001, the
Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Securities and Exchange
Commission ("SEC") pursuant to the reporting requirements of the Securities
and Exchange Act of 1934 ("1934 Act") (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the "SEC DOCUMENTS"). The Company has delivered to
the Purchaser or its representatives, or they have had access through EDGAR,
to true and complete copies of the SEC Documents. As of their respective
dates, the SEC Documents complied in all material respects with the
requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted 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. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). No other
written information provided by or on behalf of the Company to the Purchaser
which is not included in the SEC Documents, including, without limitation,
information referred to in Section 3(d) of this Subscription Agreement,
contains any untrue statement of a material fact or omits to state any
material fact necessary to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading. Neither the
Company nor any of its Subsidiaries or any of their officers, directors,
employees or agents have provided the Purchaser with any material, nonpublic
information which was not publicly disclosed prior to the date hereof and any
material, nonpublic information provided to the Purchaser by the Company or its
Subsidiaries or any of their officers, directors, employees or agents prior to
any Closing Date shall be publicly disclosed by the Company prior to such
Closing Date.
Exhibit 10.8
Page 10 of 42 Pages
g. Absence of Certain Changes. Except as disclosed in Schedule 3(g)
or the SEC Documents filed at least five (5) days prior to the date hereof,
since May 15, 2001, there has been no change or development in the business,
properties, assets, operations, financial condition, results of operations or
prospects of the Company or its Subsidiaries which has had or reasonably could
have a Material Adverse Effect. The Company has not taken any steps, and does
not currently expect to take any steps, to seek protection pursuant to any
bankruptcy law nor does the Company or its Subsidiaries have any knowledge or
reason to believe that its creditors intend to initiate involuntary bankruptcy
proceedings.
h. Absence of Litigation. Except as set forth in Schedule 3(h),
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the executive officers of Company or any of its
Subsidiaries, threatened against or affecting the Company, the Common Stock or
any of the Company's Subsidiaries or any of the Company's or the Company's
Subsidiaries' officers or directors in their capacities as such, in which an
adverse decision could have a Material Adverse Effect.
i. Acknowledgment Regarding the Purchase of Debentures. The Company
acknowledges and agrees that the Purchaser is acting solely in the capacity of
arm's length investor with respect to the Transaction Documents and the
transactions contemplated hereby and thereby. The Company further acknowledges
that the Purchaser is not acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to the Transaction Documents
and the transactions contemplated hereby and thereby and any advice given by
the Purchaser or any of its respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated hereby and
thereby is merely incidental to the Purchaser's purchase of the Debentures. The
Company further represents to the Purchaser that the Company's decision to
enter into the Transaction Documents has been based solely on the independent
evaluation by the Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or
Circumstances. No event, liability, development or circumstance has occurred
or exists, or to its knowledge is contemplated to occur, with respect to the
Company or its Subsidiaries or their respective business, properties, assets,
prospects, operations or financial condition, that would be required to be
disclosed by the Company under applicable securities laws on a registration
statement filed with the SEC relating to an issuance and sale by the Company of
its Common Stock and which has not been publicly announced.
k. Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of
the Company or any of its Subsidiaries, is any such dispute threatened. Neither
the Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that relations with
their employees are good. No executive officer (as defined in Rule 501(f) of
the 1933 Act) has notified the Company that such officer intends to leave the
Company's employ or otherwise terminate such officer's employment with the
Company.
Exhibit 10.8
Page 11 of 42 Pages
l. Intellectual Property Rights. The Company and its Subsidiaries
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Schedule 3(l), none of the
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights necessary to conduct its business as now or as proposed to be
conducted have expired or terminated, or are expected to expire or terminate
within two years from the date of this Subscription Agreement. The Company and
its Subsidiaries do not have any knowledge of any infringement by the Company
or its Subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on Schedule 3(l), there is no claim, action or
proceeding being made or brought against, or to the Company's knowledge, being
threatened against, the Company or its Subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its Subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.
m. Environmental Laws. The Company and its Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval where, in each of the
three foregoing cases, the failure to so comply would have, individually or in
the aggregate, a Material Adverse Effect.
n. Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(n) or such
as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company or
any of its Subsidiaries. Any real property and facilities held under lease by
the Company or any of its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property
and buildings by the Company and its Subsidiaries.
Exhibit 10.8
Page 12 of 42 Pages
o. Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as management of the Company believes to be prudent
and customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
p. Regulatory Permits. The Company and its Subsidiaries have in
full force and effect all certificates, approvals, authorizations and permits
from the appropriate federal, state, local or foreign regulatory authorities
and comparable foreign regulatory agencies, necessary to own, lease or operate
their respective properties and assets and conduct their respective
businesses, and neither the Company nor any such Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, approval, authorization or permit, except for such certificates,
approvals, authorizations or permits which if not obtained, or such
revocations or modifications which, would not have a Material Adverse Effect.
q. Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
r. No Materially Adverse Contracts, Etc. Neither the Company nor
any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
s. Tax Status. The Company and each of its Subsidiaries has made or
filed all United States 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 and each of its Subsidiaries
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
Exhibit 10.8
Page 13 of 42 Pages
due on such returns, reports and declarations, except those being contested in
good faith and has 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.
t. Certain Transactions. Except as set forth on Schedule 3(t) and
in the SEC Documents filed at least ten days prior to the date hereof and
except for arm's length transactions pursuant to which the Company makes
payments in the ordinary course of business upon terms no less favorable than
the Company could obtain from third parties and other than the grant of stock
options disclosed on Schedule 3(c), none of the officers, directors, or
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (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.
u. Dilutive Effect. The Company understands and acknowledges that
the number of shares of Common Stock issuable upon purchases pursuant to this
Subscription Agreement will increase in certain circumstances including, but
not necessarily limited to, the circumstance wherein the trading price of the
Common Stock declines following the effective date of the registration
statement covering the Common Stock underlying the Debentures (the "Effective
Date"). The Company's executive officers and directors have studied and fully
understand the nature of the transactions contemplated by this Subscription
Agreement 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 specifically acknowledges that, subject to such limitations as are
expressly set forth in the Transaction Documents, its obligation to issue
shares of Common Stock upon purchases pursuant to this Subscription Agreement
is absolute and unconditional regardless of the dilutive effect that such
issuance may have on the ownership interests of other shareholders of the
Company.
v. Right of First Refusal. The Company shall not, directly or
indirectly, without the prior written consent of May Davis Group, Inc., offer,
sell, grant any option to purchase, or otherwise dispose of (or announce any
offer, sale, grant or any option to purchase or other disposition) any of its
Common Stock or securities convertible into Common Stock at a price that is
less than the market price of the Common Stock at the time of issuance of such
security or investment (a "SUBSEQUENT FINANCING") for a period of one year
after the Effective Date, except (i) the granting of options or warrants to
employees, officers, directors and consultants, and the issuance of shares
upon exercise of options granted, under any stock option plan heretofore or
Exhibit 10.8
Page 14 of 42 Pages
hereinafter duly adopted by the Company, (ii) shares issued upon exercise of
any currently outstanding warrants or options and upon conversion of any
currently outstanding convertible debenture or convertible preferred stock, in
each case disclosed pursuant to Section 3(c), (iii) securities issued in
connection with the capitalization or creation of a joint venture with a
strategic partner, (iv) shares issued to pay part or all of the purchase price
for the acquisition by the Company of another entity (which, for purposes of
this clause (iv), shall not include an individual or group of individuals),
and (v) shares issued in a bona fide public offering by the Company of its
securities, and (vi) shares that may be issued as a result of any outstanding
rights offering between the Company and its current stockholder, unless (A)
the Company delivers to May Davis Group, Inc. a written notice (the
"SUBSEQUENT FINANCING NOTICE") of its intention to effect such Subsequent
Financing, which Subsequent Financing Notice shall describe in reasonable
detail the proposed terms of such Subsequent Financing, the amount of
proceeds intended to be raised thereunder, the person with whom such
Subsequent Financing shall be effected, and attached to which shall be a term
sheet or similar document relating thereto and (B) May Davis Group, Inc.
shall not have notified the Company by 5:00 p.m. (New York time) on the fifth
(5th) business day after its receipt of the Subsequent Financing Notice of its
willingness to provide, subject to completion of mutually acceptable
documentation, financing to the Company on substantially the terms set forth
in the Subsequent Financing Notice. If May Davis Group, Inc. shall fail to
notify the Company of its intention to enter into such negotiations within
such time period, then the Company may effect the Subsequent Financing
substantially upon the terms set forth in the Subsequent Financing Notice;
PROVIDED THAT the Company shall provide May Davis Group, Inc. with a second
Subsequent Financing Notice, and May Davis Group, Inc. shall again have the
right of first refusal set forth above in this Section, if the Subsequent
Financing subject to the initial Subsequent Financing Notice shall not have
been consummated for any reason on the terms set forth in such Subsequent
Financing Notice within thirty (30) business days after the date of the
initial Subsequent Financing Notice. The rights granted to May Davis Group,
Inc. in this Section are not subject to any prior right of first refusal
given to any other person except as disclosed on Schedule 3(c).
(w) The Company represents and warrants that it is aware of the
Security Agreement being entered into between certain shareholders as pledgors
of 12,000,000 shares of the Company's common stock and the Purchasers as the
secured parties The Company understands that the Purchasers relying on the
security agreement and the stock being pledged in the event the Company
defaults in the terms of the Subscription Agreement, Registration Rights
Agreement or Debentures being entered into between the Company and
Purchasers. Furthermore, the Company understands that were it not for this
accommodation pledge being made by certain shareholders, the Purchasers
would not be subscribing for the Debentures. Therefore, the Company
represents and warrants that in the event it defaults by failing to have the
registration statement covering this Offering declared effective that it will
cooperate with the Purchasers and do everything necessary to have the legend
removed from the pledged shares to facilitate their sale pursuant to the terms
of the Security Agreement. The Company also represents and acknowledges that
the Debenture is a full recourse loan being made by the Purchasers and that in
the event the 12,000,000 shares are not sufficient to cover 125% of Principal
plus liquidated damages that the Company shall be completely liable and
Exhibit 10.8
Page 15 of 42 Pages
responsible to pay any deficiency to the Purchasers included liquidated
damages as stated in this Subscription Agreement or the Debentures, and
reasonable attorney's fees and costs.
4. COVENANTS OF THE COMPANY
------------------------
a. Best Efforts. The Company shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in this
Subscription Agreement.
b. Blue Sky. The Company shall, at its sole cost and expense take
such action as the Company shall reasonably determine is necessary to qualify
the Common Stock underlying the shares for, or obtain exemption for the same
for, sale to the Purchaser under applicable securities or "Blue Sky" laws of
such states of the United States, as specified by Purchaser. The Company
shall, at its sole cost and expense, make all filings and reports relating to
the offer and sale of the Common Stock underlying the Debentures as required
under the applicable securities or "Blue Sky" laws of such states of the
United States as specified by the Purchaser.
c. Reporting Status. Until the earlier of (i) the date that the
Purchaser may sell all of the Common Stock underlying the shares acquired
pursuant to this Subscription Agreement without restriction pursuant to Rule
144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date
on which the Purchaser shall have sold all the Common Stock underlying the
Debentures, the Company shall file all reports required to be filed with the
SEC pursuant to the 1934 Act, and the Company shall not terminate its status
as a reporting company under the 1934 Act.
d. Use of Proceeds. The Company will use the proceeds from the sale
of the Debentures (excluding amounts paid by the Company for fees as set forth
in the Transaction Documents) for general corporate and working capital
purposes.
e. Financial Information. The Company agrees to make available to
the Purchaser via EDGAR or other electronic means the following: (i) within
five (5) business days after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-KSB, its Quarterly Reports on Form 10-QSB, any
Current Reports on Form 8-K and any Registration Statements or amendments
filed pursuant to the 1933 Act; (ii) on the same day as the release thereof,
facsimile copies of all press releases issued by the Company or any of its
Subsidiaries, (iii) copies of any notices and other information made
available or given to the shareholders of the Company generally,
contemporaneously with the making available or giving thereof to the
shareholders and (iv) within two (2) calendar days of filing or delivery
thereof, copies of all documents filed with, and all correspondence sent to,
the Principal Market, any securities exchange or market, or the National
Association of Securities Dealers, Inc.
f. Reservation of Common Stock. Subject to the following sentence,
the Company shall take all action necessary to at all times have authorized,
and reserved for the purpose of issuance, a sufficient number of shares of
Common Stock to provide for the issuance of the Common Stock underlying the
Exhibit 10.8
Page 16 of 42 Pages
Debentures. In the event that the Company determines that it does not have a
sufficient number of authorized shares of Common Stock to reserve and keep
available for issuance, the Company shall use its best efforts to increase
the number of authorized shares of Common Stock by seeking shareholder
approval by calling a shareholder's meeting within thirty (30) days of their
being such deficiency for the authorization of such additional shares.
g. Listing. The Company shall promptly secure the listing of all of
the Common Stock underlying the Debentures upon the Principal Market and each
other national securities exchange and automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice
of issuance) and shall maintain, such listing. The Company shall maintain the
Common Stock's authorization for quotation on the Principal Market, unless the
Purchaser and the Company agree otherwise. Neither the Company nor any of its
Subsidiaries shall take any action which would be reasonably expected to
result in the delisting or suspension of the Common Stock on the Principal
Market (excluding suspensions of not more than one trading day resulting from
business announcements by the Company). The Company shall promptly provide to
the Purchaser copies of any notices it receives from the Principal Market
regarding the continued eligibility of the Common Stock for listing on such
automated quotation system or securities exchange. The Company shall pay all
fees and expenses in connection with satisfying its obligations under this
Section.
h. Transactions With Affiliates. The Company shall not, and shall
cause each of its Subsidiaries not to, enter into, amend, modify or
supplement, or permit any Subsidiary to enter into, amend, modify or
supplement, any agreement, transaction, commitment or arrangement with any of
its or any Subsidiary's officers, directors, persons who were officers or
directors at any time during the previous two years, shareholders who
beneficially own 5% or more of the Common Stock, or affiliates or with any
individual related by blood, marriage or adoption to any such individual or
with any entity in which any such entity or individual owns a 5% or more
beneficial interest (each a "RELATED PARTY"), except for (i) customary
employment arrangements and benefit programs on reasonable terms, (ii) any
agreement, transaction, commitment or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such Related Party, or (iii) any agreement, transaction,
commitment or arrangement which is approved by a majority of the
disinterested directors of the Company. For purposes hereof, any director who
is also an officer of the Company or any Subsidiary of the Company shall not
be a disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "AFFILIATE" for purposes hereof means, with
respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a 5% or more equity interest in that person or entity,
(ii) has 5% or more common ownership with that person or entity, (iii)
Controls that person or entity, or (iv) shares common control with that person
or entity. "CONTROL" or "CONTROLS" for purposes hereof means that a person or
entity has the power, direct or indirect, to conduct or govern the policies of
another person or entity.
i. Intentionally deleted.
Exhibit 10.8
Page 17 of 42 Pages
j. Corporate Existence. The Company shall use its best efforts to
preserve and continue the corporate existence of the Company.
k. Notice of Certain Events Affecting Registration. The Company
shall promptly notify Purchaser upon the occurrence of any of the following
events in respect of a registration statement or related prospectus covering
the Common Stock underlying the Debentures: (i) receipt of any request for
additional information by the SEC or any other federal or state governmental
authority during the period of effectiveness of the registration statement for
amendments or supplements to the registration statement or related prospectus;
(ii) the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of any registration
statement or the initiation of any proceedings for that purpose; (iii) receipt
of any notification with respect to the suspension of the qualification or
exemption from qualification of any of the Common Stock underlying the
Debentures for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose; (iv) the happening of any event that makes
any statement made in such registration statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires the making of any changes in the
registration statement, related prospectus or documents so that, in the case
of a registration statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the
case of the related prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (v) the Company's reasonable
determination that a post-effective amendment to the registration statement
would be appropriate, and the Company shall promptly make available to
Purchaser any such supplement or amendment to the related prospectus.
l. Indemnification. In consideration of the Purchaser's execution
and delivery of the this Agreement and the Registration Rights Agreement and
acquiring the Debentures hereunder and in addition to all of the Company's
other obligations under the Transaction Documents, the Company shall defend,
protect, indemnify and hold harmless the Purchaser and all of their
shareholders, officers, directors, employees and direct or indirect investors
and any of the foregoing person's agents or other representatives (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "Indemnitees") from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the
action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to
(i) any misrepresentation or breach of any representation or warranty made by
the Company in the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (ii) any breach of any covenant,
Exhibit 10.8
Page 18 of 42 Pages
agreement or obligation of the Company contained in the Transaction Documents
or any other certificate, instrument or document contemplated hereby or
thereby, (iii) any cause of action, suit or claim brought or made against such
Indemnitee by a third party and arising out of or resulting from the
execution, delivery, performance or enforcement of the Transaction Documents
or any other certificate, instrument or document contemplated hereby or
thereby, (iv) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Debentures or
(v) the status of the Purchaser as an investor in the Company, except insofar
as any such untrue statement, alleged untrue statement, omission or alleged
omission is made in reliance upon and in conformity with written information
furnished to the Company by the Purchaser which is specifically intended by
the Purchaser for use in the preparation of any such Registration Statement,
preliminary prospectus or prospectus. 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 is permissible under applicable law. The
indemnity provisions contained herein shall be in addition to any cause of
action or similar rights the Purchaser may have, and any liabilities to which
the Purchaser may be subject.
m. Reimbursement. If (i) Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by any shareholder of the Company,
in connection with or as a result of the consummation of the transactions
contemplated by the Transaction Documents, or if Purchaser is impleaded in any
such action, proceeding or investigation by any person, or (ii) Purchaser,
other than by reason of its gross negligence or willful misconduct or by
reason of its trading of the Common Stock in a manner that is illegal under
the federal securities laws, becomes involved in any capacity in any action,
proceeding or investigation brought by the SEC against or involving the
Company or in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Documents, or if Purchaser is
impleaded in any such action, proceeding or investigation by any person, then
in any such case, the Company will reimburse Purchaser for its reasonable
legal and other expenses (including the cost of any investigation and
preparation) incurred in connection therewith, as such expenses are incurred.
In addition, other than with respect to any matter in which Purchaser is a
named party, the Company will pay to Purchaser the charges, as reasonably
determined by Purchaser, for the time of any officers or employees of
Purchaser devoted to appearing and preparing to appear as witnesses, assisting
in preparation for hearings, trials or pretrial matters, or otherwise with
respect to inquiries, hearing, trials, and other proceedings relating to the
subject matter of this Subscription Agreement. The reimbursement obligations
of the Company under this section shall be in addition to any liability which
the Company may otherwise have, shall extend upon the same terms and
conditions to any affiliates of Purchaser that are actually named in such
action, proceeding or investigation, and partners, directors, agents,
employees, attorneys, accountants, auditors and controlling persons (if any),
as the case may be, of Purchaser and any such affiliate, and shall be binding
upon and inure to the benefit of any successors of the Company, Purchaser and
any such affiliate and any such person.
Exhibit 10.8
Page 19 of 42 Pages
5. LIMITATION ON AMOUNT OF CONVERSION AND OWNERSHIP.
------------------------------------------------
Notwithstanding anything to the contrary in this Agreement, in no
event shall the Purchaser be entitled to convert any of the Debentures to the
extent that, after such conversion, that number of shares of Common Stock,
which when added to the sum of the number of Debentures beneficially owned,
(as such term is defined under Section 13(d) and Rule 13d-3 of the Securities
Exchange Act of 1934 (the "1934 ACT")), by the Purchaser, would exceed 4.99%
of the number of shares of Common Stock outstanding on the Conversion Date
(as that term is defined in the Debenture), as determined in accordance with
Rule 13d-1(j) of the 1934 Act. In no event shall the Purchaser purchase shares
of the Common Stock other than pursuant to this Subscription Agreement and the
Debenture until such date as the Purchaser has fully converted the Debentures
into Common Stock.
6. OPINION LETTER/BOARD RESOLUTION
-------------------------------
Prior to or on the Closing Date the Company shall deliver to the Escrow
Agent an opinion letter signed by counsel for the Company in the form attached
hereto as Exhibit D. Also, prior to or on the Closing Date the Company shall
deliver to the Escrow Agent a signed Board Resolution authorizing this
Offering, which shall be attached hereto as Exhibit E.
7. DELIVERY INSTRUCTIONS; FEES
---------------------------
The Debentures being purchased hereunder shall be delivered to First
Union National Bank as Escrow Agent, who will hold them in escrow until the
Closing Date at which time funds (less escrow fees, attorneys fees and
placement fees) will be wired to the Company and the Debentures will be
delivered to the Purchaser, per the Purchaser's instructions.
May Davis Group, Inc. shall receive a cash fee equal to ten percent
(10%) of the gross proceeds on each Closing Date, which amount shall be paid
upon closing directly from escrow. Upon closing of the offering the Company
shall also issue to May Davis Group a Warrant to purchase 200,000 shares of
the Company's Common Stock. At 101% of the closing bid price on the Closing
Date. The Warrant shall survive for a period of (5) five years from the date
of issuance and will be exercisable at the holder's discretion. The Warrant
will also have "piggy-back" registration rights and be exercisable on a
"cashless" basis. On the Closing Date Joseph B. LaRocco, Esq. shall receive
450,000 shares of the common stock of the Company for his services related to
document preparation and escrow related to this Offering, which shares shall
be registered in the registration statement covering this Offering, and on
each closing of $100,000, Joseph B. LaRocco, Esq. shall receive from escrow
the sum of $5,000 for document preparation related to the equity line
financing.
8. UNDERSTANDINGS.
--------------
Exhibit 10.8
Page 20 of 42 Pages
The undersigned understands, acknowledges and agrees with the Company as
follows:
FOR ALL SUBSCRIBERS:
a. This Subscription may be rejected, in whole or in part, by the
Company in its sole and absolute discretion at any time before the date set
for closing unless the Company has given notice of acceptance of the
undersigned's subscription by signing this Subscription Agreement and
delivering it to Purchaser or May Davis Group, Inc.
b. No U.S. federal or state agency or any agency of any other
jurisdiction has made any finding or determination as to the fairness of the
terms of the Offering for investment nor any recommendation or endorsement of
the Debentures or the Company.
c. The representations, warranties and agreements of the undersigned
and the Company contained herein shall be true and correct in all material
respects on and as of the date of the sale of the Debentures as if made on
and as of such date and shall survive the execution and delivery of this
Subscription Agreement and the purchase of the Debentures.
d. In making an investment decision, purchasers must rely on their
own examination of the company and the terms of the offering, including the
merits and risks involved. The shares have not been recommended by any
federal or state securities commission or regulatory authority. Furthermore,
the foregoing authorities have not confirmed the accuracy or determined the
adequacy of this document. Any representation to the contrary is a criminal
offense.
e. The Offering is intended to be exempt from registration by virtue
of Section 4(2) of the 1933 Act and the provisions of Regulation D thereunder,
which is in part dependent upon the truth, completeness and accuracy of the
statements made by the undersigned herein and in the Questionnaire.
f. It is understood that in order not to jeopardize the Offering's
exempt status under Section 4(2) of the 1933 Act and Regulation D, any
purchaser may, at a minimum, be required to fulfill the investor suitability
requirements thereunder.
g. The shares may not be resold except as permitted under the
securities act and applicable state securities laws, pursuant to registration
or exemption therefrom. Purchasers should be aware that they will be required
to bear the financial risks of this investment for an indefinite period of
time.
9. SUBMISSION TO JURISDICTION
--------------------------
a. Forum Selection and Consent to Jurisdiction. Any litigation based
thereon, or arising out of, under, or in connection with, this Agreement or
any course of conduct, course of dealing, statements (whether oral or written)
Exhibit 10.8
Page 21 of 42 Pages
or actions of the Company or Purchaser shall be brought and maintained
exclusively in the courts of the state of New York. The Company hereby
expressly and irrevocably submits to the jurisdiction of the state and federal
Courts of the state of New York for the purpose of any such litigation as set
forth above and irrevocably agrees to be bound by any final judgment rendered
thereby in connection with such litigation. The Company further irrevocably
consents to the service of process by registered mail, postage prepaid, or by
personal service within or without the State of New York. The Company hereby
expressly and irrevocably waives, to the fullest extent permitted by law, any
objection which it may have or hereafter may have to the laying of venue of
any such litigation brought in any such court referred to above and any claim
that any such litigation has been brought in any inconvenient forum. To the
extent that the Company has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether through service
or notice, attachment prior to judgment, attachment in aid of execution or
otherwise) with respect to itself or its property. The Company hereby
irrevocably waives such immunity in respect of its obligations under this
agreement and the other loan documents.
b. Waiver of Jury Trial. The Purchaser and the Company hereby
knowingly, voluntarily and intentionally waive any rights they may have to a
trial by jury in respect of any litigation based hereon, or arising out of,
under, or in connection with, this agreement, or any course of conduct,
course of dealing, statements (whether oral or written) or actions of the
Purchaser or the Company. The Company acknowledges and agrees that it has
received full and sufficient consideration for this provision and that this
provision is a material inducement for the Purchaser entering into this
agreement.
c. Submission To Jurisdiction. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought in
the state and federal courts located in New York, and the parties hereby
irrevocably submit to the non-exclusive jurisdiction of such courts for the
purpose of any such action or proceeding.
10. MISCELLANEOUS.
-------------
a. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Subscription Agreement must be
in writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided a
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) day after deposit with a
nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile
numbers for such communications shall be:
If to the Company:
Utah Clay Technology, Inc.
3985 South 200 East
Salt Lake City, Utah 84124
Attention: Dennis S. Engh, President
Telephone: 801-424-0223
Facsimile: 801-274-7804
Exhibit 10.8
Page 22 of 42 Pages
With a copy to:
Thomas J. Kenan, Esq.
Fuller, Tubb, Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Telephone: 405-235-2575
Facsimile: 405-232-8384
E-Mail: kenan@ftpslaw.com
If to the Investor:
At the address listed in the Questionnaire.
If to May Davis Group, Inc.:
c/o Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Tel.: 203-966-0566
Fax: 203-966-0363
Each party shall provide five (5) business days prior notice to the other
party of any change in address, phone number or facsimile number.
b. All pronouns and any variations thereof used herein shall be
deemed to refer to the masculine, feminine, impersonal, singular or plural, as
the identity of the person or persons may require.
c. Neither this Subscription Agreement nor any provision hereof shall
be waived, modified, changed, discharged, terminated, revoked or canceled,
except by an instrument in writing signed by the party effecting the same
against whom any change, discharge or termination is sought.
d. Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by facsimile transmission: (i) if to the Company, at it's executive
offices or (ii) if to the Purchaser, at the address for correspondence set
forth in the Questionnaire, or at such other address as may have been
specified by written notice given in accordance with this paragraph.
e. This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Utah, as
such laws are applied by Utah courts to agreements entered into, and to be
performed in, Utah by and between residents of Utah, and shall be binding upon
the undersigned, the undersigned's heirs, estate and legal representatives and
Exhibit 10.8
Page 23 of 42 Pages
shall inure to the benefit of the Company and its successors. If any
provision of this Subscription Agreement is invalid or unenforceable under any
applicable statue or rule of law, then such provisions shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any provision hereof
that may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision hereof.
f. This Agreement shall not be assignable.
g. This Subscription Agreement, together with Exhibits A, B, C, D and
E attached hereto and made a part hereof, constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and may
be amended only by a writing executed by both parties hereto.
h. This Subscription Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
Execution and delivery of this Subscription Agreement by exchange of facsimile
copies bearing the facsimile signature of a party shall constitute a valid and
binding execution and delivery of this Subscription Agreement by such party.
Such facsimile copies shall constitute enforceable original documents.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK)
Exhibit 10.8
Page 24 of 42 Pages
INVESTOR QUESTIONNAIRE
The information contained in this Questionnaire is being furnished in
order to determine whether the undersigned's subscription to purchase the
Debentures described in the Subscription Agreement may be accepted.
ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED
CONFIDENTIALLY. The undersigned understands, however, that the Company may
present this Questionnaire to such parties as it deems appropriate if called
upon to establish that the proposed offer and sale of the Securities is exempt
from registration under the 1933 Act, as amended. Further, the undersigned
understands that the offering is required to be reported to the Securities and
Exchange Commission, NASDAQ and to various state securities and "blue sky"
regulators.
IN ADDITION TO SIGNING THE SIGNATURE PAGE, IF REQUESTED BY THE COMPANY,
THE UNDERSIGNED MUST COMPLETE FORM W-9.
I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES.
__ 1. The undersigned: (a) has total assets in excess of
$5,000,000; (b) was not formed for the specific purpose of acquiring
the securities and (c) has its principal place of business in _________.
__ 2. The undersigned is a natural person whose individual net worth*
or joint net worth with his or her spouse exceeds $1,000,000.
__ 3. The undersigned is a natural person who had an individual income*
in excess of $200,000 in each of the two most recent years and who
reasonably expects an individual income in excess of $200,000 in the
current year. Such income is solely that of the undersigned and
excludes the income of the undersigned's spouse.
__ 4. The undersigned is a natural person who, together with his or her
spouse, has had a joint income* in excess of $300,000 in each of the two
most recent years and who reasonably expects a joint income in excess of
$300,000 in the current year.
* For purposes of this Questionnaire, the term "net worth" means the excess
of total assets over total liabilities. In determining "income", an investor
should add to his or her adjusted gross income any amounts attributable to tax-
exempt income received, losses claimed as a limited partner in any limited
partnership, deductions claimed for depletion, contributions to IRA or Keogh
retirement plan, alimony payments and any amount by which income from long-term
capital gains has been reduced in arriving at adjusted gross income.
Exhibit 10.8
Page 25 of 42 Pages
5. The undersigned is:
__ (a) a bank as defined in Section 3(a)(2) of the 1933 Act;
or
__ (b) a savings and loan association or other institution as
defined in Section 3(a)(5)(A) of the 1933 Act whether acting
in its individual or fiduciary capacity; or
__ (c) a broker or dealer registered pursuant to Section 15
of the 1934 Act; or
__ (d) an insurance company as defined in Section 2(13) of
the 1933 Act; or
__ (e) An investment company registered under the Investment
Company Act of 1940 or a business development company as
defined in Section 2(a)(48) of the Investment Company Act of
1940; or
__ (f) a small business investment company licensed by the
U.S. Small Business Administration under Section 301 (c) or
(d) of the Small Business Investment Act of 1958; or
__ 6. The undersigned is an entity in which all of the equity
owners are accredited investors.
Exhibit 10.8
Page 26 of 42 Pages
II. INVESTOR INFORMATION.
(a) IF THE UNDERSIGNED IS AN INDIVIDUAL:
Name ______________________________________________
Street Address ____________________________________
City, State, Zip Code _____________________________
Phone ____________________ Fax ____________________
Social Security Number ___________________________
Send Correspondence to:
___________________________________________________
___________________________________________________
___________________________________________________
(b) IF THE UNDERSIGNED IS NOT AN INDIVIDUAL:
Name of Entity ____________________________________
Person's Name ___________________ Title____________
State of Organization _____________________________
Principal Business Address ________________________
City, State, Zip Code _____________________________
Taxpayer Identification Number ____________________
Phone ____________________ Fax ____________________
Send Correspondence to:
___________________________________________________
___________________________________________________
___________________________________________________
Exhibit 10.8
Page 27 of 42 Pages
INVESTOR SIGNATURE PAGE
-----------------------
Your signature on this Signature Page evidences your agreement to be
bound by the Questionnaire, Subscription Agreement and Registration Rights
Agreement.
1. The undersigned hereby represents that (a) the information
contained in the Questionnaire is complete and accurate and (b) the undersigned
will notify UTAH CLAY TECHNOLOGY, INC. immediately if any material change in
any of the information occurs prior to the acceptance of the undersigned's
subscription and will promptly send UTAH CLAY TECHNOLOGY, INC. written
confirmation of such change.
2. The undersigned signatory hereby certifies that he/she has read and
understands the Subscription Agreement and Questionnaire, and the
representations made by the undersigned in the Subscription Agreement and
Questionnaire are true and accurate.
3. Upon closing please deliver the Debentures to May Davis Group, Inc.
___________________________________ _________________________
Amount of Debentures being purchased Date
By: _____________________
(Signature)
Name: ___________________
(Please Type or Print)
Title: __________________
(Please Type or Print)
Exhibit 10.8
Page 28 of 42 Pages
COMPANY ACCEPTANCE PAGE
-----------------------
This Subscription Agreement accepted and agreed
to this ____ day of November, 2001.
UTAH CLAY TECHNOLOGY, INC.
By__________________________________
Dennis S. Engh its President
Exhibit 10.8
Page 29 of 42 Pages
Exhibit A
NOTICE OF CONVERSION
--------------------
(To be Executed by the Registered Owner in order to Convert Debenture)
The undersigned hereby irrevocably elects, as of ________________, to
convert $________________ of its convertible debenture (the "Debenture") into
Common Stock of UTAH CLAY TECHNOLOGY, INC. (the "Company") according to the
conditions set forth in the Debenture issued by the Company. This conversion is
being made for an immediate sale.
Date of Conversion_______________________________________________________
Applicable Conversion Price______________________________________________
Number of Debentures Issuable upon this Conversion_______________________
Name(Print)______________________________________________________________
Address__________________________________________________________________
Phone_____________________________ Fax___________________________________
By:_______________________________________
Exhibit 10.8
Page 30 of 42 Pages
EXHIBIT D
Purchasers of [Company] [Describe Securities] _______________, 2001
Re: [Company]
Ladies and Gentlemen:
We have acted as counsel to [Company], a corporation incorporated under
the laws of the State of _________ (the "Company"), in connection with the
proposed issuance and sale of convertible debentures (the "Securities")
pursuant to the related Subscription Agreement (including all Exhibits and
Appendices thereto) (collectively the "Agreements").
In connection with rendering the opinions set forth herein, we have
examined drafts of the Agreement, the Company's Certificate of Incorporation,
and its Bylaws, as amended to date [other documents - describe], the
proceedings of the Company's Board of Directors taken in connection with
entering into the Agreements, and such other documents, agreements and records
as we deemed necessary to render the opinions set forth below.
In conducting our examination, we have assumed the following: (i) that
each of the Agreements has been executed by each of the parties thereto in the
same form as the forms which we have examined, (ii) the genuineness of all
signatures, the legal capacity of natural persons, the authenticity and
accuracy of all documents submitted to us as originals, and the conformity to
originals of all documents submitted to us as copies, (iii) that each of the
Agreements has been duly and validly authorized, executed and delivered by the
party or parties thereto other than the Company, and (iv) that each of the
Agreements constitutes the valid and binding agreement of the party or parties
thereto other than the Company, enforceable against such party or parties in
accordance with the Agreements' terms.
Based upon the subject to the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of __________, is
duly qualified to do business as a foreign corporation and is in good
standing in all jurisdictions where the Company owns or leases properties,
maintains employees or conducts business, except for jurisdictions in which
the failure to so qualify would not have a material adverse effect on the
Company, and has all requisite corporate power and authority to own its
properties and conduct its business.
2. The authorized capital stock of the Company consists of _______
shares of Common Stock, ________ par value per share, ("Common Stock") and
Exhibit 10.8
Page 31 of 42 Pages
______________ Preferred Stock, par value $________ per share; [describe
classes if applicable]
3. The Common Stock is registered pursuant to Section 12(b) or
Section 12(g) of the Securities Exchange Act of 1934, as amended and the
Company has timely filed all the material required to be filed pursuant to
Sections 13(a) or 15(d) of such Act for a period of at least twelve months
preceding the date hereof;
4. When duly countersigned by the Company's transfer agent and
registrar, and delivered to you or upon your order against payment of the
agreed consideration therefor in accordance with the provisions of the
Agreements, the Securities [and any Common Stock to be issued upon the
conversion of the Securities] as described in the Agreements represented
thereby will be duly authorized and validly issued, fully paid and
nonassessable;
5 The Company has the requisite corporate power and authority to
enter into the Subscription Agreement and to sell and deliver the Securities
and the Common Stock to be issued upon the conversion of the Securities as
described in the Agreements; each of the Agreements has been duly and validly
authorized by all necessary corporate action by the Company to our knowledge,
no approval of any governmental or other body is required for the execution
and delivery of each of the Agreements by the Company or the consummation of
the transactions contemplated thereby; each of the Agreements has been duly
and validly executed and delivered by and on behalf of the Company, and is a
valid and binding agreement of the Company, enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other laws affecting creditors rights generally, and except as
to compliance with federal, state, and foreign securities laws, as to which no
opinion is expressed;
6. To the best of our knowledge, after due inquiry, the execution,
delivery and performance of the Subscription Agreement and Securities by the
Company and the performance of its obligations thereunder do not and will not
constitute a breach or violation of any of the terms and provisions of, or
constitute a default under or conflict with or violate any provision of (i)
the Company's Certificate of Incorporation or By-Laws, (ii) any indenture,
mortgage, deed of trust, agreement or other instrument to which the Company is
party or by which it or any of its property is bound, (iii) any applicable
statute or regulation or as other, (iv) or any judgment, decree or order of
any court or governmental body having jurisdiction over the Company or any of
its property.
7. The issuance of Common Stock upon conversion of the Securities in
accordance with the terms and conditions of the Securities and the
Subscription Agreement, will not violate the applicable listing agreement
between the Company and any securities exchange or market on which the
Company's securities are listed.
Exhibit 10.8
Page 32 of 42 Pages
8. To the best of our knowledge, after due inquiry, there is no
pending or threatened litigation, investigation or other proceedings against
the Company [except as described in Exhibit A hereto].
9. The Company complies with the eligibility requirements for the use
of [Form SB-3] [Form SB-2], under the Securities Act of 1933, as amended.
This opinion is rendered only with regard to the matters set out in the
numbered paragraphs above. No other opinions are intended nor should they be
inferred. This opinion is based solely upon the laws of the United States and
the State of _____________ and does not include an interpretation or statement
concerning the laws of any other state or jurisdiction. Insofar as the
enforceability of the Subscription Agreement and Securities may be governed by
the laws of other states, we have assumed that such laws are identical in all
respects to the laws of the State of ___________.
The opinions expressed herein are given to you solely for your use in
connection with the transaction contemplated by the Subscription Agreement and
Securities and may not be relied upon by any other person or entity or for any
other purpose without our prior consent.
Very truly yours,
By: _____________________
Exhibit 10.8
Page 33 of 42 Pages
LIST OF EXHIBITS
----------------
EXHIBIT A Notice of Conversion
EXHIBIT B Registration Rights Agreement
EXHIBIT C Debenture
EXHIBIT D Opinion of Company's Counsel
EXHIBIT E Board Resolution
LIST OF SCHEDULES
-----------------
Schedule 3(a) Subsidiaries
Schedule 3(c) Capitalization
Schedule 3(e) Conflicts
Schedule 3(g) Material Changes
Schedule 3(h) Litigation
Schedule 3(l) Intellectual Property
Schedule 3(n) Liens
Schedule 3(t) Certain Transactions
Exhibit 10.8
Page 34 of 42 Pages
SCHEDULE 3(a) SUBSIDIARIES
None
Exhibit 10.8
Page 35 of 42 Pages
SCHEDULE 3(c) CAPITALIZATION
1. There are 500,000 warrants outstanding pursuant to a contract between Utah
Clay Technology, Inc. and Securities Compliance Control ("SCC"), as follows:
200,000 exercisable at $1 a warrant, 200,000 exercisable at $1.50 a warrant
and 100,000 exercisable at $2 a warrant. Utah Clay has advised SCC that SCC
failed to perform under the contract and that Utah Clay declares the
contract rescinded.
2. Utah Clay has issued 530,000 shares of common stock to SCC, its affiliates
and designees, which shares are restricted securities but carry with them
"piggy-back" registration rights. Again, Utah Clay regards this contract as
rescinded and regards the shares as not having been paid for.
3. In consideration of Dennis S. Engh, Daniel H. Engh and Thomas F. Harrison
("Pledgors").depositing an aggregate of 12 million shares of their holdings
of Common Stock of UTCL pursuant to a Security Agreement, which shares are
to serve as security for UTCL's performance under this Agreement which
provides for the issuance of up to $200,000 in Three-Year, 5%, Convertible
Debentures, UTCL granted options to each of the Pledgors to purchase, at
$0.09 a share, that number of shares of Common Stock of UTCL that may be
needed to replace any of such Pledgor's 12 million shares that may be sold
by the pledgees of the Security Agreement pursuant to its terms.
4. The relations between Utah Clay and SCC have not reached the point of
litigation but could. Utah Clay proposes to compromise the dispute, either
before or after litigation may be filed.
Exhibit 10.8
Page 36 of 42 Pages
SCHEDULE 3(e) CONFLICTS
NONE
Exhibit 10.8
Page 37 of 42 Pages
SCHEDULE 3(g) MATERIAL CHANGES
NONE
Exhibit 10.8
Page 38 of 42 Pages
SCHEDULE 3(h) LITIGATION
There is no filed or threatened litigation. However, as described in
Schedule 3(c), there is a dispute with Securities Compliance Control that
could develop into litigation.
Exhibit 10.8
Page 39 of 42 Pages
SCHEDULE 3(l) INTELLECTUAL PROPERTY
NONE
Exhibit 10.8
Page 40 of 42 Pages
SCHEDULE 3(n) LIENS
NONE
Exhibit 10.8
Page 41 of 42 Pages
SCHEDULE 3(t) CERTAIN TRANSACTIONS
NONE
Exhibit 10.8
Page 42 of 42 Pages
FORM OF DEBENTURE
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED
AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH
LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH
LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES
PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR
ADEQUACY OF THE OFFERING MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
AMOUNT $
DEBENTURE NUMBER NOVEMBER-2001-101
ISSUANCE DATE NOVEMBER __, 2001
MATURITY DATE MARCH __, 2002
FOR VALUE RECEIVED, Utah Clay Technology, Inc., a Utah corporation (the
"Company"), hereby promises to pay _________________________ (the "Holder") on
March __, 2002, (the "Maturity Date"), the principal amount of
___________________________ Dollars ($_______) U.S., and to pay interest on
the principal amount hereof, in such amounts, at such times and on such terms
and conditions as are specified herein.
Article 1. Interest
The Company shall pay interest on the unpaid principal amount of this
Debenture (the "Debenture") at the time of each conversion until the principal
amount hereof is paid in full or has been converted. The Debentures shall pay
five percent (5%) cumulative interest, in cash or in shares of common stock,
par value $.001 per share, of the Company ("Common Stock"), at the Company's
option, at the time of each conversion. The closing shall be deemed to have
occurred on the date the funds (less placement fees, escrow fees and attorney
fees) are received by the Company (the "Closing Date"). If the interest is to
be paid in cash, the Company shall make such payment within five (5) business
days of the date of conversion. If the interest is to be paid in Common
Stock, said Common Stock shall be delivered to the Holder, or per Holder's
instructions, within five (5) business days of the date of conversion. The
Debentures are subject to automatic conversion at the end of three (3) years
from the date of issuance at which time all Debentures outstanding will be
automatically converted based upon the formula set forth in Section 3.2.
Article 2. Method of Payment; Secured Debenture
Exhibit 10.9
Page 1 of 14 Pages
The principal amount of this Debenture is secured by shares pledged as
collateral pursuant to the terms of a Security Agreement. This Debenture is a
full recourse loan being made by the Holder and the Company is liable for any
deficiency.
This Debenture must be surrendered to the Company in order for the Holder
to receive payment of the principal amount hereof. The Company shall have the
option of paying the interest on this Debenture in United States dollars or in
Common Stock upon conversion pursuant to Article 1 hereof. The Company may
draw a check for the payment of interest to the order of the Holder of this
Debenture and mail it to the Holder's address as shown on the Register (as
defined in Section 7.2 below). Interest and principal payments shall be
subject to withholding under applicable United States Federal Internal Revenue
Service Regulations.
Article 3. Conversion
Section 3.1. Conversion Privilege
(a) The Holder of this Debenture shall have the right to convert it into
shares of Common Stock at any time and from time to time at the earlier of (i)
ninety (90) calendar days after the Closing Date or after the effective date
of the registration statement. The number of shares of Common Stock issuable
upon the conversion of this Debenture is determined pursuant to Section 3.2
and rounding the result to the nearest whole share.
(b) Less than all of the principal amount of this Debenture may be
converted into Common Stock if the portion converted is $5,000 or a whole
multiple of $5,000 and the provisions of this Article 3 that apply to the
conversion of all of the Debenture shall also apply to the conversion of a
portion of it. This Debenture may not be converted, whether in whole or in
part, except in accordance with Article 3.
(c) In the event all or any portion of this Debenture remains outstanding
on the Maturity Date, the unconverted portion of such Debenture will
automatically be converted into shares of Common Stock on such date in the
manner set forth in Section 3.2.
Section 3.2. Conversion Procedure.
(a) Debentures. Upon receipt by the Company or its designated
attorney of a facsimile or original of Holder's signed Notice of Conversion
(See Exhibit A attached hereto) preceded by, together with or followed by
receipt of the original Debenture to be converted in whole or in part in the
manner set forth in 3.2(b) below, the Company shall instruct its transfer
agent to issue one or more Certificates representing that number of shares of
Common Stock into which the Debenture is convertible. The Company shall act as
Registrar and shall maintain an appropriate ledger containing the necessary
information with respect to each Debenture.
(b) Conversion Procedures. The face amount of this Debenture may be
converted, in whole or in part. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, this Debenture to be converted
together with a facsimile or original of the signed Notice of Conversion which
evidences Holder's intention to convert the Debenture indicated. The date on
which the Notice of Conversion is effective ("Conversion Date") shall be
deemed to be the date on which the Holder has delivered to the Company a
Exhibit 10.9
Page 2 of 14 Pages
facsimile or original of the signed Notice of Conversion, as long as the
original Debenture(s) to be converted are received by the Company within three
(3) business days thereafter. Notwithstanding the above, any Notice of
Conversion not received by 5:00 P.M. EST, shall be deemed to have been
received the next business day.
(c) Common Stock to be Issued. Upon the conversion of any Debentures
and upon receipt by the Company or its attorney of a facsimile or original of
Holder's signed Notice of Conversion the Company shall instruct its transfer
agent to issue stock certificates without restrictive legend or stop transfer
instructions, if at that time the Registration Statement has been deemed
effective (or with proper restrictive legend if the Registration Statement has
not as yet been declared effective), in such denominations to be specified at
conversion representing the number of shares of Common Stock issuable upon
such conversion, as applicable. The Company warrants that no instructions,
other than these instructions, have been given or will be given to the transfer
agent and that the Common Stock shall otherwise be freely resold, except as may
be set forth herein.
(d) Conversion Rate. Holder is entitled to convert the face amount of
this Debenture, plus accrued interest, anytime following the Closing Date but
in accordance with paragraph 3.1 (a) above, at the lesser of (i) 120% of the
closing bid price (as reported by Bloomberg) on the Closing Date or (ii) 75% of
the average of the three (3) lowest closing bid prices (as reported by
Bloomberg) during the ten (10) trading days immediately prior to the Conversion
Date, each being referred to as the "Conversion Price". No fractional shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share.
(e) Nothing contained in this Debenture shall be deemed to establish or
require the payment of interest to the Holder at a rate in excess of the
maximum rate permitted by governing law. In the event that the rate of
interest required to be paid exceeds the maximum rate permitted by governing
law, the rate of interest required to be paid thereunder shall be automatically
reduced to the maximum rate permitted under the governing law and such excess
shall be returned with reasonable promptness by the Holder to the Company.
(f) It shall be the Company's responsibility to take all necessary actions
and to bear all such costs to issue the Common Stock as provided herein,
including the responsibility and cost for delivery of an opinion letter to the
transfer agent, if so required. The person in whose name the certificate of
Common Stock is to be registered shall be treated as a shareholder of record
on and after the conversion date. Upon surrender of any Debentures that are to
be converted in part, the Company shall issue to the Holder a new Debenture
equal to the unconverted amount, if so requested in writing by Holder.
(g) Within five (5) business days after receipt of the documentation
referred to above in Section 3.2(b), the Company shall deliver a certificate,
in accordance with Section 3.2(c) for the number of shares of Common Stock
issuable upon the conversion. In the event the Company does not make delivery
of the Common Stock, as instructed by Holder, within five (5) business days
after the Conversion Date, then in such event the Company shall pay to Holder
one percent (1%) in cash, of the dollar value of the Debentures being converted
per each day after the fifth (5th) business day following the Conversion Date
Exhibit 10.9
Page 3 of 14 Pages
that the Common Stock is not delivered to the Purchaser.
The Company acknowledges that its failure to deliver the Common Stock
within five (5) business days after the Conversion Date will cause the Holder
to suffer damages in an amount that will be difficult to ascertain.
Accordingly, the parties agree that it is appropriate to include in this
Debenture a provision for liquidated damages. The parties acknowledge and
agree that the liquidated damages provision set forth in this section
represents the parties' good faith effort to quantify such damages and, as
such, agree that the form and amount of such liquidated damages are reasonable
and will not constitute a penalty. The payment of liquidated damages shall
not relieve the Company from its obligations to deliver the Common Stock
pursuant to the terms of this Debenture.
Failure to issue unrestricted, freely tradable Common Stock to the
Holder(s) upon conversion shall be considered an Event of Default, which if
not cured within 10 days, shall entitle the Holder(s) to accelerate full
repayment of the Debentures then outstanding. The Company acknowledges that
the failure to honor a Notice of Conversion, shall cause definable financial
hardship on the Holder (s).
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 3.2(g) is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 3.2(g) shall
not apply but instead the provisions of Section 3.2(h) shall apply.
The Company shall make any payments incurred under this Section 3.2(g) in
immediately available funds within five (5) business days from the date the
Common Stock is fully delivered. Nothing herein shall limit a Holder's right
to pursue actual damages or cancel the conversion for the Company's failure to
issue and deliver Common Stock to the Holder within five (5) business days
after the Conversion Date.
(h) The Company shall at all times reserve (or make alternative written
arrangements for reservation or contribution of shares) and have available all
Common Stock necessary to meet conversion of the Debentures by all Holders of
the entire amount of Debentures then outstanding. If, at any time Holder
submits a Notice of Conversion and the Company does not have sufficient
authorized but unissued shares of Common Stock (or alternative shares of
Common Stock as may be contributed by Stockholders) available to effect, in
full, a conversion of the Debentures (a "Conversion Default", the date of such
default being referred to herein as the "Conversion Default Date"), the Company
shall issue to the Holder all of the shares of Common Stock which are
available, and the Notice of Conversion as to any Debentures requested to be
converted but not converted (the "Unconverted Debentures"), may be deemed null
and void upon written notice sent by the Holder to the Company. The Company
shall provide notice of such Conversion Default ("Notice of Conversion
Default") to all existing Holders of outstanding Debentures, by facsimile,
within three (3) business day of such default (with the original delivered by
overnight or two day courier), and the Holder shall give notice to the Company
by facsimile within five business days of receipt of the original Notice of
Conversion Default (with the original delivered by overnight or two day
courier) of its election to either nullify or confirm the Notice of Conversion.
Exhibit 10.9
Page 4 of 14 Pages
The Company agrees to pay to all Holders of outstanding Debentures
payments for a Conversion Default ("Conversion Default Payments") in the
amount of (N/365) x (.24) x the initial issuance price of the outstanding
and/or tendered but not converted Debentures held by each Holder where
N = the number of days from the Conversion Default Date to the date (the
"Authorization Date") that the Company authorizes a sufficient number of
shares of Common Stock to effect conversion of all remaining Debentures.
The Company shall send notice ("Authorization Notice") to each Holder of
outstanding Debentures that additional shares of Common Stock have been
authorized, the Authorization Date and the amount of Holder's accrued
Conversion Default Payments. The accrued Conversion Default shall be paid in
cash or shall be convertible into Common Stock at the Conversion Rate, upon
written notice sent by the Holder to the Company, which Conversion Default
shall be payable as follows: (i) in the event Holder elects to take such
payment in cash, cash payments shall be made to such Holder of outstanding
Debentures by the fifth day of the following calendar month, or (ii) in the
event Holder elects to take such payment in stock, the Holder may convert
such payment amount into Common Stock at the conversion rate set forth in
section 3.2(d) at anytime after the 5th day of the calendar month following
the month in which the Authorization Notice was received, until the expiration
of the mandatory three (3) year conversion period.
The Company acknowledges that its failure to maintain a sufficient number
of authorized but unissued shares of Common Stock to effect in full a
conversion of the Debentures will cause the Holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree
that it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages
provision set forth in this section represents the parties' good faith effort
to quantify such damages and, as such, agree that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The
payment of liquidated damages shall not relieve the Company from its
obligations to deliver the Common Stock pursuant to the terms of this
Debenture. Nothing herein shall limit the Holder's right to pursue actual
damages for the Company's failure to maintain a sufficient number of authorized
shares of Common Stock.
(i) If, by the fifth (5th) business day after the Conversion Date of any
portion of the Debentures to be converted (the "Delivery Date"), the transfer
agent fails for any reason to deliver the Common Stock upon conversion by the
Holder and after such Delivery Date, the Holder purchases, in an open market
transaction or otherwise, shares of Common Stock (the "Covering Shares") solely
in order to make delivery in satisfaction of a sale of Common Stock by the
Holder (the "Sold Shares"), which delivery such Holder anticipated to make
using the Common Stock issuable upon conversion (a "Buy-In"), the Company shall
pay to the Holder, in addition to any other amounts due to Holder pursuant to
this Debenture, and not in lieu thereof, the Buy-In Adjustment Amount (as
defined below). The "Buy In Adjustment Amount" is the amount equal to the
excess, if any, of (x) the Holder's total purchase price (including brokerage
commissions, if any) for the Covering Shares over (y) the net proceeds (after
brokerage commissions, if any) received by the Holder from the sale of the
Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Holder
in immediately available funds within five (5) business days of written demand
by the Holder. By way of illustration and not in limitation of the foregoing,
if the Holder purchases shares of Common Stock having a total purchase price
(including brokerage commissions) of $11,000 to cover a Buy-In with respect to
Exhibit 10.9
Page 5 of 14 Pages
shares of Common Stock it sold for net proceeds of $10,000, the Buy-In
Adjustment Amount which the Company will be required to pay to the Holder will
be $1,000.
(j) The Company shall furnish to Holder such number of prospectuses and
other documents incidental to the registration of the shares of Common Stock
underlying the Debentures, including any amendment of or supplements thereto.
(k) Limitation on Issuance of Shares. If the Company's Common Stock
becomes listed on the Nasdaq SmallCap Market after the issuance of the
Debentures, the Company may be limited in the number of shares of Common
Stock it may issue by virtue of (X) the number of authorized shares or (Y) the
applicable rules and regulations of the principal securities market on which
the Common Stock is listed or traded, including, but not necessarily limited
to, NASDAQ Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable
(collectively, the "Cap Regulations"). Without limiting the other provisions
thereof, the Debentures shall provide that (i) the Company will take all
steps reasonably necessary to be in a position to issue shares of Common Stock
on conversion of the Debentures without violating the Cap Regulations and (ii)
if, despite taking such steps, the Company still cannot issue such shares of
Common Stock without violating the Cap Regulations, the holder of a Debenture
which cannot be converted as result of the Cap Regulations (each such
Debenture, an "Unconverted Debenture") shall have the right to elect either of
the following remedies:
(x) if permitted by the Cap Regulations, require the Company to issue
shares of Common Stock in accordance with such holder's Notice of Conversion
at a conversion purchase price equal to the average of the closing bid price
per share of Common Stock for any five (5) consecutive trading days (subject
to certain equitable adjustments for certain events occurring during such
period) during the sixty (60) trading days immediately preceding the
Conversion Date; or
(y) require the Company to redeem each Unconverted Debenture for an
amount (the "Redemption Amount"), payable in cash, equal to the sum of (i) one
hundred thirty-three percent (133%) of the principal of an Unconverted
Debenture, plus (ii) any accrued but unpaid interest thereon through and
including the date (the "Redemption Date") on which the Redemption Amount is
paid to the holder.
A holder of an Unconverted Debenture may elect one of the above remedies
with respect to a portion of such Unconverted Debenture and the other remedy
with respect to other portions of the Unconverted Debenture. The Debentures
shall contain provisions substantially consistent with the above terms, with
such additional provisions as may be consented to by the Holder. The
provisions of this section are not intended to limit the scope of the
provisions otherwise included in the Debentures.
(l) Limitation on Amount of Conversion and Ownership. Notwithstanding
anything to the contrary in this Debenture, in no event shall the Holder be
entitled to convert that amount of Debenture, and in no event shall the
Company permit that amount of conversion, into that number of shares, which
when added to the sum of the number of shares of Common Stock beneficially
Exhibit 10.9
Page 6 of 14 Pages
owned, (as such term is defined under Section 13(d) and Rule 13d-3 of the
Securities Exchange Act of 1934, as may be amended, (the "1934 Act")), by the
Holder, would exceed 4.99% of the number of shares of Common Stock outstanding
on the Conversion Date, as determined in accordance with Rule 13d-1(j) of the
1934 Act. In the event that the number of shares of Common Stock outstanding
as determined in accordance with Section 13(d) of the 1934 Act is different on
any Conversion Date than it was on the Closing Date, then the number of shares
of Common Stock outstanding on such Conversion Date shall govern for purposes
of determining whether the Holder would be acquiring beneficial ownership of
more than 4.99% of the number of shares of Common Stock outstanding on such
Conversion Date.
(m) Legend. The Holder acknowledges that each certificate representing
the Debentures, and the Common Stock unless registered pursuant to the
Registration Rights Agreement, shall be stamped or otherwise imprinted with a
legend substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED
OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED
OF EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) IF
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
(n) Prior to conversion of all the Debentures and exercise of all the
Warrants, if at anytime the conversion of all the Debentures and exercise of
all the Warrants outstanding would result in an insufficient number of
authorized shares of Common Stock being available to cover all the conversions,
then in such event, the Company will move to call and hold a shareholder's
meeting or have shareholder action with written consent of the proper number
of shareholders within thirty (30) days of such event, or such greater period
of time if statutorily required or reasonably necessary as regards standard
brokerage house and/or SEC requirements and/or procedures, for the purpose of
authorizing additional shares of Common Stock to facilitate the conversions.
In such an event management of the Company shall recommend to all shareholders
to vote their shares in favor of increasing the authorized number of shares of
Common Stock. Management of the Company shall vote all of its shares of Common
Stock in favor of increasing the number of shares of authorized Common Stock.
Company represents and warrants that under no circumstances will it deny or
prevent Holder's right to convert the Debentures as permitted under the terms
of this Subscription Agreement or the Registration Rights Agreement. Nothing
in this Section shall limit the obligation of the Company to make the payments
set forth in Section 3.2(g). In the event the Company's shareholder's meeting
does not result in the necessary authorization, the Company shall redeem the
outstanding Debentures for an amount equal to (x) the sum of the principal of
the outstanding Debentures plus accrued interest thereon multiplied by (y)
133%.
(o) Redemption. The Company shall be entitled to redeem the unconverted
portion of the Debentures by giving the Holder at least ten (10) calendar day
written notice. The Holder shall be entitled to convert the balance of the
Debentures not being converted at anytime prior to the date of redemption.
Exhibit 10.9
Page 7 of 14 Pages
The redemption amount shall be 125% of the principal amount being redeemed,
plus and additional 1% for each 30 day period after the 90th calendar day
following the Closing Date.
Section 3.3. Fractional Shares. The Company shall not issue fractional
shares of Common Stock, or scrip representing fractions of such shares, upon
the conversion of this Debenture. Instead, the Company shall round up or
down, as the case may be, to the nearest whole share.
Section 3.4. Taxes on Conversion. The Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon the conversion of this Debenture. However, the Holder shall pay
any such tax which is due because the shares are issued in a name other than
its name.
Section 3.5. Company to Reserve Stock. The Company shall reserve the
number of shares of Common Stock required pursuant to and upon the terms set
forth in the Subscription Agreement to permit the conversion of this
Debenture. All shares of Common Stock which may be issued upon the conversion
hereof shall upon issuance be validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issuance
thereof.
Section 3.6. Restrictions on Sale. This Debenture has not been
registered under the Securities Act of 1933, as amended, (the "Act") and is
being issued under Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. This Debenture and the Common Stock issuable upon
the conversion thereof may only be sold pursuant to registration under or an
exemption from the Act.
Section 3.7. Mergers, Etc. If the Company merges or consolidates with
another corporation or sells or transfers all or substantially all of its
assets to another person and the holders of the Common Stock are entitled to
receive stock, securities or property in respect of or in exchange for Common
Stock, then as a condition of such merger, consolidation, sale or transfer,
the Company and any such successor, purchaser or transferee shall amend this
Debenture to provide that it may thereafter be converted on the terms and
subject to the conditions set forth above into the kind and amount of stock,
securities or property receivable upon such merger, consolidation, sale or
transfer by a holder of the number of shares of Common Stock into which this
Debenture might have been converted immediately before such merger,
consolidation, sale or transfer, subject to adjustments which shall be as
nearly equivalent as may be practicable to adjustments provided for in this
Article 3.
Article 4. Mergers
The Company shall not consolidate or merge into, or transfer all or
substantially all of its assets to, any person, unless such person assumes in
writing the obligations of the Company under this Debenture and immediately
after such transaction no Event of Default exists. Any reference herein to
the Company shall refer to such surviving or transferee corporation and the
obligations of the Company shall terminate upon such written assumption.
Exhibit 10.9
Page 8 of 14 Pages
Article 5. Reports
The Company will mail to the Holder hereof at its address as shown on the
Register a copy of any annual, quarterly or current report that it files with
the Securities and Exchange Commission promptly after the filing thereof and a
copy of any annual, quarterly or other report or proxy statement that it gives
to its shareholders generally at the time such report or statement is sent to
shareholders.
Article 6. Defaults and Remedies
Section 6.1. Events of Default. An "Event of Default" occurs if (a) the
Company does not pay the principal amount of this Debenture in full on or
before the one hundred twentieth (120th) calendar day following the Closing
Date and the registration statement covering the Common Stock underlying this
offering is not declared effective on or before the one hundred twentieth
(120th) calendar day following the Closing Date (it shall not be considered an
"Event of Default" if the registration statement covering the Common Stock
underlying this offering is declared effective on or before the one hundred
twentieth (120th) calendar day following the Closing Date), (b) any of the
Company's representations or warranties contained in the Subscription
Agreement or this Debenture were false when made or the Company fails to
comply with any of its other agreements in the Subscription Agreement or this
Debenture and such failure continues for the period and after the notice
specified below, (c) the Company pursuant to or within the meaning of any
Bankruptcy Law (as hereinafter defined): (i) commences a voluntary case; (ii)
consents to the entry of an order for relief against it in an involuntary
case; (iii) consents to the appointment of a Custodian (as hereinafter
defined) of it or for all or substantially all of its property or (iv) makes a
general assignment for the benefit of its creditors or (v) a court of
competent jurisdiction enters an order or decree under any Bankruptcy Law
that: (A) is for relief against the Company in an involuntary case; (B)
appoints a Custodian of the Company or for all or substantially all of its
property or (C) orders the liquidation of the Company, and the order or decree
remains unstayed and in effect for sixty (60) calendar days, (e) the Company's
Common Stock is suspended or no longer listed on any recognized exchange
including electronic over-the-counter bulletin board for in excess of five (5)
consecutive trading days. As used in this Section 6.1, the term "Bankruptcy
Law" means Title 11 of the United States Code or any similar federal or state
law for the relief of debtors. The term "Custodian" means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.
A default under clause (c) above is not an Event of Default until the holders
of at least 25% of the aggregate principal amount of the Debentures
outstanding notify the Company of such default and the Company does not cure
it within thirty (30) business days after the receipt of such notice, unless
the Company commences to cure such default within such period, which must
specify the default, demand that it be remedied and state that it is a
"Notice of Default".
Section 6.2. Acceleration. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
remaining principal amount of this Debenture, together with all accrued
interest and any liquidated damages, to be due and payable. Upon such
declaration, the remaining principal amount shall be due and payable
immediately.
Section 6.3 Concerning Seniority. Except as disclosed in the Company's
SEC filings, no indebtedness of the Company is senior to this Debenture in
right of payment, whether with respect to interest, damages or upon
liquidation or dissolution or otherwise.
Exhibit 10.9
Page 9 of 14 Pages
Section 6.4 Liquidation Value. The liquidation value of this Debenture
shall be equal to 125% of the outstanding balance remaining on this Debenture
plus accrued but unpaid interest and liquidated damages.
Article 7. Registered Debentures
Section 7.1. Series. This Debenture is one of a numbered series of
Debentures which are identical except as to the principal amount and date of
issuance thereof. Such Debentures are referred to herein collectively as the
"Debentures". The Debentures shall be issued in whole multiples of $5,000.
Section 7.2. Record Ownership. The Company, or its attorney, shall
maintain a register of the holders of the Debentures (the "Register") showing
their names and addresses and the serial numbers and principal amounts of
Debentures issued to them. The Register may be maintained in electronic,
magnetic or other computerized form. The Company may treat the person named
as the Holder of this Debenture in the Register as the sole owner of this
Debenture. The Holder of this Debenture is the person exclusively entitled
to receive payments of interest on this Debenture, receive notifications with
respect to this Debenture, convert it into Common Stock and otherwise exercise
all of the rights and powers as the absolute owner hereof.
Section 7.3. Worn or Lost Debentures. If this Debenture becomes
worn, defaced or mutilated but is still substantially intact and recognizable,
the Company or its agent may issue a new Debenture in lieu hereof upon its
surrender. Where the Holder of this Debenture claims that the Debenture has
been lost, destroyed or wrongfully taken, the Company shall issue a new
Debenture in place of the original Debenture if the Holder so requests by
written notice to the Company actually received by the Company before it is
notified that the Debenture has been acquired by a bona fide purchaser and the
Holder has delivered to the Company an indemnity bond in such amount and
issued by such surety as the Company deems satisfactory together with an
affidavit of the Holder setting forth the facts concerning such loss,
destruction or wrongful taking and such other information in such form with
such proof or verification as the Company may request.
Article 8. Notice.
Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Debenture must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically or electronically generated and kept on file
by the sending party); or (iii) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Utah Clay Technology, Inc.
3985 South 200 East
Salt Lake City, Utah 84124
Attention: Dennis S. Engh, President
Telephone: 801-424-0223
Facsimile: 801-274-7804
Exhibit 10.9
Page 10 of 14 Pages
With a copy to:
Thomas J. Kenan, Esq.
Fuller, Tubb, Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Telephone: 405-235-2575
Facsimile: 405-232-8384
E-Mail: Kenan@ftpslaw.com
If to the Investor:
At the address listed in the Questionnaire.
If to May Davis Group, Inc.:
c/o Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telephone: 203-966-0566
Facsimile: 203-966-0363
Each party shall provide five (5) business days prior notice to the other
party of any change in address, phone number or facsimile number.
Article 9. Time
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of
a condition or obligation within, before or after a period of time computed
from a certain date, and such period of time ends on a Saturday or a Sunday or
a public holiday, such payment may be made or condition or obligation
performed on the next succeeding business day, and if the period ends at a
specified hour, such payment may be made or condition performed, at or before
the same hour of such next succeeding business day, with the same force and
effect as if made or performed in accordance with the terms of this Debenture.
A "business day" shall mean a day on which the banks in New York are not
required or allowed to be closed.
Article 10. No Assignment
This Debenture shall not be assignable.
Article 11. Rules of Construction.
Exhibit 10.9
Page 11 of 14 Pages
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in the Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof.
Wherever, in this Debenture, a determination of the Company is required or
allowed, such determination shall be made by a majority of the Board of
Directors of the Company and if it is made in good faith, it shall be
conclusive and binding upon the Company and the Holder of this Debenture.
Article 12. Governing Law
The validity, terms, performance and enforcement of this Debenture shall
be governed and construed by the provisions hereof and in accordance with the
laws of the State of Utah applicable to agreements that are negotiated,
executed, delivered and performed solely in the State of Utah.
Article 13. Litigation
(a) Forum Selection and Consent to Jurisdiction. Any litigation
arising out of, under, or in connection with, this Debenture or any course of
conduct, course of dealing, statements (whether oral or written) or actions of
the Company or Holder shall be brought and maintained exclusively in the courts
of the State of New York. The Company hereby expressly and irrevocably submits
to the jurisdiction of the state and federal courts of the State of New York
for the purpose of any such litigation as set forth above and irrevocably
agrees to be bound by any final judgment rendered thereby in connection with
such litigation. The Company further irrevocably consents to the service of
process by registered mail, postage prepaid, or by personal service within or
without the State of New York. The Company hereby expressly and irrevocably
waives, to the fullest extent permitted by law, any objection which it may have
or hereafter may have to the laying of venue of any such litigation brought in
any such court referred to above and any claim that any such litigation has
been brought in any inconvenient forum. To the extent that the Company has or
hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to
judgment, attachment in aid of execution or otherwise) with respect to itself
or its property, the Company hereby irrevocably waives such immunity in
respect of its obligations under this Debenture.
(b) Waiver of Jury Trial. The Holder and the Company hereby knowingly,
voluntarily and intentionally waive any rights they may have to a trial by
jury in respect of any litigation based hereon, or arising out of, under, or
in connection with, this Debenture, or any course of conduct, course of
dealing, statements (whether oral or written) or actions of the Holder or the
Company. The Company acknowledges and agrees that it has received full and
sufficient consideration for this provision and that this provision is a
material inducement for the Holder purchasing this Debenture.
(c) Governing Law. The terms of this Debenture shall be governed by and
construed and enforced in accordance with the laws of the State of Utah
without regard to the conflicts of laws principles thereof.
Exhibit 10.9
Page 12 of 14 Pages
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
UTAH CLAY TECHNOLOGY, INC.
By _______________________________
Name: Dennis S. Engh
Title: President
Exhibit 10.9
Page 13 of 14 Pages
EXHIBIT C
---------
NOTICE OF CONVERSION
--------------------
(To be Executed by the Registered owner in order to Convert the Debentures.)
The undersigned hereby irrevocably elects, as of ______________, 200_ to
convert $__________ of Convertible Debentures into Common Stock of Utah Clay
Technology, Inc. (the "Company") according to the conditions set forth in the
Debenture dated November of 2001, and issued by the Company.
This conversion is being made for an immediate sale.
Date of Conversion_____________________________________________________
Applicable Conversion Price____________________________________________
Number of Shares Issuable upon this conversion_________________________
Name (Print) __________________________________________________________
Address________________________________________________________________
_______________________________________________________________________
Phone___________________________ Fax_________________________________
By: _______________________________
Exhibit 10.9
Page 14 of 14 Pages
SECURITY AGREEMENT
(STOCK PLEDGE)
This Security Agreement (the "Agreement") is made as of November __, 2001,
between Dennis S. Engh, Daniel Engh and Thomas Harrison ("Pledgors"), and
________ _______ _________ _______ ("Secured Parties") (singly a "Party" and
cumulatively the "Parties").
For good and valuable consideration, receipt of which is hereby
acknowledged, Pledgors and Secured Parties hereby agree as follows:
1. Grant of Security Interest. Pledgors hereby grants to Secured
Parties a security interest in 12,000,000 shares of Utah Clay Technology, Inc.
common stock (the "Shares" also referred to as the "Collateral"), currently
issued in the name of Pledgors, and in all proceeds thereof, including, without
limitation: (a) any and all shares issued in replacement thereof; (b) any and
all shares issued as a stock dividend or issued in connection with any increase
or decrease of capital, reclassification, reorganization, merger,
consolidation, sale of assets, combination of shares, stock split, spin-off or
split-off; (c) any and all options, warrants or rights, whether as an addition
to, or in substitution or exchange for any of said stock or otherwise; and (d)
any and all dividends or distributions, whether payable in cash or in property.
Pledgors and Secured Parties acknowledge their mutual intent that all
security interests contemplated herein are given as a contemporaneous exchange
for new value to Pledgors.
2. Debts Secured. The security interest granted by this Agreement
shall secure the following obligations, which is a full recourse obligation of
Utah Clay Technology, Inc. convertible debentures ("Debentures") issued in
favor of Secured Parties dated November ___ 2001, in the aggregate principal
amount of up to Two Hundred Thousand Dollars ($200,000), any and all renewals,
extensions, replacements, modifications and amendments thereof (including any
which increase the original principal amount).
3. Perfection Security Interest. Pledgors agrees to deliver any and
all stock certificates, or similar instruments evidencing the Collateral, to
Secured Parties or an escrow agent to be designated by Pledgors and Secured
Parties, at the time of execution of this Agreement. Pledgors agree to give
good faith, diligent cooperation to Secured Parties and to perform such other
acts as reasonably requested by Secured Parties for perfection and enforcement
of said security interest. Pledgors will promptly deliver to Secured Parties
all written notices, dividends, stock certificates, or other documents
constituting or relating to the Collateral, which are received in the future
and will promptly give Secured Parties written notice of any other notices
which are received in the future by Pledgors with respect to the Collateral.
4. No Transfer of Ownership Prior to Default. Pledgors do hereby
make, constitute and appoint Secured Parties and their designees, as Pledgors'
true and lawful attorney in fact, with full power of substitution, to transfer
Exhibit 10.10
Page 1 of 9 Pages
the Collateral on the books of the issuing corporation, or any transfer agent,
to the name of Secured Parties or such other name as designated by Secured
Parties. Such power may be exercised in the sole discretion of Secured
Parties, but only upon a default under the terms of this Agreement.
Pledgors agree to give full cooperation and to use their best efforts to
cause any issuer, transfer agent, or registrar of the Collateral to take all
such actions and to execute all such documents as may be necessary or
appropriate to effect any sale, transfer or other disposition of the
Collateral, upon a default pursuant to the terms of the Debenture.
Pledgors agree to pay any and all expenses and out of pocket costs,
including, reasonably attorney's fees and legal expenses, incurred by Secured
Parties in connection with this Section and the payment thereof shall be
secured by the Collateral.
5. Voting Rights. The voting rights with regard to the Collateral shall
be with the record owner.
6. Exercise of Options. In the event that during the term of this
Agreement subscription warrants or any other rights or options shall be issued
in connection with the Collateral, such warrants, rights and options shall
constitute part of the Collateral, Secured Parties may elect (without any duty
to do so) to exercise such warrants, rights and options on behalf of Pledgors.
Payment of all costs and expenses incurred by Secured Parties in such exercise,
including sums paid to exercise such options or warrants and reasonable
attorneys fees and legal expenses, shall be payable by Pledgors and the
payment thereof shall be secured by the Collateral. If Secured Parties elect
not to exercise such warrants, rights and options on behalf of Pledgors.
Pledgors may elect to exercise such warrants, rights and options at their cost
and expense. All new shares of stock or other interests so acquired shall be
subject to and held under the terms hereof as Collateral.
7. Duty of Secured Parties. Beyond the exercise of reasonable care
to assure safe custody of the certificates evidencing the collateral while held
hereunder, Secured Parties shall have no duty or liability to preserve rights
pertaining to the Collateral and shall be relieved of all responsibility for
the Collateral upon surrendering the certificates or tendering surrender of the
certificates to Pledgors or the agreed upon escrow agent, as the case may be.
8. Representations and Warranties Concerning Collateral. Pledgors
represents and warrants that:
a. Pledgors are the sole owners of the Collateral.
b. The Collateral is not subject to any security interest, lien,
prior assignment, or other encumbrance of any nature whatsoever except for
current taxes and assessments which are not delinquent and the security
interest created by this Agreement.
Exhibit 10.10
Page 2 of 9 Pages
9. Covenants Concerning Collateral. Pledgors covenant that:
a. Pledgors will keep the Collateral free and clear of any and
all security interests, liens, assignments or other encumbrances, except those
for current taxes and assessments which are not delinquent and those arising
from this Agreement.
b. Pledgors agree to promptly execute and deliver any other
documents reasonably requested by Secured Parties for perfection or enforcement
of this Agreement and the security interests created hereby, and to give good
faith, diligent cooperation to Secured Parties and to perform such other acts
reasonably requested by Secured Parties for perfection and enforcement of said
security interests.
10. Right to Perform for Pledgors. Secured Parties may, in their
sole discretion and without any duty to do so, elect to discharge taxes, tax
liens, security interests, or any other encumbrance upon the Collateral,
perform any duty or obligation of Pledgors, pay filing, recording, insurance
and other charges payable by Pledgors, or provide insurance as provided herein
if Pledgors fail to do so. Any such payments advanced by Secured Parties shall
be repaid by Pledgors upon demand, together with interest thereon from the date
of advance until repaid at the rate of ten percent (10%) per annum.
11. Possession of Collateral. All Collateral shall be held by an
escrow agent to be agreed upon by Pledgors and Secured Parties, who shall act
as Secured Parties agent for the purpose of perfecting their security interest
in the Collateral.
12. Default. Time is of the essence of this Agreement. The
occurrence of any of the following events shall constitute a default under this
Agreement:
a. Any representation or warranty made by or on behalf of
Pledgors in this Agreement is materially false or materially misleading when
made;
b. Pledgors fail in the payment or performance of any obligation,
covenant, agreement or liability created by or contemplated by this Agreement
or secured by this Agreement;
c. Any default in the payment or performance of any amounts,
obligation, covenant, agreement or liability under the terms of the Debentures
or this Agreement; or
No course of dealing or any delay or failure to assert any default shall
constitute a waiver of that default or of any prior or subsequent default.
13. Remedies. Upon the occurrence of any default under this
Agreement, Secured Parties shall have the following rights and remedies, in
addition to all other rights and remedies existing at law, in equity, or by
Exhibit 10.10
Page 3 of 9 Pages
statute or provided in the Debentures;
a. If Pledgors fail to cure any default within five (5) business
days after Pledgors's receipt of written notice of default from Secured
Parties, Secured Parties may sell, assign, deliver or otherwise dispose of any
or all of the Collateral for cash and/or credit and upon such terms and at
such place or places, and at such time or times, and to such person, firms,
companies or corporation as Secured Parties reasonably believes expedient,
without any advertisement whatsoever, and, after deducting the reasonable costs
and out-of-pocket expenses incurred by Secured Parties, including, without
limitation, (i) reasonable attorneys fees and legal expenses, (ii) advertising
of sale of the Collateral, (iii) sale commissions, (iv) sales tax, and (v)
costs for preservation and protection of the Collateral, apply the remainder to
pay, or to hold as a reserve against, the obligations secured by this
Agreement.
b. Secured Parties and Pledgors agree to enter into an escrow
agreement with Secured Parties' counsel as escrow agent that shall provide in
the event Pledgors are unable to cure any default within five (5) business
days, then escrow agent shall release that number of the Shares being held in
escrow, equal to $300,000 based on the closing bid price of Utah Clay
Technology, Inc.'s common stock on the trading day immediately preceding the
default. The collateral shall not be used unless the registration statement
covering the common stock underlying the Debentures has not been declared
effective on or before the ninetieth (90th) calendar day following the first
funding of $100,000, in which event, on the one hundred twentieth 120th
calendar day following the first funding of $100,000, if the registration
statement has still not been declared effective (a "Default"), that number of
shares equal to $300,000 based on the closing bid price of the Company's common
stock on the trading day immediately preceding the default shall be released by
the escrow agent to the Secured Parties, less that amount of the Debentures
already converted by the Secured Parties, if any. Once the Secured Parties
have recovered 125% of their principal, net of customary brokerage commissions
and expenses, plus any liquidated damages for failure of the registration
statement to be declared effective on or before the ninetieth (90th) calendar
day following the first funding of $100,000, the balance of the remaining
common stock they received shall be returned to the escrow agent. In the event
that the Secured Parties do not recover 125% of their principal, net of
customary brokerage commissions and expenses, plus any liquidated damages for
failure of the registration statement to be declared effective on or before the
ninetieth (90th) calendar day following the first funding of $100,000, the
escrow agent shall release additional shares to make up the shortfall, based on
the closing bid price for the trading day immediately preceding the date the
escrow agent receives trade confirmations from the Secured Parties' broker
showing the amount received from the sale of the shares. The process shall be
repeated until the Secured Parties have recovered 125% of their principal, plus
applicable liquidated damages. Each of the Secured Parties may elect at their
sole option to decline to use the collateral and instead use the conversion
feature of the Debentures. Secured Parties shall provide a weekly accounting
to Escrow Agent and Pledgors of the sales. In the event that the Common Stock
is not sufficient to pay the balance of the loan in full, the Pledgors agree to
forward additional shares of Common Stock to the Secured Parties each calendar
week until Secured Parties are able to recover the full balance of 125% of
their principal, plus 2% for each thirty (30) calendar day period ninety (90)
calendar days after the Closing Date that the registration statement was not
declared effective.
Exhibit 10.10
Page 4 of 9 Pages
c. The rights and remedies herein conferred are cumulative and
not exclusive of any other rights and remedies and shall be in addition to
every other right, power and remedy herein specifically granted or hereafter
existing at law, in equity, or by statute which Secured Parties might otherwise
have, and any and all such rights and remedies may be exercised from time to
time and as often and in such order as Secured Parties may deem expedient. No
delay or omission in the exercise of any such right, power or remedy or in the
pursuance of any remedy shall impair any such right, power or remedy or be
construed to be a waiver thereof or of any default or to be an acquiescence
therein.
d. In the event of breach or default under the terms of this
Agreement by Pledgors, Pledgors agree to pay all reasonable attorneys fees and
legal expenses incurred by or on behalf of Secured Parties in enforcement of
this Agreement, in exercising any remedy arising from such breach or default,
or otherwise related to such breach or default. Pledgors additionally agree to
pay all reasonable costs and out-of-pocket expenses, including, without
limitation, (i) reasonable attorneys fees and legal expenses, (ii) advertising
of sale of the Collateral, (iii) sale commissions, (iv) sales tax, and (v)
costs for preservation and protection of the Collateral, incurred by Secured
Parties in obtaining possession of Collateral, preparation for sale, sale or
other disposition, and otherwise incurred in foreclosing upon the Collateral.
Any and all such costs and out-of-pocket expenses shall be payable by Pledgors
upon demand, together with interest thereon at ten percent (10.0%) per annum.
e. Regardless of any breach or default, Pledgors agree to pay all
expenses, including reasonable attorneys fees and legal expenses, incurred by
Secured Parties in any bankruptcy proceeding of any type involving Pledgors,
the Collateral, or this Agreement, including, without limitation, expenses
incurred in modifying or lifting the automatic stay, determining adequate
protection, use of cash collateral, or relating to any plan of reorganization.
f. If Pledgors shall be in default under the terms of the
Debentures or this Agreement, Secured Parties, immediately and at any time
thereafter, may declare all of the indebtedness secured pursuant to this
Agreement immediately due and payable, shall have all rights available in law
or at equity, including, without limitation, specific performance of this
Agreement or for an injunction against violations of any of the terms hereof,
and the rights and all the remedies of a secured party under applicable law.
14. Notices. Any notices or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been received (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by
the sending Party); or (iii) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
Party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to Pledgors to:
Exhibit 10.10
Page 5 of 9 Pages
If to Pledgors:
Utah Clay Technology, Inc.
3985 South 200 East
Salt Lake City, Utah 84124
Attention: Dennis S. Engh, President
Telephone: 801-424-0223
Facsimile:
With a copy to:
Thomas J. Kenan, Esq.
Fuller, Tubb, Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Telephone: 405-235-2575
Facsimile: 405-232-8384
E-Mail: kenan@ftpslaw.com
If to Secured Parties:
c/o Joseph B. LaRocco, Esq.
49 Locust Avenue - Suite 107
New Canaan, CT 06840
Phone: 203-966-0566
Fax 203-966-0363
15. Indemnification. Pledgors agree to indemnify Secured Parties
for any and all claims and liabilities, and for damages which may be awarded
against Secured Parties and for all reasonable attorneys fees, legal expenses,
and other out-of-pocket expenses incurred in defending such claims, arising
from or related in any manner to the negotiation, execution, or performance of
this Agreement, excluding any claims and liabilities based upon breach or
default by Secured Parties under this Agreement or upon the negligence or
misconduct of Secured Parties. Secured Parties shall have sole and complete
control of the defense of any such claims, and are hereby given the authority
to settle or otherwise compromise any such claims as they in good faith
determine shall be in their best interests.
16. General. This Agreement is made for the sole and exclusive
benefit of Pledgors and Secured Parties and is not intended to benefit any
third party. No such third party may claim any right or benefit or seek to
enforce any term or provision of this Agreement.
In recognition of Secured Parties' right to have all its attorneys fees
and expenses incurred in connection with this Agreement secured by the
Collateral, notwithstanding payment in full of the obligations secured by the
Exhibit 10.10
Page 6 of 9 Pages
Collateral, Secured Parties shall not be required to release, reconvey, or
terminate any security interest in the Collateral unless and until Pledgors has
executed and delivered to Secured Parties a general release in form and
substance satisfactory to Secured Parties.
Secured Parties and its officers, directors, employees, representatives,
agents, attorneys, shall not be liable to Pledgors for consequential damages
arising from or relating to any breach of contract, tort, or other wrong in
connection with or relating to this Agreement or the Collateral.
If the incurring of any debt by Pledgors or the payment of any money or
transfer of property to Secured Parties by or on behalf of Pledgors should for
any reason subsequently be determined to be "voidable" or avoidable" in whole
or in part within the meaning of any state or federal law (collectively
"voidable transfers"), including, without limitation, fraudulent conveyances or
preferential transfers under the United States Bankruptcy Code or any other
federal or state law, and Secured Parties are required to repay or restore any
voidable transfers or the amount or any portion thereof, or upon the advice of
Secured Parties' counsel are advised to do so, then, as to any such amount or
property repaid or restored, including all reasonable costs, expenses, and
attorneys fees of Secured Parties related thereto, the liability of Pledgors,
and each of them, and this Agreement, shall automatically be revived,
reinstated and restored and shall exist as though the voidable transfers had
never been made.
Pledgors represent that there are no actions, suits, investigations or
proceedings pending or threatened against or affecting the validity or
enforceability of the Debentures or this Agreement, any guaranty or any
instrument, document or agreement concerning the Collateral or of which, if
adversely determined, would have a material adverse effect on the financial
condition, operations, business or properties of the Pledgors, and there are no
outstanding orders or judgments of any court or governmental authority or
awards of any arbitrator or arbitration board against the Pledgors.
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction only, be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
All references in this Agreement to the singular shall be deemed to
include the plural if the context so requires and vice versa. Reference in the
collective or conjunctive shall also include the disjunctive unless the context
otherwise clearly requires a different interpretation.
All agreements, representations, warranties and covenants made by Pledgors
shall survive the execution and delivery of this Agreement, the filing and
consummation of any bankruptcy proceedings, and shall continue in effect so
long as any obligation to Secured Parties contemplated by this Agreement is
outstanding and unpaid, notwithstanding any termination of this Agreement. All
Exhibit 10.10
Page 7 of 9 Pages
agreements, representations, warranties and covenants in this Agreement shall
bind the Party making the same and its heirs and successors, and shall be to
the benefit of and be enforceable by each Party for whom made their respective
heirs, successors and assigns.
Pledgors waive presentment, demand for payment, notice of dishonor,
protest and any other notices or demands in connections with the delivery,
acceptance, performance, default and enforcement of any promissory note or
instrument representing all or any part of the indebtedness.
Pledgors will pay to Secured Parties on demand any costs, expenses,
reasonable attorneys' fees and their reasonable disbursements incurred or paid
by Secured Parties in protecting or enforcing its rights in the Collateral and
in collecting any part of the indebtedness and such amounts extended pursuant
to this section shall be added to the indebtedness.
Any delay, failure or waiver by Secured Parties to exercise any right it
may have under this Agreement is not a waiver of Secured Parties' right to
exercise the same or any other right at any other time.
If any provision of this Agreement or the application of any provision to
any person or circumstance shall be invalid or unenforceable, neither the
balance of this Agreement nor the application of the provision to other persons
or circumstances shall be affected. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction
only, be ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
In the interest of a speedy resolution of any lawsuit which may arise
hereunder, Pledgors waives a trial by jury in any action with respect to this
Agreement and as to any issues arising relating to this Agreement.
If the incurring of any debt by Pledgors or the payment of any money or
transfer of property to Secured Parties by or on behalf of Pledgors should for
any reason subsequently be determined to be "voidable" or avoidable" in whole
or in part within the meaning of any state or federal law of the United States,
(collectively "voidable transfers"), including, without limitation, fraudulent
conveyances or preferential transfers under the United States Bankruptcy Code
or any other federal or state law, and Secured Parties are required to repay or
restore any voidable transfers or the amount or any portion thereof, or upon
the advice of Secured Parties' counsel is advised to do so, then, as to any
such amount or property repaid or restored, including all reasonable costs,
expenses, and attorneys fees of Secured Parties related thereto, the liability
of Pledgors, shall automatically be revived, reinstated and restored and shall
exist as though the voidable transfers had never been made.
Exhibit 10.10
Page 8 of 9 Pages
The Parties hereto expressly agree that this Agreement shall be governed
by, interpreted under, and construed and enforced in accordance of the laws of
the State of Utah. Any action to enforce, arising out of, or relating in any
way to, any provisions of this Agreement shall be brought in the federal courts
for the State of Utah.
All references in this Agreement to the singular shall be deemed to
include the plural if the context so requires and vice versa. Reference in the
collective or conjunctive shall also include the disjunctive unless the context
otherwise clearly requires a different interpretation. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
but all of which shall constitute one and the same Agreement.
This Agreement constitutes the entire agreement between Pledgors and
Secured Parties as to the subject matter hereof and may not be altered or
amended except by written agreement signed by Pledgors and Secured Parties.
All other prior and contemporaneous understandings between the Parties hereto
as to the subject matter hereof are rescinded.
Dated: November __, 2001
PLEDGORS:
By:_________________________________
Dennis S. Engh individually
By:_________________________________
Daniel Engh, individually
By:_________________________________
Thomas Harrison, individually
SECURED PARTIES:
By: ________________________________
By:_________________________________
By:_________________________________
Exhibit 10.10
Page 9 of 9 Pages
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of November __,
2001, by and between Utah Clay Technology, Inc., a company organized under the
laws of state of Utah, with its principal executive office at 3985 South 200
East, Salt Lake City, Utah 84124 (the "Company"), and the undersigned investor
(the "Investor").
WHEREAS, upon the terms and subject to the conditions of the Subscription
Agreement between the Investor and the Company (the "Subscription Agreement"),
the Company has agreed to issue and sell to the Investor convertible
debentures of the Company (the "Debentures"), which will be convertible into
shares of the common stock, $.001 par value per share (the "Common Stock"), of
the Company upon the terms and subject to the conditions of such Debentures;
and
WHEREAS, to induce the Investor to execute and deliver the Subscription
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"),
and applicable state securities laws, with respect to the shares of Common
Stock issuable pursuant to the Subscription Agreement and Debentures.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained hereinafter and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Investor hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "Closing Date" means the date funds are received by the Company pursuant
to the Subscription Agreement.
b. "Holder" means the Investor.
c. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
d. "Potential Material Event" means any of the following: (i) the possession
by the Company of material information not ripe for disclosure in a
Registration Statement, which shall be evidenced by determinations in good
faith by the Board of Directors of the Company that disclosure of such
information in the Registration Statement would be detrimental to the business
Exhibit 10.11
Page 1 of 19 Pages
and affairs of the Company, or (ii) any material engagement or activity by the
Company which would, in the good faith determination of the Board of Directors
of the Company, be adversely affected by disclosure in a Registration
Statement at such time, which determination shall be accompanied by a good
faith determination by the Board of Directors of the Company that the
Registration Statement would be materially misleading absent the inclusion of
such information.
e. "Principal Market" means either The American Stock Exchange, Inc., The New
York Stock Exchange, Inc., the Nasdaq National Market, The Nasdaq SmallCap
Market or the National Association of Securities Dealer's, Inc. OTC electronic
bulletin board, whichever is the principal market on which the Common Stock
is listed.
f. "Register," "Registered," and "Registration" refer to a registration
effected by preparing and filing one or more Registration Statements in
compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or
any successor rule providing for offering securities on a continuous basis
("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
g. "Registrable Securities" means the shares of Common Stock issued or
issuable (i) upon conversion of the Debentures, (ii) upon exercise of the
Warrants issuable to May Davis Group, Inc. and (iii) any shares of capital
stock issued or issuable with respect to the such Debentures and Warrants as a
result of any stock split, stock dividend, recapitalization, exchange or
similar event or otherwise, which have not been (x) included in a Registration
Statement that has been declared effective by the SEC or (y) sold under
circumstances meeting all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the 1933 Act.
h. "Registration Statement" means a registration statement of the Company
filed under the 1933 Act.
i. "Warrants" means those Warrants being issued to May Davis Group, Inc.
pursuant to the Subscription Agreement.
All capitalized terms used in this Agreement and not otherwise defined
herein shall have the same meaning ascribed to them as in the Subscription
Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, as soon as
practicable file with the SEC a Registration Statement or Registration
Statements (as is necessary) on Form SB-2 (or, if such form is unavailable for
such a registration, on such other form as is available for such a
registration), covering the resale of all of the Registrable Securities, which
Registration Statement(s) shall state that, in accordance with Rule 416
promulgated under the 1933 Act, such Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become
Exhibit 10.11
Page 2 of 19 Pages
issuable upon stock splits, stock dividends or similar transactions The
Company shall prepare and file with the SEC, as soon as possible after the
Closing Date and no later than thirty (30) days following the Closing Date,
either a Registration Statement or an amendment to an existing Registration
Statement, in either event registering for resale by the Investors a
sufficient number of shares of Common Stock for the Investors to sell the
Registrable Securities (or such lesser number as may be required by the SEC)
but in no event less than 400% of that number of shares of the Company's
Common Stock into which the relevant Debentures and all interest thereon
through their respective Maturity Dates would be convertible at the time of
filing of such Registration Statement (assuming for such purposes that all
such Debentures had been eligible to be converted, and had been converted,
into Common Stock in accordance with their terms, whether or not such accrual
of interest, eligibility or conversion had in fact occurred as of such date).
In the event the Company cannot register sufficient shares of Common Stock,
due to the remaining number of authorized shares of Common Stock being
insufficient, the Company will use its best efforts to register the maximum
number of shares it can based on the remaining balance of authorized shares
and will use its best efforts to increase the number of its authorized shares
as soon as reasonably practicable.
b. The Company shall use its best efforts to have the Registration
Statement filed with the SEC within thirty (30) calendar days after the
Closing Date. If the Registration Statement covering the Registrable
Securities required to be filed by the Company pursuant to Section 2(a) hereof
is not filed within thirty (30) calendar days following the Closing Date, then
the Company shall pay the Investor the sum of two percent (2%) of the face
amount of the Debentures outstanding as liquidated damages, and not as a
penalty, for the first thirty (30) calendar day period, pro rata, following
the thirty (30) calendar day period until the Registration Statement is filed,
and two percent (2%) for each successive thirty (30) calendar day period
thereafter.
Notwithstanding the foregoing, the amounts payable by the Company
pursuant to this Section shall not be payable to the extent any delay in the
filing of the Registration Statement occurs because of an act of, or a failure
to act or to act timely by the Investor. The damages set forth in this Section
shall continue until the obligation is fulfilled and shall be paid within
three (3) business days after each thirty (30) day period, or portion thereof,
until the Registration Statement is filed. Failure of the Company to make
payment within said three (3) business days shall be considered a default.
The Company acknowledges that its failure to have the Registration
Statement filed within said thirty (30) calendar day period will cause the
Investor to suffer damages in an amount that will be difficult to ascertain.
Accordingly, the parties agree that it is appropriate to include in this
Agreement a provision for liquidated damages. The parties acknowledge and
agree that the liquidated damages provision set forth in this section
represents the parties' good faith effort to quantify such damages and, as
such, agree that the form and amount of such liquidated damages are reasonable
and will not constitute a penalty. The payment of liquidated damages shall
not relieve the Company from its obligations to register the Common Stock and
deliver the Common Stock pursuant to the terms of this Agreement, the
Subscription Agreement and the Debenture.
Exhibit 10.11
Page 3 of 19 Pages
c. The Company shall use its best efforts to have the Registration
Statement declared effective by the SEC within ninety (90) calendar days after
the Closing Date. If the Registration Statement covering the Registrable
Securities required to be filed by the Company pursuant to Section 2(a) hereof
is not declared effective within ninety (90) calendar days following the
Closing Date, then the Company shall pay the Investor the sum of two percent
(2%) of the face amount of the Debentures outstanding as liquidated damages
and not as a penalty for the first thirty (30) calendar day period, pro rata,
following the ninety (90) calendar day period until the Registration Statement
is declared effective, and two percent (2%) for each successive thirty (30)
calendar day period thereafter.
If the Registration Statement covering the Registrable Securities
required to be filed by the Company pursuant to Section 2(a) hereof is
declared effective, but after the effective date the Investor's right to sell
is suspended, then the Company shall pay the Investor the sum of 2% of the
purchase price paid by the Investor for the Registrable Securities pursuant to
the Subscription Agreement for each thirty (30) calendar day period, pro rata,
following the suspension until such suspension ceases.
Notwithstanding the foregoing, the amounts payable by the Company
pursuant to this Section shall not be payable to the extent any delay in the
effectiveness of the Registration Statement occurs because of an act of, or a
failure to act or to act timely by the Investor. The damages set forth in
this Section shall continue until the obligation is fulfilled and shall be
paid within three (3) business days after each thirty (30) day period, or
portion thereof, until the Registration Statement is declared effective or
such suspension is released. Failure of the Company to make payment within
said three (3) business days shall be considered a default.
The Company acknowledges that its failure to have the Registration
Statement declared effective within said ninety (90) calendar day period or to
permit the suspension of the effectiveness of the Registration Statement, will
cause the Investor to suffer damages in an amount that will be difficult to
ascertain. Accordingly, the parties agree that it is appropriate to include
in this Agreement a provision for liquidated damages. The parties acknowledge
and agree that the liquidated damages provision set forth in this section
represents the parties' good faith effort to quantify such damages and, as
such, agree that the form and amount of such liquidated damages are reasonable
and will not constitute a penalty. The payment of liquidated damages shall
not relieve the Company from its obligations to register the Common Stock and
deliver the Common Stock pursuant to the terms of this Agreement, the
Subscription Agreement and the Debenture.
d. The Company agrees not to include any other securities, other than
those for the equity credit line financing, in this Registration Statement
without Investor prior written consent. Furthermore, the Company agrees that
it will not file any other Registration Statement for other securities (other
than those for the equity credit line financing, existing option holders,
strategic partners or in connection with a merger or acquisition), until
ninety (90) days after the Registration Statement for the Registrable
Securities is declared effective.
Exhibit 10.11
Page 4 of 19 Pages
e. Counsel. In connection with any offering pursuant to this Section 2,
the Investor shall have the right to select one legal counsel to administer
its interests in the Offering; provided, however, that the expenses and fees
of such legal counsel shall be borne by the Investor. The Company shall
reasonably cooperate with any such counsel.
3. RELATED OBLIGATIONS.
At such time as the Company is obligated to prepare and file a
Registration Statement with the SEC pursuant to Section 2(a), the Company will
use its best efforts to effect the registration of the Registrable Securities
in accordance with the intended method of disposition thereof and, with
respect thereto, the Company shall have the following obligations:
a. The Company shall use its best efforts to cause such Registration
Statement relating to the Registrable Securities to become effective within
ninety (90) days after the Closing Date and shall keep such Registration
Statement effective pursuant to Rule 415 until the earlier of (i) the date as
of which the Holders may sell all of the Registrable Securities without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or
successor thereto) or (ii) the date on which (A) the Holders shall have sold
all the Registrable Securities and (B) the Investor has no right to convert
the Debentures it owns into Common Stock under the Subscription Agreement
respectively (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading. The Company shall respond to all SEC comments within seven (7)
business days of receipt by the Company. If the Company fails to respond
within seven (7) business days of receipt of SEC comments, the Company shall
pay to the Investor a cash amount within three (3) business days of the end of
the month equal to 2% per month, on a pro rata basis, of the amount paid to
purchase the Debentures then outstanding, as liquidated damages and not as a
penalty; provided that the seven (7) business day period provided herein shall
be extended as may be required by delays caused by Holders' counsel pursuant
to paragraph 3g below, and, provided further, that such seven (7) business day
period shall be extended five (5) business days for responses to SEC staff
accounting comments
b The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective during the Registration Period, and, during such period, comply with
the provisions of the 1933 Act with respect to the disposition of all
Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the Investor
thereof as set forth in such Registration Statement. In the event the number
of shares of Common Stock available under a Registration Statement filed
Exhibit 10.11
Page 5 of 19 Pages
pursuant to this Agreement is at any time insufficient to cover all of the
Registrable Securities, the Company shall amend such Registration Statement,
or file a new Registration Statement (on the short form available therefor, if
applicable), or both, so as to cover all of the Registrable Securities, in
each case, as soon as practicable, but in any event within thirty (30)
calendar days after the necessity therefor arises (based on the then Purchase
Price of the Common Stock and other relevant factors on which the Company
reasonably elects to rely), assuming the Company has sufficient authorized
shares at that time, and if it does not, within thirty (30) calendar days
after such shares are authorized. The Company shall use it best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof.
Prior to conversion of all the Shares, if at anytime the conversion of
all the Shares outstanding would result in an insufficient number of
authorized shares of Common Stock being available to cover all the
conversions, then in such event, the Company will move to call and hold a
shareholder's meeting within thirty (30) days of such event for the sole
purpose of authorizing additional shares of Common Stock to facilitate the
conversions. In such an event the Company shall recommend to all
shareholders and management of the Company to vote their shares in favor of
increasing the authorized number of shares of Common Stock. The Company
represents and warrants that under no circumstances will it deny or prevent
Purchaser's right to convert the Shares as permitted under the terms of this
Subscription Agreement or this Registration Rights Agreement.
c The Company shall furnish to the Investor whose Registrable Securities
are included in any Registration Statement and its legal counsel without
charge (i) promptly after the same is prepared and filed with the SEC at least
one copy of such Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated
therein by reference and all exhibits, the prospectus included in such
Registration Statement (including each preliminary prospectus) and, with
regards to such Registration Statement(s), any correspondence by or on behalf
of the Company to the SEC or the staff of the SEC and any correspondence from
the SEC or the staff of the SEC to the Company or its representatives, (ii)
upon the effectiveness of any Registration Statement, ten (10) copies of the
prospectus included in such Registration Statement and all amendments and
supplements thereto (or such other number of copies as the Investor may
reasonably request) and (iii) such other documents, including copies of any
preliminary or final prospectus, as the Investor may reasonably request from
time to time in order to facilitate the disposition of the Registrable
Securities.
d. The Company shall use reasonable efforts to (i) register and qualify the
Registrable Securities covered by a Registration Statement under such other
securities or "blue sky" laws of such states in the United States as any
Holder reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications
in effect at all times during the Registration Period, and (iv) take all other
Exhibit 10.11
Page 6 of 19 Pages
actions reasonably necessary or advisable to qualify the Registrable
Securities for sale in such jurisdictions; provided, however, that the Company
shall not be required in connection therewith or as a condition thereto to (x)
qualify to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 3(d), (y) subject itself to general
taxation in any such jurisdiction, or (z) file a general consent to service of
process in any such jurisdiction. The Company shall promptly notify each
Holder who holds Registrable Securities of the receipt by the Company of any
notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the
securities or "blue sky" laws of any jurisdiction in the United States or its
receipt of actual notice of the initiation or threatening of any proceeding
for such purpose.
e. As promptly as practicable after becoming aware of such event, the Company
shall notify each Holder in writing of the happening of any event as a result
of which the prospectus included in a Registration Statement, as then in
effect, includes an untrue statement of a material fact or omission 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, ("Registration Default") and use all diligent efforts to
promptly prepare a supplement or amendment to such Registration Statement and
take any other necessary steps to cure the Registration Default, (which, if
such Registration Statement is on Form S-3, may consist of a document to be
filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act (as defined below) and to be incorporated by reference
in the prospectus) to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Holder (or such other
number of copies as such Holder may reasonably request). Failure to cure the
Registration Default within ten (10) business days shall result in the
Company paying liquidated damages of 2.0% of the price paid to purchase the
Shares then held by the Holders for each thirty (30) calendar day period or
portion thereof, beginning on the date of suspension. The Company shall also
promptly notify each Holder in writing (i) when a prospectus or any prospectus
supplement or post-effective amendment has been filed, and when a Registration
Statement or any post-effective amendment has become effective (notification
of such effectiveness shall be delivered to each Holder by facsimile or e-mail
on the same day of such effectiveness and by overnight mail), (ii) of any
request by the SEC for amendments or supplements to a Registration Statement
or related prospectus or related information, (iii) of the Company's
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate, (iv) in the event the Registration Statement
is no longer effective or, (v) the Registration Statement is stale for a
period of more than five (5) Trading Days as a result of the Company's
failure to timely file its financials.
The Company acknowledges that its failure to cure the Registration
Default within ten (10) business days will cause the Investor to suffer
damages in an amount that will be difficult to ascertain. Accordingly, the
parties agree that it is appropriate to include in this Agreement a
provision for liquidated damages. The parties acknowledge and agree that the
liquidated damages provision set forth in this section represents the
parties' good faith effort to quantify such damages and, as such, agree that
the form and amount of such liquidated damages are reasonable and will not
constitute a penalty.
Exhibit 10.11
Page 7 of 19 Pages
It is the intention of the parties that interest payable under any of
the terms of this Agreement shall not exceed the maximum amount permitted
under any applicable law. If a law, which applies to this Agreement which sets
the maximum interest amount, is finally interpreted so that the interest in
connection with this Agreement exceeds the permitted limits, then: (1) any
such interest shall be reduced by the amount necessary to reduce the interest
to the permitted limit; and (2) any sums already collected (if any) from the
Company which exceed the permitted limits will be refunded to the Company.
The Investor may choose to make this refund by reducing the amount that the
Company owes under this Agreement or by making a direct payment to the
Company. If a refund reduces the amount that the Company owes the Investor,
the reduction will be treated as a partial payment. In case any provision of
this Agreement is held by a court of competent jurisdiction to be excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum
extent possible, and the validity and enforceability of the remaining
provisions of this Agreement will not in any way be affected or impaired
thereby.
f. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities
for sale in any jurisdiction and, if such an order or suspension is issued,
to obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify each Holder who holds Registrable Securities being sold
of the issuance of such order and the resolution thereof or its receipt of
actual notice of the initiation or threat of any proceeding for such purpose.
g. The Company shall permit each Holder and a single firm of counsel,
designated as selling shareholders' counsel by the Holders who hold a majority
of the Registrable Securities being sold, to review and comment upon a
Registration Statement and all amendments and supplements thereto at least
three (3) business days prior to their filing with the SEC, and not file any
document in a form to which such counsel reasonably objects. The Company
shall not submit to the SEC a request for acceleration of the effectiveness
of a Registration Statement or file with the SEC a Registration Statement or
any amendment or supplement thereto without the prior approval of such
counsel, which approval shall not be unreasonably withheld.
h. At the request of any Holder, the Company shall cause to be furnished
to such Holder, on the date of the effectiveness of a Registration Statement,
an opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement, in the form of Exhibit D attached
to the Subscription Agreement.
i. The Company shall make available for inspection by (i) any Holder and
(ii) one firm of attorneys and one firm of accountants or other agents
retained by the Holders (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties
of the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably
request; provided, however, that each Inspector shall hold in strict
Exhibit 10.11
Page 8 of 19 Pages
confidence and shall not make any disclosure (except to a Holder) or use of
any Record or other information which the Company determines in good faith to
be confidential, and of which determination the Inspectors are so notified,
unless (a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise
required under the 1933 Act, (b) the release of such Records is ordered
pursuant to a final, non-appealable subpoena or order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
has knowledge. Each Holder agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, the Records
deemed confidential.
j. The Company shall hold in confidence and not make any disclosure of
information concerning a Holder provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct
a misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final, non-
appealable order from a court or governmental body of competent jurisdiction,
or (iv) such information has been made generally available to the public other
than by disclosure in violation of this Agreement or any other agreement.
The Company agrees that it shall, upon learning that disclosure of such
information concerning a Holder is sought in or by a court or governmental
body of competent jurisdiction or through other means, give prompt written
notice to such Holder and allow such Holder, at the Holder's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, such information.
k. The Company shall use its best efforts to secure designation and
quotation of all the Registrable Securities covered by any Registration
Statement on the Principal Market. If, despite the Company's best efforts,
the Company is unsuccessful in satisfying the preceding sentence, it shall use
its best efforts to cause all the Registrable Securities covered by any
Registration Statement to be listed on each other national securities exchange
and automated quotation system, if any, on which securities of the same class
or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange
or system. If, despite the Company's best efforts, the Company is
unsuccessful in satisfying the two preceding sentences, it will use its best
efforts to secure the inclusion for quotation on the Nasdaq SmallCap Market
for such Registrable Securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. as such with respect to such
Registrable Securities. The Company shall pay all fees and expenses in
connection with satisfying its obligation under this Section 3(k).
l. The Company shall cooperate with the Investor to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
Exhibit 10.11
Page 9 of 19 Pages
representing the Registrable Securities to be offered pursuant to a
Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the Holders may reasonably
request and registered in such names of the Persons who shall acquire such
Registrable Securities from the Holders, as the Holders may request.
m. The Company shall provide a transfer agent for all the Registrable
Securities not later than the effective date of the first Registration
Statement filed pursuant hereto.
n. If requested by the Holders holding a majority of the Registrable
Securities, the Company shall (i) as soon as reasonably practical incorporate
in a prospectus supplement or post-effective amendment such information as
such Holders reasonably determine should be included therein relating to the
sale and distribution of Registrable Securities, including, without
limitation, information with respect to the offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of
such prospectus supplement or post-effective amendment as soon as notified of
the matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration
Statement if reasonably requested by such Holders.
o. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
p. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any
registration hereunder.
q. Within one (1) business day after the Registration Statement which
includes Registrable Securities is declared effective by the SEC, the Company
shall deliver, and shall cause legal counsel for the Company to deliver, to
the transfer agent for such Registrable Securities, with copies to the
Investor, confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
r. At such times as the Holders may reasonably request, the Company shall
cause to be delivered, letters from the Company's independent certified public
accountants (i) addressed to the Holders that such accountants are independent
public accountants within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder, and (ii) in customary form and
covering such financial and accounting matters as are customarily covered by
letters of independent certified public accountants delivered to underwriters
in connection with public offerings.
s. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of Registrable Securities
pursuant to a Registration Statement.
4. OBLIGATIONS OF THE HOLDERS.
Exhibit 10.11
Page 10 of 19 Pages
a. At least five (5) calendar days prior to the first anticipated filing
date of a Registration Statement the Company shall notify each Holder in
writing of the information the Company requires from each such Holder if such
Holder elects to have any of such Holder's Registrable Securities included in
such Registration Statement. It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Holder
that such Holder shall furnish in writing to the Company such information
regarding itself, the Registrable Securities held by it and the intended
method of disposition of the Registrable Securities held by it as shall
reasonably be required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. Each Holder covenants and
agrees that, in connection with any sale of Registrable Securities by it
pursuant to a Registration Statement, it shall comply with the "Plan of
Distribution" section of the current prospectus relating to such Registration
Statement.
b. Each Holder, by such Holder's acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder, unless such Holder has notified the Company in writing of such
Holder's election to exclude all of such Holder's Registrable Securities from
such Registration Statement.
c. Each Holder agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 3(f) or the first
sentence of 3(e), such Holder will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(f) or the first
sentence of 3(e).
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation,
all registration, listing and qualifications fees, printing and accounting
fees, and fees and disbursements of counsel for the Company shall be paid by
the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and hereby
does, indemnify, hold harmless and defend each Holder who holds such
Registrable Securities, the directors, officers, partners, employees, agents,
representatives of, and each Person, if any, who controls, any Holder within
the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended
Exhibit 10.11
Page 11 of 19 Pages
(the "1934 Act"), (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities, judgments, fines, penalties, charges, costs, attorneys'
fees, amounts paid in settlement or expenses, joint or several (collectively,
"Claims"), incurred in investigating, preparing or defending any action,
claim, suit, inquiry, proceeding, investigation or appeal taken from the
foregoing by or before any court or governmental, administrative or other
regulatory agency, body or the SEC, whether pending or threatened, whether or
not an indemnified party is or may be a party thereto ("Indemnified Damages"),
to which any of them may become subject insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon: (i) any untrue statement or alleged untrue statement of a
material fact in a Registration Statement or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under the securities or other "blue sky" laws of any jurisdiction in
which Registrable Securities are offered ("Blue Sky Filing"), or the omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which the statements therein were made, not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
final prospectus (as amended or supplemented, if the Company files any
amendment thereof or supplement thereto with the SEC) or the omission or
alleged omission to state therein any material fact necessary to make the
statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or
alleged violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement (the matters in the foregoing
clauses (i) through (iii) being, collectively, "Violations"). Subject to the
restrictions set forth in Section 6(c) with respect to the number of legal
counsel, the Company shall reimburse the Holders and each such controlling
person, promptly as such expenses are incurred and are due and payable, for
any reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (i) shall not apply to a Claim arising out of
or based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus were timely made available by the Company pursuant to Section 3(c);
(ii) shall not be available to the extent such Claim is based on (a) a failure
of the Holder to deliver or to cause to be delivered the prospectus made
available by the Company or (b) the Indemnified Person's use of an incorrect
prospectus despite being promptly advised in advance by the Company in writing
not to use such incorrect prospectus; and (iii) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the
prior written consent of the Company, which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Indemnified Person and shall
survive the sale of the Registrable Securities by the Holders pursuant to the
Registration Statement.
Exhibit 10.11
Page 12 of 19 Pages
b. In connection with any Registration Statement in which a Holder is
participating, each such Holder agrees to severally and not jointly indemnify,
hold harmless and defend, to the same extent and in the same manner as is
set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "Indemnified
Party"), against any Claim or Indemnified Damages to which any of them may
become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claim or Indemnified Damages arise out of or are based upon any Violation, in
each case to the extent, and only to the extent, that such Violation occurs in
reliance upon and in conformity with written information furnished to the
Company by such Holder expressly for use in connection with such Registration
Statement; and, subject to Section 6(c), such Holder will reimburse any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Holder, which consent shall not be unreasonably withheld; provided, further,
however, that the Holder shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds
to such Holder as a result of the sale of Registrable Securities pursuant to
such Registration Statement. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the sale of the Registrable Securities by
the Holders pursuant to the Registration Statement. Notwithstanding anything
to the contrary contained herein, the indemnification agreement contained in
this Section 6(b) with respect to any preliminary prospectus shall not inure
to the benefit of any Indemnified Party if the untrue statement or omission
of material fact contained in the preliminary prospectus were corrected on a
timely basis in the prospectus, as then amended or supplemented. This
indemnification provision shall apply separately to each Investor and
liability hereunder shall be several and not joint.
c. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof
is to be made against any indemnifying party under this Section 6, 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 control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its
own counsel with the fees and expenses to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party,
the representation by such counsel of the Indemnified Person or Indemnified
Party and the indemnifying party would be inappropriate due to actual or
potential differing interests between such Indemnified Person or Indemnified
Party and any other party represented by such counsel in such proceeding.
The indemnifying party shall pay for only one separate legal counsel for the
Indemnified Persons or the Indemnified Parties, as applicable, and such
counsel shall be selected by Holders holding a majority-in-interest of the
Registrable Securities included in the Registration Statement to which the
Claim relates, if the Holders are entitled to indemnification hereunder, or
the Company, if the Company is entitled to indemnification hereunder, as
applicable. The Indemnified Party or Indemnified Person shall cooperate
fully with the indemnifying party in connection with any negotiation or
defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or
claim. The indemnifying party shall keep the Indemnified Party or
Indemnified Person fully appraised at all times as to the status of the
defense or any settlement negotiations with respect thereto. No indemnifying
party shall be liable for any settlement of any action, claim or proceeding
effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the consent of the Indemnified
Exhibit 10.11
Page 13 of 19 Pages
Party or Indemnified Person, consent to entry of any judgment or enter into
any settlement or other compromise which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
or Indemnified Person of a release from all liability in respect to such
Claim. Following indemnification as provided for hereunder, the indemnifying
party shall be surrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure
to deliver written notice to the indemnifying party within a reasonable time
of the commencement of any such action shall not relieve such indemnifying
party of any liability to the Indemnified Person or Indemnified Party under
this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
d. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
e. The indemnity agreements contained herein shall be in addition to (i)
any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that: (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6; (ii) no seller of Registrable Securities guilty of
Exhibit 10.11
Page 14 of 19 Pages
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of fraudulent misrepresentation; and (iii)
contribution by any seller of Registrable Securities shall be limited in
amount to the net amount of proceeds received by such seller from the sale of
such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Holders the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Holders to sell securities of the Company
to the public without registration ("Rule 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of
the Subscription Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to the Investor, promptly upon request, (i) a written statement
by the Company that it has complied with the reporting requirements of Rule
144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably
requested to permit the Investor to sell such securities pursuant to Rule 144
without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall not be assignable.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions 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 Holders who hold two-thirds (2/3) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be
binding upon each Holder and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the Holders of the
Registrable Securities. No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any
of this Agreement unless the same consideration also is offered to all of the
parties to this Agreement.
Exhibit 10.11
Page 15 of 19 Pages
11. MISCELLANEOUS.
a. A Person is deemed to be a Holder of Registrable Securities whenever
such Person owns of record such Registrable Securities. If the Company
receives conflicting instructions, notices or elections from two or more
Persons with respect to the same Registrable Securities, the Company shall act
upon the basis of instructions, notice or election received from the
registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically or electronically generated and kept on file
by the sending party); or (iii) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Utah Clay Technology, Inc.
3985 South 200 East
Salt Lake City, Utah 84124
Attention: Dennis S. Engh, President
Telephone: 801-424-0223
Facsimile: 801-274-7804
With a copy to:
Attention: Thomas J. Kenan, Esq.
Fuller Tubb Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Telephone: 405-235-2575
Facsimile: 405-232-8384
E-mail: kenan@ftpslaw.com
If to the Investor:
At the address listed in the Questionnaire.
If to May Davis Group, Inc.:
c/o Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telephone: 203-966-0566
Facsimile: 203-966-0363
Exhibit 10.11
Page 16 of 19 Pages
Each party shall provide five (5) business days prior notice to the
other party of any change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. The laws of the State of New York shall govern all issues concerning the
relative rights of the Company and its stockholders. All other questions
shall be governed by and interpreted in accordance with the laws of the State
of New York without regard to the principles of conflict of laws. Each party
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. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. This Agreement and the Transaction Documents constitute the entire
agreement among the parties hereto with respect to the subject matter hereof
and thereof. There are no restrictions, promises, warranties or undertakings,
other than those set forth or referred to herein and therein.
f. This Agreement and the Transaction Documents supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
g. The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical counterparts,
each of which shall be deemed an original but all of which shall constitute
one and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this
Agreement.
Exhibit 10.11
Page 17 of 19 Pages
i. Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions
contemplated hereby.
j. All consents and other determinations to be made by the Holders pursuant
to this Agreement shall be made, unless otherwise specified in this Agreement,
by Holders holding a majority of the Registrable Securities.
k. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent and no rules of strict
construction will be applied against any party.
IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement
to be duly executed as of the day and year first above written.
UTAH CLAY TECHNOLOGY, INC.
By: ____________________________________
Name: Dennis S. Engh
Title: President
By: ____________________________________
Name:
Title:
Exhibit 10.11
Page 18 of 19 Pages
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
Date: __________
[TRANSFER AGENT]
Re: Utah Clay Technology, Inc.
Ladies and Gentlemen:
We are counsel to Utah Clay Technology, Inc., a Utah corporation (the
"Company"), and have represented the Company in connection with that certain
Subscription Agreement (the "Subscription Agreement") entered into by and
among the Company and _________________________ (the "Investor") pursuant to
which the Company has agreed to issue to the Investor shares of the Company's
common stock, $.001 par value per share (the "Common Stock") on the terms and
conditions set forth in the Subscription Agreement. Pursuant to the
Subscription Agreement, the Company also has entered into a Registration
Rights Agreement with the Investor (the "Registration Rights Agreement")
pursuant to which the Company agreed, among other things, to register the
Registrable Securities (as defined in the Registration Rights Agreement),
including the shares of Common Stock issued or issuable under the Subscription
Agreement and upon exercise of warrants issued or issuable pursuant to the
Subscription Agreement, under the Securities Act of 1933, as amended (the
"1933 Act"). In connection with the Company's obligations under the
Registration Rights Agreement, on ____________ ___, 2001, the Company filed a
Registration Statement on Form S- ___ (File No. 333-________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names the Investor as a
selling shareholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [enter
the time of effectiveness] on [enter the date of effectiveness] and to the
best of our knowledge, after telephonic inquiry of a member of the SEC's
staff, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are pending before, or threatened by, the SEC
and the Registrable Securities are available for resale under the 1933 Act
pursuant to the Registration Statement.
Very truly yours,
[Company Counsel]
By: ____________________
cc: [Investor]
Exhibit 10.11
Page 19 of 19 Pages
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT (this "AGREEMENT"), dated as of November __, 2001 by
and among Utah Clay Technology, Inc., a Utah corporation with offices located
at 3985 South 200 East, Salt Lake City, UT 84124 (the "COMPANY"), and the
undersigned investor (the "INVESTOR").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Investor shall invest up to $6,000,000 to
purchase the Company's common stock, $.001 par value per share (the "COMMON
STOCK");
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) under the Securities Act of 1933, as amended (the "1933 ACT"),
Rule 506 of Regulation D, and the rules and regulations promulgated thereunder,
and/or upon such other exemption from the registration requirements of the 1933
Act as may be available with respect to any or all of the investments in Common
Stock to be made hereunder.
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration
Rights Agreement substantially in the form attached hereto as Exhibit A (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to
provide certain registration rights under the 1933 Act, and the rules and
regulations promulgated thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Investor hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings specified or indicated, and such meanings shall be
equally applicable to the singular and plural forms of the defined terms.
"1933 ACT" shall mean the Securities Act of 1933, as it may be amended.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as it may be
amended.
"AFFILIATE" shall have the meaning specified in Section 5(h).
"AGREED UPON PROECEDURES REPORT" shall have the meaning specified in Section
2(o).
"AGREEMENT" shall mean this Investment Agreement.
"BUY-IN" shall have the meaning specified in Section 6.
"BUY-IN ADJUSTMENT AMOUNT" shall have the meaning specified in Section 6.
Exhibit 10.12
Page 1 of 54 Pages
"CLOSING" shall have the meaning specified in Section 2(h).
"CLOSING DATE" shall mean, as defined in Section 2(h), the date which is three
(3) Trading Days following the expiration of the related Purchase Period.
"COMMON STOCK" shall mean the Common Stock of the Company.
"CONTROL" or "CONTROLS" shall have the meaning specified in Section 5(h).
"COVERING SHARES" shall have the meaning specified in Section 6.
"DOLLAR AMOUNT" shall mean the Dollar Amount of shares of common stock the
Company requests Investor to purchase.
"EFFECTIVE DATE" shall mean the date the SEC declares effective the
Registration Statement covering the transactions described in the Agreement.
"ENVIRONMENTAL LAWS" shall have the meaning specified in Section 4(m).
"ESCROW AGENT" shall mean First Union National Bank.
"ESCROW AGREEMENT" shall mean the Escrow Agreement entered into between the
Company, Investor and Escrow Agent and attached as Exhibit C.
"EXECUTION DATE" shall mean the date all Transaction Documents are executed by
the Company and Investor.
"INDEMNITEES" shall have the meaning specified in Section 10.
"INDEMNIFIED LIABILITIES" shall have the meaning specified in Section 10.
"INEFFECTIVE PERIOD" shall mean any period of time that the Registration
Statement or any Supplemental Registration Statement (as defined in the
Registration Rights Agreement) becomes ineffective or unavailable for use for
the sale or resale, as applicable, of any or all of the Registrable Securities
(as defined in the Registration Rights Agreement) for any reason (or in the
event the prospectus under either of the above is not current and deliverable)
during any time period required under the Registration Rights Agreement.
"MAJOR TRANSACTION" shall have the meaning specified in Section 2(g).
"MATERIAL ADVERSE EFFECT" shall have the meaning specified in Section 4(a).
"MATERIAL FACTS" shall have the meaning specified in Section 2(m).
Exhibit 10.12
Page 2 of 54 Pages
"MAXIMUM COMMON STOCK ISSUANCE" shall have the meaning specified in Section
2(j).
"MAXIMUM PUT AMOUNT" shall be $1,000,000.
"OPEN PERIOD" shall mean the period beginning on and including the Trading Day
immediately following the Effective Date and ending on the earlier of (i) the
date which is twenty-four (24) months from the Effective Date and (ii)
termination of the Agreement in accordance with Section 9.
"PAYMENT AMOUNT" shall have the meaning specified in Section 2(p).
"PARTIAL RELEASE FORM" shall have the meaning specified in Section 2(i).
"PRINCIPAL MARKET" shall have the meaning specified in Section 2(f).
"PROSPECTUS" shall mean the prospectus, preliminary prospectus and supplemental
prospectus used in connection with the Registration Statement.
"PURCHASE AMOUNT" shall mean the amount being paid by Investor on a particular
Closing Date to purchase the Shares.
"PURCHASE PERIOD" shall mean the period beginning on the Put Notice Date and
ending on and including the date which is ten (10) Trading Days after such
Put Notice Date.
"PURCHASE PRICE" shall mean 85% of the average of the lowest three (3) closing
bid prices of the Company's common stock during the specified Purchase Period.
"PUT NOTICE" shall mean a written notice sent to the Investor by the Company
stating the Dollar Amount of Shares the Company intends to sell to the Investor
pursuant to the terms of the Agreement and stating the current number of Shares
issued and outstanding on such date.
"PUT NOTICE DATE" shall mean the Trading Day immediately following the day on
which the Investor receives a Put Notice, however a Put Notice shall be deemed
delivered on (x) the Trading Day it is received by facsimile or otherwise by
the Investor if such notice is received prior to 12:00 noon Eastern Time
(receipt being deemed to occur if the Company possess a facsimile confirmation
showing completed transmission by such time), or (y) the immediately succeeding
Trading Day if it is received by facsimile or otherwise after 12:00 noon
Eastern Time on a Trading Day (receipt being documented as described in (x)
above). No Put Notice may be deemed delivered on a day that is not a Trading
Day.
"REGISTRATION OPINION" shall have the meaning specified in Section 2(m).
Exhibit 10.12
Page 3 of 54 Pages
"REGISTRATION OPINION DEADLINE" shall mean the date that is three (3) Trading
Days prior to each Put Notice Date.
"REGISTRATION PERIOD" shall have the meaning specified in Section 5(c).
"REGISTRATION RIGHTS AGREEMENT" shall mean the Agreement entered into by the
Company with Investor for the registration of this transaction.
"REGISTRATION STATEMENT" means the registration statement of the Company filed
under the 1933 Act covering this transaction.
"RELATED PARTY" shall have the meaning specified in Section 5(h).
"REPURCHASE EVENT" shall have the meaning specified in Section 2(i).
"RESOLUTION" shall have the meaning specified in Section 8(f).
"SEC" shall mean the Securities & Exchange Commission.
"SEC DOCUMENTS" shall have the meaning specified in Section 4(f).
"SECURITIES" shall mean the shares of common stock and warrants issued pursuant
to the terms of the Agreement.
"SHARES" shall mean the shares of common stock of the Company having a par
value of $.001 per share.
"SIGNING SHARES" shall have the meaning specified in Section 2(c)(i).
"SOLD SHARES" shall have the meaning specified in Section 6.
"SUBSIDIARIES" shall have the meaning specified in Section 4(a).
"TRADING DAY" shall mean any day on which the Principal Market for the
Company's common stock is open for trading.
"TRANSACTION DOCUMENTS" shall mean the Agreement, Registration Rights
Agreement, Escrow Agreement, Signing Warrant and each of the other agreements
entered into by the parties hereto in connection with the Agreement.
"VALUATION EVENT" shall have the meaning specified in Section 2(k).
"VOLUME WEIGHTED AVERAGE PRICE" shall be as reported by Bloomberg Financial
Markets ("BLOOMBERG"), or if not available through Bloomberg because of
delisting, then the average of the bid prices of any market makers for the
Company's Common Stock as reported in the "pink sheets" by the National
Quotation Bureau, Inc.
Exhibit 10.12
Page 4 of 54 Pages
2. PURCHASE AND SALE OF COMMON STOCK
a. Purchase and Sale of Common Stock. Upon the terms and conditions
set forth herein, the Company shall issue and sell to the Investor, and the
Investor shall purchase from the Company, up to that number of Shares having an
aggregate Purchase Price of $6,000,000.
b. Delivery of Put Notices. Subject to the terms and conditions of
the Transaction Documents, and from time to time during the Open Period the
Company may, in its sole discretion, deliver a Put Notice to the Investor which
states the Dollar Amount of Shares which the Company intends to sell to the
Investor during the Purchase Period. In addition, the Dollar Amount designated
by the Company in a Put Notice shall be equal to one hundred fifty percent
(150%) of the average daily volume (U.S. market only) for the forty (40)
Trading Days prior to the applicable Put Notice Date multiplied by the average
of the three (3) daily closing bid prices immediately preceding the Put Date,
but in no event more than $1,000,000. Once the Put Notice is received by the
Investor the Put Notice shall not be terminated, withdrawn or otherwise revoked
by the Company except in accordance with the terms of this Agreement. During
the Open Period, the Company shall not be entitled to submit a Put Notice until
after the previous closing has been completed and Put Notice may not be given
more than once each thirteen (13) Trading Days. The Purchase Price shall be
85% of the average of the lowest three (3) closing bid prices of the Common
Stock during the Purchase Period.
The Company shall be entitled to withdraw a portion of the Put Notice
amount, if the Purchase Price with respect to that Put Notice does not meet the
Minimum Acceptable Price. The Minimum Acceptable Price is defined as 80% of
the lowest closing bid price of the Common Stock for the fifteen (15) Trading
Days prior to the Put Notice Date. The Company reserves the right to withdraw
that portion of the Put Notice amount, if the Purchase Price is not equal to or
greater than 80% of the lowest closing bid price during the Purchase Period.
In the event that the Purchase Price for the applicable Purchase Period shall
be less than the Minimum Acceptable Price, the Company may elect, by sending
written notice to the Investors via facsimile, to cancel that portion of the
Put Notice remaining for that number of Trading Days remaining after the
written cancellation notice is deemed received by the Investors. The written
notice shall be deemed received by the Investors on (i) the Trading Day it is
received by facsimile or otherwise by the Investors if such notice is received
on or prior to 12:00 noon New York time, or (ii) the immediately succeeding
Trading Day if it is received by facsimile after 12:00 noon New York time on a
Trading Day or at anytime on a day which is not a Trading Day. The Company
shall still be responsible however, for delivering that number of shares of
Common Stock to the Escrow Agent that were sold by the Investors through and
including the Trading Day the written cancellation notice is deemed received by
the Investors.
Within ten (10) calendar days after the commencement of each calendar
quarter occurring subsequent to the commencement of the Open Period, the
Company undertakes to notify Investor as to its reasonable expectations as to
the Dollar Amount it intends to raise during such calendar quarter, if any,
Exhibit 10.12
Page 5 of 54 Pages
through the issuance of Put Notices. Such notification shall constitute only
the Company's good faith estimate with respect to such calendar quarter and
shall in no way obligate the Company to raise such amount during such calendar
quarter or otherwise limit its ability to deliver Put Notices during such
calendar quarter. The failure by the Company to comply with this provision can
be cured by the Company's notifying Investor at any time as to its reasonable
expectations with respect to the current calendar quarter.
c. Interest. It is the intention of the parties that only interest
that may be payable under this Agreement shall not exceed the maximum amount
permitted under any applicable law. If a law, which applies to this Agreement
which sets the maximum interest amount, is finally interpreted so that the
interest in connection with this Agreement exceeds the permitted limits, then:
(1) any such interest shall be reduced by the amount necessary to reduce the
interest to the permitted limit; and (2) any sums already collected (if any)
from the Company which exceed the permitted limits will be refunded to the
Company. The Investor may choose to make this refund by reducing the amount
that the Company owes under this Agreement or by making a direct payment to the
Company. If a refund reduces the amount that the Company owes the Investor,
the reduction will be treated as a partial payment. In case any provision of
this Agreement is held by a court of competent jurisdiction to be excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum
extent possible, and the validity and enforceability of the remaining
provisions of this Agreement will not in any way be affected or impaired
thereby.
d. Investor's Obligation to Purchase Shares. Subject to the
conditions set forth in this Agreement, following the Investor's receipt of a
validly delivered Put Notice, the Investor shall be required to purchase from
the Company during the related Purchase Period that number of Shares having an
aggregate Purchase Price equal to the lesser of (i) the Dollar Amount set
forth in the Put Notice (subject to reduction during the Purchase Period as may
be provided pursuant to the terms of this Agreement), and (ii) 15% of the
aggregate trading volume during the
applicable Purchase Period times (x) the average of the three (3) lowest closing
bid prices of the Company's Common Stock during the specified Purchase Period,
but only if said Shares bear no restrictive legend, are not subject to stop
transfer instructions and are being held in escrow, pursuant to Section 2(h),
prior to the applicable Closing Date. The Company acknowledges that there are
two entities that will sign as Investor and that each Put Notice will be divided
between them equally. Dutchess Private Equities Fund, L.P., a Delaware limited
partnership shall be obligated to provide fifty percent (50%) of the Put Amount
of each Put Notice and DRH Investment Company, LLC, a Delaware limited
liability company, shall be obligated to provide fifty percent (50%) of the Put
Amount of each Put Notice. The two Investors shall be severally and not jointly
responsible for funding.
e. Limitation on Investor's Obligation to Purchase Shares.
Notwithstanding anything to the contrary in this Agreement, in no event shall
the Investor be required to purchase, and the Company shall in no event sell to
the Investor, that number of Shares, which when added to the sum of the number
of Shares beneficially owned, (as such term is defined under Section 13(d) and
Exhibit 10.12
Page 6 of 54 Pages
Rule 13d-3 of the Securities Exchange Act of 1934, as may be amended, (the
"1934 ACT")), by the Investor, would exceed 4.99% of the number of Shares
outstanding on the Put Notice Date for such Purchase Period, as determined in
accordance with Rule 13d-1(j) under the 1934 Act. In no event shall the
Investor purchase Shares of the Common Stock other than pursuant to this
Agreement until such date as this Agreement is terminated. Each Put Notice
shall include a representation of the Company as to the number of Shares of
Common Stock outstanding on the related Put Notice Date as determined in
accordance with Section 13(d) of the 1934 Act. In the event that the number of
Shares of Common Stock outstanding as determined in accordance with Section
13(d) of the 1934 Act is different on any date during a Purchase Period than on
the Put Notice Date associated with such Purchase Period, then the number of
Shares of Common Stock outstanding on such date during such Purchase Period
shall govern for purposes of determining whether the Investor would be
acquiring beneficial ownership of more than 4.99% of the number of Shares of
Common Stock outstanding during such period.
f. Conditions to Investor's Obligation to Purchase Shares.
Notwithstanding anything to the contrary in this Agreement, the Company shall
not be entitled to deliver a Put Notice and require the Investor to purchase
any Shares at a Closing (as defined in Section 2(h)) unless each of the
following conditions are satisfied:
(i) a Registration Statement shall have been declared effective and
shall remain effective and available for the resale of all the
Registrable Securities (as defined in the Registration Rights
Agreement) at all times during the Purchase Period;
(ii) at all times during the period beginning on the related Put
Notice Date and ending on and including the related Closing Date, the
Common Stock shall have been listed on The American Stock Exchange,
Inc. or The New York Stock Exchange, Inc. or designated on the Nasdaq
National Market, The Nasdaq SmallCap Market, or the National
Association of Securities Dealer's, Inc. OTC electronic bulletin
board (the "PRINCIPAL MARKET") and shall not have been suspended from
trading thereon for a period of five (5) consecutive Trading Days
during the Open Period and the Company shall not have been notified
of any pending or threatened proceeding or other action to delist or
suspend the Common Stock;
(iii) the Company has complied with its obligations and is otherwise
not in breach of a material provision, or in default under, this
Agreement, the Registration Rights Agreement or any other agreement
executed in connection herewith which has not been corrected prior to
delivery of the Put Notice Date;
(iv) no injunction shall have been issued, or action commenced by a
governmental authority, prohibiting the purchase or the issuance of
the Common Stock;
Exhibit 10.12
Page 7 of 54 Pages
(v) the issuance of the Common Stock will not violate the shareholder
approval requirements of Nasdaq; and
(vi) for the ten (10) Trading Days immediately preceding the Put
Notice, the Volume Weighted Average Price for the Common Stock shall
be not less than $5,000.
If any of the events described in clauses (i) through (vi) above
occurs during a Purchase Period, then the Investor shall have no
obligation to purchase the Dollar Amount of Common Stock set forth in
the applicable Put Notice.
g. For purposes of this Agreement, a "MAJOR TRANSACTION" shall be deemed
to have occurred at the closing of any of the following events: (i) the
consolidation, merger or other business combination of the Company with or into
another person (other than pursuant to a migratory merger effected solely for
the purposes of changing the jurisdiction of incorporation of the Company) (ii)
the sale or transfer of all or substantially all of the Company's assets; or
(iii) the consummation of a purchase, tender or exchange offer made to, and
accepted by, the holders of more than 30% of the economic interest in, or the
combined voting power of all classes of voting stock of, the Company.
h. Mechanics of Purchase of Shares by Investor. Subject to the
satisfaction of the conditions set forth in Sections 2(f), 7 and 8, the closing
of the purchase by the Investor of Shares (a "CLOSING") shall occur on the date
which is three (3) Trading Days following the expiration of the related
Purchase Period (a "CLOSING DATE"). Prior to each Closing Date, (i) the
Company shall deliver to the Escrow Agent pursuant to the Escrow Agreement,
annexed hereto as Exhibit C, certificates representing the Shares to be issued
to the Investor on such date and registered in the name of the Investor, or
deposit such Shares into the account(s) (with the Investor receiving
confirmation that the Shares are in such account(s)) designated by the Investor
for the benefit of the Investor and (ii) the Investor shall deliver to the
Escrow Agent the Purchase Price to be paid for such Shares (after receipt of
confirmation of delivery of such Shares), determined as aforesaid, by wire
transfer. In the alternative to physical delivery of certificates for Common
Stock to the Escrow Agent, if delivery of the Shares may be effectuated by
electronic book-entry through The Depository Trust Company ("DTC"), then
delivery of the Shares pursuant to such purchase shall, unless requested
otherwise by such Investor (or holder of such Shares), settle by book-entry
transfer through DTC by the Closing Date. The parties agree to coordinate with
DTC to accomplish this objective. In addition, each of the Company and the
Investor shall deliver all documents, instruments and writings required to be
delivered by either of them to the Escrow Agent pursuant to this Agreement at
or prior to each Closing.
i. Partial Release of Shares. After Investor has received a Put
Notice, but prior to the related Closing Date, the Investor, may authorize the
Escrow Agent to release, every five (5) Trading Days, a portion of the Purchase
Amount from escrow to the Company in exchange for a fixed number of Shares,
Exhibit 10.12
Page 8 of 54 Pages
subject to the following conditions:
(i) The Investor shall fill out and sign a Partial Release of
Purchase Amount and Shares (the "Partial Release Form"). The Partial
Release Form shall set forth the number of Shares to be released to
Investor and the dollar amount the Escrow Agent shall wire to the
Company.
(ii) The Partial Release Form shall be filled out and signed by
the appropriate Investor and faxed to the Company prior to 12:00 p.m.
New York City time.
The number of Shares stated in the Partial Release Form shall be equal to
the dollar amount to be released divided by 85% of the lowest three (3) closing
bid prices during that number of Trading Days of the Pricing Period that have
expired.
The Company and Investor agree that on the related Closing Date, an
adjustment shall be made so that the terms set forth in the Investment
Agreement shall be honored with the balance of the Purchase Amount being
released to the Company and the balance of the Shares owed to Investor being
released to Investor.
j. Overall Limit on Common Stock Issuable. Notwithstanding anything
contained herein to the contrary, if during the Open Period the Company becomes
listed on an exchange that limits the number of shares of Common Stock that may
be issued without shareholder approval, then the number of Shares issuable by
the Company and purchasable by the Investor, including the shares of Common
Stock issuable to the Investors pursuant to Section 11(b), shall not exceed
that number of the shares of Common Stock that may be issuable without
shareholder approval, subject to appropriate adjustment for stock splits, stock
dividends, combinations or other similar recapitalization affecting the Common
Stock (the "MAXIMUM COMMON STOCK ISSUANCE"), unless the issuance of Shares,
including any Common Stock to be issued to the Investors pursuant to Section
11(b), in excess of the Maximum Common Stock Issuance shall first be approved
by the Company's shareholders in accordance with applicable law and the By-laws
and Articles of Incorporation of the Company, if such issuance of shares of
Common Stock could cause a delisting on the Principal Market. The parties
understand and agree that the Company's failure to seek or obtain such
shareholder approval shall in no way adversely affect the validity and due
authorization of the issuance and sale of Shares hereunder or the Investor's
obligation in accordance with the terms and conditions hereof to purchase a
number of Shares in the aggregate up to the Maximum Common Stock Issuance
limitation, and that such approval pertains only to the applicability of the
Maximum Common Stock Issuance limitation provided in this Section 2(j).
k. "VALUATION EVENT" shall mean an event in which the Company at any time
during a "Purchase Period" takes any of the following actions:
(i) subdivides or combines its Common Stock;
Exhibit 10.12
Page 9 of 54 Pages
(ii) pays a dividend in Common Stock or makes any other
distribution of its Common Stock, except for dividends paid with
respect to the Preferred Stock;
(iii) issues any options or other rights to subscribe for or
purchase Common Stock and the price per share for which Common Stock
may at any time thereafter be issuable pursuant to such options or
other rights shall be less than the Bid Price in effect
immediately prior to such issuance;
(iv) issues any securities convertible into or exchangeable for
Common Stock and the consideration per share for which shares of
Common Stock may at any time thereafter be issuable pursuant to the
terms of such convertible or exchangeable securities shall be less
than the Bid Price in effect immediately prior to such issuance;
(v) issues shares of Common Stock otherwise than as provided in
the foregoing subsections (i) through (iv), at a price per share
less, or for other consideration lower, than the Bid Price in effect
immediately prior to such issuance, or without consideration;
(vi) makes a distribution of its assets or evidences of
indebtedness to the holders of Common Stock as a dividend in
liquidation or by way of return of capital or other than as a
dividend payable out of earnings or surplus legally available for
dividends under applicable law or any distribution to such holders
made in respect of the sale of all or substantially all of the
Company's assets (other than under the circumstances provided for in
the foregoing subsections (i) through (v); or
(vii) takes any action affecting the number of shares of Common
Stock outstanding, other than an action described in any of the
foregoing subsections (i) through (vi) hereof, inclusive, which in
the opinion of the Company's Board of Directors, determined in good
faith, would have a materially adverse effect upon the rights of
Investor at the time of a Put Notice is delivered to Investor.
l. The Company agrees that it shall not take any action that would
result in a Valuation Event occurring during a Purchase Period.
m. Accountant's Letter and Registration Opinion. Whenever reasonably
requested by Investor, the Company shall cause to be delivered to the Investor,
on or prior to each Registration Opinion Deadline, an opinion of the Company's
independent counsel, (the "REGISTRATION OPINION"), addressed to the Investor
stating, inter alia, that no facts ("MATERIAL FACTS") have come to such
counsel's attention that have caused it to believe that the Registration
Statement is subject to an Ineffective Period or to believe that the
Registration Statement, any supplemental Registration Statement (as each may be
amended, if applicable), and any related prospectuses, contain an untrue
statement of material fact or omits a material fact required to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. If a Registration Opinion cannot be delivered by the
Exhibit 10.12
Page 10 of 54 Pages
Company's independent counsel to the Investor on the Registration Opinion
Deadline due to the existence of Material Facts or an Ineffective Period, the
Company shall promptly notify the Investor and as promptly as possible amend
each of the Registration Statement and any supplemental Registration
Statements, as applicable, and any related prospectus or cause such Ineffective
Period to terminate, as the case may be, and deliver such Registration Opinion
and updated prospectus as soon as possible thereafter. If at any time after a
Put Notice shall have been delivered to Investor but before the related Closing
Date, the Company acquires knowledge of such Material Facts or any Ineffective
Period occurs, the Company shall promptly notify the Investor and the balance
of the Purchase Period shall be canceled and the Investor shall only be
responsible for that portion of the Purchase Amount up to the beginning of the
Ineffective Period.
n. (i) Whenever reasonably requested by Investor, the Company shall
engage its independent auditors to perform the procedures in accordance with
the provisions of Statement on Auditing Standards No. 71, as amended, as agreed
to by the parties hereto, and reports thereon (the "BRING DOWN COLD COMFORT
LETTERS") as shall have been reasonably requested by the Investor with respect
to certain financial information contained in the Registration Statement and
shall have delivered to the Investor such a report addressed to the Investor,
on or prior to each Registration Opinion Deadline;
(ii) in the event that the Investor shall have requested delivery
of an Agreed Upon Procedures Report pursuant to Section 2(o), the Company shall
engage its independent auditors to perform certain agreed upon procedures and
report thereon as shall have been reasonably requested by the Investor with
respect to certain financial information of the Company and the Company shall
deliver to the Investor a copy of such report addressed to the Investor. In the
event that the report required by this Section 2(n) cannot be delivered by the
Company's independent auditors, the Company shall, if necessary, promptly
revise the Registration Statement and the Company shall not deliver a Put
Notice to Investor until such report is delivered.
o. Procedure if Material Facts are Reasonably believed to be untrue
or are omitted. In the event after such consultation the Investor or the
Investor's counsel reasonably believes that the Registration Statement contains
an untrue statement or a material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading, (i) the Company shall file with the SEC an amendment to the
Registration Statement responsive to such alleged untrue statement or omission
and provide the Investor, as promptly as practicable, with copies of the
Registration Statement and related Prospectus, as so amended, or (ii) if the
Company disputes the existence of any such material misstatement or omission,
(x) the Company's independent counsel shall provide the Investor's counsel with
a Registration Opinion and (y) in the event the dispute relates to the adequacy
of financial disclosure and the Investor shall reasonably request, the
Company's independent auditors shall provide to the Company a letter ("AGREED
UPON PROCEDURES REPORT") outlining the performance of such "agreed upon
procedures" as shall be reasonably requested by the Investor and the Company
shall provide the Investor with a copy of such letter.
Exhibit 10.12
Page 11 of 54 Pages
p. Delisting; Suspension. If at any time during the Open
Period or within thirty (30) calendar days after the end of the Open Period,
(i) the Registration Statement, after it has been declared effective, shall not
remain effective and available for sale of all the Registrable Securities, (ii)
the Common Stock shall not be listed on the Principal Market or shall have been
suspended from trading thereon (excluding suspensions of not more than one
trading day resulting from business announcements by the Company) or the
Company shall have been notified of any pending or threatened proceeding or
other action to delist or suspend the Common Stock, (iii) there shall have
occurred a Major Transaction (as defined in Section 2(g)) or the public
announcement of a pending Major Transaction which has not been abandoned or
terminated, or (iv) the Registration Statement is no longer effective or stale
for a period of more than five (5) Trading Days as a result of the Company to
timely file its financials, the Company shall repurchase within thirty (30)
calendar days of the occurrence of one of the events listed in clauses (i),
(ii), (iii) or (iv)above (each a "REPURCHASE EVENT") and subject to the
limitations imposed by applicable federal and state law, all or any part of the
Shares issued to the Investor within the sixty (60) Trading Days preceding the
occurrence of the Repurchase Event and then held by the Investor at a price per
Share equal to the highest Volume Weighted Average Price during the period
beginning on the date of the Repurchase Event and ending on and including the
date on which the Investor is paid by the Company for the repurchase of the
Shares (the "PAYMENT AMOUNT"). If the Company fails to pay to the Investor the
full aggregate Payment Amount within ten (10) calendar days of the occurrence
of a Repurchase Event, the Company shall pay to the Investor, on the first
Trading Day following such tenth (10th) calendar day, in addition to and not in
lieu of the Payment Amount payable by the Company to the Investor an amount
equal to 2% of the aggregate Payment Amount then due and payable to the
Investor, in cash by wire transfer, plus compounded annual interest of 18% on
such Payment Amount during the period, beginning on the day following such
tenth calendar day, during which such Payment Amount, or any portion thereof,
is outstanding.
3. INVESTOR'S REPRESENTATIONS AND WARRANTIES.
The Investor represents and warrants to the Company that:
a. Sophisticated Investor. The Investor has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of the prospective investment in the
Securities.
b. Authorization; Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Investor and is a
valid and binding agreement of the Investor enforceable against the Investor in
accordance with its terms, subject as to enforceability to general principles
of equity and to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies..
Exhibit 10.12
Page 12 of 54 Pages
c. Section 9 of the 1934 Act. During the Open Period, the Investor
will comply with the provisions of Section 9 of the 1934 Act, and the rules
promulgated thereunder, with respect to transactions involving the Common
Stock.
d. No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Investor and the consummation by the Investor of
the transactions contemplated hereby and thereby will not (i) result in a
violation of the Articles of Incorporation or the By-laws or (ii) conflict
with, or constitute a material default (or an event which with notice or lapse
of time or both would become a material default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
material agreement, contract, indenture mortgage, indebtedness or instrument to
which the Investor or any of its Subsidiaries is a party, or result in a
violation of any law, rule, regulation, order, judgment or decree applicable to
the Investor or any of its Subsidiaries or by which any property or asset of
the Investor or any of its Subsidiaries is bound or affected. The business of
the Investor and its Subsidiaries is not being conducted, and shall not be
conducted, in violation of any law, statute, ordinance, rule, order or
regulation of any governmental authority or agency, regulatory or self-
regulatory agency, or court, except for possible violations the sanctions for
which either individually or in the aggregate would not have a Material Adverse
Effect.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth in the Schedules attached hereto, the Company
represents and warrants to the Investor that:
a. Organization and Qualification. The Company and its
"SUBSIDIARIES" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) (a complete list of which is set forth in Schedule 4(a)) are
corporations duly organized and validly existing in good standing under the
laws of the respective jurisdictions of their incorporation, and have the
requisite corporate power and authorization to own their properties and to
carry on their business as now being conducted. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation to do business and is
in good standing in every jurisdiction in which its ownership of property or
the nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good
standing would not have a Material Adverse Effect. As used in this Agreement,
"MATERIAL ADVERSE EFFECT" means any material adverse effect on the business,
properties, assets, operations, results of operations, financial condition or
prospects of the Company and its Subsidiaries, if any, taken as a whole, or on
the transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents (as defined
in Section 1 and 4(b)below).
b. Authorization; Enforcement; Compliance with Other Instruments.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Signing Warrant, and each of the other agreements entered into
Exhibit 10.12
Page 13 of 54 Pages
by the parties hereto in connection with the transactions contemplated by this
Agreement (collectively, the "TRANSACTION DOCUMENTS"), and to issue the Shares
and the Signing Warrant in accordance with the terms hereof and thereof, (ii)
the execution and delivery of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including without limitation the reservation for issuance and the issuance of
the Shares and the Signing Warrant pursuant to this Agreement, have been duly
and validly authorized by the Company's Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors, or
its shareholders, (iii) the Transaction Documents have been duly and validly
executed and delivered by the Company, and (iv) the Transaction Documents
constitute the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may
be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally, the enforcement of creditors' rights and remedies.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 100,000,000 shares of Common Stock, of
which as of the date hereof approximately 28,220,253 shares are issued and
outstanding, 10,000,000 shares of Preferred Stock, of which as of the date
hereof 84,817 shares of non-voting, non-convertible Series A Preferred Stock
are issued and outstanding. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except
as disclosed in Schedule 4(c) which is attached hereto and made a part hereof,
(i) no shares of the Company's capital stock are subject to preemptive rights
or any other similar rights or any liens or encumbrances suffered or permitted
by the Company, (ii) there are no outstanding debt securities, (iii) there are
no outstanding shares of capital stock, options, warrants, scrip, rights to
subscribe to, 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 or options, warrants, scrip, rights to subscribe to, 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, (iv) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement),
(v) there are no outstanding securities of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries, (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities as described in this Agreement, (vii) the Company
does not have any stock appreciation rights or "phantom stock" plans or
agreements or any similar plan or agreement and (viii) there is no dispute as
to the class of any shares of the Company's capital stock. The Company has
Exhibit 10.12
Page 14 of 54 Pages
furnished to the Investor, or the Investor has had access through EDGAR to,
true and correct copies of the Company's Articles of Incorporation, as in
effect on the date hereof (the "ARTICLES OF INCORPORATION"), and the Company's
By-laws, as in effect on the date hereof (the "BY-LAWS '), and the terms of all
securities convertible into or exercisable for Common Stock and the material
rights of the holders thereof in respect thereto.
d. Issuance of Shares. A sufficient number of Shares issuable
pursuant to this Agreement has been duly authorized and reserved for issuance
(subject to adjustment pursuant to the Company's covenant set forth in Section
5(f) below) pursuant to this Agreement. Upon issuance in accordance with this
Agreement, the Securities will be validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof.
In the event the Company cannot register a sufficient number of Shares, due to
the remaining number of authorized shares of Common Stock being insufficient,
the Company will use its best efforts to register the maximum number of shares
it can based on the remaining balance of authorized shares and will use its
best efforts to increase the number of its authorized shares as soon as
reasonably practicable.
e. No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby will not (i) result in a violation
of the Articles of Incorporation, any Certificate of Designations, Preferences
and Rights of any outstanding series of preferred stock of the Company or the
By-laws or (ii) conflict with, or constitute a material default (or an event
which with notice or lapse of time or both would become a material default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, contract, indenture mortgage,
indebtedness or instrument to which the Company or any of its Subsidiaries is a
party, or result in a violation of any law, rule, regulation, order, judgment
or decree (including United States federal and state securities laws and
regulations and the rules and regulations of the Principal Market or principal
securities exchange or trading market on which the Common Stock is traded or
listed) 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. Except as disclosed in Schedule 4(e), neither the Company nor its
Subsidiaries is in violation of any term of, or in default under, the Articles
of Incorporation, any Certificate of Designations, Preferences and Rights of
any outstanding series of preferred stock of the Company or the By-laws or
their organizational charter or by-laws, respectively, or any contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
Subsidiaries, except for possible conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations that would not
individually or in the aggregate have a Material Adverse Effect. The business
of the Company and its Subsidiaries is not being conducted, and shall not be
conducted, in violation of any law, statute, ordinance, rule, order or
regulation of any governmental authority or agency, regulatory or self-
regulatory agency, or court, except for possible violations the sanctions for
which either individually or in the aggregate would not have a Material Adverse
Effect. Except as specifically contemplated by this Agreement and as required
Exhibit 10.12
Page 15 of 54 Pages
under the 1933 Act, the Company is not required to obtain any consent,
authorization, permit or order of, or make any filing or registration (except
the filing of a registration statement) with, any court, governmental
authority or agency, regulatory or self-regulatory agency or other third party
in order for it to execute, deliver or perform any of its obligations under, or
contemplated by, the Transaction Documents in accordance with the terms hereof
or thereof. All consents, authorizations, permits, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof and are
in full force and effect as of the date hereof. Except as disclosed in Schedule
4(e), the Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing. The Company is
not, and will not be, in violation of the listing requirements of the Principal
Market as in effect on the date hereof and on each of the Closing Dates and is
not aware of any facts which would reasonably lead to delisting of the Common
Stock by the Principal Market in the foreseeable future.
f. SEC Documents; Financial Statements. Since February 1999, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the 1934 Act (all of the foregoing filed prior to the date hereof and all
exhibits included therein and financial statements and schedules thereto and
documents incorporated by reference therein being hereinafter referred to as
the "SEC DOCUMENTS"). The Company has delivered to the Investor or its
representatives, or they have had access through EDGAR, true and complete
copies of the SEC Documents. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted 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. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have
been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other written information provided by or on behalf of the
Company to the Investor which is not included in the SEC Documents, including,
without limitation, information referred to in Section 4(d) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary to make the statements therein, in the light of the circumstance
under which they are or were made, not misleading. Neither the Company nor any
of its Subsidiaries or any of their officers, directors, employees or agents
have provided the Investor with any material, nonpublic information which was
Exhibit 10.12
Page 16 of 54 Pages
not publicly disclosed prior to the date hereof and any material, nonpublic
information provided to the Investor by the Company or its Subsidiaries or any
of their officers, directors, employees or agents prior to any Closing Date
shall be publicly disclosed by the Company prior to such Closing Date.
g. Absence of Certain Changes. Except as disclosed in Schedule 4(g)
or the SEC Documents filed at least five (5) days prior to the date hereof,
since June 1, 2000, there has been no change or development in the business,
properties, assets, operations, financial condition, results of operations or
prospects of the Company or its Subsidiaries which has had or reasonably could
have a Material Adverse Effect. The Company has not taken any steps, and does
not currently expect to take any steps, to seek protection pursuant to any
bankruptcy law nor does the Company or its Subsidiaries have any knowledge or
reason to believe that its creditors intend to initiate involuntary bankruptcy
proceedings.
h. Absence of Litigation. Except as set forth in Schedule 4(h),
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the executive officers of Company or any of its
Subsidiaries, threatened against or affecting the Company, the Common Stock or
any of the Company's Subsidiaries or any of the Company's or the Company's
Subsidiaries' officers or directors in their capacities as such, in which an
adverse decision could have a Material Adverse Effect.
i. Acknowledgment Regarding Investor's Purchase of Shares. The
Company acknowledges and agrees that the Investor is acting solely in the
capacity of arm's length purchaser with respect to the Transaction Documents
and the transactions contemplated hereby and thereby. The Company further
acknowledges that the Investor is not acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby and
any advice given by the Investor or any of its respective representatives or
agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to the Investor's purchase
of the Securities. The Company further represents to the Investor that the
Company's decision to enter into the Transaction Documents has been based
solely on the independent evaluation by the Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or Circumstances.
No event, liability, development or circumstance has occurred or exists, or to
its knowledge is contemplated to occur, with respect to the Company or its
Subsidiaries or their respective business, properties, assets, prospects,
operations or financial condition, that would be required to be disclosed by
the Company under applicable securities laws on a registration statement filed
with the SEC relating to an issuance and sale by the Company of its Common
Stock and which has not been publicly announced.
k. Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of
Exhibit 10.12
Page 17 of 54 Pages
the Company or any of its Subsidiaries, is any such dispute threatened.
Neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and its Subsidiaries believe that
relations with their employees are good. No executive officer (as defined in
Rule 501(f) of the 1933 Act) has notified the Company that such officer intends
to leave the Company's employ or otherwise terminate such officer's employment
with the Company.
l. Intellectual Property Rights. The Company and its Subsidiaries
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Schedule 4(l), none of the
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights necessary to conduct its business as now or as proposed to be
conducted have expired or terminated, or are expected to expire or terminate
within two years from the date of this Agreement. The Company and its
Subsidiaries do not have any knowledge of any infringement by the Company or
its Subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on Schedule 4(l), there is no claim, action or
proceeding being made or brought against, or to the Company's knowledge, being
threatened against, the Company or its Subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its Subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.
m. Environmental Laws. The Company and its Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval where, in each of the
three foregoing cases, the failure to so comply would have, individually or in
the aggregate, a Material Adverse Effect.
n. Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property except as described in the Company's
Form 10-SB and Form 10-KSB filings with the SEC and available through EDGAR,
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
Exhibit 10.12
Page 18 of 54 Pages
and clear of all liens, encumbrances and defects except such as are described
in Schedule 4(n) or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company or any of its Subsidiaries. Any real property and facilities
held under lease by the Company or any of its Subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.
o. Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as management of the Company believes to be prudent
and customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
p. Regulatory Permits. The Company and its Subsidiaries have in full
force and effect all certificates, approvals, authorizations and permits from
the appropriate federal, state, local or foreign regulatory authorities and
comparable foreign regulatory agencies, necessary to own, lease or operate
their respective properties and assets and conduct their respective businesses,
and neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
approval, authorization or permit, except for such certificates, approvals,
authorizations or permits which if not obtained, or such revocations or
modifications which, would not have a Material Adverse Effect.
q. Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
r. No Materially Adverse Contracts, Etc. Neither the Company nor any
of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
Exhibit 10.12
Page 19 of 54 Pages
s. Tax Status. The Company and each of its Subsidiaries has made or
filed all United States 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 and each of its Subsidiaries
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 has 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.
t. Certain Transactions. Except as set forth on Schedule 4(t) and in
the SEC Documents filed at least ten days prior to the date hereof and except
for arm's length transactions pursuant to which the Company makes payments in
the ordinary course of business upon terms no less favorable than the Company
could obtain from third parties and other than the grant of stock options
disclosed on Schedule 4(c), none of the officers, directors, or employees of
the Company is presently a party to any transaction with the Company or any of
its Subsidiaries (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.
u. Dilutive Effect. The Company understands and acknowledges that
the number of shares of Common Stock issuable upon purchases pursuant to this
Agreement will increase in certain circumstances including, but not necessarily
limited to, the circumstance wherein the trading price of the Common Stock
declines during the period between the Effective Date and the end of the Open
Period. The Company's executive officers and directors have studied and fully
understand the nature of the transactions contemplated by this Agreement 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 specifically
acknowledges that, subject to such limitations as are expressly set forth in
the Transaction Documents, its obligation to issue shares of Common Stock upon
purchases pursuant to this Agreement is absolute and unconditional regardless
of the dilutive effect that such issuance may have on the ownership interests
of other shareholders of the Company.
v. Right of First Refusal. The Company shall not, directly or
indirectly, without the prior written consent of Investor offer, sell, grant
any option to purchase, or otherwise dispose of (or announce any offer, sale,
grant or any option to purchase or other disposition) any of its Common Stock
Exhibit 10.12
Page 20 of 54 Pages
or securities convertible into Common Stock at a price that is less than the
market price of the Common Stock at the time of issuance of such security or
investment (a "SUBSEQUENT FINANCING") for a period of one year after the
Effective Date, except (i) the granting of options or warrants to employees,
officers, directors and consultants, and the issuance of shares upon exercise
of options granted, under any stock option plan heretofore or hereinafter duly
adopted by the Company, (ii) shares issued upon exercise of any currently
outstanding warrants or options and upon conversion of any currently
outstanding convertible debenture or convertible preferred stock, in each case
disclosed pursuant to Section 4(c), (iii) securities issued in connection with
the capitalization or creation of a joint venture with a strategic partner,
(iv) shares issued to pay part or all of the purchase price for the acquisition
by the Company of another entity (which, for purposes of this clause (iv),
shall not include an individual or group of individuals), and (v) shares issued
in a bona fide public offering by the Company of its securities, unless (A) the
Company delivers to Investor a written notice (the "SUBSEQUENT FINANCING
NOTICE") of its intention to effect such Subsequent Financing, which Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder,
the person with whom such Subsequent Financing shall be effected, and attached
to which shall be a term sheet or similar document relating thereto and (B)
Investor shall not have notified the Company by 5:00 p.m. (New York time) on
the fifth (5th) Trading Day after its receipt of the Subsequent Financing
Notice of its willingness to provide, subject to completion of mutually
acceptable documentation, financing to the Company on substantially the terms
set forth in the Subsequent Financing Notice. If Investor shall fail to notify
the Company of its intention to enter into such negotiations within such time
period, then the Company may effect the Subsequent Financing substantially upon
the terms set forth in the Subsequent Financing Notice; PROVIDED THAT the
Company shall provide Investor with a second Subsequent Financing Notice, and
Investor shall again have the right of first refusal set forth above in this
Section, if the Subsequent Financing subject to the initial Subsequent
Financing Notice shall not have been consummated for any reason on the terms
set forth in such Subsequent Financing Notice within fifteen (15) Trading Days
after the date of the initial Subsequent Financing Notice. The rights granted
to Investor in this Section are not subject to any prior right of first
refusal given to any other person except as disclosed on Schedule 4(c).
5. COVENANTS OF THE COMPANY
a. Best Efforts. The Company shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Section 7
of this Agreement.
b. Blue Sky. The Company shall, at its sole cost and expense, on or
before each of the Closing Dates, take such action as the Company shall
reasonably determine is necessary to qualify the Securities for, or obtain
exemption for the Securities for, sale to the Investor at each of the Closings
pursuant to this Agreement under applicable securities or "Blue Sky" laws of
such states of the United States, as specified by Investor, and shall provide
evidence of any such action so taken to the Investor on or prior to the
Closing Date. The Company shall, at its sole cost and expense, make all filings
Exhibit 10.12
Page 21 of 54 Pages
and reports relating to the offer and sale of the Securities required under the
applicable securities or "Blue Sky" laws of such states of the United States
following each of the Closing Dates.
c. Reporting Status. Until the earlier of (i) the first date which
is after the date this Agreement is terminated pursuant to Section 9 and on
which the Holders (as that term is defined in the Registration Rights
Agreement) may sell all of the Securities acquired pursuant to this Agreement
without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or
successor thereto), or (ii) the date on which (A) the Holders shall have sold
all the Securities issuable hereunder and (B) this Agreement has been
terminated pursuant to Section 9 (the "REGISTRATION PERIOD"), the Company shall
file all reports required to be filed with the SEC pursuant to the 1934 Act,
and the Company shall not terminate its status as a reporting company under the
1934 Act.
d. Use of Proceeds. The Company will use the proceeds from the sale
of the Shares (excluding amounts paid by the Company for fees as set forth in
the Transaction Documents) for general corporate and working capital purposes.
e. Financial Information. The Company agrees to make available to
the Investor via EDGAR or other electronic means the following to the Investor
during the Registration Period: (i) within five (5) Trading Days after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its
Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any
Registration Statements or amendments filed pursuant to the 1933 Act; (ii) on
the same day as the release thereof, facsimile copies of all press releases
issued by the Company or any of its Subsidiaries, (iii) copies of any notices
and other information made available or given to the shareholders of the
Company generally, contemporaneously with the making available or giving
thereof to the shareholders and (iv) within two (2) calendar days of filing or
delivery thereof, copies of all documents filed with, and all correspondence
sent to, the Principal Market, any securities exchange or market, or the
National Association of Securities Dealers, INC.
f. Reservation of Shares. Subject to the following sentence, the
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, a sufficient number of shares of Common
Stock to provide for the issuance of the Securities hereunder. In the event
that the Company determines that it does not have a sufficient number of
authorized shares of Common Stock to reserve and keep available for issuance as
described in this Section 5(f), the Company shall use its best efforts to
increase the number of authorized shares of Common Stock by seeking shareholder
approval for the authorization of such additional shares.
g. Listing. The Company shall promptly secure the listing of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
upon the Principal Market and each other national securities exchange and
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Registrable Securities from time to time issuable under the terms of the
Exhibit 10.12
Page 22 of 54 Pages
Transaction Documents. The Company shall maintain the Common Stock's
authorization for quotation on the Principal Market. Neither the Company nor
any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on the
Principal Market (excluding suspensions of not more than one trading day
resulting from business announcements by the Company). The Company shall
promptly provide to the Investor copies of any notices it receives from the
Principal Market regarding the continued eligibility of the Common Stock for
listing on such automated quotation system or securities exchange. The Company
shall pay all fees and expenses in connection with satisfying its obligations
under this Section 5(g).
h. Transactions With Affiliates. The Company shall not, and shall
cause each of its Subsidiaries not to, enter into, amend, modify or supplement,
or permit any Subsidiary to enter into, amend, modify or supplement, any
agreement, transaction, commitment or arrangement with any of its or any
Subsidiary's officers, directors, persons who were officers or directors at any
time during the previous two years, shareholders who beneficially own 5% or
more of the Common Stock, or affiliates or with any individual related by
blood, marriage or adoption to any such individual or with any entity in which
any such entity or individual owns a 5% or more beneficial interest (each a
"RELATED PARTY"), except for (i) customary employment arrangements and benefit
programs on reasonable terms, (ii) any agreement, transaction, commitment or
arrangement on an arms-length basis on terms no less favorable than terms which
would have been obtainable from a person other than such Related Party, or
(iii) any agreement, transaction, commitment or arrangement which is approved
by a majority of the disinterested directors of the Company. For purposes
hereof, any director who is also an officer of the Company or any Subsidiary of
the Company shall not be a disinterested director with respect to any such
agreement, transaction, commitment or arrangement. "AFFILIATE" for purposes
hereof means, with respect to any person or entity, another person or entity
that, directly or indirectly, (i) has a 5% or more equity interest in that
person or entity, (ii) has 5% or more common ownership with that person or
entity, (iii) controls that person or entity, or (iv) shares common control
with that person or entity. "CONTROL" or "CONTROLS" for purposes hereof means
that a person or entity has the power, direct or indirect, to conduct or govern
the policies of another person or entity.
i. Filing of Form 8-K. On or before the date which is three (3)
Trading Days after the Execution Date, the Company shall file a Current Report
on Form 8-K with the SEC describing the terms of the transaction contemplated
by the Transaction Documents in the form required by the 1934 Act, if such
filing is required.
j. Corporate Existence. The Company shall use its best efforts to
preserve and continue the corporate existence of the Company.
k. Notice of Certain Events Affecting Registration; Suspension of
Right to Make a Put. The Company shall promptly notify Investor upon the
occurrence of any of the following events in respect of a Registration
Statement or related prospectus in respect of an offering of the Shares: (i)
Exhibit 10.12
Page 23 of 54 Pages
receipt of any request for additional information by the SEC or any other
federal or state governmental authority during the period of effectiveness of
the Registration Statement for amendments or supplements to the Registration
Statement or related prospectus; (ii) the issuance by the SEC or any other
federal or state governmental authority of any stop order suspending the
effectiveness of any Registration Statement or the initiation of any
proceedings for that purpose; (iii) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; (iv) the happening of any event that makes any
statement made in such Registration Statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires the making of any changes in the
Registration Statement, related prospectus or documents so that, in the case of
a Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the
case of the related prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (v) the Company's reasonable
determination that a post-effective amendment to the Registration Statement
would be appropriate, and the Company shall promptly make available to Investor
any such supplement or amendment to the related prospectus. The Company shall
not deliver to Investor any Put Notice during the continuation of any of the
foregoing events.
l. Reimbursement. If (i) Investor, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by any shareholder of the Company,
in connection with or as a result of the consummation of the transactions
contemplated by the Transaction Documents, or if Investor is impleaded in any
such action, proceeding or investigation by any person, or (ii) Investor, other
than by reason of its gross negligence or willful misconduct or by reason of
its trading of the Common Stock in a manner that is illegal under the federal
securities laws, becomes involved in any capacity in any action, proceeding or
investigation brought by the SEC against or involving the Company or in
connection with or as a result of the consummation of the transactions
contemplated by the Transaction Documents, or if Investor is impleaded in any
such action, proceeding or investigation by any person, then in any such case,
the Company will reimburse Investor for its reasonable legal and other expenses
(including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which Investor is a named party, the Company will
pay to Investor the charges, as reasonably determined by Investor, for the time
of any officers or employees of Investor devoted to appearing and preparing to
appear as witnesses, assisting in preparation for hearings, trials or pretrial
matters, or otherwise with respect to inquiries, hearing, trials, and other
proceedings relating to the subject matter of this Agreement. The reimbursement
obligations of the Company under this section shall be in addition to any
liability which the Company may otherwise have, shall extend upon the same
terms and conditions to any affiliates of Investor that are actually named in
such action, proceeding or investigation, and partners, directors, agents,
Exhibit 10.12
Page 24 of 54 Pages
employees, attorneys, accountants, auditors and controlling persons (if any),
as the case may be, of Investor and any such affiliate, and shall be binding
upon and inure to the benefit of any successors of the Company, Investor and
any such affiliate and any such person.
6. COVER. If, the number of Shares represented by any Put Notices
become restricted or are no longer freely trading for any reason, and after the
applicable Closing Date, the Investor purchases, in an open market transaction
or otherwise, the Company's Common Stock (the "Covering Shares") in order to
make delivery in satisfaction of a sale of Common Stock by the Investor (the
"Sold Shares"), which delivery such Investor anticipated to make using the
Shares represented by the Put Notice (a "Buy-In"), the Company shall pay to
the Investor the Buy-In Adjustment Amount (as defined below). The "Buy-In
Adjustment Amount" is the amount equal to the excess, if any, of (a) the
Investor's total purchase price (including brokerage commissions, if any) for
the Covering Shares over (b) the net proceeds (after brokerage commissions, if
any) received by the Investor from the sale of the Sold Shares. The Company
shall pay the Buy-In Adjustment Amount to the Investor in immediately available
funds immediately upon demand by the Investor. By way of illustration and not
in limitation of the foregoing, if the Investor purchases Common Stock having a
total purchase price (including brokerage commissions) of $11,000 to cover a
Buy-In with respect to the Common Stock it sold for net proceeds of $10,000,
the Buy-In Adjustment Amount which the Company will be required to pay to the
Investor will be $1,000.
7. CONDITIONS OF THE COMPANY'S OBLIGATION TO SELL.
The obligation hereunder of the Company to issue and sell the Shares to
the Investor is further subject to the satisfaction, at or before each Closing
Date, of each of the following conditions set forth below. These conditions are
for the Company's sole benefit and may be waived by the Company at any time in
its sole discretion.
a. The Investor shall have executed each of this Agreement and the
Registration Rights Agreement and delivered the same to the Company.
b. The Investor shall have delivered to the Company the Purchase Price
for the Shares being purchased by the Investor at the Closing (after receipt of
confirmation of delivery of such Shares) by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company.
c. The representations and warranties of the Investor shall be true
and correct as of the date when made and as of the applicable Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Investor shall have performed, satisfied and
complied with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Investor at or prior to such Closing Date.
Exhibit 10.12
Page 25 of 54 Pages
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
e. No Valuation Event shall have occurred since the applicable Put
Notice Date.
8. FURTHER CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE.
The obligation of the Investor hereunder to purchase Shares is subject to
the satisfaction, on or before each Closing Date, of each of the following
conditions set forth below.
a. The Company shall have executed each of the Transaction Documents
and delivered the same to the Investor.
b. The Common Stock shall be authorized for quotation on the
Principal Market and trading in the Common Stock shall not have been suspended
by the Principal Market or the SEC, at any time beginning on the date hereof
and through and including the respective Closing Date (excluding suspensions of
not more than one Trading Day resulting from business announcements by the
Company, provided that such suspensions occur prior to the Company's delivery
of the Put Notice related to such Closing).
c. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the applicable Closing Date as
though made at that time (except for (i) representations and warranties that
speak as of a specific date and (ii) with respect to the representations made
in Sections 4(g), (h) and (j) and the third sentence of Section 4(k) hereof,
events which occur on or after the date of this Agreement and are disclosed in
SEC filings made by the Company at least ten (10) Trading Days prior to the
applicable Put Notice Date) and the Company shall have performed, satisfied and
complied with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Company on or before such Closing Date. The Investor may request an update as
of such Closing Date regarding the representation contained in Section 4(c)
above.
d. Investor shall have received an opinion letter of the Company's
counsel on or before the Execution Date.
e. The Company shall have executed and delivered to the Escrow Agent
or Investor the certificates representing, or have executed electronic book-
entry transfer of, the Shares, (in such denominations as such Investor shall
request) being purchased by the Investor at such Closing.
f. The Board of Directors of the Company shall have adopted
resolutions consistent with Section 4(b)(ii) above and in a form reasonably
acceptable to the Investor (the "RESOLUTIONS") and such Resolutions shall not
Exhibit 10.12
Page 26 of 54 Pages
have been amended or rescinded prior to such Closing Date.
g. If requested by the Investor, the Investor shall receive a letter
of the type, in the form and with the substance of the letter described in
Section 3(s) of the Registration Rights Agreement from the Company's auditors.
h. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
i. The Registration Statement shall be effective on each Closing Date
and no stop order suspending the effectiveness of the Registration statement
shall be in effect or shall be pending or threatened. Furthermore, on each
Closing Date (i) neither the Company nor Investor shall have received notice
that the SEC has issued or intends to issue a stop order with respect to such
Registration Statement or that the SEC otherwise has suspended or withdrawn the
effectiveness of such Registration Statement, either temporarily or
permanently, or intends or has threatened to do so (unless the SEC's concerns
have been addressed and Investor is reasonably satisfied that the SEC no longer
is considering or intends to take such action),and (ii) no other suspension of
the use or withdrawal of the effectiveness of such Registration Statement or
related prospectus shall exist.
j. At the time of each Closing, the Registration Statement (including
information or documents incorporated by reference therein) and any amendments
or supplements thereto shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or which would require
public disclosure or an update supplement to the prospectus.
k. There shall have been no filing of a petition in bankruptcy,
either voluntarily or involuntarily, with respect to the Company and there
shall not have been commenced any proceedings under any bankruptcy or
insolvency laws, or any laws relating to the relief of debtors, readjustment of
indebtedness or reorganization of debtors, and there shall have been no calling
of a meeting of creditors of the Company or appointment of a committee of
creditors or liquidating agents or offering of a composition or extension to
creditors by, for, with or without the consent or acquiescence of the Company.
l. If applicable, the shareholders of the Company shall have approved
the issuance of any Shares in excess of the Maximum Common Stock Issuance in
accordance with Section 2(j).
m. The conditions to such Closing set forth in Section 2(f) shall
have been satisfied on or before such Closing Date.
Exhibit 10.12
Page 27 of 54 Pages
n. The Company shall have certified to the Investor the number of
shares of Common Stock outstanding as of a date within five (5) Trading Days
prior to such Closing Date.
o. The Company shall have delivered to such Investor such other
documents relating to the transactions contemplated by this Agreement as such
Investor or its counsel may reasonably request upon reasonable advance notice.
9. TERMINATION.
a. Termination. The representations, warranties and covenants
contained in or incorporated into this Agreement, insofar as applicable to the
transactions consummated hereunder prior to such termination, shall survive its
termination for the period of any applicable statute of limitations.
b. Termination. This Agreement shall terminate upon occurrence of any
one of the following events:
(i) when the Investor has purchased an aggregate of $6,000,000 in the
Common Stock of the Company pursuant to this Agreement; provided that
the representations, warranties and covenants contained in this
Agreement insofar as applicable to the transactions consummated
hereunder prior to such termination, shall survive the termination of
this Agreement for the period of any applicable statute of
limitations,
(ii) on the date which is twenty-four (24) months after the Effective
Date;
(iii) if the Company shall file or consent by answer or
otherwise to the entry of an order for relief or approving a petition
for relief, reorganization or arrangement or any other petition in
bankruptcy for liquidation or to take advantage of any bankruptcy or
insolvency law of any jurisdiction, or shall make an assignment for
the benefit of its creditors, or shall consent to the appointment of
a custodian, receiver, trustee or other officer with similar powers
of itself or of any substantial part of its property, or shall be
adjudicated a bankrupt or insolvent, or shall take corporate action
for the purpose of any of the foregoing, or if a court or
governmental authority of competent jurisdiction shall enter an
order appointing a custodian, receiver, trustee or other officer with
similar powers with respect to the Company or any substantial part of
its property or an order for relief or approving a petition for
relief or reorganization or any other petition in bankruptcy or for
liquidation or to take advantage of any bankruptcy or insolvency law,
or an order for the dissolution, winding up or liquidation of the
Company, or if any such petition shall be filed against the Company;
Exhibit 10.12
Page 28 of 54 Pages
(iv) if the Company shall enter into an equity credit line
financing facility during the Open Period ;
(v) the trading of the Common Stock is suspended by the SEC, the
Principal Market or the NASD for a period of five (5) consecutive
Trading Days during the Open Period;
(vi) the Company shall not have filed with the SEC the initial
Registration Statement with respect to the resale of the Registrable
Securities in accordance with the terms of the initial Registration
Rights Agreement within sixty (60) calendar days of the date hereof
or the Registration Statement has not been declared effective within
one hundred eighty (180) calendar days of the date hereof; or
(vii) the Common Stock ceases to be registered under the 1934
Act.
(viii) The Securities cease to be registered under the 1934 Act or
listed or traded on the Nasdaq National Market, American Stock
Exchange or Nasdaq Small Cap Market or the OTC Bulletin Board; or
(ix) The Company requires shareholder approval under Nasdaq rules to
issue additional shares and such approval is not obtained within 60
days from the date when the Company has issued its 19.9% maximum
allowable shares.
Upon the occurrence of one of the above-described events, the Company shall
send written notice of such event to the Investor.
10. INDEMNIFICATION. In consideration of the Investor's execution and
delivery of the this Agreement and the Registration Rights Agreement and
acquiring the Shares hereunder and in addition to all of the Company's other
obligations under the Transaction Documents, the Company shall defend,
protect, indemnify and hold harmless the Investor and all of their
shareholders, officers, directors, employees and direct or indirect investors
and any of the foregoing person's agents 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,
Exhibit 10.12
Page 29 of 54 Pages
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements (the "INDEMNIFIED LIABILITIES'), incurred by any Indemnitee
as a result of, or arising out of, or relating to (i) any misrepresentation or
breach of any representation or warranty made by the Company in the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby (ii) 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, (iii) any cause of
action, suit or claim brought or made against such Indemnitee by a third party
and arising out of or resulting from the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (iv) any transaction financed or
to be financed in whole or in part, directly or indirectly, with the proceeds
of the issuance of the Shares or (v) the status of the Investor or holder of
the Shares as an investor in the Company, except insofar as any such
misrepresentation, breach or any untrue statement, alleged untrue statement,
omission or alleged omission is made in reliance upon and in conformity with
written information furnished to the Company by the Investor which is
specifically intended by the Investor for use in the preparation of any such
Registration Statement, preliminary prospectus or prospectus. 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 is permissible under
applicable law. The indemnity provisions contained herein shall be in addition
to any cause of action or similar rights the Investor may have, and any
liabilities the Investor may be subject to.
11. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of New York without regard to the
principles of conflict of laws. Each party 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. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
b. Fees and Expenses.
(i) As an inducement to Dutchess Private Equities, L.P. to enter
into this Agreement, the Company has agreed to issue to Dutchess
Private Equities, L.P. as a commitment fee that number of shares of
Common Stock equal to $22,500 divided by the closing bid price of the
Company's Common Stock on the Execution Date. These shares will be
registered in the current offering and shall be issued to Dutchess
Private Equities, L.P. in certificate form no later than two (2)
Exhibit 10.12
Page 30 of 54 Pages
Trading Days after the Execution Date.
(ii) The Company has agreed to issue to May Davis Group, Inc., as
part of its placement fee, that number of shares of Common Stock
equal to $90,000 divided by the closing bid price of the Company's
Common Stock on the Execution Date. These shares will be registered
in the current offering and shall issuable to May Davis Group, Inc.
in certificate form no later than two (2) Trading Days following the
Execution Date. Additionally, on each Closing Date the Company
shall pay to May Davis Group, Inc., as part of its placement fee an
amount equal to 5.0% of the Purchase Amount being paid by DRH
Investment Company, LLC, which amount shall be deducted from the
Purchase Amount by the Escrow Agent and paid directly to May Davis
Group, Inc.
(iii) Dutchess Advisors, Ltd. is acting in an advisory capacity to
one of the investors, Dutchess Private Equities Fund, L.P., and the
Company has agreed to pay an amount in cash and Common Stock for the
advisory services being rendered to that Investor. On each Closing
Date the Company shall pay to Dutchess Advisors, Ltd., as part of its
advisory fee, an amount equal to 5.0% of the Purchase Amount being
paid by Dutchess Private Equities Fund, L.P., which amount shall be
deducted from the Purchase Amount by the Escrow Agent and paid
directly to Dutchess Advisors, Ltd. The Company shall also issue to
Dutchess Advisors, Ltd., as part of its advisory fee, that number of
shares of Common Stock equal to $67,500 divided by the closing bid
price of the Company's Common Stock on the Execution Date. These
shares will be registered in the current offering and shall be issued
to Dutchess Advisors, Ltd. in certificate form no later than two (2)
Trading Days after the Execution Date.
(iv) On each debenture closing of $100,000, Joseph B. LaRocco,
Esq. shall receive from escrow the sum of $5,000 for document
preparation related to the equity line financing.
(vi) Except as otherwise set forth herein, each party shall pay
the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party
incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. Any attorneys' fees and expenses
incurred by either the Company or by the Investor in connection with
the preparation, negotiation, execution and delivery of any
amendments to this Agreement or relating to the enforcement of the
rights of any party, after the occurrence of any breach of the terms
of this Agreement by another party or any default by another party in
respect of the transactions contemplated hereunder, shall be paid on
demand by the party which breached the Agreement and/or defaulted, as
the case may be. The Company shall pay all stamp and other taxes and
Exhibit 10.12
Page 31 of 54 Pages
duties levied in connection with the issuance of any Securities
issued pursuant hereto.
c. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original,
not a facsimile signature.
d. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
e. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
f. Entire Agreement; Amendments. This Agreement supersedes all other
prior oral or written agreements between the Investor, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
(including the other Transaction Documents) contain the entire understanding of
the parties with respect to the matters covered herein and therein and, except
as specifically set forth herein or therein, neither the Company nor the
Investor makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be amended other
than by an instrument in writing signed by the Company and the Investor, and
no provision hereof may be waived other than by an instrument in writing signed
by the party against whom enforcement is sought.
g. Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) day after deposit with a
nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
UTAH CLAY TECHNOLOGY, INC.
Dennis S. Engh, President
3985 South 2000 East
Salt Lake City, UT 84124
Telephone: 801-424-0223
Exhibit 10.12
Page 32 of 54 Pages
Facsimile: 801-274-7804
And
Thomas J. Kenan, Esq.
Fuller, Tubb, Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Telephone: 405-235-2575
Facsimile: 405-232-8384
E-mail: kenan@ftpslaw.com
If to the Investor at the address listed in the Questionnaire:
And
Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telephone: 203-966-0566
Facsimile: 203-966-0363
Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number.
h. Assignment. This Agreement may not be assigned. Notwithstanding
anything to the contrary contained in the Transaction Documents, the Investor
shall be entitled to pledge the Shares in connection with a bona fide margin
account.
i. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.
j. Survival. The representations and warranties of the Company and
the Investor contained in Sections 2 and 3, the agreements and covenants set
forth in Sections 4 and 5, and the indemnification provisions set forth in
Section 10, shall survive each of the Closings. The Investor shall be
responsible only for its own representations, warranties, agreements and
covenants hereunder.
k. Publicity. The Company and Investor shall consult with each other
in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and no party shall issue any
such press release or otherwise make any such public statement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other parties with prior notice of such
public statement. Notwithstanding the foregoing, the Company shall not publicly
disclose the name of Investor without the prior written consent of such
Exhibit 10.12
Page 33 of 54 Pages
Investor, except to the extent required by law. Investor acknowledges that this
Agreement and all or part of the Transaction Documents may be deemed to be
"material contracts" as that term is defined by Item 601(b)(10) of Regulation
S-K, and that the Company may therefore be required to file such documents as
exhibits to reports or registration statements filed under the Securities 1933
Act or the 1934 Act. Investor further agrees that the status of such documents
and materials as material contracts shall be determined solely by the Company,
in consultation with its counsel.
l. Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
m. Placement Agent. Except as set forth in this Agreement, no fees or
commissions will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other person or
entity, with respect to the transactions contemplated by the Transaction
Documents. The Investor shall have no obligation with respect to any fees or
with respect to any claims made by or on behalf of other persons or entities
for fees of a type contemplated in this Section that may be due in connection
with the transactions contemplated by the Transaction Documents. The Company
shall indemnify and hold harmless the Investor, their employees, officers,
directors, agents, and partners, and their respective affiliates, from and
against all claims, losses, damages, costs (including the costs of preparation
and attorney's fees) and expenses incurred in respect of any such claimed or
existing fees, as such fees and expenses are incurred.
n. No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
o. Remedies. The Investor and each holder of the Shares shall have
all rights and remedies set forth in this Agreement and the Registration Rights
Agreement and all rights and remedies which such holders have been granted at
any time under any other agreement or contract and all of the rights which such
holders have under any law. Any person having any rights under any provision of
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any default
or breach of any provision of this Agreement, including the recovery of
reasonable attorneys fees and costs, and to exercise all other rights granted
by law.
p. Payment Set Aside. To the extent that the Company makes a payment
or payments to the Investor hereunder or the Registration Rights Agreement or
the Investor enforces or exercises its rights hereunder or thereunder, and such
payment or payments or the proceeds of such enforcement or exercise or any part
thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
Exhibit 10.12
Page 34 of 54 Pages
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to
the extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.
q. The Company agrees that the Investors shall be severally and not jointly
liable for the representations, covenants and warranties made in this
Agreement. Also, the Company agrees that the Investors shall be severally and
not jointly liable for any breaches of this Agreement, and each Investor shall
bear its own liability based on which Investor caused such breach.
[Balance of this page intentionally left blank.]
Exhibit 10.12
Page 35 of 54 Pages
UTAH CLAY TECHNOLOGY, INC.
QUESTIONNAIRE
The information contained in this Questionnaire is being furnished in
order to determine whether the undersigned's subscription to purchase the
Shares described in the Investment Agreement may be accepted.
ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED
CONFIDENTIALLY. The undersigned understands, however, that the Company may
present this Questionnaire to such parties as it deems appropriate if called
upon to establish that the proposed offer and sale of the Securities is exempt
from registration under the 1933 Act, as amended. Further, the undersigned
understands that the offering is required to be reported to the Securities and
Exchange Commission, NASDAQ and to various state securities and "blue sky"
regulators.
IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED MUST COMPLETE
FORM W-9 ATTACHED HERETO.
I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES.
__ 1. The undersigned: (a) has total assets in excess of $5,000,000;
(b) was not formed for the specific purpose of acquiring the
securities and (c) has its principal place of business in ___________.
__ 2. The undersigned is a natural person whose individual net worth*
or joint net worth with his or her spouse exceeds $1,000,000.
__ 3. The undersigned is a natural person who had an individual
income* in excess of $200,000 in each of 1999 and 2000 and who
reasonably expects an individual income in excess of $200,000 in 2001.
Such income is solely that of the undersigned and excludes the income
of the undersigned's spouse.
__ 4. The undersigned is a natural person who, together with his or
her spouse, has had a joint income* in excess of $300,000 in each of
1999 and 2000 and who reasonably expects a joint income in excess of
$300,000 during 2001.
* For purposes of this Questionnaire, the term "net worth" means the excess
of total assets over total liabilities. In determining "income", an investor
should add to his or her adjusted gross income any amounts attributable to tax-
exempt income received, losses claimed as a limited partner in any limited
partnership, deductions claimed for depletion, contributions to IRA or Keogh
retirement plan, alimony payments and any amount by which income from long-term
capital gains has been reduced in arriving at adjusted gross income.
Exhibit 10.12
Page 36 of 54 Pages
__ 5. The undersigned is:
(a) a bank as defined in Section 3(a)(2) of the 1933 Act;
or
(b) a savings and loan association or other institution as
defined in Section 3(a)(5)(A) of the 1933 Act whether acting in
its individual or fiduciary capacity; or
(c) a broker or dealer registered pursuant to Section 15 of
the 1934 Act; or
(d) an insurance company as defined in Section 2(13) of the
1933 Act; or
(e) An investment company registered under the Investment
Company Act of 1940 or a business development company as
defined in Section 2(a)(48) of the Investment Company Act of
1940; or
(f) a small business investment company licensed by the
U.S. Small Business Administration under Section 301 (c) or (d)
of the Small Business Investment Act of 1958; or
__ 6. The undersigned is an entity in which all of the equity owners
are accredited investors.
Exhibit 10.12
Page 37 of 54 Pages
II. INVESTOR INFORMATION.
If the undersigned is an individual:
Name _______________________________________________
Street Address _____________________________________
City, State, Zip Code ______________________________
Phone, Fax _________________________________________
Social Security Number (or Taxpayer Identification Number)
____________________________________________________
Send Correspondence to:
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
If the undersigned is a Partnership or Other Entity:
Contact Name _______________________________________
State of Organization ______________________________
Principal Business Address _________________________
City, State, Zip Code ______________________________
Taxpayer Identification Number _____________________
Phone, Fax _________________________________________
Exhibit 10.12
Page 38 of 54 Pages
INVESTOR SIGNATURE PAGE
Your signature on this Signature Page evidences your agreement to be bound
by the Questionnaire, Investment Agreement and Registration Rights Agreement.
1. The undersigned hereby represents that (a) the information
contained in the Questionnaire is complete and accurate and (b) the undersigned
will notify UTAH CLAY TECHNOLOGY, INC. immediately if any material change in
any of the information occurs prior to the acceptance of the undersigned's
subscription and will promptly send UTAH CLAY TECHNOLOGY, INC. written
confirmation of such change.
2. The undersigned signatory hereby certifies that he/she has read and
understands the Investment Agreement and Questionnaire, and the representations
made by the undersigned in the Investment Agreement and Questionnaire are true
and accurate.
3. Upon closing please deliver the Shares to May Davis Group, Inc.
______________________________ ________________________
Number of Shares being purchased Date
By: _______________________
(Signature)
Name: _____________________
(Please Type or Print)
Title: ____________________
(Please Type or Print)
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. AS
AMENDED (THE "ACT"), AND MAY NOT BE RESOLD OR UNLESS SUCH SECURITIES ARE
INCLUDED IN AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT.
Exhibit 10.12
Page 39 of 54 Pages
COMPANY ACCEPTANCE PAGE
_______________________
This Investment Agreement accepted and agreed
to this ____ day of November, 2001.
UTAH CLAY TECHNOLOGY, INC.
By__________________________________
Dennis S. Engh, its President
Exhibit 10.12
Page 40 of 54 Pages
LIST OF EXHIBITS
-----------------
EXHIBIT A Registration Rights Agreement
EXHIBIT B Opinion of Company's Counsel
EXHIBIT C Escrow Agreement
EXHIBIT D Broker Representation Letter
EXHIBIT E Board Resolution
EXHIBIT F Put Notice
EXHIBIT G Partial Release of Purchase Amount and Shares
LIST OF SCHEDULES
-----------------
Schedule 4(a) Subsidiaries
Schedule 4(c) Capitalization
Schedule 4(e) Conflicts
Schedule 4(g) Material Changes
Schedule 4(h) Litigation
Schedule 4(l) Intellectual Property
Schedule 4(n) Liens
Schedule 4(t) Certain Transactions
Exhibit 10.12
Page 41 of 54 Pages
EXHIBIT D
[BROKER'S LETTERHEAD]
Date
Via Facsimile
Attention:
______________________
______________________
______________________
Re: UTAH CLAY TECHNOLOGY, INC.
Dear __________________:
It is our understanding that the Form______ Registration Statement bearing SEC
File Number ( ___-______) filed by UTAH CLAY TECHNOLOGY, INC. on Form _____ on
__________, 2001 was declared effective on _________, 2001.
This letter shall confirm that ______________ shares of the common stock of
UTAH CLAY TECHNOLOGY, INC. are being sold on behalf of __________________ and
that we shall comply with the prospectus delivery requirements set forth in
that Registration Statement by filing the same with the purchaser.
If you have any questions please do not hesitate to call.
Sincerely,
______________________
Exhibit 10.12
Page 42 of 54 Pages
cc: Joseph B. LaRocco, Esq.
Exhibit 10.12
Page 43 of 54 Pages
EXHIBIT F
PUT NOTICE NO. ______
UTAH CLAY TECHNOLOGY, INC.
UTAH CLAY TECHNOLOGY, INC., a Utah corporation (the "Company"), hereby
elects to exercise its right pursuant to the Investment Agreement to require
Investor to purchase shares of its common stock. The Company hereby certifies
that:
1. The Dollar Amount is: $_______________.
2. The Purchase Period runs from ____________________ to
____________________.
3. The current number of shares of common stock issued and outstanding as
of _____________ are __________________________.
4. 85% of the average of the three (3) lowest closing bid prices
("Average3") for the Common Stock as reported by Bloomberg Financial LP during
the ten (10) Trading Day Purchase Period is as follows:
Average3 x 85% = Purchase Price x (15% of Volume) = Total
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
___________ x 85% = __________ x _____________ = $__________
GRAND TOTALS _____________ $__________
Number of Shares being Purchased (total of 15% volume column) _______________
Exhibit 10.12
Page 44 of 54 Pages
Aggregate Purchase Price of Shares __________________
Less Escrow Fee - __________________
Less Dutchess Advisors, Ltd. Fee - __________________
Less May Davis Group, Inc. Fee - __________________
Amount to be wired to Company ==================
The undersigned has executed this Put Notice as of this ___ day of _________,
200__.
UTAH CLAY TECHNOLOGY, INC.
By:_______________________________________
Name and title:
Exhibit 10.12
Page 45 of 54 Pages
EXHIBIT G
PARTIAL RELEASE OF PURCHASE AMOUNT AND SHARES
To:
UTAH CLAY TECHNOLOGY, INC.
Dennis S. Engh, President
3985 South 2000 East
Salt Lake City, UT 84124
Telephone: 801-424-0223
Facsimile: 801-274-7804
Thomas J. Kenan, Esq.
Fuller, Tubb, Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Telephone: 405-235-2575
Facsimile: 405-232-8384
E-mail: kenan@ftpslaw.com
Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telephone No.: 203-966-0566
Telecopier No.: 203-966-0363
Pursuant to the terms of the Investment Agreement the Investor requests the
release from the Company of __________ shares of the Company's Common Stock by
overnight delivery or DWAC, if available, and the Investor, upon confirmation
of receipt of the Shares by the Escrow Agent shall wire $____________ to the
Company within two (2) Trading Days of said confirmation at which time Escrow
Agent shall wire the funds to the Company and deliver the shares to the
Investor pursuant to the instructions given to the Escrow Agent by the Investor
INVESTOR
By:_______________________________________________
Note: The number of Shares stated in this PARTIAL RELEASE OF PURCHASE AMOUNT
AND SHARES Form shall be equal to the dollar amount to be released divided by
85% of the THREE (3) lowest closing bid prices during that number of Trading
Days that have elapsed in the specified Pricing Period.
Exhibit 10.12
Page 46 of 54 Pages
SCHEDULE 4(a) SUBSIDIARIES
NONE
Exhibit 10.12
Page 47 of 54 Pages
SCHEDULE 4(c) CAPITALIZATION
1. There are 500,000 warrants outstanding pursuant to a contract between Utah
Clay Technology, Inc. and Securities Compliance Control ("SCC"), as follows:
200,000 exercisable at $1 a warrant, 200,000 exercisable at $1.50 a warrant
and 100,000 exercisable at $2 a warrant. Utah Clay has advised SCC that SCC
failed to perform under the contract and that Utah Clay declares the
contract rescinded.
2. Utah Clay has issued 530,000 shares of common stock to SCC, its affiliates
and designees, which shares are restricted securities but carry with them
"piggy-back" registration rights. Again, Utah Clay regards this contract as
rescinded and regards the shares as not having been paid for.
3. In consideration of Dennis S. Engh, Daniel H. Engh and Thomas F. Harrison
("Pledgors").depositing an aggregate of 12 million shares of their holdings
of Common Stock of UTCL pursuant to a Security Agreement, which shares are
to serve as security for UTCL's performance under this Agreement which
provides for the issuance of up to $200,000 in Three-Year, 5%, Convertible
Debentures, UTCL granted options to each of the Pledgors to purchase, at
$0.09 a share, that number of shares of Common Stock of UTCL that may be
needed to replace any of such Pledgor's 12 million shares that may be sold
by the pledgees of the Security Agreement pursuant to its terms.
4. The relations between Utah Clay and SCC have not reached the point of
litigation but could. Utah Clay proposes to compromise the dispute, either
before or after litigation may be filed.
Exhibit 10.12
Page 48 of 54 Pages
SCHEDULE 4(e) CONFLICTS
NONE
Exhibit 10.12
Page 49 of 54 Pages
SCHEDULE 4(g) MATERIAL CHANGES
NONE
Exhibit 10.12
Page 50 of 54 Pages
SCHEDULE 4(h) LITIGATION
1. There is no filed or threatened litigation. However, as described in
Schedule 4(c), there is a dispute with Securities Compliance Control that could
develop into litigation.
Exhibit 10.12
Page 51 of 54 Pages
SCHEDULE 4(l) INTELLECTUAL PROPERTY
NONE
Exhibit 10.12
Page 52 of 54 Pages
SCHEDULE 4(n) LIENS
NONE
Exhibit 10.12
Page 53 of 54 Pages
SCHEDULE 4(t) CERTAIN TRANSACTIONS
NONE
Exhibit 10.12
Page 54 of 54 Pages
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of November __,
2001, by and between UTAH CLAY TECHNOLOGY, INC., a company organized under the
laws of state of Utah, with its principal executive office at 3985 South 200
East, Salt Lake City, Utah 84124 (the "Company"), and the undersigned investor
(the "Investor").
WHEREAS, In connection with the Investment Agreement by and between the
Company and the Investor of even date herewith (the "Investment Agreement"),
the Company has agreed to issue to the Investor (i) an indeterminate number of
shares of the Company's common stock, $.001 par value per share (the "Common
Stock"), to be purchased pursuant to the Investment Agreement, (ii) and Common
Stock in the amounts set forth in Section 2(c)(i) of the Investment Agreement
(the "Signing Shares"); and
WHEREAS, To induce the Investor to execute and deliver the Investment
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"),
and applicable state securities laws, with respect to the shares of Common
Stock issuable pursuant to the Investment Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained hereinafter and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Investor hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "Execution Date" means the date this Agreement and the Investment
Agreement are signed by the Company and the Investor.
b. "Holder" means the Investor.
c. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
d. "Potential Material Event" means any of the following: (i) the possession
by the Company of material information not ripe for disclosure in a
Registration Statement, which shall be evidenced by determinations in good
faith by the Board of Directors of the Company that disclosure of such
information in the Registration Statement would be detrimental to the
business and affairs of the Company, or (ii) any material engagement or
activity by the Company which would, in the good faith determination of the
Board of Directors of the Company, be adversely affected by disclosure in a
Registration Statement at such time, which determination shall be accompanied
by a good faith determination by the Board of Directors of the Company that
Exhibit 10.13
Page 1 of 16 Pages
the Registration Statement would be materially misleading absent the inclusion
of such information.
e. "Principal Market" means either The American Stock Exchange, Inc., The New
York Stock Exchange, Inc., the Nasdaq National Market, The Nasdaq SmallCap
Market or the National Association of Securities Dealer's, Inc. OTC electronic
bulletin board whichever is the principal market on which the Common Stock is
listed.
f. "Register," "Registered," and "Registration" refer to a registration
effected by preparing and filing one or more Registration Statements in
compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or
any successor rule providing for offering securities on a continuous basis
("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
g. "Registrable Securities" means the shares of Common Stock issued or
issuable (i) pursuant to the Investment Agreement, and (ii) any shares of
capital stock issued or issuable with respect to the such shares of Common
Stock, if any, as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise, which have not been
(x) included in a Registration Statement that has been declared effective by
the SEC or (y) sold under circumstances meeting all of the applicable
conditions of Rule 144 (or any similar provision then in force) under the 1933
Act.
h. "Registration Statement" means a registration statement of the Company
filed under the 1933 Act.
All capitalized terms used in this Agreement and not otherwise defined
herein shall have the same meaning ascribed to them as in the Investment
Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, as soon as
practicable file with the SEC a Registration Statement or Registration
Statements (as is necessary) on Form SB-2 (or, if such form is unavailable
for such a registration, on such other form as is available for such a
registration), covering the resale of all of the Registrable Securities, which
Registration Statement(s) shall state that, in accordance with Rule 416
promulgated under the 1933 Act, such Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become
issuable upon stock splits, stock dividends or similar transactions. The
Company shall initially register for resale 30,000,000 shares of Common
Stock. In the event the Company cannot register sufficient shares of Common
Stock, due to the remaining number of authorized shares of Common Stock being
insufficient, the Company will use its best efforts to register the maximum
number of shares it can based on the remaining balance of authorized shares
and will use its best efforts to increase the number of its authorized shares
as soon as reasonably practicable.
b. The Company shall use its best efforts to have the Registration
Statement(s) declared effective by the SEC within ninety (90) calendar days
after the Execution Date.
Exhibit 10.13
Page 2 of 16 Pages
c. The Company agrees not to include any other securities, other than
those for the current Regulation D, Series B convertible preferred stock
offering, in this Registration Statement without Investor's prior written
consent. Furthermore, the Company agrees that it will not file any other
Registration Statement for other securities (other than those for the
current Regulation D, Series B convertible preferred stock offering, existing
option holders, strategic partners or in connection with a merger or
acquisition), until ninety (90) days after the Registration Statement for the
Registrable Securities is declared effective.
d. Counsel. In connection with any offering pursuant to this Section 2,
the Investor shall have the right to select one legal counsel to administer
its interests in the Offering; provided, however, that the expenses and fees
of such legal counsel shall be borne by the Investor. The Company shall
reasonably cooperate with any such counsel.
3. RELATED OBLIGATIONS.
At such time as the Company is obligated to prepare and file a
Registration Statement with the SEC pursuant to Section 2(a), the Company will
use its best efforts to effect the registration of the Registrable Securities
in accordance with the intended method of disposition thereof and, with
respect thereto, the Company shall have the following obligations:
a. The Company shall use its best efforts to cause such Registration
Statement relating to the Registrable Securities to become effective within
ninety (90) days after the Closing Date and shall keep such Registration
Statement effective pursuant to Rule 415 until the earlier of (i) the date as
of which the Holders may sell all of the Registrable Securities without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or
successor thereto) or (ii) the date on which (A) the Holders shall have sold
all the Registrable Securities and (B) the Investor has no right to acquire
any additional shares of Common Stock under the Investment Agreement
respectively (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective during the Registration Period, and, during such period, comply with
the provisions of the 1933 Act with respect to the disposition of all
Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the Investor
thereof as set forth in such Registration Statement. In the event the number
of shares of Common Stock available under a Registration Statement filed
pursuant to this Agreement is at any time insufficient to cover all of the
Registrable Securities, the Company shall amend such Registration Statement,
or file a new Registration Statement (on the short form available therefor,
Exhibit 10.13
Page 3 of 16 Pages
if applicable), or both, so as to cover all of the Registrable Securities, in
each case, as soon as practicable, but in any event within thirty (30)
calendar days after the necessity therefor arises (based on the then Purchase
Price of the Common Stock and other relevant factors on which the Company
reasonably elects to rely), assuming the Company has sufficient authorized
shares at that time, and if it does not, within thirty (30) calendar days
after such shares are authorized. The Company shall use it best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof.
c The Company shall furnish to the Investor whose Registrable Securities
are included in any Registration Statement and its legal counsel without charge
(i) promptly after the same is prepared and filed with the SEC at least one
copy of such Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits, the prospectus included in such Registration
Statement (including each preliminary prospectus) and, with regards to such
Registration Statement(s), any correspondence by or on behalf of the Company
to the SEC or the staff of the SEC and any correspondence from the SEC or the
staff of the SEC to the Company or its representatives, (ii) upon the
effectiveness of any Registration Statement, ten (10) copies of the prospectus
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as the Investor may reasonably
request) and (iii) such other documents, including copies of any preliminary
or final prospectus, as the Investor may reasonably request from time to time
in order to facilitate the disposition of the Registrable Securities.
d. The Company shall use reasonable efforts to (i) register and qualify the
Registrable Securities covered by a Registration Statement under such other
securities or "blue sky" laws of such states in the United States as any
Holder reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications
in effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable
Securities for sale in such jurisdictions; provided, however, that the Company
shall not be required in connection therewith or as a condition thereto to (x)
qualify to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 3(d), (y) subject itself to general
taxation in any such jurisdiction, or (z) file a general consent to service of
process in any such jurisdiction. The Company shall promptly notify each
Holder who holds Registrable Securities of the receipt by the Company of any
notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the
securities or "blue sky" laws of any jurisdiction in the United States or its
receipt of actual notice of the initiation or threatening of any proceeding
for such purpose.
e. As promptly as practicable after becoming aware of such event, the
Company shall notify each Holder in writing of the happening of any event as
a result of which the prospectus included in a Registration Statement, as then
in effect, includes an untrue statement of a material fact or omission 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, ("Registration Default") and use all diligent efforts to
promptly prepare a supplement or amendment to such Registration Statement and
Exhibit 10.13
Page 4 of 16 Pages
take any other necessary steps to cure the Registration Default, (which, if
such Registration Statement is on Form S-3, may consist of a document to be
filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act (as defined below) and to be incorporated by reference
in the prospectus) to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Holder (or such other
number of copies as such Holder may reasonably request). Failure to cure the
Registration Default within ten (10) business days shall result in the
Company paying liquidated damages of 2.0% of the cost of all Common Stock then
held by the Holders for each thirty (30) calendar day period or portion
thereof, beginning on the date of suspension. The Company shall also promptly
notify each Holder in writing (i) when a prospectus or any prospectus
supplement or post-effective amendment has been filed, and when a Registration
Statement or any post-effective amendment has become effective (notification
of such effectiveness shall be delivered to each Holder by facsimile on the
same day of such effectiveness and by overnight mail), (ii) of any request by
the SEC for amendments or supplements to a Registration Statement or related
prospectus or related information, (iii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement
would be appropriate, (iv) in the event the Registration Statement is no
longer effective or, (v) the Registration Statement is stale for a period of
more than five (5) Trading Days as a result of the Company's failure to timely
file its financials.
The Company acknowledges that its failure to cure the Registration
Default within ten (10) business days will cause the Investor to suffer
damages in an amount that will be difficult to ascertain. Accordingly, the
parties agree that it is appropriate to include a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages
provision set forth in this section represents the parties' good faith effort
to quantify such damages and, as such, agree that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty.
It is the intention of the parties that interest payable under any of
the terms of this Agreement shall not exceed the maximum amount permitted
under any applicable law. If a law, which applies to this Agreement which sets
the maximum interest amount, is finally interpreted so that the interest in
connection with this Agreement exceeds the permitted limits, then: (1) any
such interest shall be reduced by the amount necessary to reduce the interest
to the permitted limit; and (2) any sums already collected (if any) from the
Company which exceed the permitted limits will be refunded to the Company.
The Investor may choose to make this refund by reducing the amount that the
Company owes under this Agreement or by making a direct payment to the
Company. If a refund reduces the amount that the Company owes the Investor,
the reduction will be treated as a partial payment. In case any provision of
this Agreement is held by a court of competent jurisdiction to be excessive
in scope or otherwise invalid or unenforceable, such provision shall be
adjusted rather than voided, if possible, so that it is enforceable to the
maximum extent possible, and the validity and enforceability of the remaining
provisions of this Agreement will not in any way be affected or impaired
thereby.
f. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities
for sale in any jurisdiction and, if such an order or suspension is issued,
to obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify each Holder who holds Registrable Securities being sold
of the issuance of such order and the resolution thereof or its receipt of
Exhibit 10.13
Page 5 of 16 Pages
actual notice of the initiation or threat of any proceeding for such purpose.
g. The Company shall permit each Holder and a single firm of counsel,
designated as selling shareholders' counsel by the Holders who hold a majority
of the Registrable Securities being sold, to review and comment upon a
Registration Statement and all amendments and supplements thereto at least
three (3) business days prior to their filing with the SEC, and not file any
document in a form to which such counsel reasonably objects. The Company
shall not submit to the SEC a request for acceleration of the effectiveness of
a Registration Statement or file with the SEC a Registration Statement or any
amendment or supplement thereto without the prior approval of such counsel,
which approval shall not be unreasonably withheld.
h. At the request of any Holder, the Company shall cause to be furnished to
such Holder, on the date of the effectiveness of a Registration Statement, an
opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement.
i. The Company shall make available for inspection by (i) any Holder and
(ii) one firm of attorneys and one firm of accountants or other agents
retained by the Holders (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties
of the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably
request; provided, however, that each Inspector shall hold in strict
confidence and shall not make any disclosure (except to a Holder) or use of
any Record or other information which the Company determines in good faith to
be confidential, and of which determination the Inspectors are so notified,
unless (a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise
required under the 1933 Act, (b) the release of such Records is ordered
pursuant to a final, non-appealable subpoena or order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
has knowledge. Each Holder agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, the Records
deemed confidential.
j. The Company shall hold in confidence and not make any disclosure of
information concerning a Holder provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct
a misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final, non-
appealable order from a court or governmental body of competent jurisdiction,
or (iv) such information has been made generally available to the public other
than by disclosure in violation of this Agreement or any other agreement. The
Company agrees that it shall, upon learning that disclosure of such
information concerning a Holder is sought in or by a court or governmental
body of competent jurisdiction or through other means, give prompt written
Exhibit 10.13
Page 6 of 16 Pages
notice to such Holder and allow such Holder, at the Holder's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, such information.
k. The Company shall use its best efforts to secure designation and
quotation of all the Registrable Securities covered by any Registration
Statement on the Principal Market. If, despite the Company's best efforts,
the Company is unsuccessful in satisfying the preceding sentence, it shall use
its best efforts to cause all the Registrable Securities covered by any
Registration Statement to be listed on each other national securities exchange
and automated quotation system, if any, on which securities of the same class
or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange
or system. If, despite the Company's best efforts, the Company is
unsuccessful in satisfying the two preceding sentences, it will use its best
efforts to secure the inclusion for quotation on the Nasdaq SmallCap Market
for such Registrable Securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. as such with respect to such
Registrable Securities. The Company shall pay all fees and expenses in
connection with satisfying its obligation under this Section 3(k).
l. The Company shall cooperate with the Investor to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a
Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the Holders may reasonably
request and registered in such names of the Persons who shall acquire such
Registrable Securities from the Holders, as the Holders may request.
m. The Company shall provide a transfer agent for all the Registrable
Securities not later than the effective date of the first Registration
Statement filed pursuant hereto.
n. If requested by the Holders holding a majority of the Registrable
Securities, the Company shall (i) as soon as reasonably practical incorporate
in a prospectus supplement or post-effective amendment such information as
such Holders reasonably determine should be included therein relating to the
sale and distribution of Registrable Securities, including, without
limitation, information with respect to the offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration
Statement if reasonably requested by such Holders.
o. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
p. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any
registration hereunder.
Exhibit 10.13
Page 7 of 16 Pages
q. Within one (1) business day after the Registration Statement which
includes Registrable Securities is declared effective by the SEC, the Company
shall deliver, and shall cause legal counsel for the Company to deliver, to
the transfer agent for such Registrable Securities, with copies to the
Investor, confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
r. At or prior to the date of the first Put Notice (as that term is defined
in the Investment Agreement) and at such other times as the Holders may
reasonably request, the Company shall cause to be delivered, letters from the
Company's independent certified public accountants (i) addressed to the Holders
that such accountants are independent public accountants within the meaning of
the 1933 Act and the applicable published rules and regulations thereunder,
and (ii) in customary form and covering such financial and accounting matters
as are customarily covered by letters of independent certified public
accountants delivered to underwriters in connection with public offerings.
s. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of Registrable Securities
pursuant to a Registration Statement.
4. OBLIGATIONS OF THE HOLDERS.
a. At least five (5) calendar days prior to the first anticipated filing
date of a Registration Statement the Company shall notify each Holder in
writing of the information the Company requires from each such Holder if such
Holder elects to have any of such Holder's Registrable Securities included in
such Registration Statement. It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Holder
that such Holder shall furnish in writing to the Company such information
regarding itself, the Registrable Securities held by it and the intended
method of disposition of the Registrable Securities held by it as shall
reasonably be required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. Each Holder covenants and
agrees that, in connection with any resale of Registrable Securities by it
pursuant to a Registration Statement, it shall comply with the "Plan of
Distribution" section of the current prospectus relating to such Registration
Statement.
b. Each Holder, by such Holder's acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder, unless such Holder has notified the Company in writing of such
Holder's election to exclude all of such Holder's Registrable Securities from
such Registration Statement.
c. Each Holder agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 3(f) or the first
sentence of 3(e), such Holder will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(f) or the first
sentence of 3(e).
Exhibit 10.13
Page 8 of 16 Pages
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation,
all registration, listing and qualifications fees, printing and accounting
fees, and fees and disbursements of counsel for the Company shall be paid by
the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and hereby
does, indemnify, hold harmless and defend each Holder who holds such
Registrable Securities, the directors, officers, partners, employees, agents,
representatives of, and each Person, if any, who controls, any Holder within
the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended
(the "1934 Act"), (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities, judgments, fines, penalties, charges, costs, attorneys'
fees, amounts paid in settlement or expenses, joint or several (collectively,
"Claims"), incurred in investigating, preparing or defending any action,
claim, suit, inquiry, proceeding, investigation or appeal taken from the
foregoing by or before any court or governmental, administrative or other
regulatory agency, body or the SEC, whether pending or threatened, whether or
not an indemnified party is or may be a party thereto ("Indemnified Damages"),
to which any of them may become subject insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out
of or are based upon: (i) any untrue statement or alleged untrue statement of
a material fact in a Registration Statement or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under the securities or other "blue sky" laws of any jurisdiction in
which Registrable Securities are offered ("Blue Sky Filing"), or the omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which the statements therein were made, not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
final prospectus (as amended or supplemented, if the Company files any
amendment thereof or supplement thereto with the SEC) or the omission or
alleged omission to state therein any material fact necessary to make the
statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or
alleged violation by the Company of the 1933 Act, the 1934 Act, any other
law, including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement (the matters in the foregoing
clauses (i) through (iii) being, collectively, "Violations"). Subject to the
restrictions set forth in Section 6(c) with respect to the number of legal
counsel, the Company shall reimburse the Holders and each such controlling
person, promptly as such expenses are incurred and are due and payable, for
any reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (i) shall not apply to a Claim arising out of
or based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person
Exhibit 10.13
Page 9 of 16 Pages
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus were timely made available by the Company pursuant to Section 3(c);
(ii) shall not be available to the extent such Claim is based on (a) a failure
of the Holder to deliver or to cause to be delivered the prospectus made
available by the Company or (b) the Indemnified Person's use of an incorrect
prospectus despite being promptly advised in advance by the Company in writing
not to use such incorrect prospectus; and (iii) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the
prior written consent of the Company, which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Indemnified Person and shall
survive the resale of the Registrable Securities by the Holders pursuant to
the Registration Statement.
b. In connection with any Registration Statement in which a Holder is
participating, each such Holder agrees to severally and not jointly indemnify,
hold harmless and defend, to the same extent and in the same manner as is set
forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "Indemnified
Party"), against any Claim or Indemnified Damages to which any of them may
become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claim or Indemnified Damages arise out of or are based upon any Violation, in
each case to the extent, and only to the extent, that such Violation occurs in
reliance upon and in conformity with written information furnished to the
Company by such Holder expressly for use in connection with such Registration
Statement; and, subject to Section 6(c), such Holder will reimburse any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Holder, which consent shall not be unreasonably withheld; provided, further,
however, that the Holder shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds
to such Holder as a result of the sale of Registrable Securities pursuant to
such Registration Statement. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the resale of the Registrable Securities
by the Holders pursuant to the Registration Statement. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any preliminary prospectus
shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
were corrected on a timely basis in the prospectus, as then amended or
supplemented.
c. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a
Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this
Section 6, 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 control of the
defense thereof with counsel mutually satisfactory to the indemnifying party
and the Indemnified Person or the Indemnified Party, as the case may be;
provided, however, that an Indemnified Person or Indemnified Party shall have
the right to retain its own counsel with the fees and expenses to be paid by
the indemnifying party, if, in the reasonable opinion of counsel retained by
the indemnifying party, the representation by such counsel of the Indemnified
Person or Indemnified Party and the indemnifying party would be inappropriate
due to actual or potential differing interests between such Indemnified Person
or Indemnified Party and any other party represented by such counsel in such
proceeding. The indemnifying party shall pay for only one separate legal
counsel for the Indemnified Persons or the Indemnified Parties, as applicable,
and such counsel shall be selected by Holders holding a majority-in-interest
of the Registrable Securities included in the Registration Statement to which
the Claim relates, if the Holders are entitled to indemnification hereunder,
or the Company, if the Company is entitled to indemnification hereunder, as
applicable. The Indemnified Party or Indemnified Person shall cooperate fully
with the indemnifying party in connection with any negotiation or defense of
any such action or claim by the indemnifying party and shall furnish to the
Exhibit 10.13
Page 10 of 16 Pages
indemnifying party all information reasonably available to the Indemnified
Party or Indemnified Person which relates to such action or claim. The
indemnifying party shall keep the Indemnified Party or Indemnified Person
fully appraised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for
any settlement of any action, claim or proceeding effected without its written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the consent of the Indemnified Party or Indemnified Person, consent to entry
of any judgment or enter into any settlement or other compromise which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party or Indemnified Person of a release from
all liability in respect to such Claim. Following indemnification as provided
for hereunder, the indemnifying party shall be surrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties,
firms or corporations relating to the matter for which indemnification has
been made. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action.
d. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
e. The indemnity agreements contained herein shall be in addition to (i)
any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
Exhibit 10.13
Page 11 of 16 Pages
contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that: (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6; (ii) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of fraudulent misrepresentation; and (iii)
contribution by any seller of Registrable Securities shall be limited in
amount to the net amount of proceeds received by such seller from the sale of
such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Holders the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Holders to sell securities of the Company
to the public without registration ("Rule 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit the Company's obligations under Section 5(c) of the
Investment Agreement) and the filing of such reports and other documents is
required for the applicable provisions of Rule 144; and
c. furnish to the Investor, promptly upon request, (i) a written statement
by the Company that it has complied with the reporting requirements of Rule
144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably
requested to permit the Investor to sell such securities pursuant to Rule 144
without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall not be assignable.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions 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 Holders who hold two-thirds (2/3) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be
binding upon each Holder and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the Holders of the
Registrable Securities. No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any
of this Agreement unless the same consideration also is offered to all of the
parties to this Agreement.
Exhibit 10.13
Page 12 of 16 Pages
11. MISCELLANEOUS.
a. A Person is deemed to be a Holder of Registrable Securities whenever
such Person owns of record such Registrable Securities. If the Company
receives conflicting instructions, notices or elections from two or more
Persons with respect to the same Registrable Securities, the Company shall act
upon the basis of instructions, notice or election received from the
registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically or electronically generated and kept on file
by the sending party); or (iii) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
UTAH CLAY TECHNOLOGY, INC.
Dennis S. Engh, President
3985 South 2000 East
Salt Lake City, UT 84124
Telephone: 801-424-0223
Facsimile: 801-274-7804
And
Thomas J. Kenan, Esq.
Fuller, Tubb, Pomeroy & Stokes
201 Robert S. Kerr Avenue, Suite 1000
Oklahoma City, OK 73102
Telephone: 405-235-2575
Facsimile: 405-232-8384
E-mail: kenan@ftpslaw.com
If to the Investor:
At the address listed in the Questionnaire.
And
c/o Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telephone: 203-966-0566
Facsimile: 203-966-0363
Exhibit 10.13
Page 13 of 16 Pages
Each party shall provide five (5) business days prior notice to the other
party of any change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. The laws of the State of Utah shall govern all issues concerning the
relative rights of the Company and its stockholders. All other questions
shall be governed by and interpreted in accordance with the laws of the State
of New York without regard to the principles of conflict of laws. Each party
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. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. This Agreement and the Transaction Documents constitute the entire
agreement among the parties hereto with respect to the subject matter hereof
and thereof. There are no restrictions, promises, warranties or undertakings,
other than those set forth or referred to herein and therein.
f. This Agreement and the Transaction Documents supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
g. The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical counterparts,
each of which shall be deemed an original but all of which shall constitute
one and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the
Exhibit 10.13
Page 14 of 16 Pages
purposes of this Agreement and the consummation of the transactions
contemplated hereby.
j. All consents and other determinations to be made by the Holders pursuant
to this Agreement shall be made, unless otherwise specified in this Agreement,
by Holders holding a majority of the Registrable Securities.
k. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent and no rules of strict
construction will be applied against any party.
IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement
to be duly executed as of the day and year first above written.
UTAH CLAY TECHNOLOGY, INC.
By: ____________________________________
Name: Dennis S. Engh
Title: President
DUTCHESS PRIVATE EQUITIES FUND, L.P.
BY ITS GENERAL PARTNER DUTCHESS CAPITAL MANAGEMENT, LLC
By: ____________________________________
Name:
Title: A Managing Member
DRH INVESTMENT COMPANY, LLC
By: ____________________________________
Name:
Title:
Exhibit 10.13
Page 15 of 16 Pages
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
Date: __________
[TRANSFER AGENT]
Re: Utah Clay Technology, Inc.
Ladies and Gentlemen:
We are counsel to Utah Clay Technology, Inc., a Utah corporation (the
"Company"), and have represented the Company in connection with that certain
Investment Agreement (the "Investment Agreement") entered into by and among
the Company and _________________________ (the "Investor") pursuant to which
the Company has agreed to issue to the Investor shares of the Company's common
stock, $.001 par value per share (the "Common Stock") on the terms and
conditions set forth in the Investment Agreement. Pursuant to the Investment
Agreement, the Company also has entered into a Registration Rights Agreement
with the Investor (the "Registration Rights Agreement") pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement), including the shares of Common
Stock issued or issuable under the Investment Agreement, under the Securities
Act of 1933, as amended (the "1933 Act"). In connection with the Company's
obligations under the Registration Rights Agreement, on ____________ ___,
2001, the Company filed a Registration Statement on Form S- ___ (File No.
333-________) (the "Registration Statement") with the Securities and Exchange
Commission (the "SEC") relating to the Registrable Securities which names the
Investor as a selling shareholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC'
s staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [enter
the time of effectiveness] on [enter the date of effectiveness] and to the
best of our knowledge, after telephonic inquiry of a member of the SEC's
staff, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are pending before, or threatened by, the SEC and
the Registrable Securities are available for resale under the 1933 Act
pursuant to the Registration Statement.
Very truly yours,
[Company Counsel]
By: ____________________
cc: [Investor]
Exhibit 10.13
Page 16 of 16 Pages
Utah Clay Technology, Inc.
May Davis Group, Inc.
ESCROW AGREEMENT
With
FIRST UNION NATIONAL BANK
This Agreement is made and entered into as of November __, 2001 by
and among Utah Clay Technology, Inc. (the "Company"), May Davis Group, Inc.
(the "Placement Agent"), and FIRST UNION NATIONAL BANK, a national banking
association with a principal New York corporate trust office at First Union
National Bank, Corporate Trust Group, 12 East 49th Street, 37th Floor, New
York, NY 10017 (the "Escrow Agent").
WHEREAS, the Company proposes to offer for sale to investors through the
Placement Agent up to $200,000 of the Company's convertible debentures (the
"Debentures"). The Debentures are being offered through the Placement Agent at
various face amounts and up to $6,000,000 of the Company's Common Stock. The
Debentures are being offered through the Placement Agent pursuant to the terms
of a Subscription Agreement (the "Subscription Agreement") being entered into
between the Company and the buyers named therein, and the Common Stock is
being offered through the Placement Agent pursuant to the terms of an
Investment Agreement (the "Investment Agreement") being entered into between
the Company and one or more investors.
WHEREAS, the Debentures are being offered and sold through the Placement
Agent only to persons who have advised the Company that they are "accredited
investors" as defined under Regulation D promulgated under the Securities Act
of 1933, as amended.
WHEREAS, the offering of Debentures will terminate at the close of
business on November 26, 2001 (the "Termination Date"), unless otherwise
terminated or extended by mutual agreement of the Company and the Placement
Agent, and if acceptable subscriptions have not been received by the Company
on or before such date, no Debentures will be sold and all payments made by
subscribers of the Debentures ("Subscribers") will be refunded by the Escrow
Agent, without interest, upon written authorization of fund destination by the
Subscribers. The Placement Agent reserves the right, in its sole discretion,
to reject any subscription, in whole or in part, for the purchase of the
Debentures offered hereby. In the case of orders which are rejected or
partially rejected, the Escrow Agent will promptly refund, without interest,
the amount of the subscription price representing the entire rejected order or
that portion thereof which has not been accepted.
WHEREAS, the offering of Common Stock under the Investment Agreement will
terminate at the close of business twenty-four (24) calendar months after the
date the registration statement covering the Common Stock is declared
effective (the "Termination Date").
WHEREAS, with respect to (a) all subscription payments for Debentures
received from Subscribers and (b) all payments for the Common Stock received
from investors pursuant to the Investment Agreement, the Company proposes to
establish an escrow account with the Escrow Agent at the office of its
Corporate Trust Group, New York, NY.
WHEREAS, the Placement Agent intends to sell the Debentures as the
Company's placement agent on a "best efforts" basis up to $200,000, (the
"Maximum Offering").
WHEREAS, the Company and the Placement Agent desire to establish an
escrow account ("Escrow Fund Account") in which funds received from
Subscribers of Debentures will be deposited pending completion of the escrow
period. The Escrow Agent agrees to serve as escrow agent in accordance with
the terms and conditions set forth herein.
Exhibit 10.14
Page 1 of 6 Pages
NOW THEREFORE, the parties hereto agree as follows:
1. The Escrow Agent shall hold the Escrow Fund Account subject to the
terms of this Escrow Agreement and shall act in accordance with the
instructions contained in this Escrow Agreement.
2. Upon the written instructions of the Placement Agent and the
Company, the Escrow Agent shall deliver all or a part of the funds in the
Escrow Fund Account, at such times and in such manner as shall be set forth in
such instructions.
3. Unless otherwise instructed by the Placement Agent, any cash balances
held under this Escrow Agreement shall be invested in the Evergreen Cash
Management Treasury Money Market Fund # 765. All income earned from the
Escrow Fund Account shall be retained by the Escrow Agent and disbursed for
any fees, expenses or other amounts due to the Escrow Agent.
4. This Escrow Agreement shall terminate upon the final distribution
of all amounts in the Escrow Account and any income earned thereon.
5. (a) The Escrow Agent shall not in any way be bound or affected
by any notice of modification or cancellation of this Escrow Agreement unless
in writing signed by the Company and the Placement Agent, nor shall the Escrow
Agent be bound by any modification hereof unless the same shall be
satisfactory to it. The Escrow Agent shall be entitled to rely upon any
notice, certification, demand or other writing delivered to it hereunder by
the Company and/or the Placement Agent without being required to determine the
authenticity or the correctness of any facts stated therein, the propriety or
validity of the service thereof, or the jurisdiction of the court issuing any
judgment.
(b) The Escrow Agent may act in reliance upon any signature
believed by it to be genuine, and may assume that any person purporting to
give any notice or receipt, or make any statements in connection with the
provisions hereof has been duly authorized to do so.
(c) The Escrow Agent may act relative hereto in reliance upon
advice of counsel in reference to any matter connected herewith, and shall not
be liable for any mistake of fact or error or judgment, or for any acts or
omissions of any kind, unless caused by its willful misconduct or gross
negligence.
(d) The Escrow Agent may resign and be discharged of its
duties as Escrow Agent hereunder by giving ten (10) days written notice to the
Company and the Placement Agent. Such resignation shall take effect ten (10)
days after the giving of such notice, or upon receipt by the Escrow Agent of
an instrument of acceptance executed by a successor escrow agent and upon
delivery by the Escrow Agent to such successor of all of the escrowed
documents and funds or securities then held by it. If no successor escrow
agent is appointed in writing ten (10) days after giving such notice, the
Escrow Agent shall deliver all funds in the Escrow Account to the Company.
(e) The Company and the Placement Agent hereby agree to
jointly and severally, indemnify and hold the Escrow Agent harmless from any
loss, liability or expense, arising out of or related to this Escrow
Agreement, and for all costs and expenses, including the fees and expenses of
counsel, incurred in connection with this Escrow Agreement. The provisions of
this paragraph shall survive the termination of this Agreement.
(f) The duties and obligations of the Escrow Agent shall be
determined solely by the express provisions of this Agreement and the Escrow
Agent shall not be liable except for the performance of such duties and
obligations as are specifically set forth in this Escrow Agreement. The
Escrow Agent shall have no liability or duty to inquire into the terms and
conditions of any agreement to which it is not a party.
(g) If a controversy arises between one or more of the parties
hereto, or between any of the parties hereto and any person not a party
hereto, as to whether or not or to whom the Agent shall deliver the Escrow
Exhibit 10.14
Page 2 of 6 Pages
Account or any portion thereof or as to any other matter arising out of or
relating to this Agreement or the Escrow Account deposited hereunder, the
Escrow Agent shall not be required to determine same and need not make any
delivery of the funds in the Escrow Account or any portion thereof but may
retain such funds until the rights of the parties to the dispute shall have
finally been determined by agreement or by final order of court of competent
jurisdiction, provided, however, that the time of appeal of any such final
order has expired without an appeal having been made. The Escrow Agent shall
deliver the Escrow Account or any portion thereof within 15 days after the
Escrow Agent has received written notice of any such agreement or final order
(accompanied by an affidavit that the time for appeal has expired without an
appeal having been made). The Escrow Agent shall be entitled to assume that
no such controversy has arisen unless it has received a written notice that
such a controversy has arisen which refers specifically to this Agreement and
identifies by name and address the adverse claimants to the controversy. If a
controversy of the type referred to in this paragraph arises, the Escrow Agent
may, in its sole discretion but shall not be obligated to, commence
interpleader or similar actions or proceedings for determination of the
controversy.
(h) The Escrow Agent shall not be required to institute or
defend any action (including interpleader) or legal process involving any
matter referred to herein which in any manner affects it or its duties or
liabilities hereunder. In the event the Escrow Agent shall institute or
defend any such action or legal process, it shall do so only upon receiving
full indemnity in an amount and of such character as it shall require, against
any and all claims liabilities, judgments, attorney's fees and other expenses
of every kind in relation thereto, except in the case of its own willful
misconduct or gross negligence.
(i) In the event that the Escrow Agent receives or becomes
aware of conflicting demands or claims with respect to any funds, securities,
property or documents deposited or delivered in connection herewith, or the
parties disagree about the interpretation of this Agreement, or about the
rights and obligations, or the propriety, of any action contemplated by the
Escrow Agent hereunder, or if the Escrow Agent otherwise has any doubts as to
the proper disposition of funds or the execution of any of its duties
hereunder, the Escrow Agent shall have the right to discontinue any or all
further acts on its part until such conflict, disagreement or doubt is
resolved to its satisfaction. In addition, the Escrow Agent may, in its sole
discretion, file an action in interpleader in any court of competent
jurisdiction to resolve the dispute or uncertainty. The Placement Agent and
the Company agree, jointly and severally, to indemnify the Escrow Agent and
hold it harmless from and against all costs, including reasonable attorney's
fees and expenses incurred by it in connection with such action. In the event
that the Escrow Agent files an action in interpleader, it shall thereupon be
fully released and discharged from all further obligations to perform any and
all duties or obligations imposed upon it by this Agreement, other than
safekeeping of the assets in the Escrow Account, if not paid into Court.
6. Any notice, direction, request, instruction, legal process, or
other instrument to be given or served hereunder by any party to another shall
be in writing, shall be delivered personally or sent by certified mail, return
receipt requested, to the respective party or parties at the following
addresses, and shall be deemed to have been given when received.
IF TO THE COMPANY,
UTAH CLAY TECHNOLOGY, INC.
Dennis S. Engh, President
3985 South 2000 East
Salt Lake City, UT 84124
Telephone: 801-424-0223
Fax: 801-274-7804
Tax ID#
IF TO THE PLACEMENT AGENT,
Hunter Singer
May Davis Group, Inc.
c/o National Securities
120 Broadway, 28th Floor
New York, New York 10271
Tel.: 212-417-8118
Fax: 212-417-3627
Exhibit 10.14
Page 3 of 6 Pages
Tax ID#
If to the Escrow Agent:
First Union National Bank
Corporate Trust Group
12 East 49th Street, 37th Floor
New York, NY 10017
Tel: 212-451-2531
Fax: 212-451-2537
Any party may change its or his address by written notice to each of
the other parties.
7. The Escrow Agent's fee for acting under this Escrow Agreement shall
be set forth in a separate letter and agreed to by the party or parties
responsible for payment. The Escrow Agent's fees and expenses, including
counsel fees, shall be paid by the Company. The Escrow Agent is hereby given
a first priority lien on the Escrow Fund to protect, indemnify and reimburse
itself for all fees, costs, expenses and liabilities arising out of this
Escrow Agreement and the performance of its duties hereunder.
8. This Escrow Agreement shall be binding upon the parties hereto and
the Escrow Agent, and their respective successors, legal representatives and
assigns.
Utah Clay Technology, Inc. May Davis Group, Inc.
By: ________________________________ By:___________________________________
Dennis S. Engh, President
FIRST UNION NATIONAL BANK
Escrow Agent
Date: ______________________________ By: __________________________________
Exhibit 10.14
Page 4 of 6 Pages
FIRST UNION NATIONAL BANK
ESCROW AGENT
FEE SCHEDULE
I. Initial Set-Up Fee $ 500
II. Administration Fee $ 1,500
-up to 10 Subscribers/Holders,
thereafter, $50.00 per Subscriber/Holder
III. Per Closing Fee $ 500
-for each closing after the first closing-,
$ 500 per closing.
The above mentioned fees are basic charges and do not include out-of-pocket
expenses, which will be billed in addition to the regular charges as required.
Out-of-pocket expenses shall include, but are not limited to: telephone tolls,
stationery and postage expenses.
Unless otherwise directed, all Escrow Funds will be automatically invested
into the Evergreen Cash Management Treasury Money Market Fund, # 765.
The Initial Fee and Administration Fee are payable at the closing of this
transaction. Thereafter any out-of-pocket expenses will be billed upon the
termination of the Subscription Escrow Agreement.
Please execute one copy and return to my attention.
By:__________________________ Date:________________________
First Union National Bank
By:__________________________ Date:_________________________
Utah Clay Technology, Inc.
Dennis S. Engh, President
Exhibit 10.14
Page 5 of 6 Pages
First Union National Bank
Corporate Trust Group
12 East 49th Street, 37th Floor
New York, NY 10271
(212) 451-2531telephone
(212) 451-2537facsimile
Wiring Instructions US Mail/Overnight Courier
- -------------------------------------------------------------------------------
First Union National Bank First Union National Bank
Charlotte NC Corporate Trust Department
ABA# 053 000 219 12 East 49th Street, 37th Floor
Credit a/c New York, NY 10271
FFC:
Attn:
Exhibit 10.14
Page 6 of 6 Pages
FULLER, TUBB, POMEROY & STOKES
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
201 ROBERT S. KERR AVENUE, SUITE 1000
OKLAHOMA CITY, OK 73102
G. M. FULLER (1920-1999) TELEPHONE 405-235-2575
JERRY TUBB FACSIMILE 405-232-8384
DAVID POMEROY
TERRY STOKES
_____
OF COUNSEL:
MICHAEL A. BICKFORD
THOMAS J. KENAN
ROLAND TAGUE
BRADLEY D. AVEY
December 13, 2001
Dennis Engh, President
Utah Clay Technology, Inc.
3985 South 2000 East
Salt Lake City, UT 84124
Re: Utah Clay Technology, Inc.
Dear Mr. Engh:
The undersigned is named in the Form SB-2 Registration Statement of Utah
Clay Technology, Inc. (the "Company"), a Utah corporation, which registration
statement is to be filed with the Securities and Exchange Commission in
connection with the registration of 11,650,000 shares of Common Stock being
offered by nine selling security holders. The capacity in which the
undersigned is named in such SB-2 Registration Statement is that of counsel to
the Company and as a person who has given an opinion on the validity of the
securities being registered and upon other legal matters concerning the
registration or offering of the securities described therein.
The undersigned hereby consents to being named in such SB-2 Registration
Statement in the capacity therein described.
Sincerely,
/s/ Thomas J. Kenan
Thomas J. Kenan
Exhibit 23
Page 1 of 1 Page
KABANI & COMPANY, INC.
Certified Public Accountants
8700 Warner Avenue, Suite 200
Fountain Valley, California 92708
Telephone 714-849-1543
Fax 714-596-0303
e-mail: hamid@kabanico.com
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated April 3, 2001, with respect to
the financial statements of Utah Clay Technology, Inc. included in a Form SB-2
Registration Statement for the registration of 33,900,119 common shares.
/s/ Kabani & Company, Inc.
Kabani & Company, Inc.
Fountain Valley, California
December 25, 2001
Exhibit 23.1
Page 1 of 1 Page