SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-22049
S.W. LAM, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 62-1563911
------------------------ ----------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre
Man Lok St., Hunghom, Hong Kong
----------------------------------------
(Address of principal executive offices)
(852) 2766 3688
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(Registrant's Telephone Number, Including Area Code)
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(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
---- -----
As of June 1, 1998, 12,800,000 shares of Common Stock of the issuer were
outstanding.
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
--------------------------------
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1997 and
March 31, 1997............................................... 1
Consolidated Statements of Operations - For the three
months ended June 30, 1997 and June 30, 1996................. 2
Consolidated Statements of Cash Flows - For the three
months ended June 30, 1997 and June 30, 1996................. 3
Notes to Consolidated Financial Statements................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 7
SIGNATURES............................................................. 8
<PAGE>
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
<TABLE>
June 30, March 31,
ASSETS 1997 1997
------------ ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $5,088 $94
Accounts receivable, net of allowance for doubtful accounts 5,105 5,106
Inventory 10,926 8,509
Prepayments and other current assets 1,034 142
Due from a director 679 475
----------- ---------
Total Current Assets 22,832 14,326
Property, plant and equipment, and capital leases, net 10,219 7,083
----------- ---------
Total Assets $33,051 $21,409
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings $2,225 $2,275
Long-term bank loans, current portion 348 197
Capital lease obligations, current portion 222 229
Accounts payable 2,228 1,619
Deposits from customers 200 1,125
Accrued liabilities 273 267
Convertible short term loan 10,000 0
Income tax payable 6,008 5,846
----------- ---------
Total Current Liabilities 21,504 11,558
Long-term Liabilities
Long-term bank loans, non-current portion 1,290
1,467
Capital lease obligations, non current portion
186 260
Deferred taxation 284 284
----------- ---------
Total Liabilities 23,441 13,392
----------- ---------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares $.001 par value, issued
and outstanding 100,000 shares - Series A Preferred Stock 0 0
Common stock, authorized 25,000,000 shares $.001 par value, issued
and outstanding 12,800,000 at June 30, 1997 and March 31, 1997 13 13
Additional paid-in capital 847 846
Retained Earnings 8,597 7,008
Cumulative translation adjustments 153 150
----------- ---------
Total Stockholders' Equity 9,610 8,017
----------- ---------
Total liabilities and Stockholders' Equity $33,051 $21,409
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
Three Months Ended June 30,
1997 1996
----------- -----------
Revenue 13,927 6,880
Cost of sales and services: (10,327) (5,134)
------------ ------------
Gross Profit 3,600 1,746
Operating Expenses:
Selling, general and administrative expenses (1,409) (823)
------------ ------------
Income from Operations 2,191 923
Other Income (Expense): (461) 4
------------ ------------
Income before Provision for Income Taxes 1,730 927
Provision for Income Taxes (142) (319)
------------ ------------
Net Income $1,588 $608
============ ============
Earnings per Share:
Primary earning per share $0.12 $0.05
------------ ------------
Primary common shares outstanding 12,800,000 12,000,000
------------ ------------
The accompanying notes are an integral part of these consolidated
financial statements
2
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
<TABLE>
For the Three Months Ended
June 30, 1997 June 30, 1996
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $1,588 $608
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation of property, plant and equipment 614 277
(Write back of ) Provision for deferred income tax 0 0
Decrease (Increase) In Operating Assets:
Accounts receivable 1 (760)
Inventory (2,417) (993)
Prepayments and other current assets (892) (28)
Due from a Director (204) 732
Increase (Decrease) In Operating Liabilities:
Accounts payable 609 671
Deposits from customers (925) (478)
Accrued liabilities 6 (57)
Income taxes payable 162 312
-------------- ---------------
Net cash provided by (used in) operating activities (1,458) 284
-------------- ---------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (3,748) (427)
-------------- ---------------
Net cash used in investing activities (3,748) (427)
-------------- ---------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 0 0
Payment of Dividends 0 0
Net (decrease) increase in short term bank borrowings (49) 90
Net (decrease) increase in convertible short term loans 10,000 0
Additions of capital lease obligations 204 91
Repayment of capital element of capital lease obligations (285) (21)
Additions of long term bank loans 388 0
Repayment of long term bank loans (61) (93)
-------------- ---------------
Net cash provided by (used in) financing activities 10,197 67
-------------- ---------------
Effect of exchange rate changes on cash 3 (140)
-------------- ---------------
Net increase (decrease) in cash 4,994 (216)
Cash and Cash Equivalents, beginning of period 94 294
-------------- ---------------
Cash and Cash Equivalents, end of period $5,088 $28
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of S.W. Lam, Inc. and all of its wholly owned and majority owned
subsidiary companies. The March 31, 1997 balance sheet data was derived
from audited financial statements but does not include all disclosures
required by generally accepted accounting principles. The interim financial
statements and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's Form 10-K for the
year ended March 31, 1997. In the opinion of management, the interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for the interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full year
ending March 31, 1998.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
The translation of the financial statements of group companies into United
States Dollars is performed for balance sheet accounts using closing
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using average exchange rate during each reporting period.
The gains or losses resulting from translation are included in shareholders
equity separately as cumulative translation adjustments.
3. SIGNIFICANT EVENTS
a. Note Payable
In consideration for a loan of $10,000,000 from Phenomenal Limited, the
Company's wholly owned subsidiary Quality Prince Limited executed a
Convertible Note ("Note") in the principal amount of $10,000,000 with a
maturity of March 20, 1998. The Note may be converted into 2914 shares or
such other number of shares as will constitute not less than 29.14% of
Quality Prince Limited, and bears interest at the rate of three percent
compounded monthly, provided that if the Company is not in Default with
respect to any repayment obligation thereunder, then the rate shall be
reduced to 1.5% compounded monthly.
b. Warrants
As additional consideration for the loan of $10,000,000, the Company issued
Phenomenal Limited, warrants ("Warrants") to purchase 5,263,158 shares of
the Company's common stock, $.001 par value, at a purchase price of $2.19,
exercisable for a period commencing upon the date of the grant of the
Warrants and ending on the earlier of (i) May 31, 1998 or (ii) the closing
of a consolidation or merger of the Company (other than with its
wholly-owned subsidiary), or the transfer of all or substantially all of
the Company's assets to, another corporation (unless the owners of the
capital stock of the Company, prior to such transaction, continue to own a
majority of the capital stock of the surviving corporation). The Warrants
may only be exercised in the event that the Note is not converted pursuant
to its terms.
4. SUBSEQUENT EVENTS
On June 4, 1998, the Company (and its subsidiaries) and Phenomenal Limited
executed an agreement ("Deed Amendment") to modify the terms of the Note
and the Warrants. Pursuant to the Deed Amendment, Phenomenal Limited agreed
to an investment in the Company's subsidiary, Hang Fung Jewellery Company
Limited ("Hang Fung Jewellery") in the form of 5,263,788 redeemable
preference shares (the "Preferred Shares"), $.01 par value issued at a
premium of $1.8897726 as a substitution for the Note. The Preferred Shares
shall have no voting rights except with respect to matters which affect
their rights, matters of dissolution or the issuance of additional shares.
4
<PAGE>
The Deed Amendment evidences the Company's intent to form a new holding
company for the shares of Hang Fung Jewellery and Kai Hang Jewellery
Company Limited, (the "Restructuring") currently owned by Quality Prince
Limited; and to list the shares of the new company on The Stock Exchange of
Hong Kong Limited (the "Listing"). If the Restructuring and Listing occur
before March 20, 1999, the Preferred Shares must be redeemed and the
redemption amount of $10,000,000 plus any amount of dividend must be used
to subscribe for shares in the newly listed company. If the Restructuring
and Listing have not occurred by March 20, 1999, the Preferred Shares must
be redeemed as follows: (1) for the redemption amount of $10,000,000 plus a
dividend without any obligation to subscribe for shares in the new company;
or (2) if the Restructuring occurs before March 31, 1999, then for the
redemption amount of $10,000,000 plus a dividend, however all or part of
the aggregate redemption amount must be used to subscribe for shares in the
new holding company. If the Restructuring has not occurred before March 31,
1999, then the Preferred Shares may not be redeemed until the Restructuring
is completed not later than June 30, 1999, and all or part of the aggregate
redemption amount shall be used for subscription shares in the new company.
Regardless of whether the Restructuring has occurred, the Preferred Shares
may be redeemed at any time after June 30, 1999, provided that all, part or
none of the aggregate redemption amount is used for such subscription
shares.
4
<PAGE>
The Warrants, originally issued for an exercise period expired on May 31,
1998 have been extended by the Deed Amendment to May 31, 1999 or the date
of the Listing, whichever is earlier and the number of warrant shares was
increased. The Warrants may only be exercised as an alternative to
subscription shares in the new holding company; and likewise subscription
to shares in the new holding company is forfeited in the event that the
Warrants are exercised.
5
<PAGE>
Item 2. - Management's Discussion and Analysis Of Financial Condition
And Results Of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements.
Material Changes in Results Of Operations (US$,000)
The Company's total revenues increased $7,047 or 102.4% to $13,927, for the
three months ended June 30, 1997 from $6,880 for the three months ended June 30,
1996. This increase consisted of an increase in sales of $4,254 and subcontract
service income of $2,793. The increase in sales revenues is attributable to the
introduction of new products, additional marketing, and the celebration of the
return of Hong Kong to China. The increase in subcontract service income is
attributable to an increase in marketing, new technology and an increase in the
number of supply contracts. The cost of sales and services increased $5,193 or
101.1% to $10,327 for the three months ended June 30, 1997, from $5,134 for the
three months ended June 30, 1996. The increase resulted from the increase in
revenues during the quarter. The cost of sales and services as a percentage of
revenue decreased slightly to 74.2% for the three months ended June 30, 1997
from 74.6% for the three months ended June 30, 1996.
Selling, general and administrative expenses increased $586, or 71.2% for the
three months ended June 30, 1997 to $1,409 for the three months ended June 30,
1997, from $823 for the three months ended June 30, 1996. The increase in the
expenses is attributable to the increased sales volume marketing efforts of the
Company.
Other expense increased $465 to $461 for the three months ended June 30, 1997
from income of $4 for the three months ended June 30, 1996. This increase is
entirely attributable to an increase of $472 in interest expenses which was
marginally offset by $7 of interest income. The increase in interest expense is
attributable to the loan from Phenomenal Limited.
The provision for income taxes decreased by $177 to $142 for the three months
ended June 30, 1997 from $319 for the three months ended June 30, 1996. The tax
provisions as a percent of pre-tax income decreased to 8.2% for the three months
ended June 30, 1997 from 34.4% for the three months ended June 30, 1996. The
decrease resulted from an increase in revenue derived from territory of lower
tax rates.
Material Changes in Financial Condition, Liquidity and Capital Resources
(US$,000, except per share data)
The Company had a cash balance of $5,088 and working capital of $1,328 at June
30, 1997 compared to a cash balance of $94 and working capital of $2,768 at
March 31, 1997. The increase in cash is attributable to the receipt of proceeds
from a short term loan of $10,000. The decrease in working capital resulted from
the increase in short term loans.
For the three months ended June 30, 1997 net cash used in operating activities
amounted to $1,458 as compared to net cash provided by operating activities of
$284 for the corresponding period of the prior year. This change resulted from
an increase in inventory, prepaid expenses, loans to a director and a reduction
in deposits which was partially offset by increased earnings, depreciation,
accounts payable and income taxes payable.
Net cash used in investing activities amounted to $3,748 and $427 for the three
months ended June 30, 1997 and 1996 respectively. This increase resulted from
substantial additions to property, plant and equipment.
Net cash provided by financing activities amounted to $10,197 and $67 for the
three months ended June 30, 1997 and 1996, respectively. This increase is
attributable to the $10,000 short term loan from Phenomenal Limited.
At June 30, 1997, the Company had long term debt totaling $1,937 compared to
long term debt at March 31, 1997 of $1,834. This $103, or 5.6%, increase is
primarily attributable to an increase in the Company's bank loan.
In consideration for a loan of $10,000 from Phenomenal Limited, the Company's
wholly owned subsidiary Quality Prince Limited executed a Convertible Note
("Note") in the principal amount of $10,000 with a maturity of March 20, 1998.
The Note may be converted into 2914 shares or such other number of shares as
will constitute not less than 29.14% of Quality Prince Limited, and bears
interest at the rate of three percent compounded monthly, provided that if the
Company is not in Default with respect to any repayment obligation thereunder,
then the rate shall be reduced to 1.5% compounded monthly.
6
<PAGE>
As additional consideration for the loan of $10,000, the Company issued
Phenomenal Limited, warrants ("Warrants") to purchase 5,263,158 shares of the
Company's common stock, $.001 par value, at a purchase price of $2.19,
exercisable for a period commencing upon the date of the grant of the Warrants
and ending on the earlier of (i) May 31, 1998 or (ii) the closing of a
consolidation or merger of the Company (other than with its wholly-owned
subsidiary), or the transfer of all or substantially all of the Company's assets
to, another corporation (unless the owners of the capital stock of the Company,
prior to such transaction, continue to own a majority of the capital stock of
the surviving corporation). The Warrants may only be exercised in the event that
the Note is not converted pursuant to its terms.
On June 4, 1998, the Company (and its subsidiaries) and Phenomenal Limited
executed an agreement ("Deed Amendment") to modify the terms of the Note and the
Warrants. Pursuant to the Deed Amendment, Phenomenal Limited agreed to an
investment in the Company's subsidiary, Hang Fung Jewellery Company Limited
("Hang Fung Jewellery") in the form of 5,263,788 redeemable preference shares
(the "Preferred Shares"), $.01 par value issued at a premium of $1.8897726 as a
substitution for the Note. The Preferred Shares shall have no voting rights
except with respect to matters which affect their rights, matters of dissolution
or the issuance of additional shares.
The Deed Amendment evidences the Company's intent to form a new holding company
for the shares of Hang Fung Jewellery and Kai Hang Jewellery Company Limited,
(the "Restructuring") currently owned by Quality Prince Limited; and to list the
shares of the new company on The Stock Exchange of Hong Kong Limited (the
"Listing"). If the Restructuring and Listing occur before March 20, 1999, the
Preferred Shares must be redeemed and the redemption amount of $10,000 plus any
amount of dividend must be used to subscribe for shares in the newly listed
company. If the Restructuring and Listing have not occurred by March 20, 1999,
the Preferred Shares must be redeemed as follows: (1) for the redemption amount
of $10,000 plus a dividend without any obligation to subscribe for shares in the
new company; or (2) if the Restructuring occurs before March 31, 1999, then for
the redemption amount of $10,000 plus a dividend, however all or part of the
aggregate redemption amount must be used to subscribe for shares in the new
holding company. If the Restructuring has not occurred before March 31, 1999,
then the Preferred Shares may not be redeemed until the Restructuring is
completed not later than June 30, 1999, and all or part of the aggregate
redemption amount shall be used for subscription shares in the new company.
Regardless of whether the Restructuring has occurred, the Preferred Shares may
be redeemed at any time after June 30, 1999, provided that all, part or none of
the aggregate redemption amount is used for such subscription shares.
The Warrants, originally issued for an exercise period expired on May 31, 1998
have been extended by the Deed Amendment to May 31, 1999 or the date of the
Listing, whichever is earlier and the number of warrant shares was increased.
The Warrants may only be exercised as an alternative to subscription shares in
the new holding company; and likewise subscription to shares in the new holding
company is forfeited in the event that the Warrants are exercised.
Management believes that based on its current financial condition, the Company's
cash and working capital is sufficient to meet the Company's anticipated needs
for at least the next twelve months.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Warrant Agreement with Phenomenal Limited
10.2 Convertible Note with Phenomenal Limited
10.3 Deed Amendment
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
7
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
S.W. LAM, INC.
Dated: July 9, 1998 By: /s/ Lam Sai Wing
----------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: July 9, 1998
By: /s/ Chan Yam Fai
----------------------------
Chan Yam Fai, Jane
Chief Financial Officer
8
<PAGE>
Warrant to Purchase
5,263,158 shares of Common Stock
Void after May 31, 1998
S.W. LAM, INC.
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Phenomenal Limited, a corporation
organized under the laws of the British Virgin Islands ("Holder"), or registered
assigns, is entitled to purchase Five Million Two Hundred Sixty Three Thousand
One Hundred Fifty Eight (5,263,158), fully paid and nonassessable shares of
Common Stock ("Warrant Shares") of S.W. Lam, Inc., a corporation organized under
the laws of the State of Nevada, at a price of U.S. Two Dollars Nineteen Cents
(US$2.19) or ('Exercise Price"), subject to adjustments and all other terms and
conditions set forth in this Warrant.
1. Definitions. As used herein, the following terms, unless the context
otherwise requires, shall have the following meanings:
(a) "Common Shares" shall mean shares of the Company's presently or
subsequently authorized Common Stock (as described in the Articles of
Incorporation and Bylaws of the Company), and any stock into which such
Common Stock may hereafter be exchanged.
(b) "Company" shall mean S.W. Lam, Inc., a corporation organized under
the laws of the State of Nevada, and any corporation which shall succeed to
or assume the obligations of S.W. Lam, Inc. under this Warrant.
(c) "Date of Grant" shall mean May (___) 1997.
(d) "Exercise Date" shall mean the effective date of the delivery of
the Notice of Exercise pursuant to Sections 4 and 8 below.
(e) "Holder" shall mean any person who shall at the time be the
registered holder of Warrant.
(f) "Securities Act" shall mean the Securities Act of 1933, or any
similar federal statute, and the rules and regulations of the Securities
and Exchange Commission (or any other federal agency then administering the
Securities Act) under the legislation, all as they may be in effect at the
time.
1
<PAGE>
2. Issuance of Warrant and Private Offering.
(a) Consideration. This Warrant is issued in consideration of and as
an inducement for Holder to grant a loan of US$10 million with conversion
features to Quality Prince Ltd., a wholly owned subsidiary of the Company.
(b) Private Offering. (i) The sale and purchase of the Warrant
hereunder is exempt from the registration and prospectus delivery
requirements of the Securities Act. The Company has not sold any warrants
to anyone other than the Holder, and no other shares of the company has
been issued and sold by the Company within the six-month period immediately
prior to the date hereof. The Company agrees that it, or anyone acting on
its behalf, will neither offer any warrant so as to bring the issuance and
sale thereof within the provisions of Section 5 of the Securities Act, nor
offer any similar securities for issuance or sale to, or solicit any offer
to acquire any of the same from, or otherwise approach or negotiate with
respect thereto with, anyone if the sale of any warrant and any such
purposes of the Securities Act, including, without limitation, Regulation D
thereunder. In the case of the offer and sale of the Preferred Stock, no
form of general solicitation or general advertising was used by the
Company, including, but not limited to, advertisements, articles, notices
or other communications published in any newspaper, magazine or similar
medium or broadcast over television or radio, or any seminar or meeting
whose attendees were invited by any general solicitation or general
advertising.
3. Term. The purchase right represented by this Warrant is exercisable only
during the period commencing upon the Date of Grant and ending on the earlier of
(i) May 31, 1998 or (ii) the closing of a consolidation or merger of the Company
(other than with its wholly-owned subsidiary) with or into, or the transfer of
all or substantially all of the Company's assets to, another corporation (unless
the owners of the capital stock of the Company, prior to such transaction,
continue to own a majority of the capital stock of the surviving corporation).
4. Method of Exercise and Payment.
(a) Method of Exercise. Subject to Section 3 hereof and compliance
with all applicable securities laws, the purchase right represented by this
Warrant may be exercised, whole or in part and from time to time, by the
Holder in accordance with the exercise schedule attached hereto as Exhibit
B by (i) surrender of this Warrant and delivery of the Notice of Exercise
(the form of which is attached hereto as Exhibit A), duly executed, at the
principal office of the Company and (ii) payment to the Company of an
amount equal to the product of the then applicable Exercise Price
multiplied by the number of Common Shares then being purchased pursuant to
one of the payment methods permitted under Section 4(b) below.
(b) Method of Payment. Payment shall be made either (1) by check drawn
on a bank in good standing and for United States funds made payable to the
Company, or (2) by wire transfer of United States funds for the account of
the Company. Notwithstanding any provisions herein to the contrary, in lieu
of exercising this Warrant as set forth in the preceding sentence, the
Holder may elect to receive shares equal to the value (as determined below)
of this Warrant by surrender of this Warrant and delivery of the Notice of
Exercise (the form of which is attached hereto as Exhibit A), duly
executed, at the principal office of the Company, in which event the
Company shall issue to the Holder a number of shares of Common Shares
computed using the following formula:
2
<PAGE>
X = Y(A-B)
-----
A
Where X = the number of shares of Common Shares to be issued to the Holder,
Y = the number of shares of Common Shares under this Warrant which are
being exercised,
A = the fair market value of one share of the Company's Common Shares
(at the date of such calculation), and
B = the Exercise Price (as adjusted to the date of such calculation).
For purposes of the above calculation, fair market value of one share
of Common Shares shall be determined by the mutual agreement of the
Company's Board of Directors and Holder; provided, however, that where
there exists a public market for the Company's Common Shares at the time of
such exercise, fair market value shall mean the average over the preceding
twenty (20) trading days (or such fewer number of days as such public
market has existed) of the mean of the high closing bid and asked prices on
the over-the-counter market as reported by Nasdaq, or if then traded on a
national securities exchange or the Nasdaq National Market, the average
over the preceding twenty (20) trading days (or such fewer number of days
as the Common Shares have been so traded) of the mean of the high and low
prices on the principal national securities exchange or the National Market
on which it is so traded. Notwithstanding the foregoing, in the event the
Warrant is exercised in connection with the Company's initial public
offering of Common Stock, the fair market value per share shall be the per
share offering price to the public of the Company's initial public
offering.
(c) Delivery of Certificate. In the event of any exercise of the
purchase right represented by this Warrant, certificates for the Common
Shares so purchased shall be delivered to the Holder within thirty (30)
days of delivery of the Notice of Exercise and, unless this Warrant has
been fully exercised or has expired, a new warrant representing the portion
of the Common Shares with respect to which this Warrant shall not then have
been exercised shall also be issued to the Holder within such (30) day
period.
(d) No Fractional Shares. No fractional shares shall be issued in
connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the
fair market value per Share as of the date of exercise.
5. Adjustment of Exercise Price and Number of Shares. The number of
securities issuable upon the exercise of this Warrant and the Exercise Price
shall be subject to adjustment from time to time upon the occurrence of certain
events, as follows:
(a) Adjustment for Dividends in Stock . In case at any time or from
time to time on or after the date hereof the holders of the Common Shares
of the Company shall have received or, on or after the record date fixed
for the determination of eligible stockholders, shall have become entitled
to receive, without payment therefor, other or additional stock of the
Company by way of dividend then, and in each case, the Holder of this
Warrant shall, upon the exercise hereof, be entitled to receive, in
addition to the number of Common Shares receivable thereupon, and without
payment of any additional consideration therefor, the amount of such other
or additional stock of the Company which such Holder would hold on the date
of such exercise had it been the holder of record of such Common Shares on
the date hereof and had thereafter, during the period from the date hereof
to and including the date of such exercise, retained such shares and/or all
other additional stock receivable by it as aforesaid during such period,
giving effect to all adjustments called for during such period by
Subsections (b) and (d) of this Section 5.
3
<PAGE>
(b) Reorganization, Reclassification or Recapitalization of the
Company. In case of (1) a capital reorganization, reclassification or
recapitalization of the Company's capital stock (other than in the cases
referred to in of Section 5(c) hereof), (2) the Company's consolidation or
merger with or into another corporation in which the Company is not the
surviving entity, or a reverse triangular merger in which the Company is
the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted, by virtue of the
merger, into other property, whether in the form of securities, cash or
otherwise, or (3) the sale or transfer of the Company's property as an
entirety or substantially as an entirety, then, as part of such
reorganization, reclassification, recapitalization, merger, consolidation,
sale or transfer, lawful provision shall be made so that there shall
thereafter be deliverable upon the exercise of this Warrant or any portion
thereof (in lieu of or in addition to the number of Common Shares
theretofore deliverable, as appropriate), and without payment of any
additional consideration, the number of shares of stock or other securities
or property to which the holder of the number of Common Shares which would
otherwise have been deliverable upon the exercise of this Warrant or any
portion thereof at the time of such reorganization, reclassification,
recapitalization, consolidation, merger, sale or transfer would have been
entitled to receive in such reorganization, reclassification,
recapitalization, consolidation, merger, sale or transfer. Section 5(b)
shall apply to successive reorganizations, reclassifications,
recapitalizations, consolidations, mergers, sales and transfers and to the
stock or securities of any other corporation that are at the time
receivable upon the exercise of this Warrant. If the per-share
consideration payable to the Holder for shares of Common Shares in
connection with any transaction described in this Section 5(b) is in a form
other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
Directors.
(c) Reclassifications. If the Company changes any of the securities as
to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant
shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under
this Warrant immediately prior to such reclassification or other change and
the Exercise Price therefor shall be appropriately adjusted.
(d) Stock Splits and Reverse Stock Splits. If, at any time on or after
the date hereof, the Company shall subdivide its outstanding Common Shares
into a greater number of shares, the Exercise Price in effect immediately
prior to such subdivision shall thereby be proportionately reduced and the
number of shares receivable upon exercise of this Warrant shall thereby be
proportionately increased; and, conversely, if at any time on or after the
date hereof the outstanding number of Common Shares shall be combined into
a smaller number of shares, the Exercise Price in effect immediately prior
to such combination shall thereby be proportionately increased and the
number of shares receivable upon exercise of the Warrant shall be
proportionately decreased.
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(e) Adjustment of Exercise Price. If, during the period commencing on
the date that this Warrant becomes exercisable and terminating on May 31,
1998, the Company issues any Common Shares (as defined in the Articles of
Incorporation and Bylaws) for no consideration or for a consideration per
share less than the in effect immediately prior to the time of such
issuance, then the Exercise Price shall be reduced to the per share price
at which the said Common Shares were issued and sold.
(f) Liquidation; Dissolution. If the Company shall dissolve, liquidate
or wind up its affairs, the Holder shall have the right, but not the
obligation, to exercise this Warrant effective as of the date of such
dissolution, liquidation or winding up. If any such dissolution,
liquidation or winding up results in any cash distribution to the Holder in
excess of the aggregate Exercise Price for the Common Shares for which this
Warrant is exercised, then the Holder may, at its option, exercise this
Warrant without making payment of such aggregate Exercise Price and, in
such case, the Company shall, upon distribution to the Holder, consider
such aggregate Exercise Price to have been paid in full, and in making such
settlement to the Holder, shall deduct an amount equal to such aggregate
Exercise Price from the amount payable to the Holder.
(g) No Impairment. The Company shall not, by amendment of the
Company's Articles of Incorporation or Bylaws or through any
reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but shall at
all times in good faith assist in the carrying out of all the provisions of
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder against
impairment.
(h) Application. Except as otherwise provided herein, all sections of
this Section 5 are intended to operate independently of one another. If an
event occurs that requires the application of more than one section, all
applicable sections shall be given independent effect.
6. Notices of Record Date, Etc. In the event of (a) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution (the "Distribution"), (b) any capital reorganization or
reclassification of the stated capital of the Company or any consolidation or
merger of the Company with any other corporation or corporations (other than a
wholly-owned subsidiary), or the sale or distribution of all or substantially
all of the Company's property and assets (the "Reorganization Event"), or (c)
any proposed filing of a registration statement under the Act in connection with
a primary public offering of the Company's Common Stock (the "Registration
Event"), the Company will mail or cause to be mailed to the Holder a notice
specifying (i) the date of any such Distribution stating the amount and
character of such Distribution, (ii) the date on which any such Reorganization
Event or Registration Event is expected to become effective, and (iii) the time,
if any, that is to be fixed as to when the holders of record of the Company's
securities shall be entitled to exchange their shares of the Company's
securities for securities or other property deliverable upon such Reorganization
Event. Such notice shall be mailed at least thirty (30) days prior to the date
therein specified.
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7. Rights of Shareholders. No Holder shall be entitled to vote or receive
dividends or be deemed the holder of Common Shares or any other securities of
the Company which may at any time be issuable on the exercise of this Warrant
for any purpose, nor shall anything contained herein be construed to confer upon
the Holder, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, consolidation, merger, transfer of assets or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Common Shares issuable upon exercise hereof shall have become
deliverable, as provided herein.
8. Replacement of Warrants. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and amount to the Company or, in the
case of mutilation, on surrender and cancellation of Warrant, the Company at its
expense shall execute and deliver, in lieu of this Warrant, a new warrant or
like tenor.
9. Exchange of Warrant. Subject to the other provisions of this Warrant, on
surrender of Warrant for exchange, properly endorsed and subject to the
provisions of this Warrant with respect to compliance with applicable securities
laws, the Company at its expense shall issue to or on the order of the Holder a
new warrant or warrants of like tenor, in the name of the Holder or as the
Holder (on payment by the Holder of any applicable transfer taxes) may direct,
for the number of Common Shares issuable upon exercise thereof.
10. Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be delivered personally, mailed by
certified or registered mail, postage prepaid, return receipt requested, as
delivered by facsimile (sent to 852-2877-6612 for the Holder, and sent to
852-2362-3034, for the Company) or delivered by courier or overnight delivery,
addressed (a) if to Holder, at Suite 3322, 33rd Floor, Two Pacific Place, 88
Queensway, Hong Kong or at such other address as such Holder shall have
furnished to the Company in writing, (b) if to the Company, at Units 25-32,
2/F., Block B, Focal industrial Centre, 21 Man Lok Street, Hunghom, Kowloon,
Hong Kong, or at such other address as the Company shall have furnished to the
Holder in writing. Notices that are mailed shall be deemed received upon
personal delivery or confirmation of facsimile receipt or, if earlier, three (3)
days after deposit in the mail.
11. Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
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12. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Nevada, without regard to its conflict
of law principles.
13. Attorneys' Fees. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled as determined by such court, equity or arbitration proceeding.
Dated: May , 1997
---------
S.W. Lam, Inc.
By:
-----------------------------
Sai Wing Lam, President
-----------------------------
Chan Yam Fai, Jane, Secretary
HOLDER:
- -----------------------------
Phenomenal Limited
By:
--------------------------
Wong Kwong Chi, Director
Address:
Suite 3322, 33rd Floor,
Two Pacific Place,
88 Queensway,
Hong Kong.
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<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: S.W. Lam, Inc.:
1. The undersigned Holder of the attached original, executed Common Stock
Purchase Warrant hereby elects to exercise its purchase right under such Warrant
with respect to Common Shares, as defined in the Warrant, of S.W. Lam, Inc..
2. The undersigned Holder elects to pay the aggregate Exercise Price for
such Common Shares (the "Exercise Shares") in the following manner:
[ ] by the enclosed check drawn on a bank and for United States funds
made payable to the Company in the amount of $ ; or
[ ] by wire transfer of United States funds to the account of the
Company in the amount of $ , which transfer has been made before or
simultaneously with the delivery of Notice pursuant to the
instructions of the Company.
[ ] noncash exercise in accordance with Section 4(b) of the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of Common Shares in the name of the undersigned or in such
other names as is specified below;
Name:
-----------------------------
Address:
-----------------------------
-----------------------------
HOLDER:
---------------------------
By:
------------------------
Title:
------------------------
Date:
--------------------
<PAGE>
EXHIBIT B
EXERCISE SCHEDULE
100% of the Common Shares is exercisable as of the Date of Grant.
SCHEDULE 2
CONVERTIBLE NOTE CERTIFICATE
QUALITY PRINCE LIMITED
Incorporated in the British Virgin Islands.
Registered Office P.O. Box 3444
Road Town
Tortola
British Virgin Islands
THIS IS TO CERTIFY THAT the total face value of the convertible note ("the
Note") in respect of which this Certificate is issued is the amount specified
below ("Face Value") and that the Noteholder named below is registered as the
holder of the Note having such total face value bearing interest at the rate
specified below. At the issue of this Certificate the Note is paid in full.
Note Holder: Phenomenal Limited
Address: P.O. Box 957, Offshore Incorporations Centre
Road Town, Tortola, British Virgin Islands
Face Value: United States Dollars $10,000,000
Conversion Shares: 2914 Shares or such other number of shares that will
constitute not less than 29.14% of the total issued share
capital of Quality Prince Limited.
Date of Issue:
Interest Rate: Three per cent (3%) per month compounding monthly provided
that in the event the Company shall not default with respect
to any repayment obligation with respect to the Principal
or obligation in respect of payment of interest the rate
shall be reduced to one and one half per cent (1.5%) per
month.
The Note comprised in this Certificate are issued with and subject to the
Conditions attached hereto. Interest shall be calculated and paid in accordance
with the Conditions.
DATED:
- ------------------------------------------
Signed by Director
----------------------
for and on behalf of
QUALITY PRINCE LIMITED
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This Certificate must be delivered to QUALITY PRINCE LIMITED before any Transfer
will be registered or any new Certificate or Certificates issued in exchange or
repayment.
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<PAGE>
CONDITIONS
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
(a) Unless the contrary intention appears:
"Business Day" means a day on which banks are open for banking
business in Hong Kong;
"The Company" means Quality Prince Limited;
"Conversion Date" means, in relation to the Note, the date with effect
from which the Note is converted into Ordinary Shares following
receipt by the Company of a notice given pursuant to and in accordance
with the provisions of Condition 3;
"Directors" means the Directors of the Company;
"Group" means the Company and its subsidiaries and associated
companies including without limitation Hang Fung Jewellery Company
Limited, Kai Hang Jewellery Co, Limited and Beijing Huarong Jewellery
Co Ltd.
"Investment Agreement" means the agreement of even date between the
Company, S.W. Lam Inc. Lam Sai Wing, Chan Yam Fai, Jane and Phenomenal
Limited.
"Maturity" and "Maturity Date" means the date ascertained pursuant to
Condition 6.
"Note Certificate" means the certificate evidencing the Note in
respect of which the Noteholder is registered;
"Noteholder" and "holder of notes" means in relation to the Note at
any time, the person registered as the holder of the Note in the
Register;
"Ordinary Shares" means fully paid ordinary shares of $1.00 each in
the capital of the Company;
"Register" shall mean the register to be maintained pursuant to
Condition 10;
"Securities" includes shares, debentures, debenture stock, notes and
any options to subscribe for the same;
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<PAGE>
(b) all references to statutory provisions (including acts, rules,
regulations, orders, by-laws and ordinances) include any modification
or re-enactment of such statutory provisions (whether before, on or
after the date of this document) for the time being in force;
(c) where in these conditions a period of time dating from a given day,
act or event is specified or allowed for any purpose, the time shall
be reckoned exclusive of that day or of the day on which the act or
event occurred but inclusive of the day on which that period expires;
(d) words importing the singular or plural include the plural and singular
respectively;
(e) words importing any gender include every gender;
(f) all dollar ($) amounts are in United States currency;
(g) words denoting persons include bodies and corporations;
(h) a reference to a party or parties means the named parties to this
document and includes that party's executors, administrators and
permitted assigns, or if a company, its successors and permitted
assigns;
(i) clause headings do not affect the interpretation of this document;
(j) where a word or phrase is given a particular meaning in this document,
other parts of speech and grammatical forms of that word or phrase
have a corresponding meaning;
(k) a reference to a Condition, Schedule or Annexure is a reference to a
Clause or Schedule of or Annexure to this document; and
(l) every agreement or undertaking expressed or implied by which more than
one person is bound binds those persons and any two or more of them
jointly and each of them severally.
2 GENERAL TERMS OF ISSUE
2.1 The Note shall:
(a) have a principal amount of the amount specified as the face value in
the Note Certificate;
(b) be paid for in full on application;
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<PAGE>
(c) be convertible into the number of Ordinary Shares specified in the
Note Certificate in the manner and at the times provided by Condition
3 and, subject to Condition 3;
(d) entitle the Noteholder to interest at the rate specified in the Note
Certificate calculated daily on the principal amount of each Note,
such interest payable in full on the Maturity Date;
(e) be transferable; and
(f) be deemed beneficially owned by the person registered as the holder
thereof.
3. GENERAL RIGHTS OF CONVERSION
3.1 The Note shall be convertible into Ordinary Shares by written notice (in
the form if any annexed to this Note Certificate or in such other form as
the Company may accept acting reasonably) given by the Noteholder to the
Company requiring the Company to convert. Such notice may be given at any
time after the date of issue and on or prior to the Maturity Date.
The notice shall be accompanied by the Note Certificate. The Noteholder
shall have the right to nominate a nominee or nominees to be allotted
shares upon the conversion of the Note in addition to or in substitution
for the Noteholder in such proportions as the Noteholder shall determine.
3.2 The Noteholder may in respect of any notice under this Condition 3 at its
option convert only part of the Face Value of the Note into Ordinary Shares
of the Company. The number of Ordinary Shares that shall be allotted upon
such exercise shall be a proportion of the total number of shares that
would be allotted upon the exercise of the entire Face Value of the Note
Certificate identical to that proportion that the amount converted
represents to the total Face Value of this Certificate. Upon any partial
exercise of the Note the Company shall issue to the Noteholder a new Note
Certificate for the balance of the Note then outstanding on identical terms
mutatis mutandis to this Note Certificate (provided that the Maturity Date
shall be the Maturity Date specified in the original Note Certificate).
3.3 A notice given pursuant to this Condition 3 shall be irrevocable.
4. ALLOTMENT OF SHARES
4.1 The Company shall allot the Ordinary Shares to which the Noteholder is
entitled upon conversion of the Note pursuant to Condition 3 within 3
Business Days of the Conversion Date to the Noteholder and/or its nominee
as the case may be and any such allotment shall have effect and be deemed
to have been made on that Conversion Date.
4.2 The Company shall not later than 3 Business days after allotment in the
case of conversion pursuant to Condition 3 forward free of charge to the
Noteholder (or to such other person as such Noteholder may in writing
request) a Certificate for the number of Ordinary Shares allotted on
conversion of the Note (and where applicable a substitute Note Certificate
for the balance of the Note that was not converted).
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<PAGE>
4.3 Subject to the preceding paragraphs of this Condition, Ordinary Shares
allotted upon conversion of the Note shall rank in all respects pari passu
and form one class with the Ordinary Shares on issue at the Conversion
Date.
5. COVENANTS BY THE COMPANY
5.1 The Company hereby covenants with each Noteholder that it will until the
Noteholder converts the Note into Ordinary Shares, or until the date the
whole of the Principal and any interest accruing is repaid to the
Noteholder, whichever is the later date:
(a) execute and do all such assurances and things as shall be reasonably
necessary for conferring the full benefit of these Conditions upon
each Noteholder;
(b) use its best endeavors to carry on and conduct the business of the
Group in a proper and efficient manner and without limitation at all
times preserve and keep in full force and effect its corporate
existence and rights and franchises material to the business of the
Group;
(c) keep or cause to be kept proper books of account and to enter therein
full particulars of all dealings and transactions in relation to the
business of the Group and all of its subsidiaries and to make such
records available according to these Conditions;
(d) maintain or cause to be maintained in good repair and working order
and condition all assets of the Group used or useful in the business
of the Group and form time to time make or cause to be made all
appropriate repairs renewals and replacements of those assets;
adequately insure and keep insured with insurers or underwriters of
good repute all of the property and assets of the Group as may be of
an insurable nature against all risks properly insurable against in
the ordinary course of business and as may from time to time be
prudent having regard to the nature and extent of the business of the
Group and to duly pay all premiums and other sums payable in respect
of such insurances;
(e) duly comply with all statutory requirements with respect to the filing
of reports, accounts and statements and the furnishing thereof to such
statutory or other bodies or persons required or entitled by law to
receive the same by the members of the Group, and to keep open all
registers maintained by the Company and the other members of the Group
for inspection and all other like matters;
(f) ensure that:
(i) the Company will at all times have sufficient authorized but
un-issued ordinary capital to permit Noteholders to exercise the
right of conversion into Ordinary Shares;
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<PAGE>
(ii) the voting and other rights attached to the Ordinary Shares shall
not be altered in a manner which is prejudicial to the interests
of Noteholders;
(iii)it will observe and perform all the covenants, conditions and
agreements contained or implied in any mortgage, charge or other
security given by the Company except where the same is waived;
(iv) it will duly and punctually observe and perform all the
covenants, terms, conditions and obligations imposed upon it
pursuant to these Conditions;
(g) provide to each Noteholder a copy of all notices reports, statement
and other material as and when provided to the members of the Company;
(h) duly comply with all laws applicable to the Company and ensure such
compliance by all subsidiaries of the Company;
(i) give timely notice to each Noteholder of any actual or potential
breach of any of these Conditions;
(j) attend to the due payment of all taxation liabilities of and duly
assessed to or otherwise payable by the Company or any other member of
the Group and, in respect thereof, to make timely provision for all
such payments;
(k) not without the prior consent of the Noteholder:
(i) alter the financial year of the Company;
(ii) suffer or allow to exist in favour of any person, any security
interest ranking for payment in the event of a winding up of the
Company before the Noteholder;
(iii)grant or agree to grant any person a charge, mortgage, lien or
other encumbrance (or similar interest) over any of the Company's
assets or undertakings or permit or agree to permit the grant to
any person of a charge, mortgage or other encumbrance (or similar
interest) over any assets or undertaking of a Group member; or
(iv) otherwise permit any creditor to be paid in preference to the
payment of interest to the Noteholder or capital upon redemption
of the Note as the case may require.
(vi) issue any Ordinary Shares or other Securities or permit any
member of the Group to issue any Ordinary Shares or other
Securities.
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<PAGE>
6. MATURITY AND REPAYMENT
6.1 The Maturity Date of the Notes shall be the expiration of ten months from
the Date of Issue specified in the Note Certificate. Upon the Maturity Date
the Company shall repay the principal amount of the Note together with all
interest accruing in respect of the Note at that date.
6.2 In the event that the Company shall default with respect to the repayment
of the principal amount of the Note and/or the interest accruing in respect
thereto the Company shall immediately on default be liable for interest at
the rate specified in the Note Certificate calculated from the date of
drawdown and payable monthly on the first Business Day of each calender
month. The Noteholder's entitlement to such interest shall be in addition
to any other remedy of the Noteholder whether under the terms of these
Conditions or otherwise.
7. RIGHT TO SEEK WINDING UP ORDER
7.1 If the Company fails to make payment of principal and/or interest in
respect of the Note for a period of 7 days or more after the due date for
payment (and has failed to make such payment within a further 7 days of
receipt of a written notice from the Noteholder requiring payment) any
Noteholder may without prejudice to any other remedy institute proceedings
in the courts of Hong Kong for the winding up of the Company.
8. NOTE DUE ON DEFAULT
8.1 Notwithstanding any other Condition but subject to the proviso hereafter,
the face value of the Note shall at the option of the Noteholder become due
and payable in cash forthwith on the occurrence of any one or more of the
following events:
(a) if the Company does not repay or otherwise redeem any Note on the date
upon which such repayment or redemption becomes due in accordance with
these Conditions;
(b) if the Company does not pay any interest to the Noteholder or other
moneys (except principal moneys and premiums) which become due and
payable by the Company pursuant to these Conditions, in the case of
interest, within 2 Business Days after it becomes due for payment and
in the case of any such other moneys, within 2 Business Days after
demand therefor by the Noteholder;
(c) if the Company or any member of the Group shall default (as principal
or as guarantor or other surety) in the payment of any principal of or
premium, if any, or interest on any indebtedness in respect of
borrowed money (other than the Note), or in the performance of or
compliance with any term of any evidence of such indebtedness or of
any mortgage, indenture, or other agreement relating to such
indebtedness, if that default gives to the holder of the obligation
the right to accelerate the indebtedness;
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<PAGE>
(d) if any action is taken for the winding up of the Company or any member
of the Group (including the appointment of a provisional liquidator)
and that action is not stayed or dismissed within 30 days;
(e) if an order is made for the winding up, or dissolution without winding
up, of the Company or any member of the Group;
(f) if an effective resolution is passed for the winding up of the Company
or any member of the Group unless the winding up is for the purpose of
reconstruction or amalgamation and the scheme of reconstruction or
amalgamation with or without modification has the prior consent of the
holder of the Note;
(g) if any distress or execution is levied or enforced upon or against any
of the assets or property of the Company or any member of the Group
for a sum or sums exceeding in aggregate Hong Kong dollars $3,000 or
its equivalent in any other currency;
(h) if a controller, receiver or receiver and manager is appointed of or
an encumbrancer takes possession of the undertaking of the Company or
any member of the Group or any part thereof;
(i) if the Company or any member of the Group stops payment of its debts
generally;
(j) if the Company or any member of the Group ceases or threatens to cease
to carry on its business;
(k) if any Company or any member of the Group enters into any arrangement
or composition with creditors generally;
(l) if without the prior consent in writing of the Noteholder the Company
or any member of the Group pays any dividend while any interest on the
Note has become payable and remains unpaid;
(m) if the Company shall fail or cease to observe or perform any one or
more of its covenants or undertakings in Condition 5;
(n) if any written representation or representation made by or on behalf
of the Company in the Investment Agreement or otherwise in connection
with the transactions contemplated in the Investment Agreement shall
prove to have been false or incorrect in any material respect on the
date on which it has been made; or
(o) if the Company is in breach of any other of these Conditions or any
term of the Investment Agreement (save for the obligations specified
in this Condition) and such default is not remedied within seven (7)
days of notice in writing being given by the Noteholder to the
Company.
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9. CONDITIONS BINDING ON PARTIES AND SUCCESSORS
These conditions shall be binding upon the Company, the Noteholders and all
persons claiming through or under them respectively.
10. REGISTER
10.1 The Company shall maintain a Register of Noteholders and shall enter
therein all transactions and details required by these Conditions to be
entered therein.
10.2 The Register shall be maintained at the Registered Office of the Company or
at such other location as the Company may select and notify to the
Noteholders.
11. TRANSFER OF NOTE
11.1 Subject to Condition 11.4, the Noteholder will be entitled to transfer the
Note or any part thereof by lodging with the Company at the address of the
Register on which the Noteholder's Note are for the time being recorded a
proper instrument of transfer duly stamped if necessary, executed by the
transferor and executed by the transferee except where execution by the
transferee is rendered unnecessary by the statute. No fee will be charged
for the registration of a transfer.
11.2 The transferor shall be deemed to remain the owner of the Note until the
name of the transferee is entered in the Register in respect thereof.
11.3 Subject to any applicable law relating thereto, an instrument of transfer
shall be in a form acceptable to the Directors generally and shall be
forwarded for registration to the address of the Register on which the
Noteholder's Note are for the time being recorded accompanied by the
certificate for the Note to be transferred and if satisfied with such
evidence the Company will register the transfer and will recognize the
transferee as the Noteholder entitled to the amount of the Note comprised
in the transfer.
11.4 Any person becoming entitled to Notes in consequence of the death or
bankruptcy of any holder of the Note may upon producing such evidence that
the Noteholder sustains the character in respect of which he proposes to
act under this Condition or of the Noteholder's title as the Directors
shall think sufficient be registered himself as the holder of the Note or
subject to the preceding Conditions as to transfer, may transfer the Note.
12. PAYMENT TO NOTEHOLDERS
12.1 Any interest principal or other moneys payable on or in respect of the Note
shall be paid:
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(i) cashier's order sent through the post to the registered address of the
Noteholder or such other address as the Noteholder shall notify; or
(ii) by deposit to such account with any bank as the Noteholder by written
notice to the Company may direct.
13. CANCELLATION PRODUCTION AND REPLACEMENT OF NOTE CERTIFICATES
13.1 If any Note Certificate issued pursuant to these Conditions be worn out or
defaced then upon production thereof to the Directors they may cancel the
same and may issue a new Note Certificate in lieu thereof.
13.2 If a Note Certificate is lost or destroyed then upon proof thereof to the
satisfaction of the Directors and in case of a lost Note Certificate or in
default of proof of destruction of a Note Certificate on such terms as to
evidence and indemnity and the payment of out-of-pocket expenses of the
Company in investigating evidence as the Directors may deem adequate being
given, a new Note Certificate in lieu thereof shall be given to the persons
entitled to such lost or destroyed Note Certificate. An entry as to the
issue of the new Note Certificate and indemnity (if any) shall be made in
the Register.
13.3 Any stamp duty payable on a new Note Certificate issued under this
Condition 13 shall be paid by the Noteholder.
11
<PAGE>
SCHEDULE
----------
NOTICE OF EXERCISE OF RIGHT TO CONVERT
I/We being the Registered Holders of the Note in the Issue give notice to
convert into fully paid Ordinary Shares the whole/only [amount] of the Note in
accordance with the Conditions constituting the Note.
*I/We accept the fully paid Ordinary Shares to be issued pursuant to this Notice
subject to the Memorandum and Articles of Association of the Issuer. OR
====
*I/We nominate the fully paid Ordinary Shares to be issued pursuant to the
Notice shall be held by the following parties in the following proportions
subject to the Memorandum and Articles of Association of the Issuer.
[Name of Nominee/s and Number of Shares]
I/We agree to accept the fully paid Ordinary Shares to be registered in my/our
name(s) and authorize the entry of my/our name(s) in the Register of Members in
respect of the shares to be allotted to us and the dispatch of a certificate for
those Ordinary Shares to me/us.
I/We agree to be bound by the memorandum and Articles of Association of the
Issuer.
[Authorised signatory of Noteholder]
Dated this day of 19
NOTES
1. This Notice will not be effective unless given pursuant to the terms of the
Conditions.
2. Where the Noteholder is incorporated the common seal and attestation clause
is to be affixed in accordance with its constituent documents and duly
attested.
3. If this Notice is signed by an Attorney or other authorised person/s the
relevant Power of Attorney or other documentary evidence of authority if
not already produced and noted by the Company must be forwarded with this
Notice for notation and return.
S.W. LAM, INC.
QUALITY PRINCE LTD.
PHENOMENAL LIMITED
LAM SAI WING
CHAN YAM FAI, JANE
HANG FUNG GOLD TECHNOLOGY LIMITED
HANG FUNG JEWELLERY COMPANY LIMITED
SOYCUE LIMITED
-----------------------------------------
DEED OF AMENDMENT
-----------------------------------------
Jones, Day, Reavis & Pogue
29th Floor, Entertainment Building
30 Queen's Road Central
Hong Kong
Telephone: (852) 2526-6895
Facsimile: (852) 2868-5871
<PAGE>
THIS DEED is made on the day of June 1998.
-------------
AMONG
(1) S.W. LAM, INC. a company incorporated in Nevada, United States of America
with its registered office at Corporation Trust Company, One East Street,
Reno, Nevada 89501, U.S.A. ("S.W. Lam, Inc.");
(2) QUALITY PRINCE LTD. a British Virgin Islands corporation with its
registered office at P.O. Box 3444, Road Town, Tortola, British Virgin
Islands ("Quality Prince");
(3) PHENOMENAL LIMITED a British Virgin Islands corporation with its registered
office at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola,
British Virgin Islands ("Phenomenal");
(4) LAM SAI WING [HKID: D526157(1)] at Units 25-32, 2nd Floor, Block B, Focal
Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong ("Mr.
Lam");
(5) CHAN YAM FAI, JANE [HKID: G293329(1)] at Units 25-32, 2nd Floor, Block B,
Focal Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong
("Mrs Lam"; collectively with Mr. Lam, "the Lams"); and
(6) HANG FUNG GOLD TECHNOLOGY LIMITED a company incorporated in Bermuda with
its registered office at Clarendon House, 2 Church Street, Hamilton, HM 11,
Bermuda ("List Co").
(7) HANG FUNG JEWELLERY COMPANY LIMITED, a company incorporated in Hong Kong
with its registered office at Units 25-32, 2nd Floor, Block B, Focal
Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon ("HF Jewellery").
(8) SOYCUE LIMITED, a company incorporated in the British Virgin Islands with
its registered office at P. O. Box 71, Craigmuir Chambers, Road Town,
Tortola, British Virgin Islands ("Soycue").
RECITALS
A. Quality Prince is the holding company of the group of companies known as
the Hang Fung Group.
B. HF Jewellery, further details of which are specified in Schedule 6, is a
wholly owned subsidiary of Quality Prince.
C. The parties (apart from HF Jewellery, Soycue and List Co) entered into an
agreement entitled "Investment Agreement for a Warrant to Purchase
5,263,158 shares of Common Stock of S.W. Lam, Inc. and a US$ 10,000,000
Convertible Note Certificate of Quality Prince Ltd." on May 20, 1997 in
Hong Kong (the "Original Agreement") for the purpose of providing by
Phenomenal financing in the amount of US$10,000,000 to the Hang Fung Group,
as that term is defined in the Original Agreement. A copy of the Original
Agreement is attached to this Deed as Schedule 1.
-1-
<PAGE>
D. Pursuant to Section 6 of the Convertible Note Certificate of Quality Prince
(the "Note"), which was issued under and formed an integral part of the
Original Agreement, the amount due under the Note, i.e. the principal
amount of US$10,000,000 and all the interest accruing, shall be due and
repayable on the expiration of ten months from the date of issue, namely on
March 20, 1998, unless the holder of the Note has exercised its right of
conversion pursuant to Section 3 of the Note. Phenomenal, as the holder of
the Note, has not exercised such right.
E. To extend the financing provided to the Hang Fung Group by Phenomenal under
the Original Agreement, the parties have agreed that the principal amount
advanced by Phenomenal pursuant to the Note shall be restructured and
capitalized into redeemable preference shares in the capital of HF
Jewellery, that Phenomenal shall waive its right to obtain all interest
accrued under the Note, and that certain modifications to the Original
Agreement shall be adopted under the terms and conditions as further
described below.
F. The parties also wish to document their intention to list the Hang Fung
Group on The Stock Exchange of Hong Kong Limited and to specify certain
circumstances under which Phenomenal or its nominee may subscribe for
shares in List Co.
G. The parties began negotiating the terms and conditions for the
restructuring before March 20, 1998 but were not able to complete the
restructuring as of March 20, 1998. The parties executed extension
agreements to extend the Original Agreement until June ___, 1998 to allow
time for the preparation and execution of documents necessary for the
implementation of the restructuring.
H. Section 9.09 of the Original Agreement provides that any term of the
Original Agreement may be amended only by a written instrument signed by
the party against whom enforcement of any such amendment is sought.
I. The parties desire to amend the Original Agreement to carry out the
purposes of Recitals E and F above by and in accordance with this Deed.
NOW THIS DEED WITNESSES:
ARTICLE 1. GENERAL
Section 1.1 Effectiveness.
This Deed shall be effective as of the date hereof ("Effective Date").
-2-
<PAGE>
Section 1.2 Definitions.
For purposes of this Deed, the following words and phrases shall have the
following meanings:
(a) "Aggregate Redemption Amount" has the meaning specified in Section 7.4.
(b) "Completion" has the meaning specified in Section 6.1.
(c) "Effective Date" has the meaning specified in Section 1.1.
(d) "Listing" has the meaning specified in Section 7.1.
(e) "Prospectus Date" has the meaning specified in Section 7.6.
(f) "Put Option Agreement" has the meaning specified in Section 2.2.
(g) "Redeemable Preference Shares" has the meaning specified in Section 2.1.
Any other words with initial capitalization that are used and not defined in
this Deed shall have the meanings ascribed to them in the Original Agreement.
ARTICLE 2. ISSUANCE OF REDEEMABLE PREFERENCE SHARES
Section 2.1 Issuance of Redeemable Preference Shares.
Before Completion, HF Jewellery will have duly authorized the issuance of
5,263,788 redeemable preference shares of US$0.01 each ("Redeemable Preference
Shares") at a premium of US$ 1.8897726 each to Phenomenal or its nominee
(representing a total subscription amount of US$10,000,000), such redeemable
preference shares having the rights, restrictions, privileges, and preferences
of which are set forth in Schedule 2 to this Deed. HF Jewellery shall before the
Completion amend its Memorandum and Articles of Association to permit HF
Jewellery to be legally authorized to issue the Redeemable Preference Shares in
accordance with the terms under Schedule 2.
Section 2.2 Put Option Agreement.
The Lams shall enter into a duly executed put option agreement (the "Put Option
Agreement") with Phenomenal substantially in the form set out in Schedule 3 at
Completion, enabling Phenomenal to sell the Redeemable Preference Shares to the
Lams in the event HF Jewellery fails to timely redeem the Redeemable Agreement
Shares pursuant to Section 7.2 or 7.3 hereof, as the case may be, on the terms
specified in the Put Option Agreement.
ARTICLE 3. SATISFACTION OF NOTE AND RELEASE OF SECURITY
Section 3.1 Satisfaction of the Note.
Upon Completion, all obligations of Quality Prince under the Note shall be
deemed fully satisfied and extinguished and the Note shall cease to have any
force or effect.
Section 3.2 Release of Share Mortgage and Personal Guarantee.
3
<PAGE>
Upon Completion, the Share Mortgages and the Personal Guarantees referred to in
the Original Agreement shall be completely discharged, and the original share
certificates in S.W. Lam, Inc. and Good Day Holdings Limited and all blank
instruments of transfer held by Phenomenal under the Share Mortgages shall be
returned to the holders of the share certificates.
Section 3.3 Language Made Without Force and Effect.
All language in the Original Agreement relating to the Note that are made
obsolete or inconsistent with the provisions herein shall be deleted and made
without force and effect upon the Completion.
ARTICLE 4. COMMON STOCK PURCHASE WARRANT TO BE EXTENDED
Section 4.1 Warrant to be Extended.
The Common Stock Purchase Warrant of S.W. Lam, Inc. executed in connection with
the Original Document (the "Warrant") shall be extended through mid-night, May
31, 1999 or until the Listing, whichever date is earlier, by the execution of an
Extension and Modification Agreement substantially in the form of Schedule 4
hereto by S.W. Lam, Inc. and Phenomenal.
Section 4.2 Number of Common Stock Modified.
The number of shares in the Common Stock of S.W. Lam, Inc. subject to the
Warrant shall be modified in accordance with the following formula:
5,263,788 shares x [ 1 + (n x 0.1956)/365 x 1.899773/2.15 ]
where
- -----
n = number of days elapsing between March 20, 1998 and the day on which the
Warrant is exercised
Section 4.3 Rights as Redeemable Preference Share Holder and Warrant Holder
Mutually Exclusive.
The redemption and subscription rights of Phenomenal specified in Article 7
herein are alternative to and mutually exclusive with the rights of Phenomenal
as holder of the Warrant. By exercising its right to cause the redemption of the
Redeemable Preference Shares and subscribe for ordinary shares in List Co with
the redemption proceeds, Phenomenal will forfeit its right to exercise the
Warrant. By exercising the Warrant, Phenomenal will forfeit its right to to
cause the redemption of the Redeemable Preference Shares and subscribe for
ordinary shares in List Co with the redemption proceeds.
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<PAGE>
ARTICLE 5. COVENANTS OF HF JEWELLERY AND SOYCUE
Section 5.1 No New Shares in HF Jewellery.
From the Effective Date and prior to redemption by HF Jewellery of all the
Redeemable Preference Shares issued to Phenomenal pursuant to Section 7.2 or
7.3, HF Jewellery covenants not to issue additional shares, whether ordinary or
preference, to any other party without the written consent of Phenomenal (such
consent not to be unreasonably withheld).
Section 5.2 No Demand on Inter-Company Loan.
From the Effective Date and prior to the redemption of the Redeemable Preference
Shares by HF Jewellery pursuant to Section 7.2 or 7.3 hereof, Soycue covenants
that it shall not demand nor accept any payment from HF Jewellery for the
repayment of any interest or principal on an inter-company loan due from HF
Jewellery to Soycue in the amount of HK$22,791,000 existing as of the Effective
Date without the consent of Phenomenal.
ARTICLE 6. COMPLETION
Section 6.1 Time and Place.
The completion ("Completion") of the transactions contemplated under this Deed
shall take place at the offices of Jones, Day, Reavis & Pogue ("Jones Day") at
29th Floor, Entertainment Building, 30 Queen's Road Central, Hong Kong on June
30, 1998, or such other time and place as may be mutually agreed on.
Section 6.2 Documents to be Delivered.
At Completion the Lams will deliver or procure the delivery of the following
documents to Phenomenal:
(a) Share certificates representing 5,263,788 shares of Redeemable Preference
Shares in HF Jewellery issued to Phenomenal or its nominee. The
certificates shall be registered on HF Jewellery's books in the name of
Phenomenal or its nominee.
(b) Evidence to the reasonable satisfaction of Phenomenal that the Memorandum
and Articles of Association of HF Jewellery has been amended pursuant to
Section 2.1 herein.
(c) A Put Option Agreement substantially in the form of Schedule 3, duly
executed by the Lams.
(d) An Extension and Modification Agreement for the Warrant substantially in
the form of Schedule 4 (the "Warrant Extension Agreement"), duly executed
by S.W. Lam, Inc.
-5-
<PAGE>
Section 6.3 Documents to be Delivered by Phenomenal.
At Completion Phenomenal will deliver the following documents to the Lams,
Quality Prince or S.W. Lam, Inc., as the case may be:
(a) The original Convertible Note Certificate executed by Quality Prince.
(b) Share certificates and blank instruments of transfer in S.W. Lam, Inc. and
in Good Day Holdings Limited.
(c) The original Personal Guarantees executed by the Lams.
(d) The original Share Mortgages.
Section 6.4 Procedures at Completion.
At Completion, the Lams, S.W. Lam, Inc. and Phenomenal, as the case may be,
shall execute the following documents:
(a) The Warrant Extension Agreement.
(b) The Put Option Agreement.
ARTICLE 7. RIGHT TO SUBSCRIBE FOR SHARES IN LIST CO AND LISTING OF HANG FUNG
GROUP OF COMPANIES
Section 7.1 Intention of Listing.
The Lams, S.W. Lam, Inc., Quality Prince and HF Jewellery hereby jointly and
severally represent that it is their intention that the Hang Fung Group should
apply for listing of the shares in List Co on The Stock Exchange of Hong Kong
Limited (the "Listing"), and that for that purpose the respective parties have
procured the incorporation of List Co, a company incorporated in Bermuda, on
December 4, 1997. Notwithstanding any other provision in the Original Agreement
or this Deed, the Lams, S.W. Lam, Inc., Quality Prince, List Co, HF Jewellery
and Soycue are not required to obtain any consent from Phenomenal in order to
implement the Listing. The Lams, S.W. Lam Inc and Quality Prince hereby agree to
use their reasonable endeavors to procure that prior to March 20, 1999 the Hang
Fung Group will implement a restructuring so that List Co shall become the
holding company of the corporations constituting the Hang Fung Group.
Section 7.2 Redemption of Redeemable Preference Shares before March 20, 1999.
The parties hereto agree that except as provided in this paragraph, Phenomenal
shall not have the right to redeem any of its Redeemable Preference Shares
before March 20, 1999. Phenomenal shall be obliged to exercise its right to (i)
cause HF Jewellery to redeem the Redeemable Preference Shares to be issued to
Phenomenal or its nominee pursuant to this Deed (notwithstanding the terms of
issue of such Redeemable Preference Shares) and (ii) to apply a minimum of US$
10,000,000 or any larger amount up to the Aggregate Redemption Amount (as
defined in Section 7.4) for the subscription of shares in List Co pursuant to
Section 7.5, if at any time before March 20, 1999 reasonable evidence has been
produced to Phenomenal in writing of (a) the completion of the restructuring
contemplated in Section 7.1; and (b) the approval by the Listing Committee of
The Stock Exchange of Hong Kong Limited of the Listing, provided that the
notional market capitalization of List Co disclosed in the prospectus to be
issued by List Co shall not be less than the amount set forth in Section 7.7.
Within five (5) days of the occurrence of (a) and (b) above, Phenomenal shall
serve a notice in writing to HF Jewellery or the Lams to cause the redemption of
the Redeemable Preference Shares and to subscribe for shares in List Co, in each
case, prior to the date of bulk printing of the prospectus as referred to above.
-6-
<PAGE>
Section 7.3 Redemption of Redeemable Preference Shares after March 19, 1999.
If one or both of the above conditions (a) and (b) set out in Section 7.2 are
not satisfied by 20 March 1999, Phenomenal shall be required by serving an
irrevocable notice (the "March Notice") to HF Jewellery or the Lams before March
31, 1999 to elect either one of the following options (i) or (ii).
(a) Under option (i), Phenomenal shall cause HF Jewellery to redeem the
Redeemable Preference Shares in accordance with Section 7.4 without further
subscribing for any shares in List Co with any of the Aggregate Redemption
Amount received from the redemption.
(b) Under option (ii), Phenomenal shall cause HF Jewellery to redeem the
Redeemable Preference Shares in accordance with Section 7.4, and, provided
that it is established before March 31, 1999 by HF Jewellery or the Lams
that condition (a) set out in Section 7.2 has been satisfied, shall be
obliged to apply part or all of the Aggregate Redemption Amount to
subscribe for shares in List Co pursuant to Section 7.5. If condition (a)
set out in Section 7.2 has not been satisfied before March 31, 1999,
Phenomenal shall be obliged to continue to hold the Redeemable Preference
Shares and shall not have the right to require HF Jewellery or the Lams to
redeem any of the Redeemable Preference Shares until such time when
condition (a) set out in Section 7.2 is satisfied, which time in no event
shall be later than June 30, 1999, under which circumstance Phenomenal
shall be obliged to cause the redemption and subscribe for shares in List
Co pursuant to Section 7.5. If the condition (a) set out in Section 7.2 is
not satisfied by June 30, 1999, Phenomenal shall have the right but not the
obligation by serving an irrevocable notice (the "June Notice") to HF
Jewellery or the Lams to cause a redemption of the Redeemable Preference
Shares and elect to apply none, part or all of the Aggregate Redemption
Amount to subscribe for shares in List Co until such time when condition
(a) set out in Section 7.2 is satisfied, at which time Phenomenal shall be
obliged to serve an irrevocable notice to HF Jewellery or the Lams within
ten (10) days after satisfaction of condition (a) set out in Section 7.2 to
cause HF Jewellery to redeem the Redeemable Preference Shares and elect to
apply none, part or all of the Aggregate Redemption Amount to subscribe for
shares in List Co pursuant to Section 7.5.
-7-
<PAGE>
Section 7.4 Determination and Payment of Redemption Amount.
The Aggregate Redemption Amount shall mean and consist of (i) US$10,000,000
representing a return of capital; and (ii) a dividend payable at the same time
with (i), and collectively shall be calculated in accordance with the following
formula:
ARA = US$10,000,000 x (1 + n x 0.1956/365)
where
- -----
ARA = the aggregate redemption amount (the "Aggregate Redemption Amount")
payable by HF Jewellery to Phenomenal for the redemption of all the 5,263,788
Redeemable Preference Shares held by Phenomenal.
n = number of days elapsing from March 20, 1998 to the date the Aggregate
Redemption Amount is paid to Phenomenal, which in any event will not exceed 365
days.
Only in the event of either (a) a redemption by HF Jewellery of the Redeemable
Preference Shares held by Phenomenal pursuant to Section 7.3 (a) whereby
Phenomenal has served the March Notice electing not to subscribe for shares in
List Co; or (b) where condition (a) set out in Section 7.2 not being satisfied
by June 30, 1999 pursuant to Section 7.3(b) and Phenomenal has served the June
Notice to HF Jewellery or the Lams, HF Jewellery shall be required to tender the
payment in lawful U.S. currency for (i) the Aggregate Redemption Amount within
90 days of the date of the March Notice or the June Notice, as the case may be,
served by Phenomenal under Section 7.3; and (ii) a special dividend calculated
under the formula below shall accrue and be payable together with the Aggregate
Redemption Amount on the date the payment for the Aggregate Redemption Amount is
made:
SD = US$10,000,000 x (n x 0.1956/365 )
where
- -----
SD = special dividend
n = number of days elapsing from March 20, 1999 to the date the Aggregate
Redemption Amount is paid to Phenomenal.
Section 7.5 Subscription of Shares.
Immediately upon the payment by HF Jewellery of the Aggregate Redemption Amount
in respect of the Redeemable Preference Shares pursuant to Section 7.4,
Phenomenal shall be obliged to subscribe for that number of shares in List Co
using all or part of the Aggregate Redemption Amount paid by HF Jewellery to
Phenomenal for the redemption of all of the 5,263,788 Redeemable Preferences
Shares held by Phenomenal pursuant to Section 7.2 as follows:
(a) For an aggregate subscription of US$10 million, Phenomenal will subscribe
for such number of shares in the List Co representing 29.14% of total
number of outstanding ordinary shares in List Co without taken into any
shares to be issued and allotted under the Listing. The per share issue
price shall be US$ 10 million divided by the number of shares issued
pursuant to this paragraph.
-8-
<PAGE>
(b) For any amount in excess of US$ 10,000,000, Phenomenal will subscribe for
shares in List Co at a price per share 13.16% higher than the price per
share paid for the first 29.14% shares under Section 7.5(a).
(c) In the event a special dividend is paid pursuant to the June Notice,
Phenomenal may elect to apply the proceeds of such special dividend to
subscribe for any additional shares in List Co at the per share price
stated in (b) hereinabove.
Section 7.6 Shareholders Agreement.
S.W. Lam, Inc. and the Lams shall further procure, and Quality Prince shall
further agree that upon the subscription of the shares by Phenomenal or its
nominee as provided in Section 7.3, the shareholders of List Co shall enter into
a shareholders agreement with Phenomenal or its nominee in the form specified in
Schedule 5. It is expressly agreed and acknowledged that such agreement shall
terminate and shall become void and cease to have any force or effect on the
date being the date of any prospectus (the "Prospectus Date") that may be issued
by List Co in respect of the initial public offer in the course of an
application for listing of the shares of List Co or such earlier date as may be
agreed by the parties.
Section 7.7 Market Capitalization.
Phenomenal hereby agrees and covenants by its execution hereof, that List Co may
seek a listing of the shares on The Stock Exchange of Hong Kong Limited without
the consent of Phenomenal (or any affiliated company of Phenomenal) under the
Original Agreement, this Deed or any shareholders agreement to which Phenomenal
is a party, provided that:
(a) the notional market capitalization expressed in Hong Kong dollars of List
Co immediately prior to the commencement of trading of List Co on The Stock
Exchange of Hong Kong Limited shall be not less than HK$ 2.5 x 18,063,158 x
A.
where
-----
A = represents the US$/HK$ exchange rate prevailing on the date of issuance
of the prospectus, under which an initial public offer is made to
facilitate the Listing.
(b) In this Section 7.7 notional market capitalisation shall mean the amount
calculated as follows:
MC = N x IP
where
-----
MC - is the notional market capitalisation
-9-
<PAGE>
N - is the number of shares in issue on the first day of trading of the
shares of List Co on The Stock Exchange of Hong Kong Limited
IP - means the issue price of shares to be issued under the initial public
offer prior to such listing.
Section 7.8 Right to Appoint Board Representative.
S. W. Lam, Inc., Quality Prince, and the Lams hereby agree and covenant that
they will procure that while Phenomenal or it nominees hold twenty per cent
(20%) or greater of the total issued share capital of List Co, Phenomenal shall
have the right to appoint one Director to the Board of Directors of the List Co.
ARTICLE 8. WARRANTIES AND REPRESENTATIONS
Section 8.1 Representations and Warranties.
Mr. Lam, Mrs. Lam, S.W. Lam, Inc., Quality Prince and HF Jewellery do hereby
jointly and severally represent and warrant as follows:
(a) The details of HF Jewellery specified in Schedule 6 are complete and
accurate in all respect and without limitation, Quality Prince is the
holding company of the Hang Fung Group in the manner specified in the
organizational chart annexed to Schedule 6.
(b) The representations and warranties under Article 5 in the Original
Agreement were true and accurate when made and, except as hereby rendered
obsolete or inconsistent by this Deed, remain true and accurate in all
material respects as of this date.
(c) Each of the parties has obtained all consents and authorizations necessary
or required for it to meet and perform the conditions of this Deed and the
Deed constitutes a legal, valid, and binding obligation, enforceable in
accordance with its provisions.
ARTICLE 9. MISCELLANEOUS
Section 9.1 Continued Effect of Original Agreement.
All provisions of the Original Agreement, except as modified by this Deed, shall
remain in full force and effect and are reaffirmed. Each party acknowledges that
it, as its respective interests appear, is liable for all damages arising from
nonperformance under this Deed if all conditions of this Deed are not met; and
that if this Deed is performed such performance shall be accepted as full
performance of its obligations under the Original Agreement. Other than as
stated in this Deed, this Deed shall not operate as a waiver of any condition or
obligation imposed on the parties under the Original Agreement. All
representations and warranties under Article 5 and all the affirmative and
negative covenants under Articles 7 and 8 of the Original Agreement attributable
to Quality Prince Limited shall be deemed to also have been made by and
applicable to HF Jewellery.
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<PAGE>
Section 9.2 Further Assurances.
The parties shall at their own cost and expense execute and deliver further
documents and instruments and shall take such other actions as may be reasonably
required or appropriate to evidence or carry out the intent and purposes of this
Deed.
Section 9.3 Interpretation of Deed.
In the event of any conflict, inconsistency, or incongruity between any
provision of this Deed and any provision of the Original Agreement, the
provisions of this Deed shall prevail.
Section 9.4 Governing Law and Severability.
This Deed shall be governed by and construed in accordance with the laws of the
Hong Kong SAR and the parties submit to the non-exclusive jurisdiction of the
courts of the Hong Kong SAR. If a court or other tribunal of competent
jurisdiction holds any provision of this Deed to be unenforceable, the remaining
portions of this Deed shall remain in full force and effect.
Section 9.5 Entire Agreement.
This Deed, together with the Original Agreement, constitutes the entire
agreement between the parties hereto pertaining to the subject matter of this
Deed, and any and all other written or oral agreements existing between the
parties before the date of this Deed with respect to the subject matter of this
Deed, except pertinent parts of the Original Agreement, are expressly cancelled.
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<PAGE>
EXECUTED as a deed:
THE COMMON SEAL of )
PHENOMENAL LIMITED )
was hereunto affixed in accordance )
with its Articles of Association )
in the presence of: )
- ------------------------------------------
Director
THE COMMON SEAL of )
S.W. LAM, INC. )
was hereunto affixed in accordance )
with its Bylaws )
in the presence of: )
- ------------------------------------------
Lam Sai Wing, President
- ------------------------------------------
Chan Yam Fai, Jane, Secretary
THE COMMON SEAL of )
QUALITY PRINCE LIMITED )
was hereunto affixed in accordance )
with its Articles of Association )
in the presence of: )
- ------------------------------------------
Director
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<PAGE>
SIGNED, SEALED and )
DELIVERED by LAM SAI WING )
[HKID: D526157(1)] )
in the presence of: )
- ------------------------------------------
SIGNED, SEALED and )
DELIVERED by CHAN YAM FAI, JANE )
[HKID: G293329(1)] )
in the presence of: )
- ------------------------------------------
THE COMMON SEAL of )
HANG FUNG GOLD TECHNOLOGY LIMITED )
was hereunto affixed in accordance )
with its Bye-laws )
in the presence of: )
- ------------------------------------------
Director
THE COMMON SEAL of )
HANG FUNG JEWELLERY COMPANY LIMITED )
was hereunto affixed in accordance )
with its Articles of Association )
in the presence of: )
- ------------------------------------------
Director
THE COMMON SEAL of )
SOYCUE LIMITED )
was hereunto affixed in accordance )
with its Articles of Association )
in the presence of: )
- ------------------------------------------
Director
13
<PAGE>
Schedule 1
INVESTMENT AGREEMENT
14
<PAGE>
Schedule 2
RIGHTS, RESTRICTIONS, PRIVILEGES, AND PREFERENCES
OF REDEEMABLE PREFERENCE SHARES
The nature and extent of the preferences, rights, privileges, and restrictions
granted to or imposed on the holders of the Redeemable Preference Shares are as
follows:
(a) Redemption Right by holder: holders of the Redeemable Preference Shares
shall be entitled on or after March 20, 1999 pursuant to a Deed of
Amendment, dated June ________, 1998, to which HF Jewellery is a party (the
"Deed") to deliver to HF Jewellery for redemption a certificate or
certificates for the Redeemable Preference Shares, properly endorsed, at
which time HF Jewellery shall redeem the shares represented by the
certificate or certificates by paying to each registered shareholder of
Redeemable Preference Shares, in cash, the value of the shares determined
in accordance with the following formula:
The aggregate redemption amount shall consist of (i) US$10,000,000
representing a return of capital; and (ii) a dividend payable at the same
time with (i) , and collectively shall be calculated in accordance with the
following formula:
ARA = US$10,000,000 x (1 + n x 0.1956/365)
where
-----
ARA = the aggregate redemption amount (the "Aggregate Redemption Amount")
payable by HF Jewellery to Phenomenal for the redemption of all the
5,263,788 Redeemable Preference Shares held by Phenomenal.
n = number of days elapsing from March 20, 1998 to the date the Aggregate
Redemption Amount is paid to Phenomenal, which in any event will not exceed
365 days.
(b) Special Dividend Entitlement: holders of Redeemable Preference Shares shall
be entitled to a special dividend pursuant to Section 7.4 of the Deed.
(c) Voting Rights: holders of Redeemable Preference Shares shall have no voting
rights in respect of any general meeting of HF Jewellery, save and except
for any resolution:
(i) under which the rights attaching to Redeemable Preference Shares may
be varied in any manner;
(ii) any resolution in respect of the winding up of HF Jewellery;
(iii)any resolution to issue additional shares in the capital of HF
Jewellery or provide mandate to directors to issue the same.
-15-
<PAGE>
(d) Winding-Up: holders of Redeemable Preference Shares shall on a winding up
of HF Jewellery rank for priority to holders of ordinary shares, so that
any surplus assets proceeds or assets shall be distributed to holders of
Redeemable Preference Shares, so as to repay the Aggregate Redemption
Amount prior to any distribution to ordinary shareholders.
-16-
<PAGE>
Schedule 3
PUT OPTION AGREEMENT
Date day of 1998
LAM SAI WING
CHAN YAM FAI, JANE
and
PHENOMENAL LIMITED
-----------------------------------
PUT OPTION AGREEMENT
-----------------------------------
Jones, Day, Reavis & Pogue
29th Floor, Entertainment Building
30 Queen's Road Central
Hong Kong
Telephone: (852) 2526-6895
Facsimile: (852) 2868-5871
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<PAGE>
PUT OPTION AGREEMENT made on _______ day of _______, 1998.
BETWEEN
(1) Lam Sai Wing (Hong Kong Identity Card No.: D526157 (1)) of Unit 25-32, 2nd
Floor, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom,
Kowloon, and Chan Yam Fai, Jane (Hong Kong Identity Card No. G293329(1) of
the same address (collectively the "Optionor"); and
(2) Phenomenal Limited, a company incorporated under the laws of the British
Virgin Islands and whose registered office is at P.O. Box 957, Offshore
Incorporations Centre, Road Town, Tortola, British Virgin Islands (the
"Optionee").
RECITALS
A. At the request of the Optionor and pursuant to the terms of a deed of
amendment (the "Deed") dated June _______, 1998 between the Optionor, Hang
Fung Jewellery Company Limited, a company incorporated in Hong Kong with
its registered office at Units 25-32, 2nd Floor, Block B, Focal Industrial
Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong (the "Company"),
S.W. Lam, Inc., Quality Prince Limited, Soycue Limited, Hang Fung Gold
Technology Limited ("List Co") and the Optionee, the Optionee agrees to
replace a convertible note in the sum of US$10,000,000 issued by Quality
Prince Limited to Optionee with an investment in the Company in the form of
Redeemable Preference Shares in the capital of the Company.
B. The Company has issued 5,263,788 Redeemable Preference Shares to the
Optionee (the "Redeemable Preference Shares") on the terms specified in the
Deed and the Company's Memorandum and Articles of Association.
C. It is a condition of the Deed that the Optionor will grant to Optionee a
put option pursuant to this Put Option Agreement.
NOW IT IS HEREBY AGREED:
1. PUT OPTION AGREEMENT
--------------------
In consideration of the Optionee entering into the Deed, the Optionor
grants to the Optionee an option to require Optionor to purchase all of the
5,263,788 Redeemable Preference Shares in the Company (the "Option Shares")
held by the Optionee under the following terms and conditions.
1.1 Optionee shall have the right to require Optionor to purchase or to procure
purchasers for all of the Option Shares from Optionee if the Company shall
default in redeeming the Option Shares pursuant to the Deed and the terms
of issue of the Option Shares.
-18-
<PAGE>
1.2 Optionee may exercise this Put Option by giving written notice (the "Put
Option Notice") to Optionor (or any one of them) at the address specified
in Clause 7 herein, stating that the Put Option is thereby exercised. Such
Put Option Notice may be given any time after the failure of the Company
described in Section 2.2 of the Deed has occurred.
1.3 Within 90 days after the date of service of the Put Option Notice on
Optionor by Optionee, Optionor shall be obliged to pay to Optionee the Put
Option Exercise Price as defined below payable for the Option Shares
calculated in accordance with Clause 1.4 and Optionee shall be obliged to
deliver to Optionor, or as Optionor may direct, the certificate or
certificates relating to the Option Shares together with an instrument of
transfer and bought and sold note in respect thereof executed by Optionee,
such instrument of transfer to be in a registrable form in all respects.
1.4 The purchase price (the "Put Option Exercise Price") payable by Optionor to
Optionee in respect of the Option Shares shall be the Aggregate Redemption
Amount calculated pursuant to Section 7.4 of the Deed, together with an
additional amount representing interest calculated on a daily basis at the
rate of 19.56% per annum for the period commencing from the date the
Aggregate Redemption Amount is due under the Deed to the date the payment
is made by Optionor.
1.5 Optionee warrants that upon the exercise of the Put Option:
(a) the Option Shares shall be free from any lien, charge, encumbrance or
interest of any kind whatsoever; and
(b) the Option Shares shall be sold together with all rights attaching
thereto at the date of the exercise of such option.
2. INDEMNITY
---------
Without prejudice to the provisions contained in Clause 1, the Optionor
unconditionally and irrevocably undertakes and covenants, as a separate,
additional and continuing obligation, to indemnify the Optionee against all
losses, liabilities, damages, costs and expenses whatsoever arising out of
any failure by the Company to redeem the Option Shares pursuant to the
Deed. This indemnity shall remain in effect notwithstanding that the Put
Option under Clause 1 may cease to be valid or enforceable against the
Optionor for any reason whatsoever.
(The put option in Clause 1 and the indemnity in Clause 2 given by the
Optionor are hereinafter collectively referred to as the "Put Option".)
3. SECURITY
--------
3.1 Neither the liability of the Optionor nor the validity or enforceability of
this Put Option shall be prejudiced, diminished, affected or discharged by:
-19-
<PAGE>
(a) the granting of any time, concession or indulgence to the Company or
any other person with respect to the redemption of the Option Shares;
(b) any variation or modification of the Deed or any document in relation
thereto;
(c) the invalidity or unenforceability of any obligation or liability of
the Company to the Optionee;
(d) any invalidity or irregularity in the execution of the Deed or other
document relating thereto;
(f) the insolvency or liquidation or any incapacity, disability or
limitation, or any change in the constitution or status of the
Company.
4. RECONSTRUCTION OF OPTIONEE
--------------------------
This Put Option Agreement shall continue to be binding and effective as a
continuing protection notwithstanding any amalgamation of the Optionee with
any third party and notwithstanding any reconstruction of the Optionee
involving the transfer of all or any of the assets of the Optionee to a
party, or notwithstanding the sale of all or any part of the undertaking
and assets of the Optionee to a third party, whether the third party with
which the Optionee amalgamates or to whom the Optionee transfers all or any
of the assets, either on a reconstruction or sale as aforesaid, shall or
shall not differ in their or in its objects character and construction from
that of the Optionee, it being the intent of the Optionor that this Put
Option Agreement shall remain valid and effectual in all respects and that
the benefit of this Put Option Agreement and all rights conferred upon the
Optionee hereby may be assigned to and enforced by such third party and
enforceable in the same manner to all intents and purposes as if such third
party had been named herein instead of the Optionee.
5. WAIVER AND SEVERABILITY
-----------------------
5.1 No failure or delay by the Optionee in exercising any right, power or
remedy hereunder shall impair such right, power or remedy or operate as a
waiver thereof, nor shall any single or partial exercise of the same
preclude any further exercise thereof or the exercise of any other right,
power or remedy.
5.2 The rights, powers and remedies herein provided are cumulative and do not
exclude any other rights, powers and remedies provided by law.
5.3 Each of the provisions in this Put Option Agreement is severable and
distinct from the others, and if at any time any provision of this Put
Option Agreement is or becomes illegal, invalid or unenforceable in any
respect under the law of any jurisdiction, the legality, validity and
enforceability of such provision under the law of any other jurisdiction,
and of the remaining provisions of this Put Option Agreement, shall not be
affected or impaired thereby.
-20-
<PAGE>
6. ASSIGNMENT
----------
The Optionee may assign its rights under this Put Option Agreement or any
part thereof, and this Put Option Agreement shall enure to the benefit of
the Optionee and its successors and assigns.
7. NOTICES
-------
7.1 Delivery
All notices, demands or other communications which are to be given under
this Put Option Agreement shall be in writing and shall be addressed as
shown below:
(a) if to the Optionor or either of them:
Address: c/o Units 25-32, 2 nd Floor
Block B, Focal Industrial Centre
21 Man Lok Street, Hunghom
Kowloon
Hong Kong
Facsimile Number: (852) 2362-3034
(b) if to the Optionee:
Address: c/o Transpac Group
Suite 3322, 33rd Floor
Two Pacific Place
88 Queensway
Hong Kong
Facsimile Number: (852) 2877-6612
Attention: Managing Director, Transpac Group
7.2 Receipt
-------
Any such notice may be delivered personally, by prepaid post, or sent by
facsimile transmission and shall be deemed to have been effectively served:
(a) if by delivery in person, when delivered to the addressee;
(b) if by facsimile transmission when despatched;
(c) if by post:
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<PAGE>
(i) on the second Business Day following day of posting if sent from
Hong Kong to the address of a recipient in Hong Kong unless
actually received sooner; or
(ii) on the seventh Business Day following the day of posting if sent
from Hong Kong to the address of an overseas recipient (and vice
versa) unless actually received sooner.
7.3 Nothing in this Clause 7 shall preclude the service of communication or the
proof of such service by any other mode permitted by law.
8. GENERAL
-------
8.1 The expressions the "Optionee", the "Company" and the "Optionor" whenever
used here include and extend to their successors, executors, administrator,
legal representatives and assigns. Where the context allows the expression
"security", the term shall be deemed to include a judgement, specialty,
guarantee, indemnity, negotiable and other instruments and securities of
every kind.
8.2 Headings used in this Put Option Agreement are for convenience only and
shall not affect its interpretation.
8.3 The obligations and liabilities of Lam Sai Wing and Chan Yam Fai, Jane
under the Put Option Agreement shall be joint and several.
9. TERMINATION UPON LISTING
------------------------
Notwithstanding any other provisions herein, this Put Option Agreement
shall terminate and shall become void and cease to have any force or effect
on the date being the date of any prospectus that may be issued by List Co
in respect of the listing of the shares of List Co on The Stock Exchange of
Hong Kong Limited.
10. GOVERNING LAW AND ARBITRATION
-----------------------------
This Put Option Agreement is governed by and is to be construed in
accordance with the laws of Hong Kong SAR and the parties hereto submit to
the non exclusive jurisdiction of the courts of Hong Kong.
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<PAGE>
IN WITNESS whereof the Optionor has duly executed this Put Option Agreement as a
deed.
SIGNED, SEALED AND DELIVERED by ) Signature
LAM SAI WING )
in the presence of: ) ------------------------------------
- ------------------------------------
Name:
SIGNED, SEALED AND DELIVERED by ) Signature
CHAN YAM FAI, JANE )
in the presence of: ) ------------------------------------
- ------------------------------------
Name:
THE COMMON SEAL of )
PHENOMENAL LIMITED )
was hereunto affixed in accordance with its )
Articles of Association )
in the presence of: )
- ------------------------------------
Director
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<PAGE>
Schedule 4
EXTENSION AND MODIFICATION AGREEMENT
S. W. LAM, INC. - COMMON STOCK PURCHASE WARRANT
THIS EXTENSION refers to a Warrant to Purchase 5,263,158 shares of Common
Stock in S.W. Lam, Inc. (the "Common Stock")granted to Phenomenal Limited, a
British Virgin Islands corporation, on May 20, 1997 (the "Warrant"). The Warrant
will be void after May 31, 1998.
S.W. Lam, Inc. Phenomenal Limited, and all the other parties to a certain
"Investment Agreement for a Warrant to Purchase 5,263,158 Shares of Common Stock
of S.W. Lam, Inc. and a US$10,000,000 Convertible Note Certificate of Quality
Prince Ltd." (the "Original Agreement") have agreed to restructure the financing
provided thereunder by entering into a Deed of Amendment amending the Original
Agreement (the "Deed"). The Deed contemplates an extension of the Warrant
through May 31, 1999, or the Prospectus Date (as defined in the Deed), whichever
date is earlier, and to adjust the number of shares of Common Stock subject to
the Warrant.
In consideration of the mutual obligations in the Deed, S.W. Lam, Inc.
agrees to and hereby extends the term of the Warrant to May 31, 1999, or the
Prospectus Date (as defined in the Deed), whichever date is earlier, and the
date "May 31, 1998" appearing on the first page and in Sections 3(i) and 5(e) of
the Warrant shall be substituted with the date "May 31, 1999, or the Prospectus
Date (as defined in the Deed), whichever date is earlier." The number of shares
of Common Stock subject to the Warrant shall be adjusted in accordance with
Section 4.2 under the Deed.
S.W. Lam, Inc. agrees that except as hereby modified as to the term and the
dates of the Warrant, the Warrant shall remain in full force and effect in
accordance with all the terms and conditions as originally stated therein
through May 31, 1999, or the Prospectus Date (as defined in the Deed), whichever
date is earlier.
Dated: April ______________, 1998
S.W. Lam, Inc.
By:
-----------------------------
Lam Sai Wing, President
By:
-----------------------------
Chan Yam Fai, Jane, Secretary
HOLDER OF WARRANT:
- -----------------------------
Phenomenal Limited
By:
--------------------------
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<PAGE>
Schedule 5
SHAREHOLDERS AGREEMENT (List Co)
THIS SHAREHOLDERS AGREEMENT AND DEED (the "Agreement") is made on
________________, 19________.
BETWEEN
(1) PHENOMENAL LIMITED, a company incorporated in the British Virgin Islands,
at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola,
British Virgin Islands ("Phenomenal")
(2) QUALITY PRINCE LIMITED, a company incorporated in the British Virgin
Islands, at P.O. Box 3444, Road Town, Tortola, British Virgin Islands
("QPL")
RECITALS
A. QPL is the holder of __________ Shares in Hang Fung Gold Technology Limited
(the "List Co"), and Phenomenal is the holder of _______Shares in List Co.
B. By this Agreement, the undersigned parties desire to establish certain
mutual rights, obligations, and covenants as set forth herein.
NOW IT IS AGREED AS A DEED AS FOLLOWS:
1. CERTAIN DEFINITIONS
-------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
"Associates" means, with reference to any person, a spouse; and
relative of that person within the third degree;
any director, officer, or employee of that person,
any corporation, association, firm, or other entity
of which that person is a member, director, officer,
or employee; and any other person directly or indirectly
controlling or controlled by, or under direct of indirect
common control with, that person.
"Board" means the board of directors of List Co.
"Control" means the ownership of 51 percent or more of the voting
power of the corporate entity.
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<PAGE>
"Deed" means the Deed of Amendment entered into between
Phenomenal, QPL, List Co, and certain other parties on
June ____, 1998.
"Director" means a director of the board of directors of List Co.
"Hang Fung Group"means Hang Fung Jewellery Company Ltd., a Hong Kong
corporation, and Kai Hang Jewellery Company Ltd., a Hong
Kong corporation, both of which are wholly owned
subsidiaries of QPL.
"Investment means the Investment Agreement executed by and among
Agreement" SWL, QPL, Phenomenal Limited, Lam Sai Wing and Chan Yam
Fai, Jane in Hong Kong on May 20, 1997.
"List Co" means Hang Fung Gold Technology Limited
"Phenomenal" means Phenomenal Limited, a British Virgin Islands
corporation.
"QPL" means Quality Prince Limited, a company incorporated
in the British Virgin Islands.
"Shareholder" means a holder of Shares.
"Shares" means all [#] outstanding and issued common or ordinary
shares in List Co.
"SWL" means S. W. Lam, Inc. a corporation organized under
the laws of the State of Nevada.
2. APPOINTMENT OF DIRECTORS AND MEETINGS OF SHAREHOLDERS AND DIRECTORS
-------------------------------------------------------------------
2.1 Appointment of Directors
------------------------
Phenomenal shall have the right to appoint, or effectively have the ability
to elect a minimum of one (1) Director to the board of directors of List
Co. Such a Director appointed by Phenomenal shall have the right to approve
or disapprove any major actions of List Co, including without limitation
those specified in Section 3.1 herein. The parties hereto may agree to
increase the number of Directors representing the interest of Phenomenal to
more than one (1) to reflect any increase in the proportional equity
interest of Phenomenal in List Co. If any director(s) nominated or elected
directly or indirectly by Phenomenal shall resign or otherwise cease to act
as a director any replacement or substitute shall also be nominated or
elected by Phenomenal.
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<PAGE>
2.2 Calling of meetings
-------------------
Any Shareholder shall have the right to call a shareholders' meeting upon
at least seven days' notice to the other Shareholders. Any Director shall
have the right to call a board of directors' meeting upon at least five
days' notice. All the board meetings and shareholders' meeting of List Co
shall be held in Hong Kong, unless otherwise unanimously agreed upon by all
the Shareholders or Directors.
2.3 Quorum
------
The presence of a Director appointed or elected by Phenomenal at any Board
meetings shall be a condition for a quorum. The presence of a
representative of Phenomenal at any Shareholders' meeting shall be a
condition for a quorum, except after adjournment with notice of at least
three days.
2.4 Deed of Bylaws, etc.
-------------------
The provisions under Sections 2.1 through 2.3 shall be binding on the
parties to the extent they are not inconsistent with the laws of the
jurisdiction of List Co.
3. APPROVAL FOR MAJOR ACTIONS AND REPORTING REQUIREMENTS
-----------------------------------------------------
3.1 Actions requiring Approvals
---------------------------
Any of the following actions undertaken by List Co or any companies within
the Hang Fung Group shall require Board approval of List Co.
(a) amendment to the bye-laws and memorandum of association, material
changes in the business, winding up of List Co or any of its
subsidiaries or affiliates, or mergers or acquisitions of disposal of
other companies, otherwise than for the purpose of reorganizing List
Co and its subsidiaries in preparation for the listing of List Co on
the Hong Kong Stock Exchange.
(b) increase of authorized capital, or issuance of new shares or options
or of any other interests in shares, or any capital reorganization,
otherwise than for the purpose of reorganizing List Co and its
subsidiaries in preparation for the listing of List Co on the Hong
Kong Stock Exchange.
(c) approval of annual budgets and business plans, and any proposed or
actual increase of 10 percent or more over the total budgeted amount
for capital, operating and any other expenditures under the business
plans approved.
(d) capital expenditures exceeding HK$1 million per item, or any other
major asset commitments or disposal.
(e) any banking facilities or other assumptions of liability out of the
ordinary course of business, or the granting of any security interest.
(f) the granting of any gifts or the guaranteeing of any third party's
obligations.
27
<PAGE>
(g) any activities not in the ordinary course of business, and any
transactions that may involve a conflict of interest for any
shareholder or director or that are otherwise conducted other than at
arm's length.
(h) any declaration of dividends by List Co or its subsidiaries.
(i) any change in auditor or financial year end.
3.2 Continuing Reporting Requirements
---------------------------------
All the financial reporting requirements and obligations of List Co to
Phenomenal as specified in Sections 7.02 through 7.09 of the Investment
Agreement shall continue in full force and effect, until List Co's or a
successor company's common or ordinary shares are listed and publicly
traded on the Hong Kong Stock Exchange or another national securities
exchange.
3.3 Disposition of Shares in Hang Fung Group
----------------------------------------
The parties agree they shall procure that there shall not be any
disposition or transfer of any shares in the companies constituting the
Hang Fung Group, including without limitation Hang Fung Jewellery Company
Limited and Kai Hang Jewellery Company Limited by List Co or any other
party without the written consent of Phenomenal, otherwise than for the
purpose of reorganizing List Co and its subsidiaries in preparation for the
listing of List Co on the Hong Kong Stock Exchange.
4. TRANSFER OF SHARES
------------------
4.1 Restrictions on Transfers
-------------------------
Save as provided in Section 4.2, no Shareholders of List Co shall, or shall
attempt or offer to sell, transfer, assign or otherwise dispose of
("Transfer") any of its Shares except for transfer to one of more corporate
entities which are affiliated or under common control with the Shareholder.
Any purported Transfer by such a Shareholder of its shares in violation of
this Section 4 shall be void and of no force or effect.
4.2 Right of First Refusal
----------------------
Except as provided in Section 4.1 hereof, if at any time any Shareholder
(the "Transferring Shareholder") desires to Transfer any of its Shares (the
"Offered Stock"), such Transfer shall take place only in accordance with
the following procedures:
(a) The Transferring Shareholder shall give written notice ("Shareholder's
Notice") to the other Shareholders of the Shares (collectively, the
"Offerees") within ten (10) days after receipt of written, bona fide
offer (the "Offer") from a third party (the "Offeror"), which notice
is signed by the Transferring Shareholder and sets forth all the
material terms of the Offer (including (i) the Transferring
Shareholder's bona fide intention to transfer the Offered Stock; (ii)
the number of shares of the Offered Stock; (iii) the name, address and
relationship, if any, to the Transferring Shareholder of the Offeror;
and (iv) the bona fide cash price or, in reasonable detail, other
consideration, per share for which the Transferring Shareholder
proposes to transfer such Offered Stock (the "Offered Price")),
together with copies of any agreement or documents executed or
delivered, or to be executed or delivered, by the Transferring
Shareholder and the Offeror.
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(b) The Offerees shall have the exclusive right for a period of thirty
(30) days after receipt of the Shareholder's Notice ("Exercise
Period") to notify the Transferring Shareholder of the Offerees'
election to purchase the shares of Offered Stock on the same terms and
conditions contained in the Offer ("Right of First Refusal"). The
Offerees' rights to purchase the shares of Offered Stock shall be
prorata to their respective holdings of List Co's capital stock on a
fully diluted basis. An Offeree's prorata share shall be determined by
dividing the number of Shares and Common Stock held by an Offeree by
the total number of Shares and Common Stock held by all Offerees. Any
Offeree that wishes to exercise the Right of First Refusal shall so
notify List Co and the Transferring Shareholder within the Exercise
Period. If any Offeree does not make such election to exercise the
Right of First Refusal within the Exercise Period, such declining
Offeree shall give written notice ("Declining Notice") to the
remaining Offerees and such remaining Offerees shall have the right to
purchase any shares of Offered Stock not purchased by the declining
Offeree or Offerees, which purchase shall be prorata if more than one
remaining Offeree elects to make such purchase. An election to
purchase the shares of Offered Stock not purchased by the declining
Offeree or Offerees shall be made by written notice to the other
Offerees and List Co within fifteen (15) days after receipt of the
Declining Notice ("Additional Exercise Period"). Within five days
after expiration of the Additional Exercise Period, List Co will give
written notice (the "Expiration Notice") to the Transferring
Shareholder and to the Offerees specifying the shares of Offered Stock
that were subscribed by the Offerees exercising their Right of First
Refusal.
(c) In the event that no Offeree elects to purchase the shares of Offered
Stock (or if such elections are made with respect to less than all the
shares of Offered Stock) within the Exercise Period and the Additional
Exercise Period, the Transferring Shareholder shall have the right
during the ensuing thirty (30) day period to Transfer to the Offeror
the shares of Offered Stock offered to the Offerees on the terms set
forth in the Shareholder's Notice. The Offeror shall as a condition to
each such purchase execute a counterpart of this Agreement or
otherwise agree in writing (in such form as shall be satisfactory to
the Board of Directors of List Co) to be bound by this Agreement to
the same extent that the Transferring Shareholder was bound. If such
Transfer is not completed within such thirty (30) day period, the
Transferring Shareholder shall be required, before Transferring its
shares to any third party, to reoffer the shares to the Offerees in
the manner set forth in this Section 4.2.
(d) The Transfer of the shares of Offered Stock resulting from the
acceptance of the Offer by one or more Offerees in accordance with
this Section 4.2 shall take place at a closing on a date designated by
List Co within ten (10) business days following acceptance of the
Offer by such Offeree or Offerees or such other time as the
Transferring Shareholder and the Offerees shall mutually agree. At
such closing, each Offeree shall pay the purchase price for the shares
of Offered Stock against delivery by the Transferring Shareholder of
(I) documentary evidence reasonably satisfactory to the Offeree of the
Transfer of all shares to such Offeree and (ii) a sales agreement in
form reasonably satisfactory to the Offeree containing, among other
things, a representation and warranty by the Transferring Shareholder
that the Transferring Shareholder is, and the Offeree shall be, the
record and beneficial owner of such shares with good title thereto,
free and clear of all liens and encumbrances.
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<PAGE>
4.3 Tack Along and Repurchase Option
--------------------------------
Subject to Section 4.4 below, QPL and any of its Associates holding Shares
in List Co (each an "Applicable Shareholder" and collectively the
"Applicable Shareholders") shall jointly and severally, before making a
transfer or other disposal of any of their Shares (the "Applicable
Shareholders' Transfer Shares") to a third party, procure that such third
party offers to acquire from Phenomenal the same proportionate part of
Phenomenal's Shares as the number of the Applicable Shareholders' Transfer
Shares bears to all the Shares held by the Applicable Shareholders, and any
such offer shall:
(a) in relation to the acquisition of Phenomenal's Shares, be on the same
terms (subject to Sub-Section (b) below) as to price per Share, time
of payment and sharing of stamp duty as those applicable to the
proposed transfer by the Applicable Shareholders of the Applicable
Shareholders' Transfer Shares and be conditional upon the Applicable
Shareholders actually transferring the Applicable Shareholders'
Transfer Shares and customary warranties as to title being given by
Phenomenal; and
(b) where the offers extended to the Applicable Shareholders are not the
same as among them, the terms to be offered to Phenomenal shall be
those as are, in the opinion of Phenomenal, most favorable to the
offeree.
4.4 Notice to Phenomenal
--------------------
Each of the Applicable Shareholders shall, before a transfer by them of
Control of List Co to a third party, or a transfer of any Shares to a third
party which, when aggregated with the Shares held by such third party or
his Associates, would result in such third party and his Associates
acquiring Control of List Co, give not less than 14 days' notice in writing
to Phenomenal, and Phenomenal may at any time within 14 days after the
expiry of such 14 day period by a written notice (the "Election Notice")
served on any of the Applicable Shareholders require any of the Applicable
Shareholders either:
(a) to procure that the proposed transferee offers to acquire from
Phenomenal all of its Shares, and any such offer shall be made in
accordance with Section 4.5 below; or
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(b) to purchase from Phenomenal all of its Shares in accordance with
Section 4.6 below.
4.5 Election Notice
---------------
If Phenomenal shall by Election Notice require any of the Applicable
Shareholders to procure the proposed transferee referred to in Section 4.4
to acquire from Phenomenal all of its Shares, the offer by the proposed
transferee must:
(a) in relation to the acquisition of Phenomenal's Shares, be on the same
terms (subject to Sub-Section (b) below) as to price per Share, time
of payment and sharing of stamp duty as those applicable to the
proposed transfer by any of the Applicable Shareholders of their
Shares and be conditional upon the Applicable Shareholders actually
transferring Control of List Co and customary warranties as to title
being given by Phenomenal; and
(b) where the offers extended to the Applicable Shareholders are not the
same as among them, the terms to be offered to Phenomenal shall be
those as are, in the opinion of Phenomenal, most favorable to the
offeree; and unless such third party then proceeds to acquire Control
of List Co and Phenomenal's Shares in accordance with the terms of the
relevant offers, none of the Applicable Shareholders shall transfer
any of their respective Shares to such third party.
4.6 Repurchase
----------
If Phenomenal shall elect in its Election Notice to require the Applicable
Shareholders to purchase all Phenomenal's Shares, the following provisions
shall apply:
(a) the price (the "Repurchase Price") to be paid to Phenomenal for the
repurchase (the "Repurchase") of Phenomenal's Shares ("Repurchase
Shares") shall be the offered price of the third party;
(b) notwithstanding any provisions in this Section, the liability of each
of the Applicable Shareholders to purchase the Repurchase Shares shall
be joint and several;
(c) Phenomenal shall sell with full title guarantee and the Applicable
Shareholders shall purchase the Repurchase Shares free from all
encumbrance and together with all rights attaching thereto as at the
date of the Election Notice including all dividends or distributions
which may be paid, declared or made in respect thereof at any time on
or after the date of the Election Notice;
(d) without prejudice to Sub-Section (b),unless the Applicable
Shareholders agreed otherwise, each of Applicable Shareholders shall
purchase the same proportionate part of the Repurchase Shares as the
number of Shares held by each of the Applicable Shareholders bears to
the aggregate number of Shares held by all the Applicable
Shareholders;
31
<PAGE>
(e) completion shall take place at 12:00 noon on the twenty-first day
after the date of the Election Notice or, if that is not a bank
business day, the first bank business day thereafter and, at such
completion:
(i) Phenomenal shall deliver to each of the Applicable Shareholders duly
executed instruments of transfer in favor of each of the Applicable
Shareholders the number of the Repurchase Shares determined by Section
4.6(d) above together with the share certificate therefor in the name
of Phenomenal or its nominee;
(ii) Phenomenal shall, so far as it lies within its power to do so, procure
the resignation of all Directors or directors on the board of
directors of SWL, Quality Prince, List Co or any of its subsidiaries
nominated by it with effect from completion of the Repurchase and each
such person shall acknowledge under seal that he has no claim against
List Co for whatsoever nature;
(iii)the Applicable Shareholders and Phenomenal (so far as it lies within
its power to do so) shall procure that a meeting of the Directors be
held at which resolution shall be passed:
(A) approving the transfer of the Repurchase Shares to each of the
Applicable Shareholders and the registration by List Co of such
transfer;
(B) the resignations of all Directors nominated by Phenomenal being
accepted; and
(C) such persons as the Applicable Shareholders shall be appointed
Directors with effect from completion of the Repurchase;
(iv) the Applicable Shareholders shall jointly and severally:
(A) pay or procure the payment to Phenomenal of the Repurchase Price
payable by the Applicable Shareholders by cashier's order or a
banker's draft drawn on a duly licensed bank in Hong Kong; and
(B) execute an instrument of transfer for the relevant Repurchase
Shares;
(f) Phenomenal shall warrant to the Applicable Shareholders that:
(i) Phenomenal is the legal and beneficial owner of the Repurchase Shares
free from all encumbrances and together with all rights attaching
thereto as at the date of the Election Notice and has the full power
and authority to sell and transfer the entire beneficial interests in
the Repurchase Shares to the Applicable Shareholders free from all
encumbrances and together with all rights as aforesaid; and
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<PAGE>
(ii) all stamp duties and other costs, expenses (including legal costs) and
charges payable in connection with the sale and re-transfer of the
Repurchase Shares under this Section 4.6 shall be borne by the
Applicable Shareholders and Phenomenal in equal shares.
5. MISCELLANEOUS
-------------
5.1 Governing Law
-------------
This Agreement shall be governed in all respects by the laws of Hong Kong
SAR, without regard to its conflict of law principles.
5.2 Survival
--------
The representations, warranties, covenants and agreements made herein shall
survive any investigation made by any Shareholder and the closing of the
transactions contemplated hereby.
5.3 Successors and Assigns
----------------------
Except as otherwise provided herein, the provisions hereof shall inure to
the benefit of, and be binding upon, the successors, assigns, heirs,
executors and administrators of the parties hereto.
5.4 Entire Agreement
----------------
This Agreement constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof, and no party shall
be liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein.
5.5 Notices, etc.
-------------
All notices and other communications required or permitted hereunder shall
be in writing and shall be delivered personally, mailed by certified or
registered mail, postage prepaid, return receipt requested, facsimile or
delivered by courier or overnight delivery, addressed (a) if to Phenomenal,
at 3322, 33rd Floor, Two Pacific Place, 88 Queensway, Hong Kong and if by
fax, to (852) 2877-6612 (attention: Mr. Adrian Woo), or at such other
address or fax number Phenomenal shall have provided to List Co in writing,
or (b) if to QPL, at Units 25-32, 2nd Floor, Block B, Focal Industrial
Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong, or if by fax, to
(852) 2362-3034, or at such other address or fax number as QPL shall have
furnished to Phenomenal in writing. Notices that are mailed shall be deemed
received upon personal delivery or confirmation of facsimile receipt or, if
earlier, three (3) days after deposit in the mail.
33
<PAGE>
5.6 Delays or Omissions
-------------------
Except as expressly provided herein, no delay or omission to exercise any
right, power or remedy accruing to any holder of any party hereto, upon any
breach or default of any other party under this Agreement, shall impair any
such right, power or remedy of such holder nor shall it be construed to be
a waiver of any such breach or default, or an acquiescence therein, or of
or in any similar breach or default thereafter occurring; nor shall any
waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of
any breach or default under this Agreement, or any waiver on the part of
any holder of any provisions or conditions of this agreement, must be in
writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement or by law or
otherwise afforded to any holder, shall be cumulative and not alternative.
5.7 Counterparts
------------
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one
instrument.
5.8 Severability
------------
If any provision of this Agreement, or the application thereof, shall for
any reason and to any extent be invalid or unenforceable the remainder of
this Agreement and application of such provision to persons or
circumstances shall be interpreted so as best to reasonably effect the
intent of the parties hereto, the parties further agree to replace such
void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve to the extent possible, the
economic, business and other purposes of the void or unenforceable
provision.
5.9 Titles and Subtitles
--------------------
The titles and subtitles used in this Agreement are used for convenience
only and are not considered in construing or interpreting this Agreement.
6. TERMINATION UPON LISTING
Notwithstanding any other provisions herein, this Agreement shall terminate
and shall become void and cease to have any force or effect on the date
being the date of any prospectus that may be issued by List Co in respect
of the listing of the shares of List Co on The Stock Exchange of Hong Kong
Limited.
The foregoing agreement is hereby executed as a deed as of the date first
above written.
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<PAGE>
THE COMMON SEAL of )
PHENOMENAL LIMITED )
was hereunto affixed in accordance )
with its Articles of Association )
in the presence of: )
- ----------------------------------------
Director
THE COMMON SEAL of )
QUALITY PRINCE LIMITED )
was hereunto affixed in accordance )
with its Articles of Association )
in the presence of: )
- ----------------------------------------
Director
-35-
<PAGE>
Schedule 6
INFORMATION IN RESPECT OF
HANG FUNG JEWELLERY COMPANY LIMITED
Name: Hang Fung Jewellery Company Limited
Registration Number: 496642
Registered Office:
Units 25-32, 2nd Floor, Block B,
Focal Industrial Centre, 21 Man Lok Street,
Hunghom, Kowloon
Hong Kong SAR
Authorized Capital: HK$500,000 divided into two classes:
2 Class A non-voting shares of HK$ 1.00 each and
499,998 Class B voting shares of HK$1.00 each
Directors: Lam Sai Wing, and
Chan Yam Fai, Jane
Shareholders (and no. held):
Class A non-voting shares No. of shares
------------------------- -------------
Lam Sai Wing 1
Chan Yam Fai, Jane 1
Class B voting shares
---------------------
Lam Sai Wing (Note 1) 1
Quality Prince Limited 1
Subsidiaries: None
Note 1: Lam Sai Wing holds one Class B voting share on trust for Quality Prince
Limited.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,088
<SECURITIES> 0
<RECEIVABLES> 5,105
<ALLOWANCES> 0
<INVENTORY> 10,926
<CURRENT-ASSETS> 22,832
<PP&E> 10,219
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,051
<CURRENT-LIABILITIES> 21,504
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 9,597
<TOTAL-LIABILITY-AND-EQUITY> 33,051
<SALES> 13,927
<TOTAL-REVENUES> 13,995
<CGS> (10,327)
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (1,409)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (529)
<INCOME-PRETAX> 1,730
<INCOME-TAX> (142)
<INCOME-CONTINUING> 1,588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,588
<EPS-PRIMARY> .12
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