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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. __)
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
LJ INTERNATIONAL INC.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
LJ INTERNATIONAL INC.
Unit #12, 12/F, Block A
Focal Industrial Center
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held Wednesday, December 15, 1999
To the Shareholders:
PLEASE TAKE NOTICE that our annual meeting of shareholders will be held at
the Company's Shenzhen office, 10th Floor, Block 18, Free Trade Zone, Sha Tou
Jiao, Shenzhen, People's Republic of China, on Wednesday, December 15, 1999, at
3:00 p.m., local time, for the following purposes:
1. To elect four directors to hold office for the term specified in the
proxy statement or until their successors are elected and qualified;
2. To approve an amendment to our 1998 Stock Compensation Plan increasing
the authorized number of shares of common stock from 2,000,000 to 4,000,000 (the
"1998 Stock Compensation Plan Amendment Proposal");
3. To approve an amendment to our Memorandum of Association to provide
that the authorized capital shall be restated to be made up of two classes of
shares divided into 80,000,000 shares of common stock, US$0.01 par value, and
20,000,000 shares of preferred stock, US$0.01 par value (the "Authorization of
Preferred Stock Proposal");
4. To ratify and approve the Securities Purchase Agreement, dated October
29, 1999, and all transactions contemplated thereby, including the issuance of
up to $10,500,000 of convertible debentures and all shares issuable upon
conversion thereof (the "Sale of Convertible Debentures Proposal"); and
5. To transact such other business as may properly come before the
meeting or any adjournment.
The board of directors has fixed the close of business on November 9, 1999,
as the record date for the determination of shareholders entitled to notice of
and to vote at the meeting and at any adjournment. A proxy statement which
describes the foregoing proposals and a form of proxy accompany this notice.
By Order of the Board of Directors
Ka Man Au
Secretary
Dated: November 17, 1999
IMPORTANT
Whether or not you expect to attend the meeting, please execute the
accompanying proxy and return it promptly in the enclosed reply envelope which
requires no postage. If you grant a proxy, you may revoke it at any time prior
to the meeting. Also, whether or not you grant a proxy, you may vote in person
if you attend the meeting.
<PAGE>
LJ INTERNATIONAL INC.
Unit #12, 12/F, Block A
Focal Industrial Center
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
To Be Held Wednesday, December 15, 1999
SOLICITATION OF PROXY
The accompanying proxy is solicited on behalf of the board of directors of
LJ International Inc. for use at our annual meeting of shareholders to be held
at the Company's Shenzhen office, 10th Floor, Block 18, Free Trade Zone, Sha Tou
Jiao, Shenzhen, People's Republic of China, on Wednesday, December 15, 1999, and
at any adjournment. In addition to mails, proxies may be solicited by personal
interview, telephone or telegraph by our officers, directors and other
employees, who will not receive additional compensation for such services. We
may also request brokerage houses, nominees, custodians and fiduciaries to
forward the soliciting material to the beneficial owners of stock held of record
and will reimburse them at the rates suggested by the New York Stock Exchange.
We will bear the cost of this solicitation of proxies, which are expected to be
nominal. Proxy solicitation will commence with the mailing of this proxy
statement on or about November 17, 1999.
Execution and return of the enclosed proxy will not affect your right to
attend the meeting and to vote in person. If you execute a proxy, you still
retain the right to revoke it at any time prior to exercise at the meeting. A
proxy may be revoked by delivery of written notice of revocation to our
Secretary, by execution and delivery of a later proxy or by voting the shares in
person at the meeting. A proxy, when executed and not revoked, will be voted in
accordance with its instructions. In the absence of specific instructions,
proxies will be voted "FOR" the election as directors of those nominees named in
the proxy statement, "FOR" the proposal to approve an amendment to our 1998
Stock Compensation Plan, "FOR" the proposal to approve an amendment to our
Memorandum of Association to authorize a new class of preferred stock, "FOR" the
proposal to ratify and approve our sale of up to $10.5 million of convertible
debentures, and in accordance with his best judgment on all other matters that
may properly come before the meeting.
The enclosed form of proxy provides a method for shareholders to withhold
authority to vote for any one or more of the nominees for director while
granting authority to vote for the remaining nominees. The names of all
nominees are listed on the proxy. If you wish to grant authority to vote for
all nominees, check the box marked "FOR." If you wish to withhold authority to
vote for all nominees, check the box marked "WITHHOLD." If you wish your shares
to be voted for some nominees and not for one or more of the others, check the
box marked "FOR" and indicate the name(s) of the nominee(s) for whom you are
withholding the authority to vote by writing the name(s) of such nominee(s) on
the proxy in the space provided.
<PAGE>
PURPOSE OF MEETING
As stated in the notice of annual meeting of shareholders accompanying this
proxy statement, the business to be conducted and the matters to be considered
and acted upon at the meeting are as follows:
1. To elect four directors to hold office for the term specified herein
or until their successors are elected and qualified;
2. To approve an amendment to our 1998 Stock Compensation Plan increasing
the authorized number of shares of common stock from 2,000,000 to 4,000,000 (the
"1998 Stock Compensation Plan Amendment Proposal");
3. To approve an amendment to our Memorandum of Association to provide
that the authorized capital shall be restated to be made up of two classes of
shares divided into 80,000,000 shares of common stock, US$0.01 par value, and
20,000,000 shares of preferred stock, US$0.01 par value (the "Authorization of
Preferred Stock Proposal");
4. To ratify and approve the Securities Purchase Agreement, dated October
29, 1999, and all transactions contemplated thereby, including the issuance of
up to $10,500,000 of convertible debentures and all shares issuable upon
conversion thereof (the "Sale of Convertible Debentures Proposal"); and
5. To transact such other business as may properly come before the
meeting or any adjournment.
VOTING AT MEETING
Our voting securities consist solely of common stock, $.01 par value per
share.
The record date for shareholders entitled to notice of and to vote at the
meeting is the close of business on November 9, 1999, at which time we had
outstanding and entitled to vote at the meeting 6,365,646 shares of common
stock. Shareholders are entitled to one vote for each share of common stock
held in their name on the record date. Shareholders representing a majority of
the common stock outstanding and entitled to vote must be present or represented
by proxy to constitute a quorum.
The election of directors, approval of the 1998 Stock Compensation Plan
Amendment Proposal and approval of the Sale of Convertible Debentures Proposal
each will require the affirmative vote of the holders of a majority of the
common stock present or represented by proxy at the meeting and entitled to
vote. Cumulative voting for directors is not authorized and proxies cannot be
voted for more than four nominees. Approval of the Authorization of Preferred
Stock Proposal will require the affirmative vote of the holders of 75% of our
common stock outstanding and entitled to vote at the meeting.
Yu Chuan Yih, our Chairman and principal shareholder, has entered into an
agreement with the investor under the Securities Purchase Agreement to vote all
of his shares held by him as of the record date, representing 59.2% of the
outstanding shares, in favor of the Sale of Convertible Debentures Proposal.
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STOCK OWNERSHIP
The following table sets forth the number of shares of common stock owned
as of September 1, 1999 by each person known by us to have owned more than ten
percent of our shares then outstanding, by each of our current officers,
directors and nominee-directors, and by all of our officers and directors as a
group. As far as is known to our management, no person owned more than ten
percent of our outstanding shares of common stock as of September 1, 1999 except
as set forth below.
<TABLE>
<CAPTION>
Name of Shareholder Number Percent
- ------------------- ------------- -----------
Shares Beneficially Owned
--------------------------
<S> <C> <C>
Yu Chuan Yih 3,787,200 59.5%
Ka Man Au 0
Joseph Tuszer 0
Hon Tak Ringo Ng 0
Po Yee Elsa Yue 0
Lionel C. Wang 0
All directors and executive officers as a group (6 persons) 3,787,200 59.5%
</TABLE>
___________
Of Mr. Yih's 3,787,200 shares, 1,500,000 shares are owned of record by
Pacific Growth Developments Ltd., a British Virgin Islands corporation which is
owned by Mr. Yih (60%), his wife Tammy Yih (20%) and an adult daughter, Bianca
Tzu Hsiu Yih (20%). In addition, Mr. Yih is the sole shareholder of the
following three British Virgin Islands corporations which own shares of our
common stock as follows: Welgram International Limited - 236,000 shares;
Sunflower Gold Holdings Limited -235,000 shares; and Panama Gold Holdings
Limited - 235,000 shares.
BOARD OF DIRECTORS
Our board of directors has the responsibility for establishing broad
corporate policies and for our overall performance, although it is not involved
in day-to-day operating details. The board meets regularly throughout the year,
including the annual organization meeting following the annual meeting of
shareholders, to review significant developments affecting us and to act upon
matters requiring board approval. It also holds special meetings as required
from time to time when important matters arise requiring board action between
scheduled meetings. During the last fiscal year, the board met six times.
We have established an audit committee, which consists of Messrs. Yih, Lai
and Wang. Its functions are to:
. recommend annually to the board of directors the appointment of our
independent public accountants;
. discuss and review the scope and the fees of the prospective annual audit
and review the results with the independent public accountants;
. review and approve non-audit services of the independent public
accountants;
. review compliance with our existing accounting and financial policies;
. review the adequacy of our financial organization; and
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. review our management's procedures and policies relative to the adequacy of
our internal accounting controls and compliance with federal and state laws
relating to financial reporting.
The Audit Committee met once during the fiscal year ended April 30, 1999.
We do not have a nominating committee. The functions customarily
attributable to a nominating committee are performed by the board of directors
as a whole.
No director attended fewer than 75 percent of the aggregate of the total
number of meetings of the board of directors and the total number of meetings
held by all committees of the board on which he served.
Each non-employee director is compensated separately for service on the
board and is reimbursed for expenses to attend board meetings.
ELECTION OF DIRECTORS
At the meeting, four directors are to be elected. Each director will be
elected for a one-year term or until his successor is elected and qualified.
Shares represented by properly executed proxies will be voted, in the
absence of contrary indication or revocation by the shareholder granting such
proxy, in favor of the election of the persons named below as directors. The
person named as proxy has been designated by management and intends to vote for
the election to the board of directors of the persons named below, each of whom
(except Ms. Yue) is now a director of the Company. If any nominee is unable to
serve as a director, the shares represented by the proxies will be voted, in the
absence of contrary indication, for any substitute nominee that management may
designate. We know of no reason why any nominee would be unable to serve. The
information presented with respect to the nominees was obtained in part from
each of them and in part from our records.
Nominees for Election as Directors
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Yu Chuan Yih........ 60 Chairman of the Board of Directors, President and Chief
Executive Officer
Ka Man Au........... 35 Executive Vice President, Secretary and Director
Lionel C. Wang...... 43 Non-Executive Director
Po Yee Elsa Yue..... 35 Non-Executive Director Nominee
</TABLE>
None of the directors and officers was selected pursuant to any agreement
or understanding with any other person. There is no family relationship between
any director or executive officer and any other director or executive officer.
Mr. Yih established the business of Lorenzo Jewelry Mfg. (HK) Ltd. and has
served as its president and managing director since 1987. Mr. Yih is primarily
responsible for our business
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development and overall management. He has over 20 years of experience in semi-
precious stone production and marketing. Mr. Yih has been a gemstone trader in
Brazil and has extensive experience and relationships in gem sourcing and
jewelry design. Mr. Yih is also president of the Hong Kong branch of the
Gemological Institute of America (GIA), the nonprofit educational organization
for the jewelry industry.
Ms. Au has served as a director of Lorenzo Jewelry Mfg. (HK) Ltd. since its
incorporation in 1987. Ms. Au is primarily responsible for our general
administration, human resources, operations and management.
Mr. Wang has served us as a non-executive director since June 1998. He
received his Bachelor of Commerce from Tamkung University, Taipei, Taiwan in
1978, his Master of Business Administration from California State Polytechnic
University in 1980 and his Master of Science from Stanford University in 1981.
From 1984 to 1990, Mr. Wang served as marketing research analyst and senior
strategic planning analyst for The Gillette Company, Boston, Massachusetts.
From 1990 to 1995, he served as associate director and then director of product
development for Information Resources, Inc., Waltham, Massachusetts. From 1995
to 1996, Mr. Wang served as vice-president as Nielsen North America with
responsibility for analytical and modeling projects on Kraft Foods/White Plains
account. Since 1996, Mr. Wang has served as director of analytical services for
The NPD Group, Inc., Port Washington, New York.
Ms. Yue is a non-executive director nominee. She is a graduate gemologist
from the Gemology Institute of America and has served as vice president of GIA,
Hong Kong since August 1994.
Compensation of Directors and Executive Officers
The aggregate compensation paid by us to all of our directors and executive
officers as a group for the fiscal year ended April 30, 1999 on an accrual
basis, for services in all capacities, was HK$4,038,000 (US$522,000). During the
fiscal year ended April 30, 1999, we contributed an aggregate amount of
HK$55,000 (US$7,000) toward the pension plans of our directors and executive
officers.
Executive Service Contract
We entered into an employment agreement with Mr. Yu Chuan Yih effective
October 1, 1997 for a period of three years at an annual salary of HK$1,600,000
(US$207,000). Mr. Yih's remuneration package includes benefits with respect to
a motor car. In addition, Mr. Yih will be entitled to an annual management bonus
of a sum to be determined by the board at its absolute discretion having regard
for our operating results and the performance of Mr. Yih during the relevant
financial year. The amount payable to Mr. Yih will be decided by majority
decision of the members of the board present in the meeting called for that
purpose, provided that Mr. Yih shall abstain from voting and not be counted in
the quorum in respect of the resolution regarding the amount so payable to him.
The 1998 Stock Compensation Plan
Effective June 1, 1998, we adopted and approved the 1998 Stock Compensation
Plan. The purpose of the plan is to encourage ownership of our common stock by
our officers, directors, employees and advisors to provide additional incentive
for them to promote our success and our business and to encourage them to remain
in our employ by providing them an opportunity to benefit from any
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appreciation of our common stock through the issuance of stock options. Options
constitute either incentive stock options within the meaning of Section 422 of
the United States Internal Revenue Code of 1986, as amended, or options which
constitute nonqualified options at the time of issuance of such options. The
plan provides that incentive stock options and/or nonqualified stock options may
be granted to our officers, directors, employees and advisors selected by the
compensation committee. A total of 2,000,000 shares of common stock are
authorized and reserved for issuance during the term of the plan which expires
in June 2008. The compensation committee has the sole authority to interpret the
plan and make all determinations necessary or advisable for administering the
plan. The exercise price for any incentive option must be at least equal to the
fair market value of the shares as of the date of grant. Upon the exercise of
the option, the exercise price must be paid in full either in cash, shares of
our stock or a combination. If any option is not exercised for any reason, such
shares shall again become available for the purposes of the plan.
As of April 30, 1999, we granted a total of 1,285,000 options exercisable
at $5.00 per share anytime until April 11, 2009, including an aggregate of
575,000 options to our officers and directors as a group.
THE BOARD OF DIRECTORS RECOMMENDS TO OUR SHAREHOLDERS THAT THEY VOTE "FOR"
THE ELECTION OF SUCH NOMINEES.
CERTAIN TRANSACTIONS
Yu Chuan Yih, our president and chairman, is a director and principal
shareholder of Gemological Institute of America, Hong Kong Limited; Italon
Limited; Lorenzo Consultant & Investment (China) Limited; and Hong Kong Brasil
Lapidary Limited. During the fiscal years ended April 30, 1997, 1998 and 1999,
Mr. Yih and these affiliated companies received unsecured advances from, and
made unsecured advances to, us which were interest free and repayable on demand.
During the fiscal year ended April 30, 1998, we sold an investment property
to Mr. Yih at its appraised value of HK$3,800,000 (US$492,000), resulting in a
gain to us of HK$2,904,000 (US$376,000). The sale price of the property was
based on a valuation report prepared by an independent professional property
valuer.
During the fiscal year ended April 30, 1999, we sold finished goods of
HK$74,000 (US$10,000) to Gemological Institute of America, Hong Kong Limited and
Hong Kong Brasil Lapidary Limited, which were made according to the published
prices and conditions offered to our major customers. In addition, we provided
a guarantee to a bank in respect of mortgage loans granted to Yu Chuan Yih to
the extent of HK$4,882,000 (US$632,000).
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ADDITIONAL MATTERS TO BE VOTED UPON BY SHAREHOLDERS
THE 1998 STOCK COMPENSATION PLAN AMENDMENT PROPOSAL
Our board of directors and our shareholders have adopted and approved the
1998 Stock Compensation Plan. We believe that the plan is accomplishing its
purpose which is to promote our and your interests by providing key employees
with an opportunity to acquire a proprietary interest in us and to develop a
stronger incentive to put forth maximum effort for our continued success and
growth. In addition, the opportunity to acquire a proprietary interest in us
aids us in attracting and retaining key personnel of outstanding ability.
We believe that an increase in the number of shares available for grant
under the plan is necessary to continue accomplishing its purpose. As of
November 9, 1999, only 715,000 shares remained available for grant during the
remaining term of the plan through June 2008. Accordingly, we have approved an
amendment to increase the number of shares of common stock subject to the plan
from 2,000,000 shares to 4,000,000 shares, subject to approval of our
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS TO OUR SHAREHOLDERS THAT THEY VOTE "FOR"
THE ADOPTION OF THE AMENDMENT TO THE 1998 STOCK COMPENSATION PLAN.
THE AUTHORIZATION OF PREFERRED STOCK PROPOSAL
Our board of directors has approved, subject to shareholder approval, an
amendment to our Memorandum of Association to provide that the authorized
capital shall be restated to be made up of two classes of shares divided into
80,000,000 shares of common stock, US$0.01 par value, and 20,000,000 shares of
preferred stock, US$0.01 par value ("Preferred Stock") and authorize the board
of directors, without any vote or action by the shareholders, to cause Preferred
Stock to be issued in series with such voting rights and such designations,
preferences, limitations, restrictions and relative rights as the board may
determine. Our board of directors has directed that the proposed amendment be
submitted to a vote of our shareholders at this meeting.
We believe that it is desirable and in our and your best interests that we
have the flexibility to issue shares of Preferred Stock in series and to fix the
terms of each series, without seeking further shareholder approval, except as
otherwise provided by law. We may use authorized Preferred Stock for various
corporate purposes, including possible future financing and acquisition
transactions, possible recapitalization through a stock split or stock dividend,
issuance of additional stock options or awards, and other corporate purposes.
If the proposed amendment is approved, we would be authorized to issue
these shares of Preferred Stock in one or more series with such voting powers,
designations, and relative, participating, optional or other special rights as
we may determine in our sole discretion, without further authorization by our
shareholders. Our shareholders will not have preemptive rights to subscribe for
shares of Preferred Stock.
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We cannot determine the actual effect of the Preferred Stock on your rights
as shareholders until we create a series of Preferred Stock and determine the
rights of the holders of such series. However, such effects might include:
. restrictions on the payment of dividends to holders of the common stock;
. dilution of your voting power if the holders of shares of Preferred Stock
are given voting rights;
. dilution of your equity interests and voting power if the Preferred Stock
is convertible into common stock; and
. restrictions upon any distribution of assets to the holders of the common
stock upon liquidation or dissolution until the satisfaction of any
liquidation preference granted to the holders of Preferred Stock.
We currently do not have any agreements, plans or arrangements for the
issuance of any shares of Preferred Stock.
The adoption of the proposed amendment to our Memorandum of Association
could have the effect of discouraging attempts to acquire control of us. We
have no knowledge of any present effort to accumulate our securities or to
obtain control of us. We have no plans at the present time to submit to our
shareholders for approval or take any other action with respect to any
proposals, other than the proposed amendment to our Memorandum of Association,
that might be deemed to have an anti-takeover effect. In our judgment, there
are now no provisions in our Memorandum of Association or Articles of
Association that could be viewed as having, to a significant extent, such an
effect other than (a) provisions in our Memorandum of Association providing that
vacancies in our board of directors may be filled by a majority of our remaining
directors, and (b) provisions providing for the acceleration of the
exercisability of options in certain circumstances. There is no inter-
relationship between the existing provisions and the proposed amendment.
Clause 9 of our Memorandum of Association is proposed to be amended to read
in its entirety as follows:
"The authorized capital is made up of two classes of shares
divided into 80,000,000 shares of common stock, US$0.01 par
value, and 20,000,000 shares of preferred stock, US$0.01 par
value. The Board of Directors is vested with the authority to
authorize by resolution from time to time the issuance of the
preferred shares in one or more series and to prescribe the
number of preferred shares within each such series and the voting
powers, designations, preferences, limitations, restrictions and
relative rights of each such series."
THE BOARD OF DIRECTORS RECOMMENDS TO OUR SHAREHOLDERS THAT THEY VOTE "FOR"
THE APPROVAL AND ADOPTION OF THE AUTHORIZATION OF PREFERRED STOCK PROPOSAL.
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THE SALE OF CONVERTIBLE DEBENTURES PROPOSAL
On October 29, 1999, we entered into a Securities Purchase Agreement with
an accredited investor pursuant to which we agreed to issue and the investor
agreed to purchase up to $10,500,000 of our 3% Convertible Debentures, as well
as common stock purchase warrants. On November 5, 1999, pursuant to the
Securities Purchase Agreement, we issued and the investor purchased $3,000,000
of our 3% Convertible Debentures, as well as 45,000 common stock purchase
warrants. Our shareholders are being asked to ratify and approve the Securities
Purchase Agreement, and the exhibits thereto, dated October 29, 1999, and all
transactions contemplated thereby and all shares issuable upon conversion,
including the issuance of $3,000,000 of our 3% Convertible Debentures and 45,000
common stock purchase warrants on November 5, 1999, in order to satisfy certain
listing requirements under The Nasdaq Marketplace Rules for continued listing of
our common stock on The Nasdaq Stock Market National Market System.
The following summarizes the terms of the transaction and is qualified in
its entirety by the Securities Purchase Agreement and the exhibits thereto, a
copy of which is attached hereto as Appendix A and incorporated by reference
herein. Shareholders are encouraged to review the attached Agreement and its
exhibits.
Pursuant to the authorization of our board of directors, our management
negotiated and executed the Securities Purchase Agreement pursuant to which the
investor agreed under certain terms and conditions to invest up to $10,500,000
in our 3% Convertible Debentures. Additionally, we agreed, among other things,
to issue to the investor warrants to purchase our common stock (the "Warrants").
On November 5, 1999, we issued to the investor $3,000,000 of Debentures due
November 5, 2002 and Warrants to purchase 45,000 shares of our common stock at
an exercise price of $3.75 per share with an expiration date of November 5,
2004.
The terms and conditions of the Debentures are summarized as follows:
. The interest rate on the Debentures is 3% per annum, payable twice
annually in cash or in shares of our common stock.
. The date of maturity for the $3,000,000 Debenture which we issued is
November 5, 2002.
. The Debenture is convertible into shares of our common stock at the lesser
of the Fixed Conversion Price or the Variable Conversion Price.
. The Fixed Conversion Price is the greater of:
. $5.00 per share or
. 125% of the average closing bid price of the common stock for
the 15 trading days ending on the trading day immediately before
the November 5, 1999 Initial Closing Date.
. The Variable Conversion Price means 92% of the average of the two
lowest closing bid prices of the common stock during the 20 trading
days immediately prior to conversion.
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In no event (subject to certain exceptions, including a Company default
under any Debenture or the Agreement) shall the investor be entitled to convert
any Debenture to the extent that, after such conversion, the sum of (1) the
number of shares of common stock beneficially owned by the investor and its
affiliates, and (2) the number of shares of common stock issuable upon the
conversion of the Debenture would result in beneficial ownership by the investor
and its affiliates of more than 4.9% of the outstanding shares of common stock.
The Securities Purchase Agreement also has the following additional terms:
. We are required by the terms of the Registration Rights Agreement entered
into concurrently with the Securities Purchase Agreement to file after the
closing date with the Securities and Exchange Commission a registration
statement to register the common stock issuable upon conversion of the
Debentures and exercise of the Warrants to allow the investor to resell
such common stock to the public.
. Under the terms of the Agreement, we are subject to certain cash penalties
if we are unable to deliver to the investor the common stock receivable
upon conversion of the Debentures in a timely fashion.
Our common stock is traded on the over-the-counter market and is quoted on
The Nasdaq Stock Market National Market System. In order to qualify for
inclusion in The Nasdaq Stock Market National Market System, we need to satisfy
certain financial and other criteria set forth in The Nasdaq Marketplace Rules
(the "Rules"). In addition, in order to maintain such inclusion under the
Rules, we must, among other things, follow certain corporate governance
procedures, including obtaining shareholder approval in connection with certain
corporate transactions.
Rule 4460(i) of the Rules requires shareholder approval of the issuance of
securities by an issuer under various circumstances. In particular, Subsection
(1)(D) of paragraph (i) requires shareholder approval prior to the issuance of
securities in the following situations:
(D) In connection with a transaction other than a public offering
involving:
(i) the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a
price less than the greater of book or market value which together
with sales by officers, directors or substantial shareholders of the
company equals 20% or more of common stock or 20% or more of the
voting power outstanding before the issuance; or
(ii) the sale or issuance by the company of common stock (or
securities convertible into or exercisable for common stock) equal to
20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock.
Pursuant to the terms of Securities Purchase Agreement, the Debenture is
convertible into shares of common stock at the lesser of (i) the Fixed
Conversion Price or (ii) 92% of the average of the two lowest closing bid prices
of the common stock during the 20 trading days prior to conversion. As a
result, the shares of common stock to be issued upon conversion of the Debenture
will be issued, if at all, for less than the greater of book or market value of
such shares. Pursuant to the terms of the
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Securities Purchase Agreement, we issued $3,000,000 of Debentures on November 5,
1999. As of such date, we believe that the shares on an as-converted basis
represented less than 20% of our issued and outstanding common stock and,
accordingly, did not require shareholder approval under the applicable Rules.
Nonetheless, under the terms of the Securities Purchase Agreement, we have
agreed to take all steps necessary to obtain the approval of our shareholders
regarding authorization of our issuance to the holders of our Debentures of
shares of common stock in excess of 20% of the outstanding shares of common
stock. The conversion of any additional Debentures to be issued up to an
aggregate of $10,500,000 and/or the exercise of the Warrants may likely result
in the aggregate issuance of shares of our common stock in excess of the Nasdaq
Rule. Such issuances will require us to obtain the consent of our shareholders.
THE BOARD OF DIRECTORS RECOMMENDS TO OUR SHAREHOLDERS THAT THEY VOTE "FOR"
THE APPROVAL AND RATIFICATION OF THE SALE OF CONVERTIBLE DEBENTURES PROPOSAL.
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of Moores Rowland Hong Kong will attend the meeting and
will have the opportunity to make a statement if he so desires. This
representative will be available to respond to appropriate shareholder questions
at that time.
PROPOSALS OF SHAREHOLDERS FOR PRESENTATION
AT NEXT ANNUAL MEETING OF SHAREHOLDERS
Any shareholder of record who desires to submit a proper proposal for
inclusion in the proxy materials relating to the next annual meeting of
shareholders must do so in writing and it must be received at our principal
executive offices by April 29, 2000. You must be a record or beneficial owner
entitled to vote at the next annual meeting on your proposal and must continue
to own such security entitling you to vote through the date on which the meeting
is held.
ANNUAL REPORT
Our annual report to shareholders concerning our operations during the
fiscal year ended April 30, 1999, including audited financial statements, has
been distributed to all record holders as of the record date. The annual report
is not incorporated in the proxy statement and is not to be considered a part of
the soliciting material.
OTHER BUSINESS
Our management is not aware of any other matters which are to be presented
at the meeting, nor have we been advised that other persons will present any
such matters. However, if other matters properly come before the meeting, the
individual named in the accompanying proxy shall vote on such matters in
accordance with his best judgment.
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AVAILABILITY OF ANNUAL REPORT ON FORM 20-F
UPON WRITTEN REQUEST, WE WILL PROVIDE, WITHOUT CHARGE, A COPY OF OUR ANNUAL
REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED APRIL 30, 1999 TO EACH SHAREHOLDER
OF RECORD OR TO EACH SHAREHOLDER WHO OWNED OUR COMMON STOCK LISTED IN THE NAME
OF A BANK OR BROKER, AS NOMINEE, AT THE CLOSE OF BUSINESS ON NOVEMBER 9, 1999.
ANY REQUEST BY A SHAREHOLDER FOR OUR ANNUAL REPORT ON FORM 20-F SHOULD BE SENT
TO OUR SECRETARY, LJ INTERNATIONAL INC., UNIT #12, 12/F, BLOCK A, FOCAL
INDUSTRIAL CENTER, 21 MAN LOK STREET, HUNG HOM, KOWLOON, HONG KONG.
The above notice and proxy statement are sent by order of our board of
directors.
KA MAN AU
Secretary
November 17, 1999
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APPENDIX A
SECURITIES PURCHASE AGREEMENT
FORM OF DEBENTURE (ANNEX I)
REGISTRATION RIGHTS AGREEMENT (ANNEX IV)
FORM OF WARRANT (ANNEX VI)
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SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of acceptance
set forth below, is entered into by and between LJ INTERNATIONAL INC., a British
Virgin Islands corporation, with headquarters located at Unit #12, 12/F, Block
A, Focal Industrial Center, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong (the
"Company"), and the entity named on the signature page hereto (the _Buyer_).
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D (_Regulation
D_) and/or Regulation S ("Regulation S") as promulgated by the United States
Securities and Exchange Commission (the _SEC_) under the Securities Act of 1933,
as amended (the _1933 Act_), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, 3% Convertible Debentures of the Company (the
_Convertible Debentures_) which will be convertible into shares of Common Stock,
$.01 par value per share, of the Company (the _Common Stock_), upon the terms
and subject to the conditions of such Convertible Debentures together with the
Warrants (as defined below) exercisable for the purchase of shares of Common
Stock (the "Warrant Shares"), and subject to acceptance of this Agreement by the
Company; and
WHEREAS, the Debentures and the Shares (as those terms are defined
below) have not been registered under the 1933 Act and may not be offered or
sold in the United States or to U.S. Persons, other than distributors (as such
terms are defined in Regulation S), unless the Debentures or the Shares (as
defined below), as the case may be, are registered under the 1933 Act, or an
exemption or safe harbor from the registration provisions of the 1933 Act is
available;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase.
(i) The undersigned hereby agrees to purchase initially from the
Company Convertible Debentures in the principal amount of $3,000,000 (the
_Initial Debentures_) out of a total offering of not more than $10,500,000 of
such Convertible Debentures, and having the terms and conditions and being in
the form attached hereto as Annex I.
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(ii) Subject to the terms and conditions of this Agreement and the
other Transaction Agreements, the Buyer will purchase (x) the Initial Debentures
on the Initial Closing Date (as defined below) and (y) in three or more
additional tranches (each, an _Additional Tranche_) the Additional Debentures on
the Additional Closing Dates (as those terms are defined below).
(iii) The purchase price to be paid by the Buyer shall be equal to
the face amount of the Initial Debentures or Additional Debentures, as the case
may be, being purchased on the relevant Closing Date (as defined below) and
shall be payable in United States Dollars.
b. Certain Definitions. As used herein, each of the following
terms has the meaning set forth below, unless the context otherwise requires:
(i) _Debentures_ means all or any portion of the Initial
Debentures and the Additional Debentures.
(ii) _Securities_ means the Debentures, the Warrants and the Common
Stock (x) upon the conversion of the Debentures or in lieu of interest payable
thereon or (y) upon the exercise of the Warrants.
(iii) _Purchase Price_ means the purchase price for the Initial
Debentures or the Additional Debentures, as the case may be.
(iv) _Initial Closing Date_ means the date of the closing of the
purchase and sale of the Initial Debentures, as provided herein.
(v) _Additional Closing Date_ means the date of the closing of the
purchase and sale of the relevant Additional Debentures, as provided herein.
(vi) _Closing Date_ means the Initial Closing Date or the relevant
Additional Closing Date, as the case may be.
(vii) _Effective Date_ means the effective date of the Registration
Statement covering the Registrable Securities (as those terms are defined in the
Registration Rights Agreement defined below) relating to the Debentures issued
on the Initial Closing Date and on each Additional Closing Date, respectively.
(viii) _Market Price of the Common Stock_ means (x) the average
closing bid price of the Common Stock for the five (5) trading days ending on
the trading day immediately before the relevant date indicated in the relevant
provision hereof (unless a different relevant period is specified in the
relevant provision), as reported by Bloomberg, LP or, if not so reported, as
reported on the over-the-counter market or (y) if the Common Stock is listed on
the New York Stock or the American Stock Exchange, the closing price on such
exchange on the trading day immediately before the relevant date indicated in
the relevant provision hereof (unless a different relevant period is specified
in the relevant provision), as reported in The Wall Street Journal.
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(ix) _Converted Shares_ means the shares of Common Stock issuable
upon conversion of the Debentures.
(x) _Shares_ means the shares of Common Stock representing any or
all of the Converted Shares and the Warrant Shares.
(xi) _Certificates_ means the relevant Debentures and the Warrants,
each duly executed on behalf of the Company and issued in the name of the Buyer.
(xii) _Person_ means any living person or any entity, such as, but
not necessarily limited to, a corporation, partnership or trust.
(xiii) _Affiliate_ means, with respect to a specific Person referred
to in the relevant provision, another Person who or which controls or is
controlled by or is under common control with such specified Person.
(xiv) "Transaction Agreements" means the Securities Purchase
Agreement, the Registration Rights Agreement (as defined below), the Debentures,
the Warrants, and the Joint Escrow Instructions (as defined below).
c. Form of Payment; Delivery of Certificates.
(i) The Buyer shall pay the Purchase Price for the relevant
Debentures by delivering immediately available good funds in United States
Dollars to the escrow agent (the _Escrow Agent_) identified in the Joint Escrow
Instructions attached hereto as Annex II (the _Joint Escrow Instructions_) on
the date prior to the relevant Closing Date.
(ii) No later than the relevant Closing Date, but in any event
promptly following payment by the Buyer to the Escrow Agent of the relevant
Purchase Price, the Company shall deliver the relevant Certificates to the
Escrow Agent. Time is of the essence with respect to such delivery, and failure
by the Company to make such delivery shall constitute a default by the Company
of its obligations hereunder.
(iii) By signing this Agreement, each of the Buyer and the Company,
subject to acceptance by the Escrow Agent, agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow Instructions, all of the
provisions of which are incorporated herein by this reference as if set forth in
full.
d. Method of Payment. Payment into escrow of the Purchase Price
shall be made by wire transfer of funds to:
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Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: [To be provided to the Buyer by Krieger & Prager]
Re: LJ International Transaction
Not later than 5:00 p.m., New York time, on the date which is seven (7) New York
Stock Exchange trading days after the Company shall have accepted this Agreement
and returned a signed counterpart of this Agreement to the Escrow Agent by
facsimile, the Buyer shall deposit with the Escrow Agent the Purchase Price for
the Initial Debentures in currently available funds. Time is of the essence
with respect to such payment, and failure by the Buyer to make such payment
shall constitute a default by the Buyer of its obligations hereunder.
e. Escrow Property. The Purchase Price and the Certificates
delivered to the Escrow Agent as contemplated by Sections 1(c) and (d) hereof
are referred to as the _Escrow Property._
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock
pursuant to the Registration Statement or otherwise in compliance with the 1933
Act, the Buyer is purchasing the Debentures and the Warrants and will be
acquiring the Shares for its own account for investment only and not with a view
towards the public sale or distribution thereof and not with a view to or for
sale in connection with any distribution thereof.
b. (i) The Buyer is not a U.S. Person as that term is defined
under Regulation S, and is not controlled, directly or indirectly, by a U.S.
Person.
(ii) The Buyer is outside the United States as of the date of
the execution and delivery of this Agreement.
(iii) The Buyer is purchasing the Debentures for its own
account and not on behalf of any U.S. Person, and the Buyer is the sole
beneficial owner of the Debentures, and has not pre-arranged any sale of the
Securities with any purchaser or purchasers in the United States.
(iv) The Buyer represents and warrants and hereby agrees that
all offers and sales of the Debentures prior to the expiration of a period
commencing on the date of the receipt of
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funds by the Company and ending 45 days thereafter (the "Restricted Period")
shall only be made in compliance with the safe harbor contained in Regulation S,
pursuant to the registration provisions under the 1933 Act or pursuant to an
exemption from registration, and all offers and sales after the expiration of
the 45-day period shall be made only pursuant to such registration or to an
exemption from registration.
(v) The Buyer understands that in the view of the SEC the
statutory basis for the exemption claimed for this transaction would not be
present if the offering of Debentures, and the Shares issuable upon conversion
thereof, although in technical compliance with Regulation S, is part of a plan
or scheme to evade the registration provisions of the 1933 Act. The Buyer is
acquiring the Debentures for investment purposes and has no present intention to
sell the Debentures, or the Shares issuable upon conversion thereof, in the
United States or to a U.S. Person or for the account or benefit of a U.S. Person
either now or after the expiration of the Restricted Period, except pursuant to
registration thereof or an exemption or safe harbor from registration.
(vi) The Buyer is not an underwriter of, or dealer in, the
Securities, and the Buyer is not participating, pursuant to a contractual
agreement, in the distribution of the Securities.
c. The Buyer is (i) an _accredited investor_ as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason of
the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the Securities. In evaluating its investment, the Buyer has consulted its own
investment and/or legal and/or tax advisors. The Buyer is not relying on the
Company respecting the legal, tax and other economic considerations of an
investment in the Debentures.
d. All subsequent offers and sales of the Debentures and the
Shares by the Buyer shall be made pursuant to registration of the Shares under
the 1933 Act or pursuant to an exemption from registration.
e. The Buyer understands that the Debentures are being offered and
sold to it in reliance on specific exemptions from the registration requirements
of United States federal and state securities laws and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of the Buyer to acquire the Debentures. In
particular, the Buyer understands that the Company is relying on the rules
governing offers and sales made outside the United States pursuant to Regulation
S. Rules 901 through 904 of Regulation S govern this transaction. The Buyer
will notify the Company immediately upon the occurrence of any material change
in the information regarding the Buyer contained herein occurring prior to the
issuance of Converted Shares.
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f. The Buyer and its advisors, if any, have been furnished with or
have been given access to all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Debentures and the offer of the Shares which have been requested by the Buyer,
including Annex V hereto. The Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries. Without limiting the generality of
the foregoing, the Buyer has also had the opportunity to obtain and to review
the Company's (1) Annual Report on Form 20-F for the fiscal year ended April
30, 1999, (2) Reports of Foreign Issuer on Form 6-K filed June 3, 1999, June 17,
1999, July 14, 1999, August 10, 1999, August 12, 1999, September 9, 1999 and
October 8, 1999, respectively and (3) Post-Effective Amendment No. 2 to
Registration Statement on Form F-1, filed September 24, 1999 (File No. 333-7912)
(collectively, the "Company's SEC Documents").
g. The Buyer understands that its investment in the Securities
involves a high degree of risk.
h. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
i. The Buyer hereby covenants that it will comply with all laws
and regulations in each foreign jurisdiction in which it purchases, offers,
sells or delivers the Securities, or has in its possession or distributes any
offering material.
j. This Agreement has been duly and validly authorized, executed
and delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS, ETC. The Company represents and
warrants to the Buyer, as of the date hereof and as of the Closing Date, that,
except as provided in Annex V hereto:
a. Concerning the Debentures and the Shares. There are no
preemptive rights of any stockholder of the Company, as such, to acquire the
Debentures, the Warrants or the Shares.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the British
Virgin Islands and is duly qualified as a foreign corporation in all
jurisdictions in which the failure to so qualify would have a material adverse
effect on the business, operations or condition (financial or otherwise) or
results of operation of the Company and its subsidiaries taken as a whole. The
Company is a "Reporting Issuer" as defined by Rule 902 of Regulation S. The
Company has registered its Common Stock
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pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company has filed all material required to be filed
pursuant to all reporting obligations under either Section 13(a) or 15(d) of the
Exchange Act for a period of at least twelve (12) months immediately preceding
the offer or sale of the Debentures. The Common Stock is listed and trades on
the NASDAQ National Market, and there is no pending notice, either oral or
written, with respect to its continued eligibility for such listing.
c. Authorized Shares. The authorized capital stock of the Company
consists of (i) 100,000,000 shares of Common Stock, $.01 par value per share,
of which approximately 6,365,646 had been issued as of the date hereof (without
regard to approximately 3,376,000 shares issuable, as of such date, on exercise
of outstanding warrants and stock option plan grants; collectively, the
"Existing Rights"). All issued and outstanding shares of Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable. The
Company has sufficient authorized and unissued shares of Common Stock as may be
necessary to effect the issuance of the Shares. The Shares have been duly
authorized and, when issued upon conversion of, or as interest on, the
Debentures or upon exercise of the Warrants, each in accordance with its
respective terms, will be duly and validly issued, fully paid and non-
assessable and will not subject the holder thereof to personal liability by
reason of being such holder.
d. Securities Purchase Agreement; Registration Rights Agreement
and Stock. This Agreement and the Registration Rights Agreement, the form of
which is attached hereto as Annex IV (the _Registration Rights Agreement_), and
the transactions contemplated thereby, have been duly and validly authorized by
the Company, this Agreement has been duly executed and delivered by the Company
and this Agreement is, and the Debentures, and the other Transaction Agreements,
when executed and delivered by the Company, will be, valid and binding
agreements of the Company enforceable in accordance with their respective terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium, and other similar laws affecting the enforcement of
creditors' rights generally.
e. Non-contravention. The execution and delivery of this Agreement
and the Registration Rights Agreement by the Company, the issuance of the
Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Debentures do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under (i)
the memorandum of association and articles of association of the Company, each
as currently in effect, (ii) any indenture, mortgage, deed of trust, or other
material agreement or instrument to which the Company is a party or by which it
or any of its properties or assets are bound, or (iii) to its knowledge, any
existing applicable law, rule, or regulation or any applicable decree, judgment,
or order of any court, United States federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over the
Company or any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the business,
operations or condition (financial or otherwise) or results of operations of the
Company and its subsidiaries, taken as a whole, or on the transactions
contemplated herein.
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f. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, or self-regulatory organization is
required to be obtained by the Company for the issuance and sale of the
Securities to the Buyer as contemplated by this Agreement, except such
authorizations, approvals and consents that have been obtained.
g. SEC Filings. None of the Company_s SEC Documents contained, at
the time they were filed, any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements made therein in light of the circumstances under which they were
made, not misleading. The Company has filed all material required to be filed
pursuant to all reporting obligations under either Section 13(a) or 15(d) of the
Exchange Act for a period of at least twelve (12) months preceding the offer of
the sale of the Debentures. In furtherance of the foregoing and not in
limitation thereof, the Company has, since September 1, 1998, timely filed all
requisite forms, reports and exhibits thereto with the SEC.
h. Absence of Certain Changes. Since April 30, 1999, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or otherwise), or results
of operations of the Company, except as disclosed in the Company_s SEC
Documents. Since April 30, 1999, except as provided in the Company_s SEC
Documents, the Company has not (i) incurred or become subject to any material
liabilities (absolute or contingent) except liabilities incurred in the ordinary
course of business consistent with past practices; (ii) discharged or satisfied
any material lien or encumbrance or paid any material obligation or liability
(absolute or contingent), other than current liabilities paid in the ordinary
course of business consistent with past practices; (iii) declared or made any
payment or distribution of cash or other property to stockholders with respect
to its capital stock, or purchased or redeemed, or made any agreements to
purchase or redeem, any shares of its capital stock; (iv) sold, assigned or
transferred any other tangible assets, or canceled any debts or claims, except
in the ordinary course of business consistent with past practices; (v) suffered
any substantial losses or waived any rights of material value, whether or not in
the ordinary course of business, or suffered the loss of any material amount of
existing business; (vi) made any changes in employee compensation, except in the
ordinary course of business consistent with past practices; or (vii) experienced
any material problems with labor or management in connection with the terms and
conditions of their employment.
i. Full Disclosure. There is no fact known to the Company (other
than general economic conditions known to the public generally or as disclosed
in the Company_s SEC Documents) that has not been disclosed in writing to the
Buyer that (i) would reasonably be expected to have a material adverse effect on
the business or condition of the Company (financial or otherwise) or results of
operations of the Company and its subsidiaries, taken as a whole , (ii) would
reasonably be expected to materially and adversely affect the ability of the
Company to perform its obligations pursuant to this Agreement or any of the
agreements contemplated hereby (collectively, including this Agreement, the
_Transaction Agreements_), or (iii) would reasonably be expected to materially
and adversely affect the value of the rights granted to the Buyer in the
Transaction Agreements.
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j. Absence of Litigation. Except as set forth in the Company_s SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business or financial condition, or results of operation of the
Company and its subsidiaries taken as a whole or the transactions contemplated
by any of the Transaction Agreements or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, any of the Transaction Agreements.
k. Absence of Events of Default. Except as set forth in Section
3(e) hereof, no Event of Default (or its equivalent term), as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (or its equivalent term) (as so defined in such agreement), has occurred
and is continuing, which would have a material adverse effect on the business,
operations or the condition (financial or otherwise) or results of operations of
the Company and its subsidiaries, taken as a whole.
l. Prior Issues. Except as provided in the Company_s SEC
Documents, during the twelve (12) months preceding the date hereof, the Company
has not issued any stock option grants, convertible securities, or any shares of
the Common Stock or Preferred Stock.
m. No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Company's SEC
Documents or those incurred in the ordinary course of the Company's business
since April 30, 1999, and which individually or in the aggregate, do not or
would not have a material adverse effect on the properties, business, condition
(financial or otherwise), or results of operations of the Company and its
subsidiaries, taken as a whole. No event or circumstances has occurred or
exists with respect to the Company or its properties, business, condition
(financial or otherwise), or results of operations, which, under applicable law,
rule or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or disclosed.
There are no proposals currently under consideration or currently anticipated to
be under consideration by the Board of Directors of the Company which proposal
would (x) change the memorandum of association and articles of association or
other charter document or by-laws of the Company, each as currently in effect,
with or without stockholder approval, which change would reduce or otherwise
adversely affect the rights and powers of the stockholders of the Common Stock
or (y) materially or substantially change the business, assets or capital of the
Company, including its interests in subsidiaries.
n. No Default. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it or its property is
bound.
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o. No Integrated Offering. Neither the Company nor any of its
affiliates nor any person acting on its or their behalf has, directly or
indirectly, at any time since September 1, 1998, made any offer or sales of any
security or solicited any offers to buy any security under circumstances that
would eliminate the availability of the exemption from registration under Rule
506 of Regulation D in connection with the offer and sale of the Securities as
contemplated hereby.
p. Dilution. The number of Shares issuable upon conversion of the
Debentures and the exercise of the Warrants may increase substantially in
certain circumstances, including, but not necessarily limited to, the
circumstance wherein the trading price of the Common Stock declines prior to the
conversion of the Debentures. The Company's directors have studied and fully
understand the nature of the Securities being sold hereby and recognize that
they have a potential dilutive effect. The board of directors of the Company
has concluded, in its good faith business judgment, that such issuance is in the
best interests of the Company. The Company specifically acknowledges that its
obligation to issue the Shares upon conversion of the Debentures and the
exercise of the Warrants is binding upon the Company and enforceable regardless
of the dilution such issuance may have on the ownership interests of other
stockholders of the Company.
q. Offshore Transaction. The Company has not offered or sold the
Debentures to any person in the United States, or, to the best knowledge of the
Company any identifiable groups of U.S. citizens abroad, or any U.S. person as
that term is defined in Regulation S. At the time the buy order for the
Debentures was originated, the Company and/or its agents reasonably believed
the Buyer was outside the United States and was not a U.S. Person.
r. No Directed Selling Efforts. In regard to this transaction, the
Company has not conducted any "direct selling efforts" as that term is defined
in Rule 902 of Regulation S nor has the Company conducted any general
solicitation relating to the offer and sale of the within securities to persons
resident within the United States or elsewhere.
s. Brokers, Finders. Except for payment of fees to Jesup and
Lamont Securities, Inc. (the "Placement Agent"), payment of which is the sole
responsibility of the Company, the Company has taken no action which would give
rise to any claim by any person for brokerage commission, finder's fees or
similar payments by Buyer relating to this Agreement or the transactions
contemplated hereby. Buyer shall have no obligation with respect to such fees or
with respect to any claims made by or on behalf of other Persons for fees of a
type contemplated in this Section 3(s) that may be due in connection with the
transactions contemplated hereby. The Company shall indemnify and hold harmless
each of Buyer, its employees, officers, directors, agents, and partners, and
their respective affiliates, from and against all claims, losses, damages, costs
(including the costs of preparation and attorney's fees) and expenses suffered
in respect of any such claimed or existing fees, as and when incurred.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the
Debentures have not been and are not being registered under the provisions of
the 1933 Act and, except as
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provided in the Registration Rights Agreement, the Shares have not been and are
not being registered under the 1933 Act, and may not be transferred unless (A)
subsequently registered thereunder or (B) the Buyer shall have delivered to the
Company an opinion of counsel, reasonably satisfactory in form, scope and
substance to the Company, to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; (2) any sale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any resale of such
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply with the terms and conditions of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the
Debentures and the Warrants and, until such time as the Common Stock has been
registered and sold under the 1933 Act as contemplated by the Registration
Rights Agreement and sold in accordance with an effective Registration
Statement, certificates and other instruments representing any of the Securities
shall bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of any such Securities):
THESE SECURITIES (THE _SECURITIES_) HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE _SECURITIES ACT_), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to
enter into the Registration Rights Agreement on or before the Closing Date.
d. Filings. (i) The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Securities to the Buyer
under any British Virgin Islands and/or United States laws and regulations
applicable to the Company, or by any domestic securities exchange or trading
market, and to provide a copy thereof to the Buyer promptly after such filing.
(ii) Subject to the conditions of the immediately following
sentence, the Company undertakes and agrees to take all steps necessary to have
a meeting and vote of the stockholders of the Company no later than the Meeting
Date (as defined below) regarding authorization of the Company's issuance to the
holders of the Debentures and Warrants of shares of Common Stock in excess of
twenty percent (20%) of the outstanding shares of Common Stock on the date of
this Agreement in accordance with NASDAQ Rule 4310(c)(25)(H)(i) or Rule
4460(i)(1), as may be applicable. The term "Meeting Date" means the date which
is the earlier of (x) seventy-
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five (75) days after the date on which the Company has issued, after the date of
this Agreement, shares of Common Stock which, in the aggregate equal or exceed
ten percent (10%) of the outstanding shares of Common Stock on the date hereof
or (y) the date on which the Company holds its next regular or special
stockholders meeting. The Company will recommend to the stockholders that such
authorization be granted and will seek proxies from stockholders not attending
the meeting naming a director or officer of the Company as such stockholder's
proxy and directing the proxy to vote, or giving the proxy the authority to
vote, in favor of such authorization.
(iii) In furtherance of the provisions of the immediately preceding
subparagraph (ii) hereof, the Company (a) commits to using its best efforts to
obtain any stockholder authorization contemplated by said subparagraph (ii), and
(b) represents to the Buyer that the Company has obtained the binding
irrevocable commitment or proxy (each, a "Principal Voter Proxy") of each
Principal Voter (as defined below) that such Principal Voter will vote in favor
of any stockholder authorization contemplated by said subparagraph (ii). A
"Principal Voter" is a person who meets any one or more of the following
criteria: (A) a person who is a director or principal officer of the Company
(each, a "Company Principal") and who, directly or indirectly, holds any shares
of Common Stock of the Company; (B) a spouse of a Company Principal who resides
in the household of the Company Principal (a "Principal's Spouse") and who,
directly or indirectly, holds any shares of Common Stock of the Company, (C) a
parent, sibling or child of a Company Principal who resides in the household of
a Company Principal or of a Principal's Spouse (each, a "Principal's Relative")
and who, directly or indirectly, holds any shares of Common Stock or (D) any
other person or entity, including, without limitation, for profit or non-profit
corporations, partnerships and trusts, whose voting rights regarding Common
Stock of the Company is subject to the direction, control or other influence of
any Company Principal, Principal's Spouse or Principal's Relative.
e. Reporting Status. So long as the Buyer beneficially owns any of
the Securities, the Company shall file all reports required to be filed with the
SEC pursuant to Section 13 or 15(d) of the 1934 Act, shall take all reasonable
action under its control to ensure that adequate current public information with
respect to the Company, as required in accordance with Rule 144(c)(2) of the
1933 Act, is publicly available, and shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would permit such termination. The Company will take
all reasonable action under its control to obtain and to continue the listing
and trading of its Common Stock (including, without limitation, all Registrable
Securities) on The NASDAQ/National Market or The NASDAQ/SmallCap Market
(collectively, "The NASDAQ Stock Market") and will comply in all material
respects with the Company_s reporting, filing and other obligations under the
by-laws or rules of the National Association of Securities Dealers, Inc.
(_NASD_) or The NASDAQ Stock Market.
f. Use of Proceeds. The Company will use the proceeds from the
sale of the Debentures (excluding amounts paid by the Company for legal fees,
finder's fees and escrow fees in connection with the sale of the Debentures) for
internal working capital purposes. ,Except for the express purposes detailed in
this Section 4(f), unless specifically consented to in advance in each instance
by the Buyer, the Company shall not, directly or indirectly, use such proceeds
for any loan
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to or investment in any other corporation, partnership enterprise or other
person or for the repayment of any outstanding loan by the Company to any other
party.
g. Certain Agreements. (i) The Company covenants and agrees that
it will not, without the prior written consent of the Buyer, enter into any
subsequent or further offer or sale of Common Stock or securities convertible
into Common Stock (collectively, _New Common Stock_) with any third party on any
date which is earlier than one hundred twenty (120) days from the last day of
the calendar month in which the last Effective Date occurs.
(ii) The provisions of subparagraph (g)(i) will not apply to (u) a
sale of the Company's securities to QVC Network, Inc. or its affiliates (the
"QVC Transaction"), (v) an underwritten public offering of shares of Common
Stock or Preferred Stock; (w) an offering of convertible securities at market or
above; (x) the issuance of securities pursuant to an authorized employee stock
option plan or pursuant to the Existing Rights; (y) the issuance of securities
(other than for cash) in connection with an acquisition, merger, consolidation,
sale of assets, disposition or the exchange of the capital stock for assets,
stock or other joint venture interests; or (z) securities issued to the
Placement Agent, directly or upon the exercise of warrants or other rights
issued as compensation for its services in connection with the purchases by the
Buyer under this Agreement.
(iii) By the Initial Closing Date and, to the extent necessary, each
Additional Closing Date, the Company shall obtain the agreement (each, a
_Principal_s Agreement_) of each of its Principals (as defined below) that,
without the prior written consent of the Buyer in each instance, such Principal
will not sell or otherwise transfer or offer to sell or otherwise transfer any
shares of Common Stock directly or indirectly held by such Principal prior to
one hundred twenty (120) days after the Effective Date. Each such Principal_s
Agreement shall (w) specify that it is entered into as an inducement to the
Buyer_s execution, delivery and performance of this Agreement, (x) name the
Buyer as a third party beneficiary thereof, (y) acknowledge that the Company_s
transfer agent will be provided with instructions that transfers by a Principal
require the consent of the Company and the Buyer, and (z) contemplate that, in
addition to any other damages or remedies that may be appropriate, the
Principal_s Agreement shall be enforceable by injunction sought by the Company
and the Buyer or any one or more of them. A _Principal_ is a person who meets
any one or more of the following criteria: (A) a person who is a director or
principal officer of the Company or a person who, directly or indirectly, holds
in excess of five (5%) percent of any shares of Common Stock of the Company
(each, a _Company Principal_); (B) a spouse of a Company Principal (a
_Principal_s Spouse_) who, directly or indirectly, holds any shares of Common
Stock of the Company, (C) a parent, sibling or child of a Company Principal who
resides in the household of a Company Principal or of a Principal_s Spouse
(each, a _Principal_s Relative_) and who, directly or indirectly, holds any
shares of Common Stock, or (D) any other person or entity, including, without
limitation, for profit or non-profit corporations, partnerships and trusts,
whose voting rights regarding Common Stock of the Company is subject to the
direction, control or other influence of any Company Principal, Principal_s
Spouse, or Principal_s Relative. The provisions of this Section 4(g)(iii) shall
not apply to the Yih Transaction (as defined below). The "Yih Transaction"
means the pledge and/or transfer of up to 800,000 shares of Common Stock by Yu
Chuan Yih for the benefit of Salomon Smith Barney in connection with margin
loans by Mr. Yih.
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(iv) In the event the Company breaches the provisions of this
Section 4(g), the Conversion Rate (as defined in the Debentures) shall be
amended to be equal to (x) 90% of (y) the amount determined in accordance with
the provisions of the Debenture without regard to this provision, and the Buyer
may require the Company to immediately redeem all outstanding Debentures in
accordance with Section 4(j)(y) hereof.
h. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield two hundred percent (200%) of the number of
shares of Common Stock issuable (i) at conversion as may be required to satisfy
the conversion rights of the Buyer pursuant to the terms and conditions of the
Debentures or represent payment of interest on the Debentures which have been
issued and not yet converted or the maximum amount of Additional Debentures
which may be issued on subsequent Closing Dates and (ii) upon exercise as may be
required to satisfy the exercise rights of the Buyer pursuant to the terms and
conditions of the Warrants which have been issued and not yet exercised or the
maximum amount of Warrants which may be issued on subsequent Closing Dates
(assuming for such purposes that the maximum amount of Additional Debentures
would be issued on such dates).
i. Warrants. The Company agrees to issue to the Buyer on each
Closing Date divisible warrants (the "Warrants") for the purchase of fifteen
thousand (15,000) shares of Common Stock (such number subject to equitable
adjustment in the event of a stock split or similar event after the date of this
Agreement and prior to the relevant Closing Date) for each one million dollars
($1,000,000) of the Purchase Price of the Debentures purchased by the Buyer on
that Closing Date. The Warrants shall bear an exercise price equal to one
hundred twenty percent (120%) of the closing bid price of the Common Stock on
the trading day immediately prior to the relevant Closing Date. The Warrants
will expire on the last day of the calendar month in which the fifth anniversary
of the relevant Closing Date occurs. The Warrants shall be in the form annexed
hereto as Annex VI and shall have (x) registration rights as provided in the
Registration Rights Agreement and (y) piggy-back registration rights after the
effectiveness of the Registration Statement expires, as contemplated therein.
j. Limitation on Issuance of Shares. The Company may be limited in
the number of shares of Common Stock it may issue by virtue of (X) the number of
authorized shares or (Y) the applicable rules and regulations of the principal
securities market on which the Common Stock is listed or traded, including, but
not necessarily limited to, NASDAQ Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as
may be applicable (collectively, the _Cap Regulations_). Without limiting the
other provisions thereof, the Debentures shall provide that (i) the Company will
take all steps reasonably necessary to be in a position to issue shares of
Common Stock on conversion of the Debentures without violating the Cap
Regulations and (ii) if, despite taking such steps, the Company still can not
issue such shares of Common Stock without violating the Cap Regulations, the
holder of a Debenture which can not be converted as result of the Cap
Regulations (each such Debenture, an _Unconverted Debenture_) shall have the
option, exercisable in such holder_s sole and absolute discretion, to elect
either of the following remedies:
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(x) if permitted by the Cap Regulations, require the Company
to issue shares of Common Stock in accordance with such holder's notice of
conversion at a conversion purchase price equal to the average of the
closing bid price per share of Common Stock for any five (5) consecutive
trading days (subject to certain equitable adjustments for certain events
occurring during such period) during the sixty (60) trading days
immediately preceding the date of notice of conversion; or
(y) require the Company to redeem each Unconverted Debenture
for an amount (the _Redemption Amount_), payable in cash, equal to the sum
of (i) one hundred twenty-four percent (124%) of the principal of an
Unconverted Debenture, plus (ii) any accrued but unpaid interest thereon
through and including the date (the _Redemption Date_) on which the
Redemption Amount is paid to the holder.
A holder of an Unconverted Debenture may elect one of the above remedies with
respect to a portion of such Unconverted Debenture and the other remedy with
respect to other portions of the Unconverted Debenture. The Debentures shall
contain provisions substantially consistent with the above terms, with such
additional provisions as may be consented to by the Buyer. The provisions of
this paragraph are not intended to limit the scope of the provisions otherwise
included in the Debentures.
k. Future Purchases. (i) The Buyer hereby unconditionally and
irrevocably agrees to purchase from the Company up to $7,500,000 of Debentures
(_Additional Debentures_) in one or more Additional Tranches on and subject to
the terms and conditions provided this Section 4(k). Each Additional Debenture
shall be in the form annexed hereto as Annex I.
(ii) Commencing sixty (60) days after the Effective Date covering
the Registrable Securities applicable to the transactions consummated on the
preceding Closing Date, the Company may give a notice (a _Tranche Notice_) to
the Buyer, with a copy to the Escrow Agent. The date the Tranche Notice is given
to the Buyer is referred to as the _Tranche Notice Date._ The Tranche Notice
shall specify the amount of the Additional Debentures to be purchased by the
Buyer (which amount shall be not be less than $1,500,000 and not more than
$2,500,000 in any given Tranche Notice).
(iii) It shall be a condition to the Company_s right to issue a
Tranche Notice that, as of the Tranche Notice Date and the relevant Additional
Closing Date, (A) the Registration Statement or Statements required to be filed
under the Registration Rights Agreement for all Registrable Securities relating
to Debentures purchased prior to the Additional Closing Date contemplated by the
current Tranche Notice shall have been declared effective and shall, unless all
of the Registrable Securities covered by such Registration Statement shall have
been sold, continue to be effective, (B) the Registration Rights Agreement shall
continue to be in full force and effect and be applicable to the filing of and
effectiveness of the registration of the sale of shares of Common Stock issuable
upon conversion of the Additional Debentures issued in connection with the
closing of the Additional Debentures (and the Company's issuance of the
Additional Debentures shall constitute the Company's confirmation thereof as of
such date) , and (C) the representations
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and warranties of the Company contained in Section 3 hereof shall be true and
correct in all material respects (and the Company's issuance of the Additional
Debentures shall constitute the Company's making each such representation and
warranty as of such date) and there shall have been no material adverse changes
(financial or otherwise) in the business or conditions of the Company from the
Initial Closing Date through and including the Additional Closing Date (and the
Company's issuance of the Additional Debentures shall constitute the Company's
making such representation and warranty as of such date).
(iv) It shall be a condition to the Company_s right to issue a
Tranche Notice that, as of the Tranche Notice Date, (A) the Market Price of the
Common Stock for the twenty (20) consecutive trading days ending on the day
before the Tranche Notice Date, as adjusted to reflect any stock splits, reverse
stock splits or stock dividends effected or declared after the Initial Closing
Date contemplated by this Agreement, be more than four dollars ($4.00) per
share, and (B) the average daily trading volume for the twenty (20) consecutive
trading days ending the day before the relevant Tranche Notice Date, as adjusted
to reflect any stock splits, reverse stock splits or stock dividends effected or
declared after the Initial Closing Date contemplated by this Agreement, be more
than thirty thousand (30,000) shares.
(v) Each Additional Closing Date shall be on the date which is five
(5) business days after the Effective Date of the Registrable Securities
applicable to the transactions to be consummated on such Additional Closing Date
(an "Additional Tranche Effective Date").
(vi) In addition to, and not in lieu of, any provisions of the
Registration Rights Agreement, the Company will give the Buyer and the Escrow
Agent written notice by fax transmission or by hand delivery of the filing with
the SEC of (x) the Registration Statement covering such Registrable Securities,
(y) any amendment thereto and (z) any Effectiveness Request (as defined below).
Each such notice referred to in clauses (x) or (y) shall state that such filing
was made and shall be given no later than the business day after the relevant
filing. The notice referred to in clause (z) (an"Effectiveness Request Notice")
shall be accompanied by a copy of the request (or confirmation thereof)
submitted to the SEC and shall be given no later than the day on which such
Effectiveness Request Notice is given. The giving of an Effectiveness Request
Notice shall constitute the Company's notice to the Buyer that the closing of
the purchase and sale of the Additional Debenture will take place on the fifth
business day after the Effective Date of such Registration Statement; provided,
however, that no later than noon (Eastern time) on the business day after the
Effective Date of such Registration Statement, the Company shall give written
notice by fax transmission or hand delivery to the Buyer and the Escrow Agent of
such effectiveness (an "Effectiveness Notice").
(vii) The term "Effectiveness Request" means the Company's written
request to the SEC that the SEC declare the Registration Statement effective on
a specified date which is on or after the later of (x) the seventy-fifth day
after the immediately preceding Closing Date or (y) the fifteenth day after the
relevant Tranche Notice Date; provided, however, that the Effectiveness Request
shall be given only after the SEC has advised the Company informally, in writing
or otherwise that it will respond favorably to such request.
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(viii) Notwithstanding the foregoing, if the Additional Tranche
Effective Date does not occur within seventy-five (75) days after the initial
Tranche Notice Date for the applicable Additional Tranche, the Tranche Notice
will be deemed to be of no force and effect unless the Company has issued a
Renewal Tranche Notice (as defined below). If the Company has timely issued a
Renewal Tranche Notice, but the relevant Additional Tranche Effective Date does
not occur within forty-five (45) days after the Renewal Tranche Notice Date (as
defined below), the Renewal Tranche Notice will be deemed to be of no force and
effect. The Renewal Tranche Notice shall specify the amount of the Additional
Debentures to be purchased by the Buyer, which amount shall not be less than
$1,500,000 nor more than the amount specified in the initial Tranche Notice for
such Additional Tranche. Upon issuance of the Renewal Tranche Notice, the
initial Tranche Notice shall be deemed null and void. A "Renewal Tranche
Notice" is a Tranche Notice issued by the Company during the period which is
between sixty (60) and seventy-four (74) days after the initial Tranche Date for
the applicable Additional Tranche, but before the relevant Additional Tranche
Effective Date, which notice shall for the Registrable Securities applicable to
the transactions to be consummated on such Additional Closing Date. The date
the Renewal Tranche Notice is given to the Buyer is referred to as the _Renewal
Tranche Notice Date._
(ix) Except to the extent specifically contemplated by the
provisions of this Section 4(k), the closing of each Additional Tranche shall be
conducted upon the same terms and conditions as those applicable to the closing
held on the Initial Closing Date.
(x) The Buyer_s obligations under this Section 4(k) shall
terminate (x) if the Company_s available shares do not satisfy the provisions of
Section 4(h) hereof at any time, (y) on the date which is four (4) months after
the Required Effective Date (as defined in the Registration Rights Agreement) of
the Registration Statement covering the Registrable Securities applicable to the
Initial Debentures (the _First Registration Statement_), if such First
Registration Statement has not been declared effective by such date, or (z) on
the date which is eighteen months after the Initial Closing Date.
l. Right of First Refusal, Special Dilution Protection.
(i) The Company covenants and agrees that, except as provided in
Section 4(l)(v) hereof, if during the period from the date hereof through and
including the date which is one hundred twenty (120) days after the Effective
Date of the First Registration Statement, the Company offers to enter into any
transaction (a _New Transaction_) for the sale of New Common Stock, the Company
shall notify the Buyer in writing of all of the terms of such offer (a _New
Transaction Offer_). The Buyer shall have the right (the _Right of First
Refusal_), exercisable by written notice given to the Company by the close of
business on the fifth business day after the Buyer_s receipt of the New
Transaction Offer (the _Right of First Refusal Expiration Date_), to participate
in all or any part of the New Transaction Offer on the terms so specified.
(ii) If, and only if, the Buyer does not exercise the Right of
First Refusal in full, the Company may consummate the remaining portion of the
New Transaction with any New Investor
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on the terms specified in the New Transaction Offer within thirty (30) days of
the Right of First Refusal Expiration Date.
(iii) If the terms of the New Transaction to be consummated with
such other party differ from the terms specified in the New Transaction Offer so
that the terms are more beneficial in any respect to the New Investor, the
Company shall give the Buyer a New Transaction Offer relating to the terms of
the New Transaction, as so changed, and the Buyer_s Right of First Refusal and
the preceding terms of this paragraph (l) shall apply with respect to such
changed terms.
(iv) In the event the New Transaction is consummated with such other
third party on terms providing for either a sale or exercise price equal to or
computed based on, or a determination of a conversion or exercise price based
on, a lower percentage of the then current market price (howsoever defined or
computed) than provided in the Debentures for determining the Conversion Rate or
a lower Base Price (howsoever defined or computed), the terms of any unissued or
unconverted Debentures shall be modified to reduce the relevant Conversion Rate
or Fixed Conversion Price to be equal to that provided in the New Transaction as
so consummated.
(v) The Buyer's Right of First Refusal shall not apply to the QVC
Transaction.
m. Reimbursement. If (i) any Buyer, other than by reason of its
gross negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by any stockholder of the Company,
in connection with or as a result of the consummation of the transactions
contemplated by the Transaction Agreements, or if such Buyer is impleaded in any
such action, proceeding or investigation by any Person, or (ii) any Buyer, other
than by reason of its gross negligence or willful misconduct or by reason of its
trading of the Common Stock in a manner that is illegal under the federal
securities laws, becomes involved in any capacity in any action, proceeding or
investigation brought by the SEC against or involving the Company or in
connection with or as a result of the consummation of the transactions
contemplated by the Transaction Agreements, or if such Buyer is impleaded in any
such action, proceeding or investigation by any Person, then in any such case,
the Company will reimburse such Buyer for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which such Buyer is a named party, the Company
will pay such Buyer the charges, as reasonably determined by such Buyer, for the
time of any officers or employees of such Buyer devoted to appearing and
preparing to appear as witnesses, assisting in preparation for hearings, trials
or pretrial matters, or otherwise with respect to inquiries, hearing, trials,
and other proceedings relating to the subject matter of this Agreement. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Buyer who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Buyer and any such Affiliate, and shall be binding upon and inure to
the benefit of any successors, assigns, heirs and personal representatives of
the Company, the Buyer and any such Affiliate and any such Person. The Company
also agrees that neither any Buyer nor any such Affiliate, partners, directors,
agents, employees or controlling
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persons shall have any liability to the Company or any person asserting claims
on behalf of or in right of the Company in connection with or as a result of the
consummation of the Transaction Agreements except to the extent that any losses,
claims, damages, liabilities or expenses incurred by the Company result from the
gross negligence or willful misconduct of such Buyer.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the Purchase
Price for the Initial Debentures in accordance with Section 1(c) hereof, the
Company will irrevocably instruct its transfer agent to issue Common Stock from
time to time upon conversion of the Debentures in such amounts as specified from
time to time by the Company to the transfer agent, bearing the restrictive
legend specified in Section 4(b) of this Agreement prior to registration and
sale of the Shares under the 1933 Act, registered in the name of the Buyer or
its nominee and in such denominations to be specified by the Buyer in connection
with each conversion of the Debentures. The Company warrants that no
instruction other than such instructions referred to in this Section 5 and stop
transfer instructions to give effect to Sections 4(a) and (b) hereof prior to
registration and sale of the Shares under the 1933 Act will be given by the
Company to the transfer agent and that the Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement, and applicable
law.
b. (i) The Company will permit the Buyer to exercise its right to
convert the Debentures by telecopying or delivering an executed and completed
Notice of Conversion to the Company and delivering, within seven (7) business
days thereafter, the original Debentures being converted to the Company by
express courier.
(ii) The term _Conversion Date_ means, with respect to any
conversion elected by the holder of the Debentures, the date specified in the
Notice of Conversion, provided the copy of the Notice of Conversion is
telecopied to or otherwise delivered to the Company in accordance with the
provisions hereof so that it is received by the Company on or before such
specified date.
(iii) The Company will transmit the certificates representing the
Converted Shares issuable upon conversion of any Debentures (together, unless
otherwise instructed by the Buyer, with Debentures not being so converted) to
the Buyer at the address specified in the Notice of Conversion (which may be the
Buyer_s address for notices as contemplated by Section 11 hereof or a different
address) via express courier , by electronic transfer or otherwise, within three
(3) business days (such third business day, the _Delivery Date_) after (A) the
business day on which the Company has received both of the Notice of Conversion
(by facsimile or other delivery) and the original Debentures being converted
(and if the same are not delivered to the Company on the same date, the date of
delivery of the second of such items) or (B) the date an interest payment on the
Debenture, which the Company has elected to pay by the issuance of Common Stock,
as contemplated by the Debentures, was due. If, at any time, the Buyer directs
the Company or its counsel, its transfer agent or another designated agent to
hold the Debenture on behalf of the Buyer, such possession shall satisfy the
Buyer's delivery obligation in connection with any conversion.
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Such possession shall be solely and exclusively for the benefit of Buyer and
shall not represent any other interest of the Company in the Debenture until
such Notice of Conversion is issued to the Company (and then limited to the
extent of the Debenture being converted thereby). The original Debenture shall
be returned to the Buyer at any time immediately upon direction from the Buyer.
(iv) Subject to the completeness and accuracy of the Buyer's
representations and warranties herein, upon the conversion of any Debenture
after the Restricted Period by a person who is a non-U.S. Person, the Company
shall, at its expense, take all necessary action (including the issuance of an
opinion of counsel) to assure that the Company's transfer agent shall issue
stock certificates without restrictive legend or stop orders in the name of the
Buyer (or its nominee (being a non-U.S. Person) or such non-U.S. Persons as may
be designated by the Buyer) and in such denominations to be specified at
conversion representing the number of shares of Common Stock issuable upon such
conversion, as applicable. The Company warrants that no instructions (other
than these instructions or instructions to impose a "stop transfer" instruction
with respect to the Debenture until the end of the Restricted Period) have been
or will be given to the transfer agent and that the Shares will not be subject
to any transfer limitations other than those imposed by applicable securities
laws.
c. The Company understands that a delay in the issuance of the
Shares of Common Stock beyond the Delivery Date could result in economic loss to
the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments to the Buyer for late issuance of Shares upon Conversion in
accordance with the following schedule (where
_No. Business Days Late_ is defined as the number of business days beyond two
(2) business days from the Delivery Date):
Late Payment For Each $10,000
of Debenture Principal or Interest
No. Business Days Late Amount Being Converted
---------------------- -----------------------------------
1 $ 100
2 $ 200
3 $ 300
4 $ 400
5 $ 500
6 $ 600
7 $ 700
8 $ 800
9 $ 900
10 $1,000
>10 $1,000 +$200 for each
Business Day Late beyond 10
days
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Nothing herein shall limit the Buyer_s right to
pursue actual damages for the
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Company_s failure to issue and deliver the Common Stock to the Buyer.
Furthermore, in addition to any other remedies which may be available to the
Buyer, in the event that the Company fails for any reason to effect delivery of
such shares of Common Stock within two (2) business days after the Delivery
Date, the Buyer will be entitled to revoke the relevant Notice of Conversion by
delivering a notice to such effect to the Company whereupon the Company and the
Buyer shall each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion.
d. If, by the relevant Delivery Date, the Company fails for any
reason to deliver the Shares to be issued upon conversion of a Debenture and
after such Delivery Date, the holder of the Debentures being converted (a
_Converting Holder_) purchases, in an open market transaction or otherwise,
shares of Common Stock (the _Covering Shares_) in order to make delivery in
satisfaction of a sale of Common Stock by the Converting Holder (the _Sold
Shares_), which delivery such Converting Holder anticipated to make using the
Shares to be issued upon such conversion (a _Buy-In_), the Company shall pay to
the Converting Holder, in addition to all other amounts contemplated in other
provisions of the Transaction Agreements, and not in lieu thereof, the Buy-In
Adjustment Amount (as defined below). The _Buy-In Adjustment Amount_ is the
amount equal to the excess, if any, of (x) the Converting Holder's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. The Company shall pay the
Buy-In Adjustment Amount to the Company in immediately available funds
immediately upon demand by the Converting Holder. By way of illustration and
not in limitation of the foregoing, if the Converting Holder purchases shares of
Common Stock having a total purchase price (including brokerage commissions) of
$11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net
proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required
to pay to the Converting Holder will be $1,000.
e. In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Company_s transfer agent is
participating in the Depository Trust Company (_DTC_) Fast Automated Securities
Transfer program, upon request of the Buyer and its compliance with the
provisions contained in this paragraph, so long as the certificates therefor do
not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Buyer by crediting the account of Buyer_s
Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.
f. If, at any time (i) the Company challenges, disputes or denies
the right of a holder of Debentures to effect a conversion of the Debentures
into Common Stock or otherwise dishonors or rejects any Conversion Notice
delivered in accordance with the terms of this Agreement or the Certificate of
Designations or (ii) any third party who is not and has never been an Affiliate
of such holder commences any lawsuit or proceeding or otherwise asserts any
claim before any court or public or governmental authority, which lawsuit,
proceeding or claim seeks to challenge, deny, enjoin, limit, modify, delay or
dispute the right of such holder to effect the conversion of the Debentures into
Common Stock, then such holder shall have the right, by written notice to the
-21-
<PAGE>
Company, to require the Company to promptly redeem the Debentures for cash at a
redemption price (the "Mandatory Purchase Amount") equal to (x) one hundred
twenty-four percent (124%) of the principal of the unconverted Debentures held
by such holder plus (y) all accrued but unpaid interest on the Debentures
through the date of payment of the Mandatory Purchase Amount. Under any of the
circumstances set forth above, the Company shall be responsible for the payment
of all costs and expenses of such holder, including, but not necessarily limited
to, reasonable legal fees and expenses, as and when incurred in connection with
such holder's disputing any such action or pursuing such holder's rights
hereunder (in addition to any other rights such holder may have hereunder or
otherwise). The Mandatory Purchase Amount will be payable to such holder in cash
within five (5) business days from the date such holder gives the Company
written notice that it is exercising its rights under this paragraph.
g. The holder of any Debentures shall be entitled to exercise its
conversion privilege with respect to the Debentures notwithstanding the
commencement of any case under 11 U.S.C. (S)101 et seq. (the "Bankruptcy Code").
In the event the Company is a debtor under the Bankruptcy Code, the Company
hereby waives, to the fullest extent permitted, any rights to relief it may have
under 11 U.S.C. (S)362 in respect of the conversion of the Debentures. The
Company agrees, without cost or expense to any holder, to take or to consent to
any and all action necessary to effectuate relief under 11 U.S.C. (S)362 in such
circumstances.
h. The Company will authorize its transfer agent to give
information relating to the Company directly to the Buyer or the Buyer's
representatives upon the request of the Buyer or any such representative, to the
extent such information relates to (i) the status of shares of Common Stock
issued or claimed to be issued to the Buyer in connection with a Notice of
Conversion, or (ii) the number of outstanding shares of Common Stock of all
stockholders as of a current or other specified date. The Company will provide
the Buyer with a copy of the authorization so given to the transfer agent.
i. Nothing in this Section shall affect in any way the Buyer's or
such nominee's obligations and agreement to comply with all applicable
securities laws upon resale of the Securities, or orders of a competent judicial
body. If the Buyer provides the Company with an opinion of counsel reasonably
satisfactory to the Company that registration of a resale by the Buyer of any of
the Securities in accordance with clause (1)(B) of Section 4(a) of this
Agreement is not required under the 1933 Act, the Company shall (except as
provided in clause (2) of Section 4(a) of this Agreement) permit the transfer of
the Securities and, in the case of the Converted Shares or the Warrant Shares,
as the case may be, promptly instruct the Company's transfer agent to issue one
or more certificates for Common Stock without legend in such name and in such
denominations as specified by the Buyer.
6. CLOSING DATES.
a. The Initial Closing Date shall occur on the date which is the
first NYSE trading day after each of the conditions contemplated by Sections 7
and 8 hereof shall have either been satisfied or been waived by the party in
whose favor such conditions run.
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<PAGE>
b. Each Additional Closing Date shall be the date specified in the
Tranche Notice, provided each of the conditions contemplated by Section 4(k) and
Sections 7 and 8 hereof shall have either been satisfied or been waived by the
party in whose favor such conditions run.
c. Each closing of the purchase and issuance of Debentures shall
occur on the relevant Closing Date at the offices of the Escrow Agent and shall
take place no later than 3:00 P.M., New York time, on such day or such other
time as is mutually agreed upon by the Company and the Buyer.
d. Notwithstanding anything to the contrary contained herein, the
Escrow Agent will be authorized to release the Escrow Funds to the Company and
to others and to release the other Escrow Property on the relevant Closing Date
upon satisfaction of the conditions set forth in Sections 7 and 8 hereof and as
provided in the Joint Escrow Instructions.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the
relevant Debentures to the Buyer pursuant to this Agreement on the relevant
Closing Date is conditioned upon:
a. The execution and delivery of this Agreement by the Buyer;
b. Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the Purchase Price for the relevant
Debentures in accordance with this Agreement;
c. The accuracy on such Closing Date of the representations and
warranties of the Buyer contained in this Agreement, each as if made on such
date, and the performance by the Buyer on or before such date of all covenants
and agreements of the Buyer required to be performed on or before such date; and
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Debentures on the relevant Closing Date is conditioned upon:
a. The execution and delivery of this Agreement and the other
Transaction Agreement by the Company;
b. Delivery by the Company to the Escrow Agent of the relevant
Certificates in accordance with this Agreement;
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<PAGE>
c. The accuracy in all material respects on such Closing Date of
the representations and warranties of the Company contained in this Agreement,
each as if made on such date, and the performance by the Company on or before
such date of all covenants and agreements of the Company required to be
performed on or before such date;
d. On such Closing Date, the Registration Rights Agreement shall
be in full force and effect and the Company shall not be in default thereunder;
e. On such Closing Date, the Buyer shall have received an opinion
of counsel for the Company, dated such Closing Date, in form, scope and
substance reasonably satisfactory to the Buyer, substantially to the effect set
forth in Annex III attached hereto;
f. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained;
g. From and after the date hereof to and including such Closing
Date, the trading of the Common Stock shall not have been suspended by the SEC
or the NASD and trading in securities generally on the New York Stock Exchange
or The NASDAQ/National Market shall not have been suspended or limited, nor
shall minimum prices been established for securities traded on The
NASDAQ/National Market, nor shall there be any outbreak or escalation of
hostilities involving the United States or any material adverse change in any
financial market that in either case in the reasonable judgment of the Buyer
makes it impracticable or inadvisable to purchase the Debentures; and
h. With respect to the Additional Closing Date,
(i) the Tranche Notice shall have been duly given;
(ii) each of the conditions set forth in Section 4(k) shall either
have been satisfied or been waived by the Buyer;
(iii) the Company shall have timely issued all shares issuable upon
conversion of the Debentures prior to the date of such Additional Closing Date;
(iv) the Company shall have available and shall reserve for issuance
to Buyer shares of Common Stock equal to at least one hundred and fifty percent
(150%) of the number of Shares which would be issued on conversion of all
unconverted previously issued Debentures and all Additional Debentures to be
issued on the relevant Additional Closing Date (assuming that the Conversion
Rate for all such Debentures were at a rate which is seventy-five (75%) percent
of the Conversion Rate which would have been applicable on such Additional
Closing Date); and
(v) if the Company is subject to the Cap Regulations, the aggregate
of the Common Stock issuable upon conversion of all previously issued Debentures
and all Additional Debentures
-24-
<PAGE>
to be issued on the relevant Additional Closing
Date (assuming, for unconverted Debentures, that the Conversion Rate for all
such Debentures were at a rate which is seventy-five (75%) percent of the
Conversion Rate which would have been applicable on such Additional Closing
Date), will not result in the issuance of shares in excess of the Cap
Regulations, or the Company shall have obtained the consent of its stockholders,
as contemplated by the Cap Regulations, to such issuance.
9. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York, shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be governed
by and interpreted in accordance with the laws of the State of New York
applicable to contracts to be made and performed entirely within such State,
without giving effect to the principles thereof regarding the conflict of laws.
Each of the parties consents to the jurisdiction of the federal courts whose
districts encompass any part of the City of New York or the state courts of the
State of New York sitting in the City of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. To the extent
determined by such court, the Company shall reimburse the Buyer for any
reasonable legal fees and disbursements incurred by the Buyer in enforcement of
or protection of any of its rights under any of the Transaction Agreements.
b. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
c. This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of each of the parties hereto.
d. All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
e. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
f. This Agreement may be signed in one or more counterparts, each of
which shall be deemed an original.
g. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.
h. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
-25-
<PAGE>
i. This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement thereof.
j. In no event, except as specifically contemplated by the terms of
any of the Transaction Agreements, shall either party be liable under any of the
Transaction Agreements or otherwise for any consequential, incidental, indirect,
punitive or special damages of any nature whatsoever (including, without
limitation, any damages arising out of or in connection with any loss of profit,
loss of business or anticipatory profits), even if the other party has been
advised of the likelihood of such damages occurring to the non-defaulting party;
provided, however, that the difference between the Market Price of the Common
Stock and the Conversion Rate shall not be deemed to be consequential damages.
The provisions of this Section 9(j) shall not limit the direct obligations of
either party to the other party pursuant to a specific provision of any of the
Transaction Agreements.
k. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof.
10. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given on the earliest of
(a) the date delivered, if delivered by personal delivery as against
written receipt therefor or by confirmed facsimile transmission,
(b) the seventh business day after deposit, postage prepaid, in the
United States Postal Service by registered or certified mail, or
(c) the third business day after mailing by international express
courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at the
following addresses (or at such other addresses as such party may designate by
ten (10) days_ advance written notice similarly given to each of the other
parties hereto):
COMPANY: LJ INTERNATIONAL INC.
Unit #12, 12/F, Block A
Focal Industrial Center
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong
ATTN: Yu Chuan Yih
Telephone No.: (852) 2764 3622
Telecopier No.: (852) 2764 3783
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<PAGE>
with a copy to: Andrew N. Bernstein, Esq.
Andrew N. Bernstein, P.C.
5445 DTC Parkway, Suite 520
Greenwood Village, CO 80111
Telephone No.: (303) 770 - 7131
Telecopier No.: (303) 770 - 7332
BUYER: At the address set forth on the signature page of this
Agreement.
with a copy to: Navigator Management Ltd.
Telecopier No.: (284) 494-4771
and with a copy to: Krieger & Prager, Esqs.
319 Fifth Avenue
Attn: Samuel Krieger, Esq.
New York, New York 10016
Telephone No.: (212) 689-3322
Telecopier No.: (212) 213-2077
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
Attn: Samuel Krieger, Esq.
New York, New York 10016
Telephone No.: (212) 689-3322
Telecopier No.: (212) 213-2077
11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company_s and the
Buyer_s representations and warranties herein shall survive the execution and
delivery of this Agreement and the delivery of the Certificates and the payment
of the Purchase Price, and shall inure to the benefit of the Buyer and the
Company and their respective successors and assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer by
one of its officers thereunto duly authorized as of the date set forth below.
AMOUNT AND PURCHASE PRICE OF INITIAL DEBENTURES: $
-----------------------------
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf this ________ day of
___________________, 1999.
________________________________ ________________________________
Address Printed Name of Subscriber
- --------------------------------
By:
________________________________
Telecopier No. _________________ (Signature of Authorized Person)
________________________________
Printed Name and Title
________________________________
Jurisdiction of Incorporation
or Organization
As of the date set forth below, the undersigned hereby accepts this Agreement
and represents that the foregoing statements are true and correct and that it
has caused this Securities Purchase Agreement to be duly executed on its behalf.
LJ INTERNATIONAL INC.
By: /s/ Yu Chuan Yih
------------------------------------------
Name: Yu Chuan Yih
------------------------------------------
Title: President
------------------------------------------
Date: ,1999
------------------------------------------
<PAGE>
ANNEX I
TO
SECURITIES PURCHASE AGREEMENT
<PROTOTYPE FOR EACH ISSUANCE>
FORM OF DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES ARE RESTRICTED AND MAY
NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER
THE ACT PURSUANT TO REGISTRATION OR EXEMPTION OR SAFE HARBOR THEREFROM.
No. 99- US $ ___________________________
-------------
LJ INTERNATIONAL INC.
3% CONVERTIBLE DEBENTURE DUE __________, 200 (1)
THIS DEBENTURE is one of a duly authorized issue of up to $10,500,000 in
Debentures of LJ INTERNATIONAL INC. , a corporation organized and existing under
the laws of the British Virgin Islands (the "Company") designated as its 3%
Convertible Debentures. Such Debentures may be issued in series, each of which
may have a different maturity date, but which otherwise have substantially
similar terms. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Securities Purchase Agreement, dated October
____, 1999 (the "Securities Purchase Agreement"), by and among the Company and
the Buyers (as that term is defined therein).
(1) Insert date which is third anniversary of Closing Date (the "Maturity
Date").
1
<PAGE>
FOR VALUE RECEIVED, the Company promises to pay to
____________________________________, the registered holder hereof (the
"Holder"), the principal sum of __________________________________and 00/100
Dollars (US $ ____________________________) on __________, 200 (2) (the
"Maturity Date") and to pay interest on the principal sum outstanding from time
to time in arrears (i) prior to the Maturity Date, semi-annually, on the last
day of June and December of each year, (ii) upon conversion as provided herein
or (iii) on the Maturity Date, at the rate of 3% per annum accruing from
______________________________________,(3) the date of initial issuance of this
Debenture. Accrual of interest shall commence on the first such business day to
occur after the date hereof and shall continue to accrue on a daily basis until
payment in full of the principal sum has been made or duly provided for.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Ten Thousand Dollars
(US$10,000) and integral multiples thereof. The Debentures are exchangeable for
an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same. No service
charge will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture, the Company may require, prior to issuance of a new
Debenture in the name of such other person, that it receive reasonable transfer
documentation including legal opinions that the issuance of the Debenture in
such other name does not and will not cause a violation of the Act or any
applicable state or foreign securities laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
4. A. The Holder of this Debenture is entitled, at its option, subject to
the following provisions of this Section 4, to convert all or a portion of this
Debenture into shares of Common Stock of the Company, $.01 par value per share
("Common Stock") of the Company at any time until
- ----------------------
(2) Insert the Maturity Date per fn 1.
(3) Insert Closing Date.
2
<PAGE>
the Maturity Date, at a conversion price for each share of Common Stock (the
"Conversion Rate") equal to the lower of
(x) the amount (which amount is subject to adjustment as hereinafter
provided; the "Fixed Conversion Price") which is equal to the greater of
(i) the Initial Market Price or (ii) $5.00 per share, or
(y) the Variable Conversion Price (as defined below).
B. For purposes of this Debenture, the following terms have the
meanings indicated below:
(i) "Market Price of the Common Stock" means the closing bid price
of the Common Stock for the period indicated in the relevant provision, as
reported by Bloomberg, LP or, if not so reported, as reported on the over-the-
counter market.
(ii) "Initial Market Price" means (x) one hundred twenty-five
percent (125%) of (y) the average Market Price of the Common Stock for the
fifteen (15) trading days ending on the trading day immediately before the
Initial Closing Date.
(iii) "Variable Conversion Price" means (x) ninety-two percent (92%)
of (y) the average of the two (2) lowest Market Price of the Common Stock during
the twenty (20) trading days immediately preceding the relevant Conversion Date
(as defined below), except that, to the extent any such trading day occurs prior
to the effectuation of a stock split or similar transaction occurring after the
date hereof and on or prior to the relevant Conversion Date, the Market Price of
the Common Stock used in determining the Variable Conversion Price will be
equitably adjusted to reflect such transaction.
C. Conversion shall be effectuated by surrendering the Debentures
to be converted to the Company or to the Company's transfer agent, American
Securities Transfer & Trust, Inc., accompanied by or preceded by facsimile or
other delivery to the Company of the form of conversion notice attached hereto
as Exhibit A, executed by the Holder of the Debenture evidencing such Holder's
intention to convert this Debenture or a specified portion hereof, and
accompanied, if required by the Company, by proper assignment hereof in blank.
Subject to the provisions of Section 2(E) hereof, interest accrued or accruing
from the date of issuance to the date of conversion shall, at the option of the
Company, be paid in cash or Common Stock upon conversion at the Conversion Rate
applicable to such conversion. No fractional shares of Common Stock or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded to the nearest whole share. The date on which
notice of conversion is given (the "Conversion Date") shall be deemed to be the
date on which the Holder faxes or otherwise delivers the conversion notice
("Notice of Conversion"), substantially in the form annexed hereto as Exhibit A,
duly executed, to the Company, provided that the Holder shall deliver to the
Company's transfer agent or the Company the original Debentures being converted
within seven (7)
3
<PAGE>
business days thereafter (and if not so delivered with such time, the Conversion
Date shall be the date on which the later of the Notice of Conversion and the
original Debentures being converted is received by the Company). Facsimile
delivery of the Notice of Conversion shall be accepted by the Company at
facsimile number (852) 2764-3783; ATTN: Yu Chuan Yih, Chairman. Certificates
representing Common Stock upon conversion will be delivered within three (3)
business days from the date later of the Notice of Conversion is delivered to
the Company as contemplated in the first sentence of this paragraph C or the
original Debenture is delivered to the Company's transfer agent or the Company.
D. Notwithstanding any other provision hereof or of any of the other
Transaction Agreements, in no event (except (i) with respect to a Mandatory
Conversion or a Redemption Notice Conversion [as those terms are defined below],
(ii) as specifically provided in this Debenture as an exception to this
provision, or (iii) while there is outstanding a tender offer for any or all of
the shares of the Company's Common Stock) shall the Holder be entitled to
convert any Debenture or shall the Company have the obligation to convert all or
any portion of this Debenture (and the Company shall not have the right to pay
interest on this Debenture) to the extent that, after such conversion, the sum
of (1) the number of shares of Common Stock beneficially owned by the Holder and
its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Debentures or unexercised portion of the Warrants), and (2) the number of shares
of Common Stock issuable upon the conversion of the Debentures or exercise of
the Warrants with respect to which the determination of this proviso is being
made, would result in beneficial ownership by the Holder and its affiliates of
more than 4.9% of the outstanding shares of Common Stock (after taking into
account the shares to be issued to the Holder upon such conversion or exercise).
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided
in clause (1) of such sentence. The Holder, by its acceptance of this
Debenture, further agrees that if the Holder transfers or assigns any of the
Debentures to a party who or which would not be considered such an affiliate,
such assignment shall be made subject to the transferee's or assignee's specific
agreement to be bound by the provisions of this Section 4(D) as if such
transferee or assignee were the original Holder hereof.
E. Anything herein to the contrary notwithstanding, in the event the
Company breaches the provisions of Section 4(g) of the Securities Purchase
Agreement, the Conversion Rate shall be amended to be equal to (i) 90% of (ii)
the Conversion Rate determined in accordance with the other provisions of this
Debenture without regard to this Section 4(E), and the Holder may require the
Company to immediately redeem the outstanding portion of this Debenture in
accordance with clause (y) of Section 6 hereof.
5. A. (i) Notwithstanding any other provision hereof to the contrary,
at any time prior to the Conversion Date, the Company shall have the right to
redeem (a "Redemption") all or any portion of the then outstanding principal
amount of the Debentures then held by the Holder in cash for an amount (the
"Redemption Amount") equal to one hundred twenty-four percent (124%)
4
<PAGE>
of the sum of the outstanding principal of such Debentures plus all accrued but
unpaid interest thereon through the date the Redemption Amount is paid to the
Holder (the "Redemption Payment Date").
(ii) If the Company elects to make a Redemption, the Company
shall give written notice thereof to the Holder (the "Notice of Redemption").
The Redemption Payment Date shall be the date which is twenty (20) business days
after the Holder's receipt of the Notice of Redemption. Anything in the other
provisions of this Debenture, including, but not limited to the preceding
provisions of this Section 5, to the contrary notwithstanding, with respect to
any Debentures for which a Notice of Redemption is given, the Holder shall have
the right, exercisable by giving a Notice of Conversion is submitted to the
Company within ten (10) business days of the Holder's receipt of the Company's
Notice of Redemption, to convert any or all of the Debentures sought to be
redeemed (a "Redemption Notice Conversion") and the Redemption Notice Conversion
shall take precedence over the redemption contemplated by the Notice of
Redemption. Such Debentures shall be converted in accordance with the terms
hereof.
(iii) The Redemption Amount shall, unless otherwise agreed to
in writing by the Holder after receiving the Notice of Redemption, be paid to
the Holder in cash.
(iv) In the event payment of the Redemption Amount is not
timely made, the Holder shall have the right, in the Holder's sole discretion,
to determine that (i) any rights of the Company to redeem outstanding Debentures
shall terminate, and/or (ii) the Notice of Redemption shall be null and void.
(B) Any Debentures not previously converted as of the Maturity Date
shall be deemed to be automatically converted, without further action of any
kind by the Company or any of its agents, employees or representatives, as of
the Maturity Date at the Conversion Rate applicable on the Maturity Date
("Mandatory Conversion").
6. The Holder recognizes that the Company may be limited in the number of
shares of Common Stock it may issue by (X) reason of its authorized shares, or
(Y) the applicable rules and regulations of the principal securities market on
which the Common Stock is listed or traded (collectively, the"Cap Regulations").
Without limiting the other provisions hereof, (i) the Company will take all
steps reasonably necessary to be in a position to issue shares of Common Stock
on conversion of the Debentures without violating the Cap Regulations and (ii)
if, despite taking such steps, the Company still can not issue such shares of
Common Stock without violating the Cap Regulations, the Holder of this Debenture
(to the extent the same can not be converted in compliance with the Cap
Regulations (an "Unconverted Debenture"), shall have the option, exercisable in
the Holder's sole and absolute discretion, to elect any one of the following
remedies:
(x) if permitted by the Cap Regulations, require the Company to issue
shares of Common Stock in accordance with such Holder's Notice of
Conversion relating to the Unconverted Debenture at a conversion purchase
price equal to the average of
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the closing bid price per share of Common Stock for any five (5)
consecutive trading days (subject to the equitable adjustments for certain
events occurring during such period as provided in this Debenture) during
the sixty (60) trading days immediately preceding the date of the Notice of
Conversion; or
(y) require the Company to redeem each Unconverted Debenture for an
amount (the _Redemption Amount_), payable in cash, equal to the sum of (i)
one hundred twenty-four percent (124%) of the principal of an Unconverted
Debenture, plus (ii) any accrued but unpaid interest thereon through and
including the date (the _Redemption Date_) on which the Redemption Amount
is paid to the Holder.
The holder of an Unconverted Debenture may elect one of the above remedies with
respect to a portion of such Unconverted Debenture and the other remedy with
respect to other portions of the Unconverted Debenture.
7. Subject to the terms of the Securities Purchase Agreement, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, and interest on, this
Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture and all other Debentures now or hereafter issued of
similar terms are direct obligations of the Company.
8. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
9. If the Company merges or consolidates with another corporation or sells
or transfers all or substantially all of its assets to another person and the
holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, subject to adjustments which shall
be as nearly equivalent as may be practicable. In the event of any proposed
merger, consolidation or sale or transfer of all or substantially all of the
assets of the Company (a "Sale"), the Holder hereof shall have the right to
convert by delivering a Notice of Conversion to the Company within fifteen (15)
days of receipt of notice of such Sale from the Company. In the event the
Holder hereof shall elect not to convert, the Company may prepay all outstanding
principal and accrued interest on this Debenture by paying the Redemption Amount
contemplated by Section 5(A) hereof, less all amounts required by law to be
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<PAGE>
deducted, upon which tender of payment following such notice, the right of
conversion shall terminate.
10. If, for any reason, prior to the Conversion Date or the Redemption
Payment Date, the Company spins off or otherwise divests itself of a part of its
business or operations or disposes all or of a part of its assets in a
transaction (the "Spin Off") in which the Company does not receive compensation
for such business, operations or assets, but causes securities of another entity
(the "Spin Off Securities") to be issued to security holders of the Company,
then the Company shall cause (i) to be reserved Spin Off Securities equal to the
number thereof which would have been issued to the Holder had all of the
Holder's Debentures outstanding on the record date (the "Record Date") for
determining the amount and number of Spin Off Securities to be issued to
security holders of the Company (the "Outstanding Debentures") been converted as
of the close of business on the trading day immediately before the Record Date
(the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the
conversion of all or any of the Outstanding Debentures, such amount of the
Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by
(y) a fraction, of which (I) the numerator is the principal amount of the
Outstanding Debentures then being converted, and (II) the denominator is the
principal amount of the Outstanding Debentures.
11. If, at any time while any portion of this Debenture remains
outstanding, the Company effectuates a stock split or reverse stock split of
its Common Stock or issues a dividend on its Common Stock consisting of shares
of Common Stock, the Fixed Conversion Price shall be equitably adjusted to
reflect such action. By way of illustration, and not in limitation, of the
foregoing, (i) if the Company effectuates a 2:1 split of its Common Stock,
thereafter, with respect to any conversion for which the Company issues the
shares after the record date of such split, the Fixed Conversion Price shall be
deemed to be one-half of what it had been calculated to be immediately prior to
such split; (ii) if the Company effectuates a 1:10 reverse split of its Common
Stock, thereafter, with respect to any conversion for which the Company issues
the shares after the record date of such reverse split, the Fixed Conversion
Price shall be deemed to be ten times what it had been calculated to be
immediately prior to such reverse split; and (iii) if the Company declares a
stock dividend of one share of Common Stock for every 10 shares outstanding,
thereafter, with respect to any conversion for which the Company issues the
shares after the record date of such dividend, the Fixed Conversion Price shall
be deemed to be the amount of such Fixed Conversion Price calculated immediately
prior to such record date multiplied by a fraction, of which the numerator is
the number of shares (10) for which a dividend share will be issued and the
denominator is such number of shares plus the dividend share(s) issuable or
issued thereon (11).
12. All payments contemplated hereby to be made "in cash" shall be made in
immediately available good funds in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public and
private debts. All payments of cash and each delivery of shares of Common Stock
issuable to the Holder as contemplated hereby shall be made to the Holder at
the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder from time to time; except that the Holder
can designate, by
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<PAGE>
notice to the Company, a different delivery address for any one or more specific
payments or deliveries.
13. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
14. This Debenture shall be governed by and construed in accordance
with the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non coveniens, to the bringing of any such
proceeding in such jurisdictions. To the extent determined by such court, the
Company shall reimburse the Holder for any reasonable legal fees and
disbursements incurred by the Holder in enforcement of or protection of any of
its rights under any of this Debenture.
15. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or interest
on this Debenture and same shall continue for a period of three
(3) days; or
b. Any of the representations or warranties made by the Company
herein, in the Securities Purchase Agreement, the Registration
Rights Agreement or in any certificate or financial or other
written statements heretofore or hereafter furnished by the
Company in connection with the execution and delivery of this
Debenture or the Securities Purchase Agreement shall be false or
misleading in any material respect at the time made; or
c. The Company fails to issue shares of Common Stock to the Holder
or to cause its Transfer Agent to issue shares of Common Stock
upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture, fails to
transfer or to cause its Transfer Agent to transfer any
certificate for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this Debenture
or the Registration Rights Agreement, and such transfer is
otherwise lawful, or fails to remove any restrictive legend or to
cause its Transfer Agent to transfer on any certificate or any
shares of Common Stock issued to the Holder upon conversion of
this Debenture as and when required by this Debenture, the
Securities Purchase Agreement or the Registration Rights
Agreement and such legend removal is otherwise lawful, and any
such failure
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<PAGE>
shall continue uncured for five (5) business days after written
notice from the Holder of such failure; or
d. The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition,
agreement or obligation of any Debenture in this series and such
failure shall continue uncured for a period of thirty (30) days
after written notice from the Holder of such failure; or
e. The Company shall fail to perform or observe, in any material
respect, any covenant, term, provision, condition, agreement or
obligation of the Company under the Securities Purchase Agreement
or the Registration Rights Agreement and such failure shall
continue uncured for a period of thirty (30) days after written
notice from the Holder of such failure (other than a failure to
cause the Registration Statement to become effective no later
than the Required Effective Date, as defined and provided in the
Registration Rights Agreement, as to which no such cure period
shall apply); or
f. The Company shall (1) admit in writing its inability to pay its
debts generally as they mature; (2) make an assignment for the
benefit of creditors or commence proceedings for its dissolution;
or (3) apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial part of its
property or business; or
g. A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business
without its consent and shall not be discharged within sixty (60)
days after such appointment; or
h. Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or
control of the whole or any substantial portion of the properties
or assets of the Company and shall not be dismissed within sixty
(60) days thereafter; or
i. Any money judgment, writ or warrant of attachment, or similar
process in excess of Two Hundred Thousand ($200,000) Dollars in
the aggregate shall be entered or filed against the Company or
any of its properties or other assets and shall remain unpaid,
unvacated, unbonded or unstayed for a period of sixty (60) days
or in any event later than five (5) days prior to the date of any
proposed sale thereunder; or
j. Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against
the Company and, if instituted against the Company, shall not be
dismissed within sixty (60) days after such
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<PAGE>
institution or the Company shall by any action or answer approve
of, consent to, or acquiesce in any such proceedings or admit the
material allegations of, or default in answering, a petition
filed in any such proceeding; or
k. The Company shall have its Common Stock suspended or delisted
from an exchange or over-the-counter market from trading for in
excess of five (5) trading days.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law.
16. Nothing contained in this Debenture shall be construed as conferring
upon the Holder the right to vote or to receive dividends or to consent or
receive notice as a shareholder in respect of any meeting of shareholders or any
rights whatsoever as a shareholder of the Company, unless and to the extent
converted in accordance with the terms hereof.
17. In the event for any reason, any payment by or act of the Company or
the Holder shall result in payment of interest which would exceed the limit
authorized by or be in violation of the law of the jurisdiction applicable to
this Debenture, then ipso facto the obligation of the Company to pay interest or
perform such act or requirement shall be reduced to the limit authorized under
such law, so that in no event shall the Company be obligated to pay any such
interest, perform any such act or be bound by any requirement which would result
in the payment of interest in excess of the limit so authorized. In the event
any payment by or act of the Company shall result in the extraction of a rate of
interest in excess of a sum which is lawfully collectible as interest, then such
amount (to the extent of such excess not returned to the Company) shall, without
further agreement or notice between or by the Company or the Holder, be deemed
applied to the payment of principal, if any, hereunder immediately upon receipt
of such excess funds by the Holder, with the same force and effect as though the
Company had specifically designated such sums to be so applied to principal and
the Holder had agreed to accept such sums as an interest-free prepayment of this
Debenture. If any part of such excess remains after the principal has been paid
in full, whether by the provisions of the preceding sentences of this Section 17
or otherwise, such excess shall be deemed to be an interest-free loan from the
Company to the Holder, which loan shall be payable immediately upon demand by
the Company. The provisions of this Section 17 shall control every other
provision of this Debenture.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: ____________________, 1999
LJ INTERNATIONAL INC.
By: /s/ Yu Chuan Yih
----------------------------------------------
Yu Chuan Yih
----------------------------------------------
(Print Name)
President
----------------------------------------------
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<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ ________________ of
the principal amount of the above Debenture No. ___ into Shares of Common Stock
of LJ INTERNATIONAL INC. (the "Company") according to the conditions hereof, as
of the date written below.
Conversion Date*
___________________________________________________________________
Applicable Conversion Price
___________________________________________________________
Signature
____________________________________________________________________________
[Name]
Address:
____________________________________________________________________________
_____________________________________________________________________________
* This original Debenture must be received by the Company or its transfer agent
by the seventh business date following the Conversion Date.
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<PAGE>
ANNEX IV
TO
SECURITIES PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of October 29, 1999
(this "Agreement"), is made by and between LJ INTERNATIONAL INC., a British
Virgin Islands corporation, with headquarters located at Unit #12, 12/F, Block
A, Focal Industrial Center, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong (the
"Company"), and each entity named on a signature page hereto (each, an _Initial
Investor_) (each agreement with an Initial Investor being deemed a separate and
independent agreement between the Company and such Initial Investor, except that
each Initial Investor acknowledges and consents to the rights granted to each
other Initial Investor under such agreement).
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement, dated as of October 29, 1999, between the Initial
Investor and the Company (the "Securities Purchase Agreement"; terms not
otherwise defined herein shall have the meanings ascribed to them in the
Securities Purchase Agreement), the Company has agreed to issue and sell to the
Initial Investor one or more 3% Convertible Debentures of the Company, in an
aggregate principal amount not exceeding $10,500,000 (the "Debentures"); and
WHEREAS, the Company has agreed to issue the Warrants to the Initial
Investor in connection with the issuance of the Debentures; and
WHEREAS, the Debentures are convertible into shares of Common Stock
(the "Conversion Shares"; which term, for purposes of this Agreement, shall
include shares of Common Stock of the Company issuable in lieu of accrued
interest on conversion as contemplated by the Debentures) upon the terms and
subject to the conditions contained in the Debentures and the Warrants may be
exercised for the purchase of shares of Common Stock (the _Warrant Shares_) upon
the terms and conditions of the Warrants; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), with respect to the Conversion Shares and the Warrant Shares;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(a) "Investor" means the Initial Investor and any permitted transferee
or assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof and who holds Debentures, Warrants or
Registrable Securities.
(b) _Potential Material Event_ means any of the following: (i) the
possession by the Company of material information not ripe for disclosure in a
registration statement, which shall be evidenced by determinations in good faith
by the Board of Directors of the Company that disclosure of such information in
the registration statement would be detrimental to the business and affairs of
the Company; or (ii) any material engagement or activity by the Company which
would, in the good faith determination of the Board of Directors of the Company,
be adversely affected by disclosure in a registration statement at such time,
which determination shall be accompanied by a good faith determination by the
Board of Directors of the Company that the registration statement would be
materially misleading absent the inclusion of such information.
(c) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(d) "Registrable Securities" means the Conversion Shares and the
Warrant Shares applicable to the Debentures and Warrants issued on the Initial
Closing Date or the relevant Additional Closing Date, as the case may be.
(e) "Registration Statement" means a registration statement of the
Company under the Securities Act covering Registrable Securities.
(f) "Required Effective Date" means the relevant Initial Required
Effective Date or Increased Required Effective Date (as those terms are defined
below).
(g) "Placement Agent Shares" means the shares issuable upon exercise
of warrants issued to the Placement Agent or its designees as compensation for
the Placement Agent's services in connection with the transactions contemplated
by the Transaction Agreements.
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<PAGE>
2. Registration.
(a) Mandatory and Other Registration.
(i) The Company shall prepare and file with the SEC, as soon as
possible after the Initial Closing Date no later than a date (the _Required
Filing Date_) which is thirty (30) days following the Initial Closing Date
either a Registration Statement on Form S-3 or an amendment to an existing
Registration Statement, in either event registering for resale by the Investor a
sufficient number of shares of Common Stock for the Initial Investors to sell
the Registrable Securities (or such lesser number as may be required by the SEC,
but in no event less than two hundred percent (200%) of the aggregate number of
shares (A) into which the relevant Debentures and all interest thereon through
their respective Maturity Dates would be convertible at the time of filing of
such Registration Statement (assuming for such purposes that all such Debentures
had been issued and were eligible to be converted, and had been converted, into
Conversion Shares in accordance with their terms, whether or not such issuance,
accrual of interest, eligibility or conversion had in fact occurred as of such
date) and (B) which would be issued upon exercise of all of the relevant
Warrants at the time of filing of the Registration Statement (assuming for such
purposes that such Warrants had been issued based on the Warrants issued or to
be issued based on the Additional Debentures specified in the relevant Tranche
Notice, were eligible to be exercised and had been exercised in accordance with
their terms, whether or not such issuance, eligibility or exercise had in fact
occurred as of such date). The Registration Statement (W) shall include only
the Registrable Securities (but may also include the Placement Agent Shares)
and (X) shall also state that, in accordance with Rule 416 and 457 under the
Securities Act, it also covers such indeterminate number of additional shares of
Common Stock as may become issuable upon conversion of the Debentures and the
exercise of the Warrants to prevent dilution resulting from stock splits or
stock dividends. The Company will use its reasonable best efforts to cause such
Registration Statement to be declared effective on a date (the "Initial Required
Effective Date") which is no later than is the earlier of (Y) five (5) days
after notice by the SEC that it may be declared effective or (Z) ninety (90)
days after the Initial Closing Date.
(ii) If at any time (an _Increased Registered Shares Date_), the
number of shares of Common Stock represented by the Registrable Shares, issued
or to be issued as contemplated by the Transaction Agreements, exceeds the
aggregate number of shares of Common Stock then registered, the Company shall,
within ten (10) business days after receipt of a written notice from any
Investor, either (X) amend the relevant Registration Statement filed by the
Company pursuant to the preceding provisions of this Section 2, if such
Registration Statement has not been declared effective by the SEC at that time,
to register two hundred percent (200%) of such Registrable Shares, computed as
contemplated by the immediately preceding subparagraph (i), or (Y) if such
Registration Statement has been declared effective by the SEC at that time, file
with the SEC an additional Registration Statement on Form S-3 or other
appropriate registration statement form (an _Additional Registration Statement_)
to register two hundred percent (200%) of the shares of Common Stock represented
by the Registrable Shares, computed as contemplated by the immediately preceding
subparagraph (i), that exceed the aggregate number of shares of Common
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<PAGE>
Stock already registered. The Company will use its reasonable best efforts to
cause such Registration Statement to be declared effective on a date (each, an
"Increased Required Effective Date") which is no later than (Q) with respect to
a Registration Statement under clause (X) of this subparagraph (ii), the Initial
Required Effective Date contemplated by the immediately preceding subparagraph
(i) and (R) with respect to an Additional Registration Statement, the earlier of
(I) five (5) days after notice by the SEC that it may be declared effective or
(II) thirty (30) days after the Increased Registered Shares Date.
(iii) The provisions of this Agreement apply to Registration
Statements for Registrable Securities applicable to transactions consummated on
Additional Closing Dates, except as the context may otherwise require.
(b) Payments by the Company.
(i) If the Registration Statement covering the Registrable
Securities is not filed in proper form with the SEC by the Required Filing Date,
the Company will make payment to the Initial Investor in such amounts and at
such times as shall be determined pursuant to this Section 2(b).
(ii) If the Registration Statement covering the Registrable
Securities is not effective by the relevant Required Effective Date or if the
Investor is restricted from making sales of Registrable Securities covered by
any previously effective Registration Statement at any time (the date such
restriction commences, a _Restricted Sale Date_) after the relevant Effective
Date other than during a Suspension Period (as defined below), then the Company
will make payments to the Initial Investor in such amounts and at such times as
shall be determined pursuant to this Section 2(b).
(iii) The amount (the "Periodic Amount") to be paid by the
Company to the Initial Investor shall be determined as of each Computation Date
(as defined below) and such amount shall be equal to the Periodic Amount
Percentage (as defined below) of the Purchase Price for all Debentures for the
period from the date following the relevant Required Filing Date, Required
Effective Date or Restricted Sale Date, as the case may be, to the first
relevant Computation Date, and thereafter to each subsequent Computation Date.
The _Periodic Amount Percentage_ means (A) one percent (1%) of the Purchase
Price for all the Debentures previously purchased for the period from the date
following the relevant Required Filing Date, Required Effective Date or
Restricted Sale Date, as the case may be, to the first relevant Computation
Date, and (B) two percent (2%) of the Purchase Price of all Debentures to each
Computation Date thereafter. Anything in the preceding provisions of this
paragraph (iii) to the contrary notwithstanding, after the Effective Date the
Purchase Price shall be deemed to refer to the sum of (X) the principal amount
of all Debentures previously purchased but not yet converted and (Y) the Held
Shares Value (as defined below). The _Held Shares Value_ means, for shares
acquired by the Investor upon a conversion within the thirty (30) days preceding
the Restricted Sale Date, but not yet sold by the Investor, the principal amount
of the Debentures converted into such Conversion Shares; provided, however, that
if the Investor
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<PAGE>
effected more than one conversion during such thirty (30) day period and sold
less than all of such shares, the sold shares shall be deemed to be derived
first from the conversions in the sequence of such conversions (that is, for
example, until the number of shares from the first of such conversions have been
sold, all shares shall be deemed to be from the first conversion; thereafter,
from the second conversion until all such shares are sold). By way of
illustration and not in limitation of the foregoing, if the Registration
Statement for the Registrable Securities relating to the Debentures and Warrants
issued on the Initial Closing Date is timely filed but is not declared effective
until one hundred thirty-five (135) days after the Initial Closing Date, the
Periodic Amount will aggregate three percent (3%) of the Purchase Price of the
Initial Debentures (1% for days 91-120, plus 2% for days 121-135).
(iv) Each Periodic Amount will be payable by the Company in cash or
other immediately available funds to the Investor monthly, without requiring
demand therefor by the Investor.
(v) The parties acknowledge that the damages which may be incurred
by the Investor if the Registration Statement is not filed by the Required
Filing Date or if the Registration Statement has not been declared effective by
a Required Effective Date, including if the right to sell Registrable Securities
under a previously effective Registration Statement is suspended, may be
difficult to ascertain. The parties agree that the Periodic Amounts represent a
reasonable estimate on the part of the parties, as of the date of this
Agreement, of the amount of such damages.
(vi) Notwithstanding the foregoing, the amounts payable by the
Company pursuant to this provision shall not be payable to the extent any delay
in the effectiveness of the Registration Statement occurs because of an act of,
or a failure to act or to act timely by the Initial Investor or its counsel, or
in the event all of the Registrable Securities may be sold pursuant to Rule 144
or another available exemption under the Act.
(vii) "Computation Date" means (A) the date which is the earlier of
(1) thirty (30) days after the Required Filing Date, any relevant Required
Effective Date or a Restricted Sale Date, as the case may be, or (2) the date
after the Required Filing Date, such Required Effective Date or Restricted Sale
Date on which the Registration Statement is filed (with respect to payments due
as contemplated by Section 2(b)(i) hereof) or is declared effective or has its
restrictions removed (with respect to payments due as contemplated by Section
2(b)(ii) hereof), as the case may be, and (B) each date which is the earlier of
(1) thirty (30) days after the previous Computation Date or (2) the date after
the previous Computation Date on which the Registration Statement is filed (with
respect to payments due as contemplated by Section 2(b)(i) hereof) or is
declared effective or has its restrictions removed (with respect to payments due
as contemplated by Section 2(b)(ii) hereof), as the case may be.
(viii) Anything in the preceding provisions of this Section 2(b) to
the contrary notwithstanding, if, but only if, the Registration Statement for
the Registrable Securities relating to the transactions effected on the Initial
Closing Date is declared effective within one
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<PAGE>
hundred twenty (120) days following the Initial Closing Date, the provisions of
Section 2(b)(ii) shall not apply to the fact that that Registration Statement
was initially declared effective after the Initial Required Effective Date, and
the Company will not have any obligation to pay any Periodic Amount to the
Initial Investor with respect thereto; provided, however, that the provisions of
Section.2(b)(ii) shall continue to apply to all other events described therein.
3. Obligations of the Company. In connection with the registration
of the Registrable Securities, the Company shall do each of the following:
(a) Prepare promptly, and file with the SEC by the Required Filing
Date a Registration Statement with respect to not less than the number of
Registrable Securities provided in Section 2(a) above, and thereafter use its
reasonable best efforts to cause such Registration Statement relating to
Registrable Securities to become effective by the Required Effective Date and
keep the Registration Statement effective at all times during the period (the
"Registration Period") continuing until the earliest of (i) the date that is two
(2) years after the last day of the calendar month following the month in which
the closing of the last tranche of Debentures occurs, (ii) the date when the
Investors may sell all Registrable Securities under Rule 144 without volume or
other restrictions or limits or (iii) the date the Investors no longer own any
of the Registrable Securities, which Registration Statement (including any
amendments or supplements thereto and prospectuses contained therein) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) Permit a single firm of counsel designated by the Initial
Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time (but not less than three (3)
business days) prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects.
(d) Notify each Investor, such Investor_s legal counsel identified
to the Company (which, until further notice, shall be deemed to be Krieger &
Prager, ATTN: Samuel Krieger, Esq.; each, an _Investor_s Counsel_), and any
managing underwriters immediately (and, in the case of (i)(A) below, not less
than five (5) days prior to such filing) and (if requested by any such Person)
confirm such notice in writing no later than one (1) business day following the
day (i)(A) when a Prospectus or any Prospectus supplement or post-effective
amendment to the Registration Statement
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<PAGE>
including changes in the provisions relating to the Investor, the Registrable
Securities, or the transactions reflected in the Transaction Agreements
(collectively, "Investor Matters") is proposed to be filed; (B) whenever the SEC
notifies the Company whether there will be a _review_ of such Registration
Statement; (C) whenever the Company receives (or a representative of the Company
receives on its behalf) any oral or written comments from the SEC respect of a
Registration Statement (copies or, in the case of oral comments, summaries of
such comments shall be promptly furnished by the Company to the Investors); and
(D) with respect to the Registration Statement or any post-effective amendment,
when the same has become effective; (ii) of any request by the SEC or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations or warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that to the best knowledge of
the Company makes any statement made in the Registration Statement or Prospectus
or any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. In
addition, the Company shall furnish to the Investor's Counsel copies of all
intended written responses to the comments contemplated in clause (C) of this
Section 3(d) to the extent such responses relate to Investor Matters not later
than one (1) business day in advance of the filing of such responses with the
SEC so that the Investors shall have the opportunity to comment thereon.
(e) Furnish to each Investor and such Investor_s Counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, and all amendments and
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor;
(f) As promptly as practicable after becoming aware thereof, notify
each Investor of the happening of any event of which the Company has knowledge,
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and use its best efforts promptly to prepare a supplement or
amendment to the Registration Statement or other appropriate filing with the SEC
to correct such untrue statement or omission, and deliver
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<PAGE>
a number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request;
(g) As promptly as practicable after becoming aware thereof, notify
each Investor who holds Registrable Securities being sold (or, in the event of
an underwritten offering, the managing underwriters) of the issuance by the SEC
of a Notice of Effectiveness or any notice of effectiveness or any stop order or
other suspension of the effectiveness of the Registration Statement at the
earliest possible time;
(h) Notwithstanding the foregoing, if at any time or from time to
time after the date of effectiveness of the Registration Statement, the Company
notifies the Investors in writing of the existence of a Potential Material
Event, the Investors shall not offer or sell any Registrable Securities, or
engage in any other transaction involving or relating to the Registrable
Securities, from the time of the giving of notice with respect to a Potential
Material Event until such Investor receives written notice from the Company that
such Potential Material Event either has been disclosed to the public or no
longer constitutes a Potential Material Event; provided, however, that the
Company may not so suspend the right to such holders of Registrable Securities
for more than two twenty (20) day periods in the aggregate during any 12-month
period (_Suspension Period_) with at least a ten (10) business day interval
between such periods, during the periods the Registration Statement is required
to be in effect;
(i) Use its reasonable efforts to secure and maintain the
designation of all the Registrable Securities covered by the Registration
Statement on the NASDAQ Stock Market;
(j) Provide a transfer agent, which may be a single entity, for the
Registrable Securities not later than the effective date of the Registration
Statement;
(k) Cooperate with the Investors to facilitate the timely preparation
and delivery of certificates for the Registrable Securities to be offered
pursuant to the Registration Statement and enable such certificates for the
Registrable Securities to be in such denominations or amounts as the case may
be, as the Investors may reasonably request, and, within three (3) business days
after a Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal counsel
selected by the Company to deliver, to the transfer agent for the Registrable
Securities (with copies to the Investors whose Registrable Securities are
included in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
(l) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. Obligations of the Investors. In connection with the registration
of the Registrable Securities, the Investors shall have the following
obligations:
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<PAGE>
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request. At
least ten (10) days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor (the "Requested
Information") if such Investor elects to have any of such Investor's Registrable
Securities included in the Registration Statement. If at least two (2) business
days prior to the filing date the Company has not received the Requested
Information from an Investor (a "Non-Responsive Investor"), then the Company may
file the Registration Statement without including Registrable Securities of such
Non-Responsive Investor;
(b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. Expenses of Registration. (a) All reasonable expenses (other
than underwriting discounts and commissions of the Investor) incurred in
connection with registrations, filings or qualifications pursuant to Section 3,
but including, without limitation, all registration, listing, and qualifications
fees, printers and accounting fees, the fees and disbursements of counsel for
the Company and a fee for a single counsel for the Investors (as a group and not
individually) not exceeding $3,500 for the Registration Statement covering the
Registrable Securities applicable to the Debentures and Warrants issued on the
Initial Closing Date and $1,000 for each Registration Statement covering
Registrable Securities applicable to the Additional Debentures and related
Warrants issued on each Additional Closing Date, shall be borne by the Company.
(b) Except as disclosed in the Company's SEC Documents, (i) neither
the Company nor any of its subsidiaries has, as of the date hereof, nor shall
the Company nor any of its subsidiaries, on or after the date of this Agreement,
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the Investors in this Agreement or otherwise
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<PAGE>
conflicts with the provisions hereof and (ii) neither the Company nor any of its
subsidiaries has previously entered into any agreement granting any registration
rights with respect to any of its securities to any Person. Without limiting
the generality of the foregoing, without the written consent of the Investors
holding a majority of the Registrable Securities, the Company shall not grant to
any person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in all
respects to the prior rights in full of the Investors set forth herein, and are
not otherwise in conflict or inconsistent with the provisions of this Agreement
and the other Transaction Agreements.
6. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act (each, an "Indemnified Person" or
_Indemnified Party_), against any losses, claims, damages, liabilities or
expenses (joint or several) incurred (collectively, "Claims") to which any of
them may become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
the final prospectus (as amended or supplemented, if the Company files any
amendment thereof or supplement thereto with the SEC) or the omission or alleged
omission to state therein any material fact necessary to make the statements
made therein, in light of the circumstances under which the statements therein
were made, not misleading or (iii) any violation or alleged violation by the
Company of the Securities Act, the Exchange Act, any state securities law or any
rule or regulation under the Securities Act, the Exchange Act or any state
securities law (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to clause (b) of this Section 6, the
Company shall reimburse the Investors, promptly as such expenses are incurred
and are due and payable, for any legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a) shall not (I) apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by or on behalf of any
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement thereto, if
such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) be available to the extent such Claim is based on a failure
of the Investor to deliver or cause to be delivered the prospectus made
available by the Company; or (III) apply to amounts paid in settlement of any
Claim if such settlement is effected
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<PAGE>
without the prior written consent of the Company, which consent shall not be
unreasonably withheld. Each Investor will indemnify the Company and its
officers, directors and agents (each, an "Indemnified Person" or _Indemnified
Party_) against any claims arising out of or based upon a Violation which occurs
in reliance upon and in conformity with information furnished in writing to the
Company, by or on behalf of such Investor, expressly for use in connection with
the preparation of the Registration Statement, subject to such limitations and
conditions as are applicable to the Indemnification provided by the Company to
this Section 6. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.
(b) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be. In case any such action is brought against any Indemnified Person
or Indemnified Party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such Indemnified Person or
Indemnified Party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such Indemnified Person or Indemnified
Party under this Section 6 for any legal or other reasonable out-of-pocket
expenses subsequently incurred by such Indemnified Person or Indemnified Party
in connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party shall not pursue the action to its
final conclusion. The Indemnified Person or Indemnified Party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and reasonable out-of-pocket expenses of such
counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the Indemnified Person or Indemnified Party. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; provided, however, that (a) no contribution shall be made under
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<PAGE>
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6; (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation; and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. Reports under Exchange Act. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company and (iii) such
other information as may be reasonably requested to permit the Investors to sell
such securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of the Registrable
Securities (or all or any portion of any unconverted Debenture or unexercised
Warrant) only if: (a) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment, (b) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (i) the name and address of such transferee or assignee and
(ii) the securities with respect to which such registration rights are being
transferred or assigned, (c) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and applicable state securities laws, and
(d) at or before the time the Company received the written notice contemplated
by clause (b) of this sentence the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions contained herein. In the event
of any delay in filing or effectiveness of the Registration Statement as a
result of such assignment, the Company shall not be liable for any damages
arising from such delay, or the payments set forth in Section 2(b) hereof
arising from such delay.
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<PAGE>
10. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold, in the aggregate, an eighty (80%) percent interest of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be
given in the manner contemplated by the Securities Purchase Agreement, (i) if to
the Company or to the Initial Investor, to their respective address contemplated
by the Securities Purchase Agreement, and (ii) if to any other Investor, at such
address as such Investor shall have provided in writing to the Company, or at
such other address as each such party furnishes by notice given in accordance
with this Section 11(b).
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York for contracts to be wholly performed in
such state and without giving effect to the principles thereof regarding the
conflict of laws. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the City of New York or the
state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non coveniens, to the bringing of any such proceeding in such
jurisdictions. To the extent determined by such court, the Company shall
reimburse the Investor for any reasonable legal fees and disbursements incurred
by the Investor in enforcement of or protection of any of its rights under this
Agreement.
(e) If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
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<PAGE>
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
(j) The Company acknowledges that any failure by the Company to
perform its obligations under Section 3(a) hereof, or any delay in such
performance could result in loss to the Investors, and the Company agrees that,
in addition to any other liability the Company may have by reason of such
failure or delay, the Company shall be liable for all direct damages caused by
any such failure or delay, unless the same is the result of force majeure.
Neither party shall be liable for consequential damages.
(k) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof. This Agreement may be amended only by an instrument in writing signed by
the party to be charged with enforcement thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
COMPANY:
LJ INTERNATIONAL INC.
By:____________________________________________________
Name: Yu Chuan Yih
------------------------------------------------
Title: President
------------------------------------------------
INITIAL INVESTOR:
-------------------------------------------------------
[Print Name]
By:____________________________________________________
Name:__________________________________________________
Title:_________________________________________________
<PAGE>
ANNEX VI
TO
SECURITIES PURCHASE AGREEMENT
<PROTOTYPE FOR EACH ISSUANCE>
FORM OF WARRANT
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH
RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE
SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
LJ INTERNATIONAL INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance; Certain Definitions.
-----------------------------
In consideration of good and valuable consideration, the receipt of
which is hereby acknowledged by LJ INTERNATIONAL INC. a British Virgin Islands
corporation (the "Company"), _____________________________________ or
registered assigns (the "Holder") is hereby granted the right to purchase at any
time until 5:00 P.M., New York City time, on _______________________, 200 (1)
(the "Expiration Date"), ___________________ Thousand (_____________)(2) fully
paid and nonassessable shares of the Company's Common Stock, par value $.01 per
share (the "Common Stock") at an initial exercise price per share (the "Exercise
Price") of $____________,(3) subject to further adjustment as set forth herein.
2. Exercise of Warrants.
--------------------
2.1 General. This Warrant is exercisable in whole or in part at any
time and from time to time at the Exercise Price per share of Common Stock
payable hereunder, payable in cash or by certified or official bank check. Upon
surrender of this Warrant Certificate with the annexed Notice of Exercise Form
duly executed (which Notice of Exercise Form may be submitted
- -----------------------
(1) Insert date which is last day of month in which fifth anniversary of
relevant Closing Date occurs.
(2) Fifteen thousand (15,000) for every $1,000,000 principal of Debentures
purchased.
(3) Price to be filled in equal to 120% of closing bid price of Common Stock
for trading day immediately before relevant Closing Date.
<PAGE>
either by delivery to the Company or by facsimile transmission as provided in
Section 8 hereof), together with payment of the Exercise Price for the shares of
Common Stock purchased, the Holder shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased.
2.2 Limitation on Exercise. Notwithstanding the provisions of this
Warrant, the Securities Purchase Agreement, dated October _________, 1999 (the
"Securities Purchase Agreement"), between the Company and the Holder (or the
Holder's predecessor in interest) or of the other Transaction Agreements (as
defined in the Securities Purchase Agreement), in no event (except (i) as
specifically provided in this Warrant as an exception to this provision, or (ii)
while there is outstanding a tender offer for any or all of the shares of the
Company's Common Stock) shall the Holder be entitled to exercise this Warrant,
or shall the Company have the obligation to issue shares upon such exercise of
all or any portion of this Warrant, to the extent that, after such exercise the
sum of (1) the number of shares of Common Stock beneficially owned by the Holder
and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Debentures or unexercised portion of the Warrants), and (2) the number of
shares of Common Stock issuable upon the exercise of the Warrants with respect
to which the determination of this proviso is being made, would result in
beneficial ownership by the Holder and its affiliates of more than 4.9% of the
outstanding shares of Common Stock (after taking into account the shares to be
issued to the Holder upon such exercise). For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), except as otherwise provided in clause (1) of such sentence.
The Holder, by its acceptance of this Warrant, further agrees that if the Holder
transfers or assigns any of the Warrants to a party who or which would not be
considered such an affiliate, such assignment shall be made subject to the
transferee's or assignee's specific agreement to be bound by the provisions of
this Section 2.2 as if such transferee or assignee were the original Holder
hereof.
3. Reservation of Shares. The Company hereby agrees that at all
times during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are
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<PAGE>
limited to those expressed in this Warrant and are not enforceable against the
Company except to the extent set forth herein.
6. Protection Against Dilution.
---------------------------
6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is
required pursuant to this Section 6, the Holder shall be entitled to purchase
such number of additional shares of Common Stock as will cause (i) the total
number of shares of Common Stock Holder is entitled to purchase pursuant to this
Warrant, multiplied by (ii) the adjusted Exercise Price per share, to equal
(iii) the dollar amount of the total number of shares of Common Stock Holder is
entitled to purchase before adjustment multiplied by the total Exercise Price
before adjustment.
6.2 Capital Adjustments. In case of any stock split or reverse stock
split, stock dividend, reclassification of the Common Stock, recapitalization,
merger or consolidation, or like capital adjustment affecting the Common Stock
of the Company, the provisions of this Section 6 shall be applied as if such
capital adjustment event had occurred immediately prior to the date of this
Warrant and the original Exercise Price had been fairly allocated to the stock
resulting from such capital adjustment; and in other respects the provisions of
this Section shall be applied in a fair, equitable and reasonable manner so as
to give effect, as nearly as may be, to the purposes hereof. A rights offering
to stockholders shall be deemed a stock dividend to the extent of the bargain
purchase element of the rights.
6.3 Adjustment for Spin Off. If, for any reason, prior to the
exercise of this Warrant in full, the Company spins off or otherwise divests
itself of a part of its business or operations or disposes all or of a part of
its assets in a transaction (the "Spin Off") in which the Company does not
receive compensation for such business, operations or assets, but causes
securities of another entity (the "Spin Off Securities") to be issued to
security holders of the Company, then
(a) the Company shall cause (i) to be reserved Spin Off Securities
equal to the number thereof which would have been issued to the Holder had
all of the Holder's unexercised Warrants outstanding on the record date (the
"Record Date") for determining the amount and number of Spin Off Securities
to be issued to security holders of the Company (the "Outstanding Warrants")
been exercised as of the close of business on the trading day immediately
before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be
issued to the Holder on the exercise of all or any of the Outstanding
Warrants, such amount of the Reserved Spin Off Shares equal to (x) the
Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the
numerator is the amount of the Outstanding Warrants then being exercised, and
(II) the denominator is the amount of the Outstanding Warrants; and
(b) the Exercise Price on the Outstanding Warrants shall be adjusted
immediately after consummation of the Spin Off by multiplying the Exercise
Price by a fraction (if, but
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<PAGE>
only if, such fraction is less than 1.0), the numerator of which is the
Average Market Price of the Common Stock (as defined below) for the five (5)
trading days immediately following the fifth trading day after the Record
Date, and the denominator of which is the Average Market Price of the Common
Stock on the five (5) trading days immediately preceding the Record Date; and
such adjusted Exercise Price shall be deemed to be the Exercise Price with
respect to the Outstanding Warrants after the Record Date. As used herein,
the term "Average Market Price of the Common Stock" means the average closing
bid price of a share of Common Stock, as reported by Bloomberg, LP or, if not
so reported, as reported on the over-the-counter market for the relevant
period.
7. Transfer to Comply with the Securities Act; Registration Rights.
---------------------------------------------------------------
7.1 Transfer. This Warrant has not been registered under the
Securities Act of 1933, as amended, (the "Act") and has been issued to the
Holder for investment and not with a view to the distribution of either the
Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant
Shares or any other security issued or issuable upon exercise of this Warrant
may be sold, transferred, pledged or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an opinion of
counsel satisfactory to the Company that registration is not required under the
Act. Each certificate for the Warrant, the Warrant Shares and any other
security issued or issuable upon exercise of this Warrant shall contain a legend
on the face thereof, in form and substance satisfactory to counsel for the
Company, setting forth the restrictions on transfer contained in this Section.
7.2 Registration Rights. (a) Reference is made to the Registration
Rights Agreement of even date herewith, to which the Company and the Holder (or
Holder's direct or indirect assignor, if any) are parties (the "Registration
Rights Agreement"). The Warrant Shares are Registrable Securities, as that term
is used in the Registration Rights Agreement. Subject to the provisions of the
Registration Rights Agreement, the Company agrees to file an amendment, which
shall include the Warrant Shares, to its registration statement on Form S-3 (as
so amended, the "Registration Statement"), pursuant to the Act, by the Required
Filing Date and to have the registration of the Warrant Shares completed and
effective by the Required Effective Date (as those terms are defined in the
Registration Rights Agreement).
(b) In addition to the registration rights referred to in the
preceding provisions of Section 7.2(a), effective after the expiration of the
effectiveness of the Registration Statement as contemplated by the Registration
Rights Agreement, the Holder shall have demand piggy-back registration rights
with respect to the Warrant Shares then held by the Holder or then subject to
issuance upon exercise of this Warrant (collectively, the "Remaining Warrant
Shares"), subject to the conditions set forth below. If, at any time after the
Registration Statement has ceased to be effective, the Company participates
(whether voluntarily or by reason of an obligation to a third party) in the
registration of any shares of the Company's stock, the Company shall give
written notice thereof to the Holder and the Holder shall have the right,
exercisable within ten (10) business days after receipt of such notice, to
demand inclusion of all or a portion of the Holder's Remaining
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<PAGE>
Warrant Shares in such registration statement. If the Holder exercises such
election, the Remaining Warrant Shares so designated shall be included in the
registration statement at no cost or expense to the Holder (other than any costs
or commissions which would be borne by the Holder under the terms of the
Registration Rights Agreement). The Holder's rights under this Section 7.2(b)
will expire at such time as the Holder may sell all Remaining Warrant Shares
under Rule 144 without volume or other restrictions or limits.
8. Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage pre-paid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission,
or, if mailed, two days after the date of deposit in the United States mails, as
follows:
(i) if to the Company, to:
LJ INTERNATIONAL INC.
Unit #12, 12/F, Block A
Focal Industrial Center
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong
ATTN: Yu Chuan Yih
Telephone No.: (852) 2764 3622
Telecopier No.: (852) 2764 3783
with a copy to:
Andrew N. Bernstein, Esq.
Andrew N. Bernstein, P.C.
5445 DTC Parkway, Suite 520
Greenwood Village, CO 80111
Telephone No.: (303) 770 - 7131
Telecopier No.: (303) 770 - 7332
(ii) if to the Holder, to:
ATTN:
Telephone No.: ( ) -
Telecopier No.: ( ) -
with a copy to:
Krieger & Prager, Esqs.
5
<PAGE>
319 Fifth Avenue
New York, New York 10016
Telephone No.: (212) 689-3322
Telecopier No. (212) 213-2077
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9. Supplements and Amendments; Whole Agreement. This Warrant may be
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant contains the full understanding of the parties hereto with
respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings other than expressly
contained herein and therein.
10. Governing Law. This Warrant shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
governed by and interpreted in accordance with the laws of the State of New York
applicable to contracts to be made and performed entirely within such State,
without giving effect to the principles thereof regarding the conflict of laws.
Each of the parties consents to the jurisdiction of the federal courts whose
districts encompass any part of the City of New York or the state courts of the
State of New York sitting in the City of New York in connection with any dispute
arising under this Warrant and hereby waives, to the maximum extent permitted by
law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. To the extent
determined by such court, the Company shall reimburse the Holder for any
reasonable legal fees and disbursements incurred by the Holder in enforcement of
or protection of any of its rights under this Warrant.
11. Counterparts. This Warrant may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. Descriptive Headings. Descriptive headings of the several
Sections of this Warrant are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the
__ th day of ______________________________, 1999.
LJ INTERNATIONAL INC.
By: /s/ Yu Chuan Yih
------------------------
Name: Yu Chuan Yih
-----------------------
Its: President
-----------------------
Attest:
- ------------------------------------------
Name: ____________________________________
Title: __________________________________
7
<PAGE>
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant Certificate dated as of
_____________________________, ___________, to purchase ________ shares of the
Common Stock, par value $.01 per share, of LJ INTERNATIONAL INC. and tenders
herewith payment in accordance with Section 1 of said Common Stock Purchase
Warrant.
Please deliver the stock certificate to:
Dated: ________________________________________________
By: ___________________________________________________
[ ] CASH: $ _________________________________________
8
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS OF
LJ INTERNATIONAL INC.
TO BE HELD DECEMBER 15, 1999
The undersigned hereby appoints Yu Chuan Yih as the lawful agent and Proxy of
the undersigned (with all powers the undersigned would possess if personally
present, including full power of substitution), and hereby authorizes him to
represent and to vote, as designated below, all the shares of common stock of
LJ International Inc. held of record by the undersigned as of the close of
business on November 9, 1999, at the Annual Meeting of Shareholders to be held
on Wednesday, December 15, 1999, or any adjournment or postponement.
1.ELECTION OF DIRECTORS
__FOR all nominees ___WITHHOLD
listed below AUTHORITY to
(except as marked vote for all
to the contrary nominees listed
below) below
Y.C. Yih, K.M. Au, L. Wang, P. Yue
(INSTRUCTION: To withhold authority to vote for any nominees, write the
nominees' names on the space provided below.)
-----------------------------------------------------
2. To approve an amendment to the 1998 Stock Compensation Plan increasing the
authorized number of shares of common stock from 2,000,000 to 4,000,000 (the
"1998 Stock Compensation Plan Amendment Proposal").
[_] FOR [_] AGAINST [_] ABSTAIN
3. To approve an amendment to the Memorandum of Association of the Company to
provide that the authorized capital shall be restated to be made up of two
classes of shares divided into 80,000,000 shares of common stock, US$0.01
par value, and 20,000,000 shares of preferred stock, US$0.01 par value (the
"Authorization of Preferred Stock Proposal").
[_] FOR [_] AGAINST [_] ABSTAIN
<PAGE>
4. To ratify and approve the Securities Purchase Agreement, dated October 29,
1999, and all transactions contemplated thereby, including the issuance of
up to $10,500,000 of convertible debentures and all shares issuable upon
conversion thereof (the "Sale of Convertible Debentures Proposal").
[_] FOR [_] AGAINST [_] ABSTAIN
5. In his discretion, the Proxy is authorized to vote upon any matters which
may properly come before the meeting, or any adjournment or postponement.
It is understood that when properly executed, this proxy will be voted in the
manner directed herein by the undersigned shareholder. WHERE NO CHOICE IS
SPECIFIED BY THE SHAREHOLDER, THE PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS PROPOSED IN ITEM (1) AND IN FAVOR OF ITEMS (2), (3) AND (4).
The undersigned hereby revokes all previous proxies relating to the shares
covered hereby and confirms all that the Proxy or his substitutes may do by
virtue hereof.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: _________________ , 1999
_______________________________
Signature
_______________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
[_] PLEASE CHECK THIS BOX IF YOU INTEND TO BE PRESENT AT THE MEETING.
