<PAGE>
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
QIAO XING UNIVERSAL TELEPHONE INC.
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(Name of Registrant as Specified In Its Charter)
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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>
QIAO XING UNIVERSAL TELEPHONE, INC.
Qiao Xing Building
Wu Shi Industrial Zone
Huizhou City, Guangdong,
People's Republic of China
(011) 86-752-2808-188
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held Friday, July 21, 2000
To Our Shareholders:
PLEASE TAKE NOTICE that a Special Meeting of Shareholders of Qiao Xing
Universal Telephone, Inc. will be held at our Hong Kong offices, Room 5-9,
27/F., K. Wah Centre, 191 Java Road, North Point, Hong Kong, on Friday, July 21,
2000, at 11:00 a.m., local time, for the following purposes:
1. To ratify and approve the Common Stock and Warrants Purchase Agreement
dated as of December 30, 1999, and all transactions contemplated thereby,
including the issuance of up to $20,000,000 of our common stock and shares
issuable upon exercise of warrants to purchase our common stock (the "Sale of
Common Stock Proposal"); and
2. To ratify and approve the Convertible Debenture and Warrants Purchase
Agreement dated as of May 24, 2000, and all transactions contemplated thereby,
including the issuance of $10,000,000 of our 0% Convertible Debentures and
shares issuable upon exercise of warrants to purchase our common stock (the
"Sale of Convertible Debentures Proposal").
The board of directors has fixed the close of business on June 15, 2000 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
Zhi Yang Wu
Secretary
Dated: June 21, 2000
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>
QIAO XING UNIVERSAL TELEPHONE, INC.
Qiao Xing Building
Wu Shi Industrial Zone
Huizhou City, Guangdong,
People's Republic of China
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
To Be Held Friday, July 21, 2000
SOLICITATION OF PROXY
The accompanying proxy is solicited on behalf of the board of directors of
Qiao Xing Universal Telephone, Inc. for use at our special meeting of
shareholders to be held at our Hong Kong offices, Room 5-9, 27/F., K. Wah
Centre, 191 Java Road, North Point, Hong Kong, on Friday, July 21, 2000, 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 June 21, 2000.
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. If there are no specific instructions, proxies
will be voted "FOR" the proposal to ratify and approve our sale of up to
$20,000,000 of our common stock and warrants to purchase our common stock and
"FOR" the proposal to ratify and approve our sale of $10,000,000 of our
convertible debentures and warrants to purchase our common stock.
PURPOSE OF MEETING
As stated in the notice of special meeting of shareholders accompanying
this proxy statement, the only business to be conducted and the only matters to
be considered and acted upon at the meeting are as follows:
1. To ratify and approve the Common Stock and Warrants Purchase Agreement
dated as of December 30, 1999, and all transactions contemplated thereby,
including the issuance of up to $20,000,000 of our common stock and shares
issuable upon exercise of warrants to purchase our common stock (the "Sale of
Common Stock Proposal"); and
2. To ratify and approve the Convertible Debenture and Warrants Purchase
Agreement dated as of May 24, 2000, and all transactions contemplated thereby,
including the issuance of $10,000,000 of our 0% Convertible Debentures and
shares issuable upon exercise of warrants to purchase our common stock (the
"Sale of Convertible Debentures Proposal").
<PAGE>
VOTING AT MEETING
Our voting securities consist solely of common stock, $.001 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 June 15, 2000, at which time we had
outstanding and entitled to vote at the meeting 11,972,751 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.
Approval of the Sale of Common Stock 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.
Wu Holdings Limited, our principal shareholder, has informed us that it
intends to vote all of its shares in favor of each of the Sale of Common Stock
Proposal and the Sale of Convertible Debentures Proposal. Wu Holdings Limited
has entered into agreements with the investors signatory to each of the Common
Stock and Warrants Purchase Agreement and the Convertible Debenture and Warrants
Purchase Agreement to vote all of its 6,819,000 shares as of the record date,
representing 57.0% of the outstanding common stock, in favor of each of the Sale
of Common Stock Proposal and the Sale of Convertible Debentures Proposal. When
such shares are so voted, the Sale of Common Stock Proposal and the Sale of
Convertible Debentures Proposal will be approved and adopted without any action
on the part of any other shareholder.
STOCK OWNERSHIP
The following table sets forth the number of shares of common stock owned
beneficially as of June 15, 2000 by each person known by us to have owned
beneficially more than ten percent of our shares then outstanding, by each of
our current officers and directors of the Company and by all of our current
officers and directors as a group. This information gives effect to securities
deemed outstanding pursuant to Rule 13d-3(d)(1) under the Securities Exchange
Act of 1934, as amended. As far as is known to our management, no person owned
beneficially more than ten percent of our outstanding shares of common stock as
of June 15, 2000 except as set forth below.
<TABLE>
<CAPTION>
Name of Beneficial Holder Number Percent
------------------------- ------ -------
Shares Beneficially Owned
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<S> <C> <C>
Wu Holdings Limited............................................. 6,819,000(1) 57.0
Rui Lin Wu...................................................... 7,399,000(1)(2) 60.3
Zhi Yang Wu..................................................... 250,000(3) 2.0
Zhi Fang Zhang.................................................. 0 0
Zhong Ai Li..................................................... 0 0
Jie Shi......................................................... 0 0
Zi Shu Huang.................................................... 0 0
Liu Rong Yang................................................... 0 0
Guo Liang Zhang................................................. 0 0
All directors and executive officers as a group (8 persons)..... 7,649,000(2)(3) 61.1
</TABLE>
2
<PAGE>
_________
(1) Wu Holdings Limited is a British Virgin Islands corporation which is 71.16%
owned by the Qiao Xing Trust and the remaining 28.84% is owned by Sino
Communications Ltd., a wholly owned subsidiary of a nonaffiliated
corporation listed on The Stock Exchange of Hong Kong Limited. The Qiao
Xing Trust is a Cook Islands trust which was formed for the primary benefit
of Zhi Jian Wu Li, the youngest son of Rui Lin Wu, Chairman of the Company.
The 6,819,000 shares of common stock owned of record and beneficially by Wu
Holdings Limited may be deemed to also be beneficially owned by Rui Lin Wu
(within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934, as amended) since he may be deemed to have and/or share the power to
direct the voting and disposition of such shares.
(2) Includes options currently exercisable to acquire 300,000 shares of common
stock.
(3) Includes options currently exercisable to acquire 250,000 shares of common
stock.
THE SALE OF COMMON STOCK PROPOSAL
On January 12, 2000, we entered into a Common Stock and Warrants Purchase
Agreement dated as of December 30, 1999 with two accredited investors pursuant
to which we agreed to issue and the investors agreed to purchase up to
$20,000,000 of our common stock, as well as common stock purchase warrants. On
January 12, 2000, pursuant to the Common Stock and Warrants Purchase Agreement,
we issued and the investors purchased $10,000,000 of our common stock, as well
as 360,000 common stock purchase warrants. Our shareholders are being asked to
ratify and approve the Common Stock and Warrants Purchase Agreement, and the
exhibits thereto, dated as of December 30, 1999, and all transactions
contemplated thereby, including the issuance of 833,334 shares and 360,000
common stock purchase warrants on January 12, 2000, 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 Common Stock and Warrants 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 Common Stock and Warrants Purchase Agreement
pursuant to which the investors agreed under certain terms and conditions to
invest up to $20,000,000 in our common stock. Additionally, we agreed, among
other things, to issue to the investors warrants to purchase our common stock.
On January 12, 2000, we sold to the investors an aggregate of 833,334 shares of
our common stock for a total purchase price of $10,000,000 ($12.00 per share)
and we issued to the investors warrants to purchase 360,000 shares of our common
stock at an exercise price of $46.96 per share at any time through December 31,
2004.
The Common Stock and Warrants Purchase Agreement contained certain
provisions which are no longer applicable which would have entitled the
investors to receive additional shares of common stock based upon the closing
bid prices of our common stock after 90, 180 and 270 days after the closing.
These "reset" provisions no longer apply because the investors have advised us
that they have sold the shares which they purchased.
3
<PAGE>
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.
As of the closing on January 12, 2000, we believe that the shares
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 Common Stock and Warrants Purchase
Agreement, we have agreed to take all steps necessary to obtain the approval of
our shareholders regarding authorization of our issuance to the investors of
common stock in excess of 20% of the outstanding shares of common stock.
THE BOARD OF DIRECTORS RECOMMENDS TO OUR SHAREHOLDERS THAT THEY VOTE "FOR"
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THE APPROVAL AND RATIFICATION OF THE SALE OF COMMON STOCK PROPOSAL.
THE SALE OF CONVERTIBLE DEBENTURES PROPOSAL
On June 2, 2000, we entered into a Convertible Debenture and Warrants
Purchase Agreement dated as of May 24, 2000 with the same two accredited
investors pursuant to which we agreed to issue and the investors agreed to
purchase $10,000,000 of our 0% Convertible Debentures, as well as common stock
purchase warrants. On June 2, 2000, pursuant to the Convertible Debenture and
Warrants Purchase Agreement, we issued and the investors purchased $10,000,000
of our 0% Convertible Debentures, as well as 360,000 common stock purchase
warrants. Our shareholders are being asked to ratify and approve the Convertible
Debenture and Warrants Purchase Agreement, and the exhibits thereto, dated as of
May 24, 2000, and all transactions contemplated thereby and all shares issuable
upon conversion, including the issuance of $10,000,000 of our 0% Convertible
Debentures and 360,000 common stock purchase warrants on June 2, 2000, 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.
4
<PAGE>
The following summarizes the terms of the transaction and is qualified in
its entirety by the Convertible Debenture and Warrants Purchase Agreement and
the exhibits thereto, a copy of which is attached hereto as Appendix B 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 Convertible Debenture and Warrants Purchase
Agreement pursuant to which the investors agreed under certain terms and
conditions to invest $10,000,000 in our 0% Convertible Debentures. Additionally,
we agreed, among other things, to issue to the investors warrants to purchase
our common stock. On June 2, 2000, we issued to the investors $10,000,000 of
Debentures due December 31, 2004 and warrants to purchase 360,000 shares of our
common stock at an exercise price of $24.378 per share with an expiration date
of May 26, 2005.
The terms and conditions of the Debentures are summarized as follows:
. The interest rate on the Debentures is 0% per annum.
. The date of maturity for the $10,000,000 Debentures which we issued is
December 31, 2004.
. The Debentures are 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 $25.00 per share.
. The Variable Conversion Price means 87% of the average of the two
lowest closing bid prices of our common stock during the 15 trading
days immediately prior to conversion. The variable conversion price
applies only if the closing bid price for our common stock on the
trading day prior to the conversion date is less than $28.7356. On and
after each of the 41/st/, 130/th/ and 220/th/ days after June 2, 2000,
up to one-third of the principal amount of the Debentures may be
converted, on a cumulative basis, at the variable conversion price.
. The Debentures automatically convert into common stock at the conversion
price on the maturity date.
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 9.9% of the outstanding shares of common stock.
The Convertible Debenture and Warrants Purchase Agreement also provides
that we are subject to certain cash penalties if we are unable to deliver to the
investors 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.
5
<PAGE>
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 the Convertible Debenture and Warrants Purchase
Agreement, the Debentures are 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 our common stock during the 15 trading days prior
to conversion. As a result, the shares of common stock to be issued upon
conversion of the Debentures will be issued for less than the greater of book or
market value of such shares. We believe that the shares on an as-converted
basis, along with the shares issued and issuable under the Common Stock and
Warrants Purchase Agreement, would represent more than 20% of our issued and
outstanding common stock and, accordingly, would require shareholder approval
under the applicable Rules. Under the terms of the Convertible Debenture and
Warrants 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 BOARD OF DIRECTORS RECOMMENDS TO OUR SHAREHOLDERS THAT THEY VOTE "FOR"
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THE APPROVAL AND RATIFICATION OF THE SALE OF CONVERTIBLE DEBENTURES PROPOSAL.
The above notice and Proxy Statement are sent by order of the board of
directors.
ZHI YANG WU
Secretary
June 21, 2000
6
<PAGE>
APPENDIX A
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
FORM OF STOCK PURCHASE WARRANT (EXHIBIT A)
<PAGE>
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
Between
Qiao Xing Universal Telephone, Inc.
and
the Investors Signatory Hereto
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT dated as of December 30, 1999
(the "Agreement"), between the Investors signatory hereto (each an "Investor"
and together the "Investors"), and Qiao Xing Universal Telephone, Inc., a
company duly incorporated and validly existing under the laws of the British
Virgin Islands (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase in the aggregate, (i) shares of Common Stock
(as defined below) and (ii) Warrants (as defined below) to purchase shares of
the Common Stock (as defined below).
WHEREAS, such investments will be made in reliance upon the provisions of
Regulation S ("Regulation S") and the other rules and regulations promulgated
under the United States Securities Act of 1933 (the "Securities Act"), and/or
upon such other exemption from the registration requirements of the Securities
Act as may be available with respect to any or all of the investments in
securities to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1. "Capital Shares" shall mean the Common Stock and any shares of
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any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.2. "Capital Shares Equivalents" shall mean any securities, rights,
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or obligations that are convertible into or exchangeable for or give any right
to subscribe for any Capital Shares of the Company or any Warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 1.3. "Closing" shall mean each closing of the purchase and sale of the
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Common Stock and Warrants pursuant to Section 2.1.
<PAGE>
Section 1.4. "Closing Date" shall mean the date on which all conditions to the
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applicable Closing have been satisfied (as defined in Section 2.1 (b) hereto)
and such Closing shall have occurred.
Section 1.5. "Common Stock" shall mean the Company's common stock, $0.001 par
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value per share.
Section 1.6. "Custodial Agreement" shall mean the Custodial Agreement in
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substantially the form of Exhibit F hereto with respect to the Reset Shares and
the Warrant Shares, executed and delivered contemporaneously with this
Agreement.
Section 1.7. "Custodian" shall mean the Custodian named in the Custodial
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Agreement, or any successor thereto.
Section 1.8. "Damages" shall mean any loss, claim, damage, judgment, penalty,
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deficiency, liability, costs and expenses (including, without limitation,
reasonable attorney's fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).
Section 1.9. "Escrow Agent" shall have the meaning set forth in the Escrow
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Agreement.
Section 1.10. "Escrow Agreement" shall mean the Escrow Agreement in
----------------
substantially the form of Exhibit C hereto executed and delivered
contemporaneously with this Agreement.
Section 1.11. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder.
Section 1.12. "Legend" shall mean the legend set forth in Section 9.1.
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Section 1.13. "Material Adverse Effect" shall mean any effect on the business,
-----------------------
operations, share price, properties, prospects or financial condition of the
Company that is material and adverse to the Company and its subsidiaries and
affiliates, taken as a whole, and/or any condition, circumstance, or situation
that would prohibit or otherwise interfere with the ability of the Company to
enter into and perform any of its obligations under this Agreement, the
Registration Rights Agreement, the Escrow Agreement, or the Warrants in any
material respect.
Section 1.14. "Outstanding" when used with reference to shares of Common Stock
-----------
or Capital Shares, shall mean, at any date as of which the number of such shares
is to be determined, all issued and outstanding shares, and shall include all
such shares issuable in respect of outstanding scrip or any certificates
representing fractional interests in such shares; provided, however, that
-------- -------
"Outstanding" shall not mean any such shares then directly or indirectly owned
or held by or for the account of the Company.
Section 1.15. "Person" shall mean an individual, a corporation, a partnership,
------
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
2
<PAGE>
Section 1.16. "Principal Market" shall mean the American Stock Exchange, the
----------------
NASDAQ National or SmallCap Markets, or the OTC Bulletin Board, whichever is at
the time the principal trading exchange or market for the Common Stock, based
upon share volume on each such market.
Section 1.17. "Purchase Price" shall mean $12.00 per share of Common Stock,
--------------
adjusted for any splits, reverse splits or Common Stock dividends declared by
the Company after the execution hereof as to the first Closing; and as agreed by
the parties with respect to each subsequent Closing.
Section 1.18. "Registrable Securities" shall mean the Shares and the Warrant
----------------------
Shares until the earliest of (i) the Registration Statement has been declared
effective by the SEC, and all Shares and Warrant Shares have been disposed of
pursuant to the Registration Statement, (ii) all Shares and Warrant Shares have
been sold under circumstances under which all of the applicable conditions of
Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (iii) all Shares and Warrant Shares have been otherwise
transferred to holders who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend or
(iv) such time as, in the opinion of counsel to the Company, all Shares and
Warrant Shares may be sold without any time, volume or manner limitations
pursuant to Regulation S or Rule 144(k) (or any similar provision then in
effect) under the Securities Act.
Section 1.19. "Registration Rights Agreement" shall mean the agreement
-----------------------------
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investors as of
the Closing Date in the form annexed hereto as Exhibit B.
Section 1.20. "Registration Statement" shall mean a registration statement on
----------------------
Form F-1 (or on such other form promulgated by the SEC for which the Company
then qualifies and which counsel for the Company shall deem appropriate, and
which form shall be available for the resale by the Investors of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement and in accordance with the intended
method of distribution of such securities), for the registration of the resale
by the Investor of the Registrable Securities under the Securities Act.
Section 1.21. "Regulation S" shall have the meaning set forth in the recitals
------------
of this Agreement.
Section 1.22. "Reset Shares" shall have the meaning set forth in Section
------------
6.10(d).
Section 1.23. "SEC" shall mean the Securities and Exchange Commission.
---
Section 1.24. "Securities Act" shall have the meaning set forth in the recitals
--------------
of this Agreement.
Section 1.25. "SEC Documents" shall mean the Company's Registration Statement
-------------
on Form F-1 and all amendments thereto, Annual Report on Form 20-F for the
fiscal year ended December 31, 1998 and each report, proxy statement or
registration statement filed by the Company with the SEC pursuant to the
Exchange Act or the Securities Act.
3
<PAGE>
Section 1.26. "Shares" shall mean the shares of Common Stock purchased pursuant
------
to this Agreement.
Section 1.27. "Trading Day" shall mean any day during which the Principal
-----------
Market shall be open for business.
Section 1.28. "Warrants" shall mean the Warrants substantially in the form of
--------
Exhibit A to be issued to the Investors hereunder.
Section 1.29. "Warrant Shares" shall mean all shares of Common Stock or other
--------------
securities issued or issuable pursuant to exercise of the Warrants.
ARTICLE II
Purchase and Sale of Common Stock and Warrants
Section 2.1. Investment.
----------
(a) Upon the terms and subject to the conditions set forth herein,
the Company agrees to sell, and the Investors, severally and not jointly, agree
to purchase up to $20,000,000 worth of the Shares together with the Warrants at
the Purchase Price on each Closing Date as follows:
(i) First Closing. Upon satisfaction by the Company of the
--------------
Closing conditions set forth in Section 2.1(b), the
Investors shall each deliver to the Escrow Agent their
proportionate share of the sum of Ten Million Dollars
($10,000,000) in immediately available funds and the Company
shall deliver the Common Stock certificates representing the
Shares so purchased at the Purchase Price and the applicable
number of Warrants to the Escrow Agent, to be held by the
Escrow Agent pursuant to the Escrow Agreement and the
applicable number of Warrant Shares and Reset Shares to the
Custodian, to be held by the Custodian pursuant to the
Custodial Agreement.
(ii) Subsequent Closings. Each subsequent Closing shall take
--------------------
place sixty (60) days after the preceding Closing, or if
such date is not a Trading Day, on the next Trading Day.
Upon satisfaction by the Company of the Closing conditions
set forth in Section 2.1(b), the Investors shall each
deliver to the Escrow Agent their proportionate share of
five million dollars ($5,000,000) in immediately available
funds and the Company shall deliver the Common Stock
certificates representing the Shares so purchased at the
Purchase Price agreed to for such tranche and the applicable
number of Warrants to the Escrow Agent, to be held by the
Escrow Agent pursuant to the Escrow Agreement and the
applicable number of Warrant Shares and Reset Shares to the
Custodian, to be held by the Custodian pursuant to the
Custodial Agreement.
4
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(iii) Each Closing. Upon satisfaction of the conditions set forth
------------
in Section 2.1(b), each Closing ("Closing") shall occur at
the offices of the Escrow Agent at which the Escrow Agent
(x) shall release the Shares purchased and the Warrants to
the appropriate Investor and (y) shall release the Purchase
Price (after all fees have been paid as set forth in the
Escrow Agreement), pursuant to the terms of the Escrow
Agreement.
(b) Each Closing is subject to the satisfaction or waiver by the party
sought to be benefited thereby of the following conditions:
(i) acceptance and execution by the Company and by the
Investors, of this Agreement and all Exhibits hereto;
(ii) delivery into escrow by each Investor of immediately
available funds in the amount of the Purchase Price of the
Common Stock and the Warrants, as applicable to each
Closing, as more fully set forth in the Escrow Agreement;
(iii) all representations and warranties of the Investors
contained herein shall remain true and correct as of the
Closing Date (as a condition to the Company's obligations);
(iv) all representations and warranties of the Company contained
herein shall remain true and correct as of the Closing Date
(as a condition to the Investors' obligations);
(v) the sale and issuance of the Common Stock and the Warrants
hereunder, and the proposed issuance by the Company to the
Investors of the Common Stock underlying the Warrants upon
the conversion or exercise thereof shall be legally
permitted by all laws and regulations to which the Investors
and the Company are subject and there shall be no ruling,
judgment or writ of any court prohibiting the transactions
contemplated by this Agreement;
(vi) delivery of the original fully executed Common Stock
certificates for the Shares and Warrants certificates to the
Escrow Agent and for the Reset Shares and Warrant Shares to
the Custodian;
(vii) delivery to the Escrow Agent of opinions of Andrew N.
Bernstein, P.C. and Harney, Westwood & Riegels, counsel to
the Company, covering the substance of the form of Exhibit D
hereto (as a condition to the first Closing);
(viii) delivery to the Escrow Agent of the Instructions to Transfer
Agent in the form attached hereto as Exhibit E;
(ix) delivery to the Escrow Agent of the Registration Rights
Agreement (as a condition to the first Closing);
5
<PAGE>
(x) delivery to the Escrow Agent of a written agreement of Wu
Holdings Ltd., the majority shareholder of the Company,
agreeing to vote its shares of Common Stock in favor of a
shareholder proposal to be presented to the next meeting of
shareholders to permit the issuance of a number of shares
pursuant to this Agreement which exceeds 20% of the issued
and outstanding shares of Common Stock immediately prior to
the first Closing; and
(xi) the closing bid price of the Common Stock on the Trading Day
before the applicable Closing Date shall not be less than
the Purchase Price.
(c) The Investors' obligation to purchase additional Shares of Common
Stock and Warrants at each subsequent Closing shall also be subject to the
following conditions:
(i) there shall have been no Material Adverse Effect at the
Company since the prior Closing Date;
(ii) the Company's shareholders shall have approved the
transactions contemplated hereby pursuant to the Corporate Governance Rules
of the Nasdaq Stock Market;
(iii) there shall have been no threat, nor shall there be any
basis for any threat to de-list the Common Stock from the Nasdaq Stock
Market; and
(iv) the dollar value of the average daily trading volume of the
Common Stock for the twenty (20) Trading Days preceding the applicable
Closing shall have been at least $1,500,000.00 (as to the second Closing)
and at least $2,000,000 (as to the third Closing), and, as to the third
Closing only, the average of the closing bid prices for the ten (10)
Trading Days prior to the third Closing shall have been at least $12.00.
(d) The number of Reset Shares to be delivered to the Custodian at
each Closing shall be based upon an assumed Reset Price of $5.00.
(e) The Investors' obligation to purchase any further Shares and
Warrants shall terminate when they have purchased in the aggregate $20,000,000
Purchase Price of securities from the Company.
Section 2.2. Warrants. The number of Warrants to be issued at each Closing
--------
shall equal 180,000 per $5,000,000 invested. The exercise price of the Warrants
shall be 110% of the average of the closing bid prices on the five (5) Trading
Days immediately preceding the applicable Closing Date and may be reset 180 days
after the applicable Closing Date as set forth in the Warrants.
Section 2.3. Liquidated Damages. The parties hereto acknowledge and agree that
------------------
the sums payable pursuant to the Registration Rights Agreement shall constitute
liquidated damages and not penalties. The parties further acknowledge that (a)
the amount of loss or damages likely to be
6
<PAGE>
incurred is incapable or is difficult to precisely estimate, (b) the amounts
specified in such Sections bear a reasonable proportion and are not plainly or
grossly disproportionate to the probable loss likely to be incurred by the
Investors in connection with the failure by the Company to timely cause the
registration of the Registrable Securities and (c) the parties are sophisticated
business parties and have been represented by sophisticated and able legal and
financial counsel and negotiated this Agreement at arm's length.
ARTICLE III
Representations and Warranties of Investor
Each Investor, severally and not jointly, represents and warrants to the Company
that:
Section 3.1. Intent. The Investor is entering into this Agreement for its own
------
account and not with a view to or for sale in connection with any distribution
of the Common Stock. The Investor has no present arrangement (whether or not
legally binding) at any time to sell the Shares, the Warrants, or Warrant Shares
to or through any person or entity; provided, however, that by making the
representations herein, the Investor does not agree to hold such securities for
any minimum or other specific term and reserves the right to dispose of the
Shares and Warrant Shares at any time in accordance with federal and state
securities laws applicable to such disposition, including, without limitation,
Regulation S.
Section 3.2. Sophisticated Investor. The Investor is a non-United States
----------------------
Person (as defined in Regulation S) and is a sophisticated investor (as
described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as
defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it has the capacity to protect its own
interests in connection with this transaction and is capable of evaluating the
merits and risks of an investment in the Common Stock and the Warrants. The
Investor acknowledges that an investment in the Common Stock is speculative and
involves a high degree of risk. The Investor is aware of the restrictions on
resale of the Common Stock, the Warrants and the Warrant Shares imposed by
Regulation S, and subject to its rights under the Registration Rights Agreement,
agrees to abide thereby.
Section 3.3. Authority. This Agreement and each agreement attached as an
---------
Exhibit hereto which is required to be executed by Investor has been duly
authorized and validly executed and delivered by the Investor and is a valid and
binding agreement of the Investor enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and remedies or
by other equitable principles of general application. The Investor is organized
under the laws of Canada and does not maintain any place of business in the
United States.
Section 3.4. Not an Affiliate. The Investor is not an officer, director or
----------------
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
7
<PAGE>
Section 3.5. Absence of Conflicts. The execution and delivery of this
--------------------
Agreement and each agreement which is attached as an Exhibit hereto and executed
by the Investor in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
thereof by the Investor, do not and will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor or (a)
violate any provision of any indenture, instrument or agreement to which
Investor is a party or is subject, or by which Investor or any of its assets is
bound; (b) conflict with or constitute a material default thereunder; (c) result
in the creation or imposition of any lien pursuant to the terms of any such
indenture, instrument or agreement, or constitute a breach of any fiduciary duty
owed by Investor to any third party; or (d) require the approval of any third-
party (which has not been obtained) pursuant to any material contract,
agreement, instrument, relationship or legal obligation to which Investor is
subject or to which any of its assets, operations or management may be subject.
Section 3.6. Disclosure; Access to Information. The Investor has received all
---------------------------------
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed copies of all SEC Documents.
Section 3.7. Manner of Sale. At no time was Investor presented with or
--------------
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising, or any
solicitation in the United States.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investors that, except as set forth
in the SEC Documents or Disclosure Schedule prepared by the Company and attached
hereto as Exhibit G, or as contemplated by this Agreement:
Section 4.1. Organization of the Company. The Company is a company duly
---------------------------
incorporated and validly existing in good standing under the laws of the British
Virgin Islands and has all requisite corporate authority to own its properties
and to carry on its business as now being conducted. The Company does not have
any subsidiaries and does not own more than fifty percent (50%) of or control
any other business entity. The Company is duly qualified and is in good standing
as a foreign corporation to do business in every jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect. More than 50% of the Company's Common
Stock is held of record by non-United States persons. A majority of the
Company's directors and executive officers are non-United States persons. A
majority of the Company's assets are located in the People's Republic of China.
Section 4.2. Authority. (i) The Company has the requisite corporate power and
---------
corporate authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Escrow Agreement, and the
Warrants and to issue the Shares, the Warrants and
8
<PAGE>
the Warrant Shares pursuant to their respective terms, (ii) the execution,
issuance and delivery of this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Common Stock certificates and the Warrants by the Company
and the consummation by it of the transactions contemplated hereby have been
duly authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors is required, and (iii)
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Common Stock certificates representing the Shares, and the Warrants have been
duly executed and delivered by the Company and at each Closing shall constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock sufficient in number
for the exercise of the Warrants.
Section 4.3. Capitalization. The authorized capital stock of the Company
--------------
consists of 50,000,000 shares of Common Stock, $0.001 par value per share, of
which 9,600,000 shares are issued and outstanding as of December 15, 1999. There
are no outstanding Capital Shares Equivalents nor any agreements or
understandings pursuant to which any Capital Shares Equivalents may become
outstanding. The Company is not a party to any agreement granting registration
or anti-dilution rights to any person with respect to any of its equity or debt
securities. All of the outstanding shares of Common Stock of the Company have
been duly and validly authorized and issued and are fully paid and non-
assessable.
Section 4.4. Common Stock. The Company has registered its Common Stock
-------------
pursuant to Section 12(b) or (g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act applicable to a "foreign
private issuer", and the Company is in compliance with all requirements for the
continued listing or quotation of its Common Stock, and such Common Stock is
currently listed or quoted on, the Principal Market. As of the date hereof, the
Principal Market is the Nasdaq National Market and the Company has not received
any notice regarding, and to its knowledge there is no threat, of the
termination or discontinuance of the eligibility of the Common Stock for such
listing.
Section 4.5. SEC Documents. The Company has made available to the Investors
-------------
true and complete copies of the SEC Documents. The Company has not provided to
the Investors any information that, according to applicable law, rule or
regulation, should have been disclosed publicly prior to the date hereof by the
Company, but which has not been so disclosed. As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as applicable, and rules and regulations of
the SEC promulgated thereunder and the SEC Documents did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents complied in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC or other applicable rules and regulations with respect
thereto at the time of such inclusion. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes
9
<PAGE>
thereto or (ii) in the case of unaudited interim statements, to the extent they
exclude footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments). Neither the Company nor any of its subsidiaries has any material
indebtedness, obligations or liabilities of any kind (whether accrued, absolute,
contingent or otherwise, and whether due or to become due) that would have been
required to be reflected in, reserved against or otherwise described in the
financial statements or in the notes thereto in accordance with GAAP, which was
not fully reflected in, reserved against or otherwise described in the financial
statements or the notes thereto included in the SEC Documents or was not
incurred in the ordinary course of business consistent with the Company's past
practices since the last date of such financial statements. Without limiting the
foregoing, the Company (i) is not in default (whether declared by the lender or
otherwise) on any debt for borrowed money, (ii) does not have, as of December
15, 1999, bad or doubtful receivables in excess of $100,000 in the aggregate,
(iii) has no accounts payable more than 90 days past due, (iv) has made adequate
provision for obsolete inventory, and, at December 15, 1999, had a cash position
of $4,700,929.
Section 4.6. Exemption from Registration; Valid Issuances. Subject to the
--------------------------------------------
accuracy of the Investors' representations in Article III, the sale of the
Shares, the Warrants and the Warrant Shares will not require registration under
the Securities Act and/or any applicable state securities law. When issued and
paid for in accordance with the Warrants, the Warrant Shares will be duly and
validly issued, fully paid, and non-assessable. Neither the sales of the Shares,
the Warrants or the Warrant Shares pursuant to, nor the Company's performance of
its obligations under, this Agreement, the Registration Rights Agreement, the
Escrow Agreement or the Warrants will (i) result in the creation or imposition
by the Company of any liens, charges, claims or other encumbrances upon the
Shares, the Warrants or the Warrant Shares or, except as contemplated herein,
any of the assets of the Company, or (ii) entitle the holders of Outstanding
Capital Shares to preemptive or other rights to subscribe for or acquire the
Capital Shares or other securities of the Company. The Shares, the Warrants and
the Warrant Shares shall not subject the Investors to personal liability to the
Company or its creditors by reason of the possession thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
--------------------------------------------------------
Transaction. Neither the Company nor, to the knowledge of the Company, any of
-----------
its directors or officers (i) has conducted or will conduct any general
solicitation (as that term is used in Rule 502(c) of Regulation D) or general
advertising with respect to the sale of the Shares or the Warrants, or (ii) made
any offers or sales of any security or solicited any offers to buy any security
under any circumstances that would require registration of the Shares, the
Warrants or the Warrant Shares under the Securities Act or made any "directed
selling efforts" as defined in Rule 902 of Regulation S.
Section 4.8. No Conflicts. The execution, delivery and performance of this
------------
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the Shares,
the Warrants and the Warrant Shares, do not and will not (i) result in a
violation of the Company's Memorandum or Articles of Association or By-Laws or
(ii) conflict with, or constitute a material default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
material agreement, indenture or
10
<PAGE>
instrument, or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state or local law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or by which any material property or asset of the Company is bound or
affected, nor is the Company otherwise in violation of, conflict with or default
under any of the foregoing (except in each case for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not have, individually or in the aggregate, a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a Material
Adverse Effect. The Company is not required under any Federal, state or local
law, rule or regulation to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Shares or the Warrants in accordance with the
terms hereof (other than any SEC or state securities filings that may be
required to be made by the Company subsequent to Closing, or any registration
statement that may be filed pursuant hereto); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investors
herein.
Section 4.9. No Material Adverse Change. Since June 30, 1999, no Material
--------------------------
Adverse Effect has occurred or exists with respect to the Company.
Section 4.10. No Undisclosed Events or Circumstances. Since June 30, 1999, no
--------------------------------------
event or circumstance has occurred or exists with respect to the Company or its
businesses, properties, prospects, operations or financial condition, that,
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 in the SEC Documents.
Section 4.11. Litigation and Other Proceedings. There are no lawsuits or
--------------------------------
proceedings pending or, to the knowledge of the Company, threatened, against the
Company or any subsidiary, nor has the Company received any written or oral
notice of any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. No judgment, order,
writ, injunction or decree or award has been issued by or, to the knowledge of
the Company, requested of any court, arbitrator or governmental agency which
could result in a Material Adverse Effect.
Section 4.12. No Misleading or Untrue Communication. The Company and, to the
-------------------------------------
knowledge of the Company, any of its officers and directors in connection with
the transaction contemplated by this Agreement, have not made, at any time, any
oral communication in connection with the offer or sale of the same which
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.13. Material Non-Public Information. The Company has not disclosed to
-------------------------------
the Investors any material non-public information that (i) if disclosed, would
reasonably be expected to have a material effect on the price of the Common
Stock or (ii) according to applicable law,
11
<PAGE>
rule or regulation, should have been disclosed publicly by the Company prior to
the date hereof but which has not been so disclosed.
Section 4.14. Tax Matters.
-----------
(a) The Company and each subsidiary has filed all Tax Returns which it
is required to file under applicable laws; all such Tax Returns are true and
accurate and has been prepared in compliance with all applicable laws; the
Company has paid all Taxes due and owing by it or any subsidiary (whether or not
such Taxes are required to be shown on a Tax Return) and have withheld and paid
over to the appropriate taxing authorities all Taxes which it is required to
withhold from amounts paid or owing to any employee, stockholder, creditor or
other third parties; and since June 30, 1999, the charges, accruals and reserves
for Taxes with respect to the Company (including any provisions for deferred
income taxes) reflected on the books of the Company are adequate to cover any
Tax liabilities of the Company if its current tax year were treated as ending on
the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction where
the Company does not file tax returns that the Company or any subsidiary is or
may be subject to taxation by that jurisdiction. There are no tax audits or
administrative or judicial proceedings pending or being conducted with respect
to the Company or any subsidiary; no information related to Tax matters has been
requested by any taxing authority; and, except as disclosed above, no written
notice indicating an intent to open an audit or other review has been received
by the Company or any subsidiary from any foreign, federal, state or local
taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability.
(c) For purposes of this Section 4.14:
"Tax" or "Taxes" means federal, state, county, local, foreign, or
--- -----
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with
----------
respect to Taxes, including any schedules attached thereto and
including any amendment thereof.
Section 4.15. Property. Neither the Company nor any of its subsidiaries owns
--------
any real property. Each of the Company and its subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects except such as do not materially affect the
value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and to the Company's
knowledge any real property, mineral or water rights, and buildings held under
lease by the Company as tenant are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and intended to be made of such property, mineral or water
rights, and buildings by the Company.
12
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Section 4.16. Intellectual Property. Each of the Company and its subsidiaries
---------------------
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, neither the Company
nor any of its subsidiaries is infringing upon or in conflict with any right of
any other person with respect to any Intangibles. No adverse claims have been
asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.
Section 4.17. Internal Controls and Procedures. The Company maintains books and
--------------------------------
records and internal accounting controls which provide reasonable assurance that
(i) all transactions to which the Company or any subsidiary is a party or by
which its properties are bound are executed with management's authorization;
(ii) the recorded accounting of the Company's consolidated assets is compared
with existing assets at regular intervals; (iii) access to the Company's
consolidated assets is permitted only in accordance with management's
authorization; and (iv) all transactions to which the Company or any subsidiary
is a party or by which its properties are bound are recorded as necessary to
permit preparation of the financial statements of the Company in accordance with
U.S. generally accepted accounting principles.
Section 4.18. No Misrepresentation. The representations and warranties of the
--------------------
Company contained in this Agreement, any schedule, annex or exhibit hereto and
any agreement, instrument or certificate furnished by the Company to the
Investors pursuant to this Agreement, do 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 under
which they were made, not misleading.
ARTICLE V
Covenants of the Investors
Each Investor, severally and not jointly, covenants with the Company that:
Section 5.1. Compliance with Law. The Investor's trading activities with
-------------------
respect to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and rules
and regulations of the Principal Market on which the Company's Common Stock is
listed. The Investor shall comply with the distribution compliance period
required by Regulation S of forty (40) days with respect to the Shares, Reset
Shares and Warrant Shares.
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ARTICLE VI
Covenants of the Company
Section 6.1. Registration Rights. The Company shall cause the Registration
-------------------
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof and shall use best efforts to
timely prepare and file the Registration Statement, if necessary.
Section 6.2. Reservation of Common Stock. As of the date hereof, the Company
---------------------------
has reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to issue the Shares at each Closing and pursuant to any MFN
Transaction (as hereinafter defined) and the Warrant Shares pursuant to any
exercise of the Warrants.
Section 6.3. Listing of Common Stock. The Company hereby agrees to maintain
-----------------------
the listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing to list the Shares and the Warrant Shares on
the Principal Market. The Company further agrees, if the Company applies to have
the Common Stock traded on any other Principal Market, it will include in such
application the Shares and the Warrant Shares, and will take such other action
as is necessary or desirable in the opinion of the Investors to cause the Shares
and Warrant Shares to be listed on such other Principal Market as promptly as
possible. The Company will take all action to continue the listing and trading
of its Common Stock on a Principal Market and will comply in all respects with
the Company's reporting, filing and other obligations under the bylaws or rules
of the Principal Market and shall provide Investors with copies of any
correspondence to or from such Principal Market which questions or threatens
delisting of the Common Stock, within three (3) Trading Days of the Company's
receipt thereof, until the Investors have disposed of all of their Shares and
Warrant Shares. Prior to the second Closing, the Company shall hold a special
meeting of its shareholders (or distribute an information statement following a
shareholder action by written consent) to approve the issuance of a number of
Shares, Warrant Shares and Reset Shares which may exceed 20% of the issued and
outstanding shares of Common Stock on the date prior to the first Closing, in
accordance with the rules of the Principal Market.
Section 6.4. Exchange Act Registration. The Company will cause its Common
-------------------------
Stock to continue to be registered under Section 12(b) or (g) of the Exchange
Act, will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investors have
disposed of all of their Registrable Securities.
Section 6.5. Legends. The certificates evidencing the Registrable Securities
-------
shall be free of legends, except as set forth in Article IX.
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Section 6.6. Corporate Existence; Conflicting Agreements. The Company will
-------------------------------------------
take all steps necessary to preserve and continue the corporate existence of the
Company and its operating subsidiary. The Company shall not enter into any
agreement, the terms of which agreement would restrict or impair the right or
ability of the Company to perform any of its obligations under this Agreement or
any of the other agreements attached as exhibits hereto or which would impair
the value of the subsidiary to the Company.
Section 6.7. Consolidation; Merger. The Company shall not, at any time after
---------------------
the date hereof, effect any merger or consolidation of the Company with or into,
or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument or by
operation of law the obligation to deliver to the Investors such shares of stock
and/or securities as the Investors are entitled to receive pursuant to this
Agreement and the Warrants.
Section 6.8. Issuance of Common Stock and Warrant Shares. The sale of the
-------------------------------------------
Shares and the Warrants and the issuance of the Warrant Shares pursuant to
exercise of the Warrants shall be made in accordance with the provisions and
requirements of Regulation S and any applicable state securities law. The
Company shall make any necessary SEC and "blue sky" filings required to be made
by the Company in connection with the sale of the Shares and Warrants to the
Investors as required by all applicable laws, and shall provide a copy thereof
to the Investors promptly after such filing.
Section 6.9. Limitation on Future Financing. The Company agrees that it will
------------------------------
not enter into any sale of its securities until 180 days after each Closing,
except for any sales (i) pursuant to any presently existing employee benefit
plan which plan has been approved by the Company's stockholders, (ii) pursuant
to any compensatory plan for a full-time employee or key consultant, or (iii) in
connection with a strategic partnership or other business transaction, the
principal purpose of which is not simply to raise money.
Section 6.10. Subsequent Sale at Lower Price; Reset of Purchase Price.
--------------------------------------------------------
(a) Required Adjustments. Subject to the exclusions contained in Section
--------------------
6.10(g) below, if during the period ending twelve months after each Closing (the
"MFN Period"), the Company sells any shares of its Common Stock at a per share
selling price ("Per Share Selling Price") lower than the Purchase Price per
share (as adjusted for any Reset Shares issued pursuant to Section 6.10(d))
applicable to such Closing, the Purchase Price per share of the Shares
originally sold to an Investor hereunder and still held by such Investor on the
closing date of such subsequent transaction shall be adjusted downward to equal
such lower Per Share Selling Price and such Investor shall be entitled to
receive the additional shares as provided by Section 6.10(c). The Company shall
give to each Investor written notice of any such sale within 24 hours of the
closing of any such sale.
(b) Definitions.
-----------
(i) For the purpose of this Section 6.10, the term "Per Share
Selling Price" as used in this Section 6.10 shall mean the
amount actually paid by third parties for each share of
Common Stock. A sale of shares of Common
15
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Stock shall include the sale or issuance of rights,
options, warrants or convertible securities ("derivative
securities") under which the Company is or may become
obligated to issue shares of Common Stock, and in such
circumstances the sale of Common Stock shall be deemed to
have occurred at the time of the issuance of the
derivative securities and the Per Share Selling Price of
the Common Stock covered thereby shall also include the
exercise or conversion price thereof (in addition to the
consideration per underlying share of Common Stock
received by the Company upon such sale or issuance of the
derivative security). In case of any such security issued
within the MFN Period in a "Variable Rate Transaction" or
an "MFN Transaction" (each as defined below), the Per
Share Selling Price shall be deemed to be the lowest
conversion or exercise price at which such securities are
converted or exercised or might have been converted or
exercised in the case of a Variable Rate Transaction, or
the lowest adjustment price in the case of an MFN
Transaction. If shares are issued for a consideration
other than cash, the per share selling price shall be the
fair value of such consideration as determined in good
faith by the Board of Directors of the Company.
(ii) The term "Variable Rate Transaction" shall mean a
transaction in which the Company issues or sells (a) any
debt or equity securities that are convertible into,
exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (x) at a
conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or
quotations for the Common Stock at any time after the
initial issuance of such debt or equity securities, or
(y) with a fixed conversion, exercise or exchange price
that is subject to being reset at some future date after
the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events
directly or indirectly related to the business of the
Company or the market for the Common Stock (but excluding
standard stock split anti-dilution provisions), or (b)
any securities of the Company pursuant to an "equity
line" structure which provides for the sale, from time to
time, of securities of the Company which are registered
for resale pursuant to the Securities Act.
(iii) The term "MFN Transaction" shall mean a transaction in
which the Company issues or sells any securities in a
capital raising transaction or series of related
transactions (the "New Offering") which grants to an
investor (the "New Investor") the right to receive
additional shares based upon future transactions of the
Company on terms more favorable than those granted to the
New Investor in the New Offering.
(iv) The term "MFN Period" shall have the meaning set forth in
Section 6.10(a), above.
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(c) Adjustment Mechanism. If an adjustment of the Purchase Price is
--------------------
required pursuant to Section 6.10(a), the Company shall deliver to the Investor
within eight calendar days of the closing of the transaction giving rise to the
adjustment or by such other date as may be required by Section 6.10(e)
("Delivery Date") the Investor's share of such number of additional shares of
Common Stock equal to (i) the aggregate Purchase Price paid by the Investor for
the Shares still held by the Investor divided by the adjusted Per Share Purchase
Price as required under Section 6.10(a), minus (ii) the total number of shares
of Common Stock previously delivered to the Investor hereunder; provided
--------
however, that the Company shall delay effecting such adjustment, in whole or in
-------
part, to the extent required by Section 6.10(e). In the event the Company fails
to deliver the additional shares by the applicable Delivery Date, the Company
shall be liable to the Investor for a delay payment equal to 2% of the Purchase
Price per month payable in Common Stock or cash, at the Investor's election.
(d) Reset Shares. Each Investor shall be entitled, upon demand as set
------------
forth in the Escrow Agreement, to receive additional shares of Common Stock
("Reset Shares") as follows:
(i) Shares purchased at each Closing shall only be entitled
to be reset once. Up to one-third of the Shares purchased
at each Closing may be reset on or after 90, 180 and 270
days after each Closing (on a cumulative basis), if such
shares are still beneficially owned by the Investor on
the date such reset is requested, on a first-purchased,
first-reset basis. No reset shall be made more than one
year after the applicable Closing. If the Reset Price for
any reset prior to 180 days from such Closing is less
than $5.00, such reset shall be deferred until the
earlier of the date on which such minimum Reset Price of
$5.00 is reached or such 180th day, and if a Reset Price
of $5.00 or greater has not been achieved by such 180th
day, the Reset Price shall be calculated as of such 180th
day without regard to any minimum Reset Price.
(ii) The Reset Price shall be the average of the two lowest
closing bid prices of the Common Stock during the ten
Trading Days ending on the Trading Day prior to the Reset
Date, as specified in the Investor's Reset Notice, as
described in the Escrow Agreement.
(iii) The number of Reset Shares to be issued pursuant to any
Reset Notice shall be determined by the following
formula:
(115% of the Purchase Price - Reset Price) times
the number of Shares to be reset, divided by the Reset
Price
(iv) The Reset Shares shall be delivered as set forth in the
Escrow Agreement.
(e) Limitation on Number of Shares.
------------------------------
(i) If by way of any adjustment required by this Section
6.10, the Investor would receive a number of shares of
Common Stock such that the total number of such shares
beneficially owned (within the meaning of Section 13(d)
of the Exchange Act) by the Investor as of the date of
such
17
<PAGE>
adjustment would be greater than 9.90% but less than
13.0% of the total outstanding Common Stock of the
Company, then the Company shall not effect the adjustment
required by this Section to the extent necessary to avoid
causing the aforesaid limitation to be exceeded until 120
days following the date such adjustment would have
otherwise been made.
(ii) If by way of any adjustment required by this Section
6.10, the Investor would receive a number of shares of
Common Stock such that the total number of such shares
beneficially owned by the Investor as of the date of such
adjustment would equal or exceed 13.0% of the total
outstanding Common Stock of the Company, then the Company
shall not effect the adjustment required by this Section
to the extent necessary to avoid causing the aforesaid
limitation to be exceeded until 180 days following the
date such adjustment would have otherwise been made.
(f) Capital Adjustments. In case of any stock split or reverse stock
-------------------
split, stock dividend, reclassification of common stock, recapitalization,
merger or consolidation, or like capital adjustment affecting the Common Stock
of the Company, the provisions of Section 6.10 shall be applied in a fair,
equitable and reasonable manner so as to give effect, as nearly as may be, to
the purposes hereof.
(g) Exclusions. Section 6.10(a) shall not apply to (i) sales of shares of
----------
Common Stock by the Company upon conversion or exercise of any convertible
securities, options or warrants outstanding prior to the date hereof; or (ii)
sales of shares of Common Stock by the Company pursuant to the provisions of any
shareholder-approved option or similar plan heretofore adopted by the Company.
(h) Limitation on Issuance. Unless the Company has received the approval
----------------------
of its shareholders pursuant to the Corporate Governance Rules of the Nasdaq
Stock Market, under no circumstances shall the Company issue MFN Shares or Reset
Shares in a number which, when added to the Shares and the Warrants, would
exceed 20% of the number of shares of Common Stock issued and outstanding prior
to the first Closing Date.
(i) Right of Investor to Participate in Future Transactions. The Company
-------------------------------------------------------
agrees that during the MFN Period the Investor will have a right to participate
in future non-public capital raising transactions as set forth in this Section
6.10. The Company shall give advance written notice to each Investor prior to
any offer or sale of any of its equity securities or any securities convertible
into or exchangeable or exercisable for such securities in a non-public capital
raising transaction. Prior to the closing of any such transaction, each Investor
shall have the right to participate in its pro rata share of such new offering
and purchase in such third-party sale up to the entire amount of such new
transaction. In order to exercise this right, an Investor must give written
notice to the Company of the Investor's election to participate and such notice
must be given within five (5) Trading Days following receipt of the notice from
the Company. In the event the Company gives notice to the Investor of an
expected transaction pursuant to this Section 6.10 but does not consummate such
transaction, the Company will give the Investor prompt written notice of the
cancellation of such transaction. If, subsequent to the Company giving notice to
the Investor hereunder, the terms and conditions of the proposed third-party
sale
18
<PAGE>
are changed in any way, the Company shall be required to provide a new notice to
the Investor hereunder and the Investor shall have the right to participate in
the offering on such changed terms and conditions as provided hereunder.
Section 6.11. Repurchase of Shares by Company. If the Company receives a
-------------------------------
notice from the Nasdaq Stock Market stating that the Company's Common Stock will
be delisted therefrom for any reason, then, upon demand of any Investor, the
Company shall repurchase from such Investor all Shares then held by such
Investor, at a price equal to the Purchase Price, and assuming that all Reset
Shares which could have been issued pursuant to Section 6.10(d) have been so
issued. Such repurchase shall be effected within five (5) Trading Days of
receipt of demand from the Investor if legally permissible, and if not legally
permissible then, at earliest possible date when such repurchase would be legal.
ARTICLE VII
Survival; Indemnification
Section 7.1. Survival. The representations, warranties and covenants made by
--------
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive the Closing
and the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it under
the provisions of this Agreement, irrespective of any investigation made by or
on behalf of such party on or prior to the Closing Date.
Section 7.2. Indemnity. (a) The Company hereby agrees to indemnify and hold
---------
harmless the Investors, their respective Affiliates and their respective
officers, directors, partners and members (collectively, the "Investor
Indemnitees"), from and against any and all Damages, and agrees to reimburse the
Investor Indemnitees for all reasonable out-of-pocket expenses (including the
reasonable fees and expenses of legal counsel), in each case promptly as
incurred by the Investor Indemnitees and to the extent arising out of or in
connection with:
(i) any misrepresentation, omission of fact or breach of any
of the Company's representations or warranties contained in this Agreement,
the annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement; or
(ii) any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or obligations set
forth in this Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by the
Company pursuant to this Agreement; or
19
<PAGE>
(iii) any action instituted against the Investors, or any of
them, by any stockholder of the Company who is not an Affiliate of an
Investor, with respect to any of the transactions contemplated by this
Agreement.
(b) Each Investor, severally and not jointly, hereby agrees to indemnify
and hold harmless the Company, its Affiliates and their respective officers,
directors, partners and members (collectively, the "Company Indemnitees"), from
and against any and all Damages, and agrees to reimburse the Company Indemnitees
for reasonable all out-of-pocket expenses (including the reasonable fees and
expenses of legal counsel), in each case promptly as incurred by the Company
Indemnitees and to the extent arising out of or in connection with any
misrepresentation, omission of fact, or breach of any of the Investor's
representations or warranties contained in this Agreement, the annexes,
schedules or exhibits hereto or any instrument, agreement or certificate entered
into or delivered by the Investor pursuant to this Agreement.
Section 7.3. Notice. Promptly after receipt by either party hereto seeking
------
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party from whom indemnification pursuant to Section
7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced by such omission or
delay. In connection with any Claim as to which both the Indemnifying Party and
the Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-
pocket costs and expenses, (y) the Indemnified Party reasonably shall have
concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in
clauses (x), (y) or (z) above, the fees, costs and expenses of such legal
counsel shall be borne exclusively by the Indemnified Party. Except as provided
above, the Indemnifying Party shall not, in connection with any Claim in the
same jurisdiction, be liable for the fees and expenses of more than one firm of
legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an
20
<PAGE>
unconditional release of the Indemnified Party from all liabilities with respect
to such Claim or judgment.
Section 7.4. Direct Claims. In the event one party hereunder should have a
-------------
claim for indemnification that does not involve a claim or demand being asserted
by a third party, the Indemnified Party promptly shall deliver notice of such
claim to the Indemnifying Party. If the Indemnified Party disputes the claim,
such dispute shall be resolved by mutual agreement of the Indemnified Party and
the Indemnifying Party or by binding arbitration conducted in accordance with
the procedures and rules of the American Arbitration Association as set forth in
Article X. Judgment upon any award rendered by any arbitrators may be entered in
any court having competent jurisdiction thereof.
ARTICLE VIII
Due Diligence Review; Non-Disclosure of Non-Public Information.
Section 8.1. Due Diligence Review. Subject to Section 8.2, the Company shall
--------------------
make available for inspection and review by the Investors, advisors to and
representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, Nasdaq or other
filing, all SEC Documents and other filings with the SEC, and all other publicly
available corporate documents and properties of the Company as may be reasonably
necessary for the purpose of such review, and cause the Company's officers,
directors and employees to supply all such publicly available information
reasonably requested by the Investors or any such representative, advisor or
underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of enabling the
Investors and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
21
<PAGE>
Section 8.2. Non-Disclosure of Non-Public Information.
----------------------------------------
(a) The Company shall not disclose material non-public information to
the Investors, advisors to or representatives of the Investors unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such non-
public information for review. Other than disclosure of any comment letters
received from the SEC staff with respect to the Registration Statement, the
Company may, as a condition to disclosing any non-public information hereunder,
require the Investors or the Investors' advisors and representatives to enter
into a confidentiality agreement in form and content reasonably satisfactory to
the Company and the Investors.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investors or their advisors or representatives,
and the Company represents that it does not disseminate material non-public
information to any investors who purchase stock in the Company in a public
offering, to money managers or to securities analysts, provided, however, that
notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, promptly notify the underwriters, of any event or the
existence of any circumstance (without any obligation to disclose the specific
event or circumstance) of which it becomes aware, constituting material non-
public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 8.2 shall be construed to mean that such
persons or entities other than the Investors (without the written consent of the
Investors prior to disclosure of such information as set forth in Section
8.2(a)) may not obtain non-public information in the course of conducting due
diligence in accordance with the terms of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading.
ARTICLE IX
Legends; Transfer Agent Instructions
Section 9.1. Legends. Each certificate representing Shares, Warrant Shares or
-------
Reset Shares shall not contain any restrictive legend, except that each such
certificate will have a stapled attachment bearing the following legend or
equivalent (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION
22
<PAGE>
REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY REGULATION S THEREUNDER AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH
REGISTRATION.
Section 9.2. Transfer Agent Instructions. Upon the execution and delivery
---------------------------
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions substantially in the form of Exhibit E hereto. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be.
Section 9.3. No Other Legend or Stock Transfer Restrictions. No legend other
----------------------------------------------
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article IX, and the prohibition of
transfers of the Registrable Securities except in compliance with the
requirements of Regulation S, which the Investors each hereby acknowledge.
Section 9.4. Investors' Compliance. The Investors shall not remove the affixed
---------------------
Legend prior to the end of the forty (40) day distribution compliance period
applicable to the Shares, the Warrant Shares, or, if issued, the Reset Shares.
Nothing in this Article shall affect in any way each Investor's obligations to
comply with all applicable securities laws upon resale of the Common Stock,
whether pursuant to registration, Regulation S or another exemption from
registration.
ARTICLE X
Choice of Law, Venue
Section 10.1. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the Province of Ontario applicable to contracts
made in Ontario by persons domiciled in Toronto and without regard to its
principles of conflicts of laws. Any action respecting the enforcement of this
Agreement shall be brought in a provincial or Federal court of competent
jurisdiction located in the city of Toronto. Each party consents to the personal
jurisdiction of such court and waives any defenses thereto. The non-prevailing
party to any action (as determined by the Court) shall pay the expenses of the
prevailing party, including reasonable attorney's fees, in connection with such
action. Any party shall be entitled to obtain injunctive relief
23
<PAGE>
from a court in any case where such relief is available, and the prevailing
party shall be entitled to attorneys' fees in connection therewith.
ARTICLE XI
Assignment
Section 11.1. Assignment. Neither this Agreement nor any rights of the
----------
Investors or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any permitted transferee
of any of the Shares or Warrants purchased or acquired by any Investor hereunder
with respect to the Shares or Warrants held by such person, and (b) upon the
prior written consent of the Company, which consent shall not unreasonably be
withheld or delayed, each Investor's interest in this Agreement may be assigned
at any time, in whole or in part, to any other person or entity (including any
Affiliate of the Investor) who agrees to and is able to truthfully make the
representations and warranties contained in Article III and who agrees to be
bound by the terms of this Agreement.
ARTICLE XII
Notices
Section 12.1. Notices. All notices, demands, requests, consents, approvals, and
--------
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) hand delivered, (ii) deposited
in the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the first business day
following the date of sending by reputable courier service, fully prepaid,
addressed to such address, or (c) upon actual receipt of such mailing, if
mailed. The addresses for such communications shall be:
24
<PAGE>
If to the Company: Qiao Xing Universal Telephone, Inc.
Qiao Xing Building
Wu Shi Industrial Zone
Huizhou City, Guangdong, P.R.C.
Attention: Chairman
Telephone: 011-86-752-280-8188
Facsimile: 011-86-752-280-4718
with a copy to (shall not constitute Andrew N. Bernstein, P.C.
notice): 5445 DTC Parkway, Suite 520
Greenwood Village, CO 80111
Attention: Andrew N. Bernstein, Esq.
Telephone: (303) 770-7131
Facsimile: (303) 770-7332
if to the Investors: As set forth on the signature pages
hereto
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
ARTICLE XIII
Miscellaneous
Section 13.1. Counterparts/ Facsimile/ Amendments. This Agreement may be
-----------------------------------
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 13.2. Entire Agreement. This Agreement, the agreements attached as
----------------
Exhibits hereto, which include, but are not limited to the Warrants, the Escrow
Agreement, and the Registration Rights Agreement, set forth the entire agreement
and understanding of the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits to this
Agreement are incorporated herein by this reference and shall constitute part of
this Agreement as is fully set forth herein.
Section 13.3. Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement
25
<PAGE>
shall continue in full force and effect without said provision; provided that
such severability shall be ineffective if it materially changes the economic
benefit of this Agreement to any party.
Section 13.4. Headings. The headings used in this Agreement are used for
--------
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 13.5. Number and Gender. There may be one or more Investors parties to
-----------------
this Agreement, which Investors may be natural persons or entities. All
references to plural Investors shall apply equally to a single Investor if there
is only one Investor, and all references to an Investor as "it" shall apply
equally to a natural person.
Section 13.6. Replacement of Certificates. Upon (i) receipt of evidence
---------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Shares or Warrants or any Warrant
Shares and (ii) in the case of any such loss, theft or destruction of such
certificate, upon delivery of an indemnity agreement or security reasonably
satisfactory in form to the Company and its transfer agent or (iii) in the case
of any such mutilation, on surrender and cancellation of such certificate, the
Company at its expense will execute and deliver, in lieu thereof, a new
certificate of like tenor.
Section 13.7. Fees and Expenses. Each of the Company and the Investors agrees
-----------------
to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of counsel and accountants to the Investors, in an amount equal to
$20,000 all as set forth in the Escrow Agreement.
Section 13.8. Brokerage. Each of the parties hereto represents that it has had
---------
no dealings in connection with this transaction with any finder or broker who
will demand payment of any fee or commission from the other party except for the
fees described in the Escrow Agreement. The Company on the one hand, and the
Investors, on the other hand, agree to indemnify the other against and hold the
other harmless from any and all liabilities to any person claiming brokerage
commissions or finder's fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby.
Section 13.9. Publicity. The Company agrees that it will not issue any press
---------
release or other public announcement of the transactions contemplated by this
Agreement without the prior consent of the Investors, which shall not be
unreasonably withheld nor delayed by more than two (2) Trading Days from their
receipt of such proposed release. No release shall name the Investors without
their express consent.
Section 13.10. Currency. Unless specified otherwise, all references to
--------
dollars ($) in this Agreement and all other agreements which are attached as
exhibits hereto, are references to United States Dollars.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement
to be executed by the undersigned, thereunto duly authorized, as of the date
first set forth above.
Qiao Xing Universal Telephone, Inc.
By: ___________________________________
Rui Lin Wu, Chairman
Address: 175 Bloor Street East Investor: BH Capital Investments, L.P.
South Tower, 7/th/ Floor By: HB and Co., Inc., its General Partner
Toronto, Ontario, Canada M4W 3R8
Fax: 416-929-5314 By:_____________________________________
One-half of total commitment Name: Henry Brachfeld, President
Address: 33 Prince Arthur Avenue Investor: Excalibur Limited Partnership
Toronto, Ontario, Canada M5R 1B2 By: Excalibur Capital Management, Inc.,
Fax: 416-964-8868 its general partner
One-half of total commitment By:_____________________________________
Name: William Hechter, President
27
<PAGE>
EXHIBIT A
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY OTHER APPLICABLE SECURITIES LAWS IN RELIANCE UPON THE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY REGULATION S AND
SUCH OTHER SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON
EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE
PROVISIONS OF THE SECURITIES ACT.
STOCK PURCHASE WARRANT
To Purchase 180,000 Shares of Common Stock of
Qiao Xing Universal Telephone, Inc.
THIS CERTIFIES that, for value received, [_____________________] (the
"Holder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time on or after December 31, 1999 (the "Initial Exercise
Date") and on or prior to the close of business on December 31, 2004 (the
"Termination Date") but not thereafter, to subscribe for and purchase from Qiao
Xing Universal Telephone, Inc., a company duly incorporated and validly existing
under the laws of the British Virgin Islands (the "Company"), up to one hundred
eighty thousand (180,000) shares (the "Warrant Shares") of Common Stock, $0.001
par value, of the Company (the "Common Stock"). The purchase price of one share
of Common Stock (the "Exercise Price") under this Warrant shall be $_________
(110% of the average of the closing bid prices of the Common Stock on the Nasdaq
Stock Market on the five Trading Days preceding the applicable Closing Date of
the Common Stock and Warrants Purchase Agreement dated as of December 30, 1999
pursuant to which this Warrant has been issued (the "Purchase Agreement")). The
Exercise Price and the number of shares for which the Warrant is exercisable
shall be subject to adjustment as provided herein. In the event of any conflict
between the terms of this Warrant and the Purchase Agreement, the Purchase
Agreement shall control. Capitalized terms used and not otherwise defined herein
shall have the meanings set forth for such terms in the Purchase Agreement. The
Exercise Price shall be reduced to equal 110% of the average of the closing bid
prices of the Common Stock on the Nasdaq Stock Market on the five Trading Days
preceding the 180th day after the Closing Date, if such price would be lower
than the initial Exercise Price (adjusted for any subsequent stock splits or
reverse splits).
1
<PAGE>
1. Title to Warrant. Prior to the Termination Date and subject to
----------------
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
-----------------------
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Except as provided in Section 4 herein,
-------------------
exercise of the purchase rights represented by this Warrant may be made at any
time or times on or after the Initial Exercise Date, and before the close of
business on the Termination Date by the surrender of this Warrant and the Notice
of Exercise Form annexed hereto duly executed, at the office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Company) and upon payment of the Exercise Price of the
shares thereby purchased by wire transfer or cashier's check drawn on a United
States bank, the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Certificates
for shares purchased hereunder shall be delivered to the holder hereof within
three (3) Trading Days after the date on which this Warrant shall have been
exercised as aforesaid, if such shares have not been previously delivered to an
escrow agent for the benefit of the Holder. This Warrant shall be deemed to have
been exercised and such certificate or certificates shall be deemed to have been
issued, and Holder or any other person so designated to be named therein shall
be deemed to have become a holder of record of such shares for all purposes, as
of the date the Warrant has been exercised by payment to the Company of the
Exercise Price and all taxes required to be paid by Holder, if any, pursuant to
Section 5 prior to the issuance of such shares, have been paid. If this Warrant
shall have been exercised in part, the Company shall, at the time of delivery of
the certificate or certificates representing Warrant Shares, deliver to Holder a
new Warrant evidencing the rights of Holder to purchase the unpurchased shares
of Common Stock called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant. . The Holder shall also have the right
to a "cashless exercise" in which the Holder shall be entitled to receive a
certificate for the number of shares equal to the quotient obtained by dividing
[(A-B) (X)] by (A), where:
(A) = the closing price per share of Common Stock on the Trading Day preceding
the date of such election;
(B) = the Exercise Price of the Warrant; and
(X) = the number of shares issuable upon exercise of the Warrant in accordance
with the terms of this Warrant.
2
<PAGE>
4. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
---------------------------
of Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and the Company may require, as a condition thereto, the payment of a
sum sufficient to reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its shareholder
----------------
books or records in any manner which prevents the timely exercise of this
Warrant.
7. Transfer, Division and Combination. (a) Subject to compliance
----------------------------------
with any applicable securities laws, transfer of this Warrant and all rights
hereunder, in whole or in part, shall be registered on the books of the Company
to be maintained for such purpose, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name of
the assignee or assignees and in the denomination or denominations specified in
such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by a
new holder for the purchase of shares of Common Stock without having a new
Warrant issued.
(b) This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
3
<PAGE>
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d) The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Warrants.
8. No Rights as Shareholder until Exercise. This Warrant does not
---------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
-------------------------------------------------
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant certificate
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it and
its transfer agent, and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Company will make and deliver a new Warrant or
stock certificate of like tenor and dated as of such cancellation, in lieu of
such Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
---------------------------------
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. Adjustments of Exercise Price and Number of Warrant Shares. (a)
----------------------------------------------------------
Stock Splits, etc. The number and kind of securities purchasable upon the
------------------
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following. In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment
4
<PAGE>
made pursuant to this paragraph shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.
(b) Reorganization, Reclassification, Merger, Consolidation or
----------------------------------------------------------
Disposition of Assets. In case the Company shall reorganize its capital,
---------------------
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of this Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of shares of
Common Stock for which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this Section 11.
For purposes of this Section 11, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to redemption and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 11 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
12. Voluntary Adjustment by the Company. The Company may at any time
-----------------------------------
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
13. Notice of Adjustment. Whenever the number of Warrant Shares or
--------------------
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment, setting
forth a brief statement of the facts
5
<PAGE>
requiring such adjustment and setting forth the computation by which such
adjustment was made. Such notice, in the absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
14. Notice of Corporate Action. If at any time:
--------------------------
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 30
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 16(c).
6
<PAGE>
15. Authorized Shares. The Company covenants that during the period
-----------------
the Warrant is exercisable, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of Holder against impairment. Without limiting the generality of the
foregoing, the Company will (a) not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise immediately prior to such increase in par
value, (b) take all such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant, and (c) use its best efforts to
obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof as may be necessary to enable the
Company to perform its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during
the period this Warrant is exercisable acknowledge in writing, in form
reasonably satisfactory to Holder, the continuing validity of this Warrant and
the obligations of the Company hereunder.
Before taking any action which would cause an adjustment reducing
the current Exercise Price below the then par value, if any, of the shares of
Common Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock at
such adjusted Exercise Price.
Before taking any action which would result in an adjustment in
the number of shares of Common Stock for which this Warrant is exercisable or in
the Exercise Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
16. Miscellaneous.
-------------
(a) Jurisdiction. This Warrant shall be binding upon any
------------
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of Ontario,
7
<PAGE>
Canada, without regard to its conflict of law, principles or rules. Jurisdiction
and venue shall be as set forth in Article X of the Purchase Agreement.
(b) Nonwaiver and Expenses. No course of dealing or any delay or
----------------------
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Termination Date. If the
Company fails to comply with any provision of this Warrant, the Company shall
pay to Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys' fees, including
those of appellate proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder if Holder is the prevailing party.
(c) Notices. Any notice, request or other document required or
-------
permitted to be given or delivered to the holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Purchase Agreement.
(d) Limitation of Liability. No provision hereof, in the absence
-----------------------
of affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall give rise
to any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
(e) Remedies. Holder, in addition to being entitled to exercise
--------
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
(f) Successors and Assigns. Subject to applicable securities
----------------------
laws, this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant are
intended to be for the benefit of all Holders from time to time of this Warrant
and shall be enforceable by any such Holder.
(g) Indemnification. The Company agrees to indemnify and hold
---------------
harmless Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; provided,
--------
however, that the Company will not be liable hereunder to the extent that any
-------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
8
<PAGE>
(h) Amendment. This Warrant may be modified or amended or the
---------
provisions hereof waived with the written consent of the Company and the Holder.
(i) Severability. Wherever possible, each provision of this
------------
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
(j) Headings. The headings used in this Warrant are for the
--------
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated: January ______, 2000
Qiao Xing Universal Telephone, Inc.
By:__________________________________________
Rui Lin Wu, Chairman
9
<PAGE>
NOTICE OF EXERCISE
To: Qiao Xing Universal Telephone, Inc.
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock (the "Common Stock"), of Qiao Xing Universal Telephone, Inc.
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the exercise price in full, together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
_______________________________
(Name)
_______________________________
(Address)
_______________________________
Dated:
______________________________
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
____________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ___________, _______
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
<PAGE>
APPENDIX B
CONVERTIBLE DEBENTURE AND WARRANTS PURCHASE AGREEMENT
FORM OF CONVERTIBLE DEBENTURE
FORM OF STOCK PURCHASE WARRANT
<PAGE>
CONVERTIBLE DEBENTURE AND WARRANTS PURCHASE AGREEMENT
Between
Qiao Xing Universal Telephone, Inc.
and
the Investors Signatory Hereto
CONVERTIBLE DEBENTURE AND WARRANTS PURCHASE AGREEMENT dated as of May 24,
2000 (the "Agreement"), between the Investors signatory hereto (each an
"Investor" and together the "Investors"), and Qiao Xing Universal Telephone,
Inc., a company duly incorporated and validly existing under the laws of the
British Virgin Islands (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase in the aggregate, (i) $10,000,000 principal
amount of Convertible Debentures (as defined below) and (ii) Warrants (as
defined below) to purchase up to 360,000 shares of the Common Stock (as defined
below).
WHEREAS, such investments will be made in reliance upon the provisions of
Regulation S ("Regulation S") and the other rules and regulations promulgated
under the United States Securities Act of 1933 (the "Securities Act"), and/or
upon such other exemption from the registration requirements of the Securities
Act as may be available with respect to any or all of the investments in
securities to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1. "Capital Shares" shall mean the Common Stock and any shares
--------------
of any other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of the
Company.
Section 1.2. "Capital Shares Equivalents" shall mean any securities, rights,
--------------------------
or obligations that are convertible into or exchangeable for or give any right
to subscribe for any Capital Shares of the Company or any Warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 1.3. "Closing" shall mean the Closing of the purchase and sale of the
-------
Convertible Debentures and Warrants pursuant to Section 2.1.
<PAGE>
Section 1.4. "Closing Date" shall mean the date on which all conditions to the
------------
Closing have been satisfied (as defined in Section 2.1 (b) hereto) and the
Closing shall have occurred.
Section 1.5. "Common Stock" shall mean the Company's common stock, $0.001 par
------------
value per share.
Section 1.6. "Convertible Debentures" shall mean the zero-coupon convertible
----------------------
debentures of the Company in the form of Exhibit H hereto.
Section 1.7. "Custodial Agreement" shall mean the Custodial Agreement in
-------------------
substantially the form of Exhibit F hereto with respect to the Convertible
Debentures and the Warrant Shares, executed and delivered contemporaneously with
this Agreement.
Section 1.8. "Custodian" shall mean the Custodian named in the Custodial
---------
Agreement, or any successor thereto.
Section 1.9. "Damages" shall mean any loss, claim, damage, judgment, penalty,
-------
deficiency, liability, costs and expenses (including, without limitation,
reasonable attorney's fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).
Section 1.10. "Escrow Agent" shall have the meaning set forth in the Escrow
------------
Agreement.
Section 1.11. "Escrow Agreement" shall mean the Escrow Agreement in
----------------
substantially the form of Exhibit C hereto executed and delivered
contemporaneously with this Agreement.
Section 1.12. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder.
Section 1.13. "Legend" shall mean the legend set forth in Section 9.1.
------
Section 1.14. "Material Adverse Effect" shall mean any effect on the business,
-----------------------
operations, share price, properties, prospects or financial condition of the
Company that is material and adverse to the Company and its subsidiaries and
affiliates, taken as a whole, and/or any condition, circumstance, or situation
that would prohibit or otherwise interfere with the ability of the Company to
enter into and perform any of its obligations under this Agreement, the
Convertible Debentures, the Registration Rights Agreement, the Escrow Agreement,
or the Warrants in any material respect.
Section 1.15. "Outstanding" when used with reference to shares of Common Stock
-----------
or Capital Shares, shall mean, at any date as of which the number of such shares
is to be determined, all issued and outstanding shares, and shall include all
such shares issuable in respect of outstanding scrip or any certificates
representing fractional interests in such shares; provided, however, that
-------- -------
"Outstanding" shall not mean any such shares then directly or indirectly owned
or held by or for the account of the Company.
2
<PAGE>
Section 1.16. "Person" shall mean an individual, a corporation, a partnership,
------
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
Section 1.17. "Principal Market" shall mean the American Stock Exchange, the
----------------
NASDAQ National or SmallCap Markets, or the OTC Bulletin Board, whichever is at
the time the principal trading exchange or market for the Common Stock, based
upon share volume on each such market.
Section 1.18. "Purchase Price" shall mean the face principal amount of the
--------------
Convertible Debentures.
Section 1.19. "Registrable Securities" shall mean the Shares and the Warrant
----------------------
Shares until the earliest of (i) the Registration Statement has been declared
effective by the SEC, and all Shares and Warrant Shares have been disposed of
pursuant to the Registration Statement, (ii) all Shares and Warrant Shares have
been sold under circumstances under which all of the applicable conditions of
Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (iii) all Shares and Warrant Shares have been otherwise
transferred to holders who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend or
(iv) such time as, in the opinion of counsel to the Company, all Shares and
Warrant Shares may be sold without any time, volume or manner limitations
pursuant to Regulation S or Rule 144(k) (or any similar provision then in
effect) under the Securities Act.
Section 1.20. "Registration Rights Agreement" shall mean the agreement
-----------------------------
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investors as of
the Closing Date in the form annexed hereto as Exhibit B.
Section 1.21. "Registration Statement" shall mean a registration statement on
----------------------
Form F-3 (or on such other form promulgated by the SEC for which the Company
then qualifies and which counsel for the Company shall deem appropriate, and
which form shall be available for the resale by the Investors of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement and in accordance with the intended
method of distribution of such securities), for the registration of the resale
by the Investor of the Registrable Securities under the Securities Act.
Section 1.22. "Regulation S" shall have the meaning set forth in the recitals
------------
of this Agreement.
Section 1.23. "SEC" shall mean the Securities and Exchange Commission.
---
Section 1.24. "Securities Act" shall have the meaning set forth in the recitals
--------------
of this Agreement.
Section 1.25. "SEC Documents" shall mean the Company's Registration Statement
-------------
on Form F-1 and all amendments thereto, Annual Report on Form 20-F for the
fiscal year ended December 31, 1998 and each report, proxy statement or
registration statement filed by the Company with the SEC pursuant to the
Exchange Act or the Securities Act.
3
<PAGE>
Section 1.26. "Shares" shall mean the shares of Common Stock issuable upon
------
conversion of the Convertible Debentures pursuant to this Agreement.
Section 1.27. "Trading Day" shall mean any day during which the Principal
-----------
Market shall be open for business.
Section 1.28. "Warrants" shall mean the Warrants substantially in the form of
--------
Exhibit A to be issued to the Investors hereunder.
Section 1.29. "Warrant Shares" shall mean all shares of Common Stock or other
--------------
securities issued or issuable pursuant to exercise of the Warrants.
ARTICLE II
Purchase and Sale of Convertible Debenture and Warrants
Section 2.1. Investment.
----------
(a) Upon the terms and subject to the conditions set forth herein,
the Company agrees to sell, and the Investors, severally and not jointly, agree
to purchase up to $10,000,000 worth of the Convertible Debentures together with
the Warrants at the Purchase Price on the Closing Date. Upon satisfaction by the
Company of the Closing conditions set forth in Section 2.1(b), the Investors
shall each deliver to the Escrow Agent their proportionate share of the sum of
Ten Million Dollars ($10,000,000) in immediately available funds and the Company
shall deliver the Convertible Debentures so purchased at the Purchase Price and
the Warrants to the Escrow Agent, to be held by the Escrow Agent pursuant to the
Escrow Agreement. Upon satisfaction of the conditions set forth in Section
2.1(b), the Closing ("Closing") shall occur at the offices of the Escrow Agent
at which the Escrow Agent (x) shall release the Convertible Debentures purchased
and the Warrants to the appropriate Investor and (y) shall release the Purchase
Price (after all fees have been paid as set forth in the Escrow Agreement),
pursuant to the terms of the Escrow Agreement.
(b) The Closing is subject to the satisfaction or waiver by the party
sought to be benefited thereby of the following conditions:
(i) acceptance and execution by the Company and by the
Investors, of this Agreement and all Exhibits hereto;
(ii) delivery into escrow by each Investor of immediately
available funds in the amount of the Purchase Price of the
Convertible Debentures and the Warrants, as applicable to
the Closing, as more fully set forth in the Escrow
Agreement;
(iii) all representations and warranties of the Investors
contained herein shall remain true and correct as of the
Closing Date (as a condition to the Company's obligations);
4
<PAGE>
(iv) all representations and warranties of the Company
contained herein shall remain true and correct as of the
Closing Date (as a condition to the Investors'
obligations);
(v) the sale and issuance of the Convertible Debentures and
the Warrants hereunder, and the proposed issuance by the
Company to the Investors of the Common Stock underlying
the Warrants upon the conversion or exercise thereof shall
be legally permitted by all laws and regulations to which
the Investors and the Company are subject and there shall
be no ruling, judgment or writ of any court prohibiting
the transactions contemplated by this Agreement;
(vi) delivery of the original fully executed Convertible
Debentures and Warrant certificates to the Escrow Agent;
(vii) delivery to the Escrow Agent of the opinion of Andrew N.
Bernstein, P.C., counsel to the Company, covering the
substance of the form of Exhibit D hereto;
(viii) delivery to the Escrow Agent of the Instructions to
Transfer Agent in the form attached hereto as Exhibit E;
(ix) delivery to the Escrow Agent of the Registration Rights
Agreement; and
(x) delivery to the Escrow Agent of a written agreement of Wu
Holdings Ltd., the majority shareholder of the Company,
agreeing to vote its shares of Common Stock in favor of a
shareholder proposal to be presented to the next meeting
of shareholders to permit the issuance of a number of
shares pursuant to this Agreement which exceeds 20% of the
issued and outstanding shares of Common Stock immediately
prior to December 31, 1999.
Section 2.2. Warrants. The number of Warrants to be issued at the Closing
--------
shall equal 180,000 per $5,000,000 invested. The exercise price of the Warrants
shall be 110% of the average of the closing bid prices on the five (5) Trading
Days immediately preceding the Closing Date and may be reset 180 days after the
Closing Date as set forth in the Warrants.
Section 2.3. Liquidated Damages. The parties hereto acknowledge and agree
------------------
that the sums payable pursuant to the Registration Rights Agreement shall
constitute liquidated damages and not penalties. The parties further acknowledge
that (a) the amount of loss or damages likely to be incurred is incapable or is
difficult to precisely estimate, (b) the amounts specified in such Sections bear
a reasonable proportion and are not plainly or grossly disproportionate to the
probable loss likely to be incurred by the Investors in connection with the
failure by the Company to timely cause the registration of the Registrable
Securities and (c) the parties are sophisticated business parties and have been
represented by sophisticated and able legal and financial counsel and negotiated
this Agreement at arm's length.
5
<PAGE>
ARTICLE III
Representations and Warranties of Investor
Each Investor, severally and not jointly, represents and warrants to the Company
that:
Section 3.1. Intent. The Investor is entering into this Agreement for its own
------
account and not with a view to or for sale in connection with any distribution
of the Convertible Debentures or the Shares. The Investor has no present
arrangement (whether or not legally binding) at any time to sell the Convertible
Debentures, the Shares, the Warrants, or Warrant Shares to or through any person
or entity; provided, however, that by making the representations herein, the
Investor does not agree to hold such securities for any minimum or other
specific term and reserves the right to dispose of the Convertible Debentures,
the Shares and Warrant Shares at any time in accordance with federal and state
securities laws applicable to such disposition, including, without limitation,
Regulation S.
Section 3.2. Sophisticated Investor. The Investor is a non-United States
----------------------
Person (as defined in Regulation S) and is a sophisticated investor (as
described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as
defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it has the capacity to protect its own
interests in connection with this transaction and is capable of evaluating the
merits and risks of an investment in the Convertible Debentures and the
Warrants. The Investor acknowledges that an investment in the Convertible
Debentures is speculative and involves a high degree of risk. The Investor is
aware of the restrictions on resale of the Convertible Debentures, the Shares,
the Warrants and the Warrant Shares imposed by Regulation S, and subject to its
rights under the Registration Rights Agreement, agrees to abide thereby.
Section 3.3. Authority. This Agreement and each agreement attached as an
---------
Exhibit hereto which is required to be executed by Investor has been duly
authorized and validly executed and delivered by the Investor and is a valid and
binding agreement of the Investor enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and remedies or
by other equitable principles of general application. The Investor is organized
under the laws of Canada and does not maintain any place of business in the
United States.
Section 3.4. Not an Affiliate. The Investor is not an officer, director or
----------------
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 3.5. Absence of Conflicts. The execution and delivery of this
--------------------
Agreement and each agreement which is attached as an Exhibit hereto and executed
by the Investor in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
thereof by the Investor, do not and will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor or (a)
violate any provision of any indenture, instrument or agreement to which
Investor is a party or is subject, or by which Investor or any of its assets is
bound; (b) conflict with or constitute a material default thereunder; (c) result
in the creation or imposition of any lien pursuant to the terms of any such
indenture, instrument or agreement, or constitute a breach of
6
<PAGE>
any fiduciary duty owed by Investor to any third party; or (d) require the
approval of any third-party (which has not been obtained) pursuant to any
material contract, agreement, instrument, relationship or legal obligation to
which Investor is subject or to which any of its assets, operations or
management may be subject.
Section 3.6. Disclosure; Access to Information. The Investor has received all
---------------------------------
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed copies of all SEC Documents.
Section 3.7. Manner of Sale. At no time was Investor presented with or
--------------
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising, or any
solicitation in the United States.
7
<PAGE>
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investors that, except as set forth
in the SEC Documents or previously disclosed to the Investors or on the
Disclosure Schedule prepared by the Company and attached hereto as Exhibit G, or
as contemplated by this Agreement:
Section 4.1. Organization of the Company. The Company is a company duly
---------------------------
incorporated and validly existing in good standing under the laws of the British
Virgin Islands and has all requisite corporate authority to own its properties
and to carry on its business as now being conducted. The Company does not have
any subsidiaries and does not own more than fifty percent (50%) of or control
any other business entity. The Company is duly qualified and is in good standing
as a foreign corporation to do business in every jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect. More than 50% of the Company's Common
Stock is held of record by residents who are not residents of the United States,
a majority of the Company's directors and executive officers are not United
States citizens or residents and more than 50% of the Company's assets are
located in the People's Republic of China.
Section 4.2. Authority. (i) The Company has the requisite corporate power and
---------
corporate authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Custodial Agreement and the Warrants and to issue the Convertible Debentures,
the Shares, the Warrants and the Warrant Shares pursuant to their respective
terms, (ii) the execution, issuance and delivery of this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the custodial Agreement,
the Convertible Debentures and the Warrants by the Company and the consummation
by it of the transactions contemplated hereby have been duly authorized by all
necessary corporate action and no further consent or authorization of the
Company or its Board of Directors is required, and (iii) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Convertible Debentures,
the Custodial Agreement and the Warrants have been duly executed and delivered
by the Company and at the Closing shall constitute valid and binding obligations
of the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application. The Company has duly and validly authorized and reserved for
issuance shares of Common Stock sufficient in number for the conversion of the
Convertible Debentures and the exercise of the Warrants.
Section 4.3. Capitalization. The authorized capital stock of the Company
--------------
consists of 50,000,000 shares of Common Stock, $0.001 par value per share, of
which 13,428,669 shares are issued and outstanding as of May 24, 2000. There are
no outstanding Capital Shares Equivalents nor any agreements or understandings
pursuant to which any Capital Shares Equivalents may become outstanding. The
Company is not a party to any agreement granting registration or anti-
8
<PAGE>
dilution rights to any person with respect to any of its equity or debt
securities. All of the outstanding shares of Common Stock of the Company have
been duly and validly authorized and issued and are fully paid and non-
assessable.
Section 4.4. Common Stock. The Company has registered its Common Stock
------------
pursuant to Section 12(b) or (g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act applicable to a "foreign
private issuer", and the Company is in compliance with all requirements for the
continued listing or quotation of its Common Stock, and such Common Stock is
currently listed or quoted on, the Principal Market. As of the date hereof, the
Principal Market is the Nasdaq National Market and the Company has not received
any notice regarding, and to its knowledge there is no threat, of the
termination or discontinuance of the eligibility of the Common Stock for such
listing.
Section 4.5. SEC Documents. The Company has made available to the Investors
-------------
true and complete copies of the SEC Documents. The Company has not provided to
the Investors any information that, according to applicable law, rule or
regulation, should have been disclosed publicly prior to the date hereof by the
Company, but which has not been so disclosed. As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as applicable, and rules and regulations of
the SEC promulgated thereunder and the SEC Documents did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents complied in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto at the time of such inclusion. Such financial statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they exclude footnotes
or may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited interim statements, to normal year-end audit adjustments).
Neither the Company nor any of its subsidiaries has any material indebtedness,
obligations or liabilities of any kind (whether accrued, absolute, contingent or
otherwise, and whether due or to become due) that would have been required to be
reflected in, reserved against or otherwise described in the financial
statements or in the notes thereto in accordance with GAAP, which was not fully
reflected in, reserved against or otherwise described in the financial
statements or the notes thereto included in the SEC Documents or was not
incurred in the ordinary course of business consistent with the Company's past
practices since the last date of such financial statements. Without limiting the
foregoing, the Company (i) is not in default (whether declared by the lender or
otherwise) on any debt for borrowed money, (ii) does not have, as of December
15, 1999, bad or doubtful receivables in excess of $100,000 in the aggregate,
(iii) has no accounts payable more than 90 days past due, (iv) has made adequate
provision for obsolete inventory, and, at May 23, 2000, had a cash position of
$11,231,884.
Section 4.6. Exemption from Registration; Valid Issuances. Subject to the
--------------------------------------------
accuracy of the Investors' representations in Article III, the sale of the
Convertible Debentures, the Shares, the
9
<PAGE>
Warrants and the Warrant Shares will not require registration under the
Securities Act and/or any applicable state securities law. When issued and paid
for in accordance with the Warrants, the Warrant Shares will be duly and validly
issued, fully paid, and non-assessable. When issued upon conversion of a
Convertible Debenture in accordance with its terms, the Shares will be duly and
validly issued, fully paid and non-assessable. Neither the sales of the
Convertible Debentures, the Warrants or the Warrant Shares pursuant to, nor the
Company's performance of its obligations under, this Agreement, the Registration
Rights Agreement, the Escrow Agreement, the Convertible Debentures or the
Warrants will (i) result in the creation or imposition by the Company of any
liens, charges, claims or other encumbrances upon the Convertible Debentures,
the Shares, the Warrants or the Warrant Shares or, except as contemplated
herein, any of the assets of the Company, or (ii) entitle the holders of
Outstanding Capital Shares to preemptive or other rights to subscribe for or
acquire the Capital Shares or other securities of the Company. The Convertible
Debentures, the Shares, the Warrants and the Warrant Shares shall not subject
the Investors to personal liability to the Company or its creditors by reason of
the possession thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
--------------------------------------------------------
Transaction. Neither the Company nor, to the knowledge of the Company, any of
-----------
its directors or officers (i) has conducted or will conduct any general
solicitation (as that term is used in Rule 502(c) of Regulation D) or general
advertising with respect to the sale of the Convertible Debentures or the
Warrants, or (ii) made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would require
registration of the Convertible Debentures, the Shares, the Warrants or the
Warrant Shares under the Securities Act or made any "directed selling efforts"
as defined in Rule 902 of Regulation S.
Section 4.8. No Conflicts. The execution, delivery and performance of this
------------
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the
Convertible Debentures, the Shares, the Warrants and the Warrant Shares, do not
and will not (i) result in a violation of the Company's Memorandum or Articles
of Association or By-Laws or (ii) conflict with, or constitute a material
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or
instrument, or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state or local law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or by which any material property or asset of the Company is bound or
affected, nor is the Company otherwise in violation of, conflict with or default
under any of the foregoing (except in each case for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not have, individually or in the aggregate, a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a Material
Adverse Effect. The Company is not required under any Federal, state or local
law, rule or regulation to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Shares or the Warrants in accordance with the
terms hereof (other than any SEC or state securities filings that may be
required to be made
10
<PAGE>
by the Company subsequent to Closing, or any registration statement that may be
filed pursuant hereto); provided that, for purposes of the representation made
in this sentence, the Company is assuming and relying upon the accuracy of the
relevant representations and agreements of the Investors herein.
Section 4.9. No Material Adverse Change. Since June 30, 1999, no Material
--------------------------
Adverse Effect has occurred or exists with respect to the Company.
Section 4.10. No Undisclosed Events or Circumstances. Since June 30, 1999, no
--------------------------------------
event or circumstance has occurred or exists with respect to the Company or its
businesses, properties, prospects, operations or financial condition, that,
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 in the SEC Documents.
Section 4.11. Litigation and Other Proceedings. There are no lawsuits or
--------------------------------
proceedings pending or, to the knowledge of the Company, threatened, against the
Company or any subsidiary, nor has the Company received any written or oral
notice of any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. No judgment, order,
writ, injunction or decree or award has been issued by or, to the knowledge of
the Company, requested of any court, arbitrator or governmental agency which
could result in a Material Adverse Effect.
Section 4.12. No Misleading or Untrue Communication. The Company and, to the
-------------------------------------
knowledge of the Company, any of its officers and directors in connection with
the transaction contemplated by this Agreement, have not made, at any time, any
oral communication in connection with the offer or sale of the same which
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.13. Material Non-Public Information. The Company has not disclosed
-------------------------------
to the Investors any material non-public information that (i) if disclosed,
would reasonably be expected to have a material effect on the price of the
Common Stock or (ii) according to applicable law, rule or regulation, should
have been disclosed publicly by the Company prior to the date hereof but which
has not been so disclosed.
Section 4.14. Tax Matters.
-----------
(a) The Company and each subsidiary has filed all Tax Returns which it is
required to file under applicable laws; all such Tax Returns are true and
accurate and has been prepared in compliance with all applicable laws; the
Company has paid all Taxes due and owing by it or any subsidiary (whether or not
such Taxes are required to be shown on a Tax Return) and have withheld and paid
over to the appropriate taxing authorities all Taxes which it is required to
withhold from amounts paid or owing to any employee, stockholder, creditor or
other third parties; and since June 30, 1999, the charges, accruals and reserves
for Taxes with respect to the Company (including any provisions for deferred
income taxes) reflected on the books of the Company are adequate to cover any
Tax liabilities of the Company if its current tax year were treated as ending on
the date hereof.
11
<PAGE>
(b) No claim has been made by a taxing authority in a jurisdiction where
the Company does not file tax returns that the Company or any subsidiary is or
may be subject to taxation by that jurisdiction. There are no tax audits or
administrative or judicial proceedings pending or being conducted with respect
to the Company or any subsidiary; no information related to Tax matters has been
requested by any taxing authority; and, except as disclosed above, no written
notice indicating an intent to open an audit or other review has been received
by the Company or any subsidiary from any foreign, federal, state or local
taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability.
(c) For purposes of this Section 4.14:
"Tax" or "Taxes" means federal, state, county, local, foreign, or
--- -----
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with
----------
respect to Taxes, including any schedules attached thereto and
including any amendment thereof.
Section 4.15. Property. Neither the Company nor any of its subsidiaries owns
--------
any real property. Each of the Company and its subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects except such as do not materially affect the
value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and to the Company's
knowledge any real property, mineral or water rights, and buildings held under
lease by the Company as tenant are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and intended to be made of such property, mineral or water
rights, and buildings by the Company.
Section 4.16. Intellectual Property. Each of the Company and its subsidiaries
---------------------
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, neither the Company
nor any of its subsidiaries is infringing upon or in conflict with any right of
any other person with respect to any Intangibles. No adverse claims have been
asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.
Section 4.17. Internal Controls and Procedures. The Company maintains books
--------------------------------
and records and internal accounting controls which provide reasonable assurance
that (i) all transactions to which the Company or any subsidiary is a party or
by which its properties are bound are executed with management's authorization;
(ii) the recorded accounting of the Company's consolidated
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assets is compared with existing assets at regular intervals; (iii) access to
the Company's consolidated assets is permitted only in accordance with
management's authorization; and (iv) all transactions to which the Company or
any subsidiary is a party or by which its properties are bound are recorded as
necessary to permit preparation of the financial statements of the Company in
accordance with U.S. generally accepted accounting principles.
Section 4.18. No Misrepresentation. The representations and warranties of the
--------------------
Company contained in this Agreement, any schedule, annex or exhibit hereto and
any agreement, instrument or certificate furnished by the Company to the
Investors pursuant to this Agreement, do 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 under
which they were made, not misleading.
ARTICLE V
Covenants of the Investors
Each Investor, severally and not jointly, covenants with the Company that:
Section 5.1. Compliance with Law. The Investor's trading activities with
-------------------
respect to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and rules
and regulations of the Principal Market on which the Company's Common Stock is
listed. The Investor shall comply with the distribution compliance period
required by Regulation S with respect to the Shares and Warrant Shares.
ARTICLE VI
Covenants of the Company
Section 6.1. Registration Rights. The Company shall cause the Registration
-------------------
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof and shall use best efforts to
timely prepare and file the Registration Statement, if necessary.
Section 6.2. Reservation of Common Stock. As of the date hereof, the Company
---------------------------
has reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to issue the Shares upon conversion of a Convertible
Debenture and the Warrant Shares pursuant to any exercise of the Warrants.
Section 6.3. Listing of Common Stock. The Company hereby agrees to maintain
-----------------------
the listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing to list the Shares and the Warrant Shares on
the Principal Market. The Company further agrees, if the Company applies to have
the Common Stock traded on any other Principal Market, it will include in such
application the Shares and the Warrant Shares, and will take such other action
as is necessary or desirable in the opinion of the Investors to cause the Shares
and Warrant Shares to be listed on such other Principal Market as promptly as
possible. The Company will
13
<PAGE>
take all action to continue the listing and trading of its Common Stock on a
Principal Market and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal Market
and shall provide Investors with copies of any correspondence to or from such
Principal Market which questions or threatens delisting of the Common Stock,
within three (3) Trading Days of the Company's receipt thereof, until the
Investors have disposed of all of their Shares and Warrant Shares. The Company
shall hold a meeting of its shareholders within sixty (60) days of the Closing
for the purpose of approving the issuance of a number of Conversion Shares and
Warrant Shares, which, when added to the shares of Common Stock and shares
issuable upon exercise of warrants issued pursuant to that certain Common Stock
and Warrants Purchase Agreement dated as of December 30, 1999 among the Company
and the Investors, would exceed 19.9% of the number of shares of Common Stock
issued and outstanding on December 31, 1999.
Section 6.4. Exchange Act Registration. The Company will cause its Common
-------------------------
Stock to continue to be registered under Section 12(b) or (g) of the Exchange
Act, will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investors have
disposed of all of their Registrable Securities.
Section 6.5. Legends. The certificates evidencing the Registrable Securities
-------
shall be free of legends, except as set forth in Article IX.
Section 6.6. Corporate Existence; Conflicting Agreements. The Company will
-------------------------------------------
take all steps necessary to preserve and continue the corporate existence of the
Company and its operating subsidiary. The Company shall not enter into any
agreement, the terms of which agreement would restrict or impair the right or
ability of the Company to perform any of its obligations under this Agreement or
any of the other agreements attached as exhibits hereto or which would impair
the value of the subsidiary to the Company.
Section 6.7. Consolidation; Merger. The Company shall not, at any time after
---------------------
the date hereof, effect any merger or consolidation of the Company with or into,
or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument or by
operation of law the obligation to deliver to the Investors such shares of stock
and/or securities as the Investors are entitled to receive pursuant to this
Agreement and the Warrants.
Section 6.8. Issuance of Shares and Warrant Shares. The sale of the
-------------------------------------
Convertible Debentures and the Warrants and the issuance of the Shares and
Warrant Shares pursuant to conversion of the Convertible Debentures or exercise
of the Warrants shall be made in accordance with the provisions and requirements
of Regulation S and any applicable state securities law. The Company shall make
any necessary SEC and "blue sky" filings required to be made by the Company in
connection with the sale of the Convertible Debentures and Warrants to the
Investors as required by all applicable laws, and shall provide a copy thereof
to the Investors promptly after such filing.
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Section 6.9. Limitation on Future Financing. The Company agrees that it will
------------------------------
not enter into any sale of its securities until 180 days after the Closing,
except for any sales (i) pursuant to any presently existing employee benefit
plan which plan has been approved by the Company's stockholders, (ii) pursuant
to any compensatory plan for a full-time employee or key consultant, or (iii) in
connection with a strategic partnership or other business transaction, the
principal purpose of which is not simply to raise money.
Section 6.10. Right of Investor to Participate in Future Transactions. The
-------------------------------------------------------
Company agrees that for a period of one year from the Closing the Investor will
have a right to participate in future non-public capital raising transactions as
set forth in this Section 6.10. The Company shall give advance written notice
to each Investor prior to any offer or sale of any of its equity securities or
any securities convertible into or exchangeable or exercisable for such
securities in a non-public capital raising transaction. Prior to the closing of
any such transaction, each Investor shall have the right to participate in its
pro rata share of such new offering and purchase in such third-party sale up to
the entire amount of such new transaction. In order to exercise this right, an
Investor must give written notice to the Company of the Investor's election to
participate and such notice must be given within five (5) Trading Days following
receipt of the notice from the Company. In the event the Company gives notice
to the Investor of an expected transaction pursuant to this Section 6.10 but
does not consummate such transaction, the Company will give the Investor prompt
written notice of the cancellation of such transaction. If, subsequent to the
Company giving notice to the Investor hereunder, the terms and conditions of the
proposed third-party sale are changed in any way, the Company shall be required
to provide a new notice to the Investor hereunder and the Investor shall have
the right to participate in the offering on such changed terms and conditions as
provided hereunder.
Section 6.11. Repurchase of Shares by Company. If the Company receives a
-------------------------------
notice from the Nasdaq Stock Market stating that the Company's Common Stock will
be delisted therefrom for any reason, then, upon demand of any Investor, the
Company shall repurchase from such Investor all Convertible Debentures then held
by such Investor, at a price equal to the Volume Adjusted Price on the date of
such demand multiplied by the number of Shares into which the Convertible
Debenture could then be converted. Such repurchase shall be effected within
five (5) Trading Days of receipt of demand from the Investor if legally
permissible, and if not legally permissible then, at earliest possible date when
such repurchase would be legal.
ARTICLE VII
Survival; Indemnification
Section 7.1. Survival. The representations, warranties and covenants made by
--------
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive the Closing
and the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or
15
<PAGE>
covenants, the party to whom such representations, warranties or covenants have
been made shall have all rights and remedies for such breach or violation
available to it under the provisions of this Agreement, irrespective of any
investigation made by or on behalf of such party on or prior to the Closing
Date.
Section 7.2. Indemnity. (a) The Company hereby agrees to indemnify and hold
---------
harmless the Investors, their respective Affiliates and their respective
officers, directors, partners and members (collectively, the "Investor
Indemnitees"), from and against any and all Damages, and agrees to reimburse the
Investor Indemnitees for all reasonable out-of-pocket expenses (including the
reasonable fees and expenses of legal counsel), in each case promptly as
incurred by the Investor Indemnitees and to the extent arising out of or in
connection with:
(i) any misrepresentation, omission of fact or breach of any of the
Company's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement; or
(ii) any failure by the Company to perform in any material respect
any of its covenants, agreements, undertakings or obligations set forth in
this Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by the
Company pursuant to this Agreement; or
(iii) any action instituted against the Investors, or any of them, by
any stockholder of the Company who is not an Affiliate of an Investor, with
respect to any of the transactions contemplated by this Agreement.
(b) Each Investor, severally and not jointly, hereby agrees to indemnify
and hold harmless the Company, its Affiliates and their respective officers,
directors, partners and members (collectively, the "Company Indemnitees"), from
and against any and all Damages, and agrees to reimburse the Company Indemnitees
for reasonable all out-of-pocket expenses (including the reasonable fees and
expenses of legal counsel), in each case promptly as incurred by the Company
Indemnitees and to the extent arising out of or in connection with any
misrepresentation, omission of fact, or breach of any of the Investor's
representations or warranties contained in this Agreement, the annexes,
schedules or exhibits hereto or any instrument, agreement or certificate entered
into or delivered by the Investor pursuant to this Agreement.
Section 7.3. Notice. Promptly after receipt by either party hereto seeking
------
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party from whom indemnification pursuant to Section
7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced by such omission or
delay. In connection with any Claim as to which both the Indemnifying Party and
the Indemnified Party are parties, the Indemnifying Party shall be
16
<PAGE>
entitled to assume the defense thereof. Notwithstanding the assumption of the
defense of any Claim by the Indemnifying Party, the Indemnified Party shall have
the right to employ separate legal counsel and to participate in the defense of
such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-
pocket costs and expenses of such separate legal counsel to the Indemnified
Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such
fees, out-of-pocket costs and expenses, (y) the Indemnified Party reasonably
shall have concluded that representation of the Indemnified Party and the
Indemnifying Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the Indemnified Party,
potentially differing interests between such parties in the conduct of the
defense of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those available to
the Indemnifying Party, or (z) the Indemnifying Party shall have failed to
employ legal counsel reasonably satisfactory to the Indemnified Party within a
reasonable period of time after notice of the commencement of such Claim. If the
Indemnified Party employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and expenses of such
legal counsel shall be borne exclusively by the Indemnified Party. Except as
provided above, the Indemnifying Party shall not, in connection with any Claim
in the same jurisdiction, be liable for the fees and expenses of more than one
firm of legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
Section 7.4. Direct Claims. In the event one party hereunder should have a
-------------
claim for indemnification that does not involve a claim or demand being asserted
by a third party, the Indemnified Party promptly shall deliver notice of such
claim to the Indemnifying Party. If the Indemnified Party disputes the claim,
such dispute shall be resolved by mutual agreement of the Indemnified Party and
the Indemnifying Party or by binding arbitration conducted in accordance with
the procedures and rules of the American Arbitration Association as set forth in
Article X. Judgment upon any award rendered by any arbitrators may be entered in
any court having competent jurisdiction thereof.
ARTICLE VIII
Due Diligence Review; Non-Disclosure of Non-Public Information.
Section 8.1. Due Diligence Review. Subject to Section 8.2, the Company shall
--------------------
make available for inspection and review by the Investors, advisors to and
representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, Nasdaq or other
filing, all SEC Documents and other filings with the SEC, and all other publicly
available corporate documents and properties of the Company as may be reasonably
necessary for the purpose of such review, and cause the Company's officers,
directors and employees to supply all such publicly available
17
<PAGE>
information reasonably requested by the Investors or any such representative,
advisor or underwriter in connection with such Registration Statement
(including, without limitation, in response to all questions and other inquiries
reasonably made or submitted by any of them), prior to and from time to time
after the filing and effectiveness of the Registration Statement for the sole
purpose of enabling the Investors and such representatives, advisors and
underwriters and their respective accountants and attorneys to conduct initial
and ongoing due diligence with respect to the Company and the accuracy of the
Registration Statement.
Section 8.2. Non-Disclosure of Non-Public Information.
----------------------------------------
(a) The Company shall not disclose material non-public information to the
Investors, advisors to or representatives of the Investors unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such non-
public information for review. Other than disclosure of any comment letters
received from the SEC staff with respect to the Registration Statement, the
Company may, as a condition to disclosing any non-public information hereunder,
require the Investors or the Investors' advisors and representatives to enter
into a confidentiality agreement in form and content reasonably satisfactory to
the Company and the Investors.
(b) Nothing herein shall require the Company to disclose material non-
public information to the Investors or their advisors or representatives, and
the Company represents that it does not disseminate material non-public
information to any investors who purchase stock in the Company in a public
offering, to money managers or to securities analysts, provided, however, that
notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, promptly notify the underwriters, of any event or the
existence of any circumstance (without any obligation to disclose the specific
event or circumstance) of which it becomes aware, constituting material non-
public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 8.2 shall be construed to mean that such
persons or entities other than the Investors (without the written consent of the
Investors prior to disclosure of such information as set forth in Section
8.2(a)) may not obtain non-public information in the course of conducting due
diligence in accordance with the terms of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading.
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ARTICLE IX
Legends; Transfer Agent Instructions
Section 9.1. Legends. Each certificate representing the Convertible Debentures
-------
or Warrants, or, if the convertible Debentures are converted before 41 days
after the Closing or the Warrants are exercised before 41 days after the
Closing, the Shares and the Warrant Shares, shall not contain any restrictive
legend, except that each such certificate will have a legend or stapled
attachment bearing the following legend or equivalent (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY REGULATION
S THEREUNDER AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION
THAT IS EXEMPT FROM SUCH REGISTRATION.
Section 9.2. Transfer Agent Instructions. Upon the execution and delivery
---------------------------
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions substantially in the form of Exhibit E hereto. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be.
Section 9.3. No Other Legend or Stock Transfer Restrictions. No legend other
----------------------------------------------
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article IX, and the prohibition of
transfers of the Registrable Securities except in compliance with the
requirements of Regulation S, which the Investors each hereby acknowledge.
Section 9.4. Investors' Compliance. The Investors shall not remove the affixed
---------------------
Legend prior to the end of the forty (40) day distribution compliance period
applicable to the Convertible Debentures, the Shares, the Warrants or the
Warrant Shares. Nothing in this Article shall affect in any way each Investor's
obligations to comply with all applicable securities laws upon resale of the
Common Stock, whether pursuant to registration, Regulation S or another
exemption from registration.
19
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ARTICLE X
Choice of Law, Venue
Section 10.1. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the Province of Ontario applicable to contracts
made in Ontario by persons domiciled in Toronto and without regard to its
principles of conflicts of laws. Any action respecting the enforcement of this
Agreement shall be brought in a provincial or Federal court of competent
jurisdiction located in the city of Toronto. Each party consents to the personal
jurisdiction of such court and waives any defenses thereto. The non-prevailing
party to any action (as determined by the Court) shall pay the expenses of the
prevailing party, including reasonable attorney's fees, in connection with such
action. Any party shall be entitled to obtain injunctive relief from a court in
any case where such relief is available, and the prevailing party shall be
entitled to attorneys' fees in connection therewith.
ARTICLE XI
Assignment
Section 11.1. Assignment. Neither this Agreement nor any rights of the
----------
Investors or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any permitted transferee
of any of the Shares or Warrants purchased or acquired by any Investor hereunder
with respect to the Shares or Warrants held by such person, and (b) upon the
prior written consent of the Company, which consent shall not unreasonably be
withheld or delayed, each Investor's interest in this Agreement may be assigned
at any time, in whole or in part, to any other person or entity (including any
Affiliate of the Investor) who agrees to and is able to truthfully make the
representations and warranties contained in Article III and who agrees to be
bound by the terms of this Agreement.
ARTICLE XII
Notices
Section 12.1. Notices. All notices, demands, requests, consents, approvals,
-------
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) hand delivered, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by facsimile, addressed as set forth below or to
such other address as such party shall have specified most recently by written
notice. Any notice or other communication required or permitted to be given
hereunder shall be deemed effective (a) upon
20
<PAGE>
hand delivery or delivery by facsimile, with accurate confirmation generated by
the transmitting facsimile machine, at the address or number designated below
(if delivered on a business day during normal business hours where such notice
is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the first business day following the date of
sending by reputable courier service, fully prepaid, addressed to such address,
or (c) upon actual receipt of such mailing, if mailed. The addresses for such
communications shall be:
If to the Company: Qiao Xing Universal Telephone, Inc.
Qiao Xing Building
Wu Shi Industrial Zone
Huizhou City, Guangdong, P.R.C.
Attention: Chairman
Telephone: 011-86-752-280-8188
Facsimile: 011-86-752-280-4718
with a copy to (shall not constitute Andrew N. Bernstein, P.C.
notice): 5445 DTC Parkway, Suite 520
Greenwood Village, CO 80111
Attention: Andrew N. Bernstein, Esq.
Telephone: (303) 770-7131
Facsimile: (303) 770-7332
if to the Investors: As set forth on the signature pages hereto
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
ARTICLE XIII
Miscellaneous
Section 13.1. Counterparts/ Facsimile/ Amendments. This Agreement may be
-----------------------------------
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 13.2. Entire Agreement. This Agreement, the agreements attached as
----------------
Exhibits hereto, which include, but are not limited to the Convertible
Debentures, the Warrants, the Escrow Agreement, the Custodial Agreement and the
Registration Rights Agreement, set forth the entire
21
<PAGE>
agreement and understanding of the parties relating to the subject matter hereof
and supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits to this
Agreement are incorporated herein by this reference and shall constitute part of
this Agreement as is fully set forth herein. This Agreement also supersedes that
certain Common Stock and Warrants Purchase Agreement among the parties hereto
dated as of December 30, 1999 as to Article II thereof.
Section 13.3. Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.
Section 13.4. Headings. The headings used in this Agreement are used for
--------
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 13.5. Number and Gender. There may be one or more Investors parties to
-----------------
this Agreement, which Investors may be natural persons or entities. All
references to plural Investors shall apply equally to a single Investor if there
is only one Investor, and all references to an Investor as "it" shall apply
equally to a natural person.
Section 13.6. Replacement of Certificates. Upon (i) receipt of evidence
---------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Shares or Warrants or any Warrant
Shares and (ii) in the case of any such loss, theft or destruction of such
certificate, upon delivery of an indemnity agreement or security reasonably
satisfactory in form to the Company and its transfer agent or (iii) in the case
of any such mutilation, on surrender and cancellation of such certificate, the
Company at its expense will execute and deliver, in lieu thereof, a new
certificate of like tenor.
Section 13.7. Fees and Expenses. Each of the Company and the Investors agrees
-----------------
to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of counsel and accountants to the Investors, in an amount equal to
$20,000 all as set forth in the Escrow Agreement.
Section 13.8. Brokerage. Each of the parties hereto represents that it has had
---------
no dealings in connection with this transaction with any finder or broker who
will demand payment of any fee or commission from the other party except for the
fees described in the Escrow Agreement. The Company on the one hand, and the
Investors, on the other hand, agree to indemnify the other against and hold the
other harmless from any and all liabilities to any person claiming brokerage
commissions or finder's fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby.
Section 13.9. Publicity. The Company agrees that it will not issue any press
---------
release or other public announcement of the transactions contemplated by this
Agreement without the prior consent of the Investors, which shall not be
unreasonably withheld nor delayed by more than two
22
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(2) Trading Days from their receipt of such proposed release. No release shall
name the Investors without their express consent.
Section 13.10. Currency. Unless specified otherwise, all references to
--------
dollars ($) in this Agreement and all other agreements which are attached as
exhibits hereto, are references to United States Dollars.
IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement
to be executed by the undersigned, thereunto duly authorized, as of the date
first set forth above.
Qiao Xing Universal Telephone, Inc.
By:__________________________________
Rui Lin Wu, Chairman
Address: 175 Bloor Street East Investor: BH Capital Investments, L.P.
South Tower, 7/th/ Floor By: HB and Co., Inc., its General Partner
Toronto, Ontario, Canada M4W 3R8
Fax: 416-929-5314 By:__________________________________
One-half of total commitment Name: Henry Brachfeld, President
Address: 33 Prince Arthur Avenue Investor: Excalibur Limited Partnership
Toronto, Ontario, Canada M5R 1B2 By: Excalibur Capital Management, Inc.,
Fax: 416-964-8868 its general partner
One-half of total commitment By:__________________________________
Name: William Hechter, President
23
<PAGE>
EXHIBIT H
0% CONVERTIBLE 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
"ACT") IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION PROVIDED
BY REGULATION S. THE SECURITIES ARE RESTRICTED AND MAY NOT BE
OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER
THE ACT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
No. 2 US $5,000,000
Qiao Xing Universal Telephone, Inc.
0% CONVERTIBLE DEBENTURE DUE DECEMBER 31, 2004
THIS DEBENTURE is issued by Qiao Xing Universal Telephone, Inc., a
company organized and existing under the laws of the British Virgin Islands (the
"Company") and is designated as its 0% Convertible Debenture Due December 31,
2004.
FOR VALUE RECEIVED, the Company promises to pay to Excalibur Limited
Partnership or permitted assigns (the "Holder"), the principal sum of Five
Million Dollars (US) ($US5,000,000) on December 31, 2004 (the "Maturity Date").
This Debenture shall not bear any interest. The Company will pay the principal
of this Debenture on the Maturity Date to the registered holder of this
Debenture and addressed to such holder at the last address appearing on the
Debenture Register in the form of Common Stock at the Conversion Price on the
Maturity Date. The forwarding of such Common Stock shall constitute a payment of
principal hereunder and shall satisfy and discharge the liability for principal
of this Debenture to the extent of the sum represented by such Common Stock.
This Debenture may not be prepaid without the express written consent of the
Holder.
This Debenture is subject to the following additional provisions:
1. 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. The Holder shall deliver written
notice to the Company of any proposed transfer of this Debenture. In the event
of any proposed transfer of this Debenture less than forty-one (41) days after
the date hereof, 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
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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. This Debenture has been executed and
delivered pursuant to the Convertible Debenture and Warrants Purchase Agreement
dated as of, May 24, 2000 between the Company and the original Holder (the
"Purchase Agreement"), and is subject to the terms and conditions of the
Purchase Agreement, which are, by this reference, incorporated herein and made a
part hereof. Capitalized terms used and not otherwise defined herein shall have
the meanings set forth for such terms in the Purchase Agreement.
2. The Holder of this Debenture is entitled, at its option, to
convert at any time commencing on the date hereof, the entire principal amount
of this Debenture or any portion thereof, into shares of Common Stock of the
Company ("Conversion Shares") at a fixed conversion price for each share of
Common Stock ("Conversion Price") equal to $25.00 (adjusted for any subsequent
stock splits or the like). On and after forty-one (41) days from the date
hereof, the Holder of this Debenture is entitled to convert up to one third of
the principal amount of this Debenture or any portion thereof at a variable
Conversion Price equal to the lower of (a) $25.00 (adjusted for any subsequent
stock splits or the like) or (b) the Reset Price. The Reset Price shall apply
only if the closing bid price for the Common Stock on the Trading Day prior to
the Conversion Date is less than $28.7356. The "Reset Price" shall be 87% of the
Market Price. The Market Price shall be the average of the two lowest closing
bid prices of the Common Stock during the fifteen (15) Trading Days ending on
the Trading Day prior to the Conversion Date. On and after one hundred thirty
(130) days from the date hereof, the Holder of this Debenture is entitled to
convert up to two thirds of the principal amount of this Debenture (on a
cumulative basis) or any portion thereof at a variable Conversion Price equal to
the lower of (a) $25.00 (adjusted for any subsequent stock splits or the like)
or (b) the Reset Price. The Reset Price shall apply only if the closing bid
price for the Common Stock on the Trading Day prior to the Conversion Date is
less than $28.7356. On and after two hundred twenty (220) days from the date
hereof, the Holder of this Debenture is entitled to convert up to the entire
principal amount of this Debenture or any portion thereof at a variable
Conversion Price equal to the lower of (a) $25.00 (adjusted for any subsequent
stock splits or the like) or (b) the Reset Price. The Reset Price shall apply
only if the closing bid price for the Common Stock on the Trading Day prior to
the Conversion Date is less than $28.7356. Until 180 days after the date hereof,
the Reset Price shall not be less than $5.00 (adjusted for subsequent stock
splits or the like) (the "Floor Price").
(a) Required Adjustments. Subject to the exclusions contained in
--------------------
subparagraph (d) below, if during the period ending twelve months after the date
hereof (the "MFN Period"), the Company sells any shares of its Common Stock at a
per share selling price ("Per Share Selling Price") lower than $25.00 per share
(as adjusted for any subsequent stock splits and the like) other than pursuant
to conversion of this Debenture or another Debenture of the same series issued
pursuant to the Purchase Agreement, the fixed Conversion Price of $25.00 shall
be adjusted downward to equal such lower Per Share Selling Price. The Company
shall give the Holder written notice of any such sale within 24 hours of the
closing of any such sale.
(b) Definitions. For the purpose of this Paragraph 2, the term "Per Share
-----------
Selling Price" shall mean the amount actually paid by third parties for each
share of Common Stock. A sale of shares of Common Stock shall include the sale
or issuance of rights, options, warrants or convertible securities ("derivative
securities") under which the Company is or may become obligated to issue shares
of Common Stock, and in such circumstances the sale of Common Stock shall be
deemed to have occurred at the time of the issuance of the derivative securities
and the Per Share Selling Price of the Common Stock covered thereby shall also
include the exercise or conversion price thereof (in addition to the
consideration per underlying share of Common Stock received by the Company upon
such sale or issuance of the derivative security). In case of any such security
issued within the MFN
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Period in a "Variable Rate Transaction" or an "MFN Transaction" (each as defined
below), the Per Share Selling Price shall be deemed to be the lowest conversion
or exercise price at which such securities are converted or exercised or might
have been converted or exercised in the case of a Variable Rate Transaction, or
the lowest adjustment price in the case of an MFN Transaction. If shares are
issued for a consideration other than cash, the per share selling price shall be
the fair value of such consideration as determined in good faith by the Board of
Directors of the Company.
The term "Variable Rate Transaction" shall mean a transaction in which the
Company issues or sells (a) any debt or equity securities that are convertible
into, exchangeable or exercisable for, or include the right to receive
additional shares of Common Stock either (x) at a conversion, exercise or
exchange rate or other price that is based upon and/or varies with the trading
prices of or quotations for the Common Stock at any time after the initial
issuance of such debt or equity securities, or (y) with a fixed conversion,
exercise or exchange price that is subject to being reset at some future date
after the initial issuance of such debt or equity security or upon the
occurrence of specified or contingent events directly or indirectly related to
the business of the Company or the market for the Common Stock (but excluding
standard stock split anti-dilution provisions), or (b) any securities of the
Company pursuant to an "equity line" structure which provides for the sale, from
time to time, of securities of the Company which are registered for resale
pursuant to the Securities Act.
The term "MFN Transaction" shall mean a transaction in which the Company
issues or sells any securities in a capital raising transaction or series of
related transactions (the "New Offering") which grants to an investor (the "New
Investor") the right to receive additional shares based upon future transactions
of the Company on terms more favorable than those granted to the New Investor in
the New Offering.
(c) 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 Paragraph 2 shall be applied in a fair,
equitable and reasonable manner so as to give effect, as nearly as may be, to
the purposes hereof.
(d) Exclusions. Paragraph 2(a) shall not apply to (i) sales of shares of
----------
Common Stock by the Company upon conversion or exercise of any convertible
securities, options or warrants outstanding prior to the date hereof; or (ii)
sales of shares of Common Stock by the Company pursuant to the provisions of any
shareholder-approved option or similar plan heretofore adopted by the Company.
3. The Company shall at all times prior to the conversion in full or
payment in full of this Debenture reserve a sufficient number of shares of
Common Stock to permit the Holder to convert the entire principal amount of this
Debenture at the Floor Price.
4. Notwithstanding anything to the contrary contained herein, unless the
shareholders of the Company shall have approved such issuance in accordance with
the requirements of the Principal Market, in the event that a conversion (when
aggregated with all prior conversions of portions of this Debenture and the
Warrants and the 1,210,001 shares and warrant shares issued or issuable in
connection with that certain Common Stock and Warrants Purchase Agreement of the
Company dated as of December 30, 1999) requires the Company to issue a number of
shares of Common Stock which would exceed 19.9% of the number of shares of
Common Stock issued and outstanding on December 31, 1999, the Company shall
issue only such number of shares of Common Stock as shall not exceed such limit
and, only as to conversions of this Debenture (or the portion thereof then being
converted) occurring on or after the 61st day after the Closing Date, shall pay
the Holder cash in the
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amount of the Volume Adjusted Price on the Conversion Date for the number of
shares of Common Stock in excess of such number of shares into which this
Debenture (or the portion thereof then being converted) is then convertible at
the Conversion Price. Any payments under this Paragraph 4 shall be made to an
account designated in writing by the Holder to the Company when the Notice of
Conversion is given. The rights of all holders of Convertible Debentures issued
under the Purchase Agreement to convert their Convertible Debentures into shares
of Common Stock shall be prorated among such holders based on their respective
percentage holdings at the time of conversion of the aggregate outstanding
amount of all Convertible Debentures in order to comply with the aforesaid
overall limitation. Any conversion which is paid in cash under this Paragraph 4
shall be paid within five (5) Trading Days of the Conversion Date.
5. [intentionally omitted]
6. (a) Conversion shall be effectuated by surrendering this Debenture to
the Company's attorney together with the form of conversion notice attached
hereto as Exhibit A (the "Notice of Conversion"), executed by the Holder of this
Debenture evidencing such Holder's intention to convert this Debenture or a
specified portion (as above provided) hereof, and accompanied, if required by
the Company, by proper assignment hereof in blank. No fraction of a share or
scrip representing a fraction of a share 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 the Notice of Conversion duly executed
to the Company. Facsimile delivery of the Notice of Conversion shall be accepted
by the Company at facsimile number 303-770-7332, Attn.: Andrew N. Bernstein,
Esq. Certificates representing Common Stock upon conversion will be delivered to
the Holder within three (3) Trading Days from the date the Notice of Conversion
is delivered to the Company. Delivery of shares upon conversion shall be made to
the address specified by the Holder in the Notice of Conversion. The Company's
attorney shall provide a written acknowledgement to the Holder of the remaining
principal amount of this Debenture, and shall maintain this Debenture in trust
until it has been converted or repaid in full. If the Company shall fail to
deliver the certificates representing the Common Stock within two (2) Trading
Days after the Investors have given written notice via facsimile to the
Custodian that such Common Stock has not been delivered within three (3) Trading
Days of the Custodian delivering notice to the Transfer Agent (a copy of such
notice shall be simultaneously delivered to the Investors via facsimile) to
deliver such Common Stock ("Transfer Agent Notice Date") (the Transfer Agent
Notice Date shall not occur more than three (3) Trading Days after the date of
Notice of Conversion for the purpose of calculating liquidated damages pursuant
to this provision), the Company shall pay the Holder liquidated damages of 2%
per day of the principal amount sought to be converted. Such liquidated damages
shall be paid within seven (7) Trading Days of demand therefor by the Holder.
(b) Nothing herein shall limit Holder's right to pursue injunctive relief
and/or actual damages for the Company's failure to issue and deliver Common
Stock to the holder, including, without limitation, the Holder's actual losses
occasioned by any "buy-in" of Common Stock necessitated by such late delivery.
Furthermore, in addition to any other remedies which may be available to the
Holder, in the event that the Company fails for any reason to effect delivery of
such shares of Common Stock within three (3) Trading Days from the date the
Notice of Conversion is delivered to the Company, the Holder 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 Holder shall each be restored to
their respective positions immediately prior to delivery of such Notice of
Conversion, and in such event no late payments shall be due in connection with
such withdrawn conversion.
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(c) If at any time (a) the Company challenges, disputes or denies the
right of the Holder to effect the conversion of this Debenture into Common Stock
or otherwise dishonors or rejects any Notice of Conversion delivered in
accordance with this Paragraph 6 or (b) any Company stockholder who is not and
has never been an Affiliate (as defined in Rule 405 under the Securities Act of
1933, as amended) of the Holder obtains a judgment or any injunctive relief from
any court or public or governmental authority which denies, enjoins, limits,
modifies, delays or disputes the right of the holder hereof to effect the
conversion of this Debenture into Common Stock, then the Holder shall have the
right, by written notice, to require the Company to promptly redeem this
Debenture for cash at a redemption price equal to one hundred thirty percent
(130%) of the outstanding principal amount hereof and all accrued and unpaid
interest hereon. Under any of the circumstances set forth above, if the Holder
is the prevailing party in such dispute, the Company shall be responsible for
the payment of all costs and expenses of the Holder, including reasonable legal
fees and expenses, as and when incurred in disputing any such action or pursuing
its rights hereunder (in addition to any other rights of the Holder), subject in
the case of clause (b) to the Company's right to control and assume the defense
of any such action. In the absence of an injunction precluding the same, the
Company shall issue shares upon a properly noticed conversion.
7. No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of this
Debenture at the time, place, and rate, and in the coin or currency or shares of
Common Stock, herein prescribed. This Debenture is a direct obligation of the
Company.
8. 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.
9. This Debenture shall be governed by and construed in accordance with
the laws of the Province of Ontario. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of Toronto or the state courts of the Province of Ontario sitting in the
City of Toronto 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.
10. 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.
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<PAGE>
11. In no event shall the Holder be permitted to convert this Debenture
for shares of Common Stock in excess of the amount of this Debenture upon the
conversion of which, (x) the number of shares of Common Stock owned by such
Holder (other than shares of Common Stock issuable upon conversion of this
Debenture) plus (y) the number of shares of Common Stock issuable upon
conversion of this Debenture, would be equal to or exceed 9.9% of the number of
shares of Common Stock then issued and outstanding, including shares issuable
upon conversion of this Debenture held by such Holder after application of this
Paragraph 11. As used herein, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder. To the extent that the
limitation contained in this Paragraph 11 applies, the determination of whether
this Debenture is convertible (in relation to other securities owned by the
Holder) and of which a portion of this Debenture is convertible shall be in the
sole discretion of such Holder, and the submission of a Notice of Conversion
shall be deemed to be such Holder's determination of whether this Debenture is
convertible (in relation to other securities owned by such holder) and of which
portion of this Debenture is convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination. Nothing contained herein shall be
deemed to restrict the right of a holder to convert this Debenture into shares
of Common Stock at such time as such conversion will not violate the provisions
of this Paragraph 11. The provisions of this Paragraph 11 may be waived by the
Holder of this Debenture upon not less than 75 days' prior notice to the
Company, and the provisions of this Paragraph 11 shall continue to apply until
such 75th day (or such later date as may be specified in such notice of waiver).
No conversion of this Debenture in violation of this Paragraph 11 but otherwise
in accordance with this Debenture shall affect the status of the Common Stock
issued upon such conversion as validly issued, fully-paid and nonassessable. If
on the Maturity Date the conversion of this Debenture into Common Stock pursuant
to Paragraph 4 would cause the limit contained in the first sentence of this
Paragraph 11 to be exceeded, such conversion of this Debenture shall occur up to
such limit and the remaining unconverted portion of this Debenture shall be
converted into Common Stock (1) in accordance with one or more Notices of
Conversion delivered by the Holder or (2) 65 days after the Maturity Date,
whichever is earlier.
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: May __, 2000
Qiao Xing Universal Telephone, Inc.
By:______________________________________
Rui Lin Wu, President
Attest:
_______________________
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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 Qiao Xing Universal Telephone, Inc. (the "Company") according to the
conditions hereof, as of the date written below.
Date of Conversion* ________________________________________________________
Applicable Conversion Price * ______________________________________________
Signature __________________________________________________________________
[Name]
Address: ___________________________________________________________________
___________________________________________________________________
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<PAGE>
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY OTHER APPLICABLE SECURITIES LAWS IN RELIANCE UPON THE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY REGULATION S AND
SUCH OTHER SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON
EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE
PROVISIONS OF THE SECURITIES ACT.
STOCK PURCHASE WARRANT
To Purchase 180,000 Shares of Common Stock of
Qiao Xing Universal Telephone, Inc.
THIS CERTIFIES that, for value received, Excalibur Limited Partnership (the
"Holder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time on or after May 26, 2000 (the "Initial Exercise Date")
and on or prior to the close of business on May 26, 2005 (the "Termination
Date") but not thereafter, to subscribe for and purchase from Qiao Xing
Universal Telephone, Inc., a company duly incorporated and validly existing
under the laws of the British Virgin Islands (the "Company"), up to One Hundred
Eighty Thousand (180,000) shares (the "Warrant Shares") of Common Stock, $0.001
par value, of the Company (the "Common Stock"). The purchase price of one share
of Common Stock (the "Exercise Price") under this Warrant shall be $24.378 (110%
of the average of the closing bid prices of the Common Stock on the Nasdaq Stock
Market on the five Trading Days preceding the Closing Date of the Convertible
Debenture and Warrants Purchase Agreement dated as of May 24, 2000 pursuant to
which this Warrant has been issued (the "Purchase Agreement")). The Exercise
Price and the number of shares for which the Warrant is exercisable shall be
subject to adjustment as provided herein. In the event of any conflict between
the terms of this Warrant and the Purchase Agreement, the Purchase Agreement
shall control. Capitalized terms used and not otherwise defined herein shall
have the meanings set forth for such terms in the Purchase Agreement. The
Exercise Price shall be reduced to equal 110% of the average of the closing bid
prices of the Common Stock on the Nasdaq Stock Market on the five Trading Days
preceding the 180th day after the Closing Date, if such price would be lower
than the initial Exercise Price (adjusted for any subsequent stock splits or
reverse splits).
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1. Title to Warrant. Prior to the Termination Date and subject to
----------------
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
-----------------------
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Except as provided in Section 4 herein, exercise
-------------------
of the purchase rights represented by this Warrant may be made at any time or
times on or after the Initial Exercise Date, and before the close of business on
the Termination Date by the surrender of this Warrant and the Notice of Exercise
Form annexed hereto duly executed, at the office of the Company (or such other
office or agency of the Company as it may designate by notice in writing to the
registered holder hereof at the address of such holder appearing on the books of
the Company) and upon payment of the Exercise Price of the shares thereby
purchased by wire transfer or cashier's check drawn on a United States bank, the
holder of this Warrant shall be entitled to receive a certificate for the number
of shares of Common Stock so purchased. Certificates for shares purchased
hereunder shall be delivered to the holder hereof within three (3) Trading Days
after the date on which this Warrant shall have been exercised as aforesaid, if
such shares have not been previously delivered to an escrow agent for the
benefit of the Holder. This Warrant shall be deemed to have been exercised and
such certificate or certificates shall be deemed to have been issued, and Holder
or any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the Exercise Price and
all taxes required to be paid by Holder, if any, pursuant to Section 5 prior to
the issuance of such shares, have been paid. If this Warrant shall have been
exercised in part, the Company shall, at the time of delivery of the certificate
or certificates representing Warrant Shares, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased shares of Common
Stock called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant. . The Holder shall also have the right to a
"cashless exercise" in which the Holder shall be entitled to receive a
certificate for the number of shares equal to the quotient obtained by dividing
[(A-B) (X)] by (A), where:
(A) = the closing price per share of Common Stock on the Trading Day preceding
the date of such election;
(B) = the Exercise Price of the Warrant; and
(X) = the number of shares issuable upon exercise of the Warrant in accordance
with the terms of this Warrant.
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4. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for shares of
---------------------------
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and the Company may require, as a condition thereto, the payment of a
sum sufficient to reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its shareholder books or
----------------
records in any manner which prevents the timely exercise of this Warrant.
7. Transfer, Division and Combination. (a) Subject to compliance with any
----------------------------------
applicable securities laws, transfer of this Warrant and all rights hereunder,
in whole or in part, shall be registered on the books of the Company to be
maintained for such purpose, upon surrender of this Warrant at the principal
office of the Company, together with a written assignment of this Warrant
substantially in the form attached hereto duly executed by Holder or its agent
or attorney and funds sufficient to pay any transfer taxes payable upon the
making of such transfer. Upon such surrender and, if required, such payment, the
Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by a
new holder for the purchase of shares of Common Stock without having a new
Warrant issued.
(b) This Warrant may be divided or combined with other Warrants upon
presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
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(c) The Company shall prepare, issue and deliver at its own expense
(other than transfer taxes) the new Warrant or Warrants under this Section 7.
(d) The Company agrees to maintain, at its aforesaid office, books
for the registration and the registration of transfer of the Warrants.
8. No Rights as Shareholder until Exercise. This Warrant does not entitle
---------------------------------------
the holder hereof to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price, the Warrant Shares so purchased shall
be and be deemed to be issued to such holder as the record owner of such shares
as of the close of business on the later of the date of such surrender or
payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
-------------------------------------------------
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant certificate
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it and
its transfer agent, and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Company will make and deliver a new Warrant or
stock certificate of like tenor and dated as of such cancellation, in lieu of
such Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
---------------------------------
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. Adjustments of Exercise Price and Number of Warrant Shares. (a) Stock
---------------------------------------------------------- -----
Splits, etc. The number and kind of securities purchasable upon the exercise of
-----------
this Warrant and the Exercise Price shall be subject to adjustment from time to
time upon the happening of any of the following. In case the Company shall (i)
pay a dividend in shares of Common Stock or make a distribution in shares of
Common Stock to holders of its outstanding Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock or (iv) issue any shares of its capital stock
in a reclassification of the Common Stock, then the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such adjustment of the kind and number
of Warrant Shares or other securities of the Company which are purchasable
hereunder, the holder of this Warrant shall thereafter be entitled to purchase
the number of Warrant Shares or other securities resulting from such adjustment
at an Exercise Price per Warrant Share or other security obtained by multiplying
the Exercise Price in effect immediately prior to such adjustment by the number
of Warrant Shares purchasable pursuant hereto immediately prior to such
adjustment and dividing by the number of Warrant Shares or other securities of
the Company resulting from such adjustment. An adjustment
4
<PAGE>
made pursuant to this paragraph shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.
(b) Reorganization, Reclassification, Merger, Consolidation or
----------------------------------------------------------
Disposition of Assets. In case the Company shall reorganize its capital,
---------------------
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of this Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of shares of
Common Stock for which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this Section 11.
For purposes of this Section 11, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to redemption and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 11 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
12. Voluntary Adjustment by the Company. The Company may at any time
-----------------------------------
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
13. Notice of Adjustment. Whenever the number of Warrant Shares or number
--------------------
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
promptly mail by registered or certified mail, return receipt requested, to the
holder of this Warrant notice of such adjustment or adjustments setting forth
the number of Warrant Shares (and other securities or property) purchasable upon
the exercise of this Warrant and the Exercise Price of such Warrant Shares (and
other securities or property) after such adjustment, setting forth a brief
statement of the facts
5
<PAGE>
requiring such adjustment and setting forth the computation by which such
adjustment was made. Such notice, in the absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
14. Notice of Corporate Action. If at any time:
--------------------------
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 30
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 16(c).
6
<PAGE>
15. Authorized Shares. The Company covenants that during the period the
-----------------
Warrant is exercisable, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is exercisable acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
Before taking any action which would cause an adjustment reducing the
current Exercise Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock at
such adjusted Exercise Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
16. Miscellaneous.
-------------
(a) Jurisdiction. This Warrant shall be binding upon any successors
------------
or assigns of the Company. This Warrant shall constitute a contract under the
laws of Ontario,
7
<PAGE>
Canada, without regard to its conflict of law, principles or rules. Jurisdiction
and venue shall be as set forth in Article X of the Purchase Agreement.
(b) Nonwaiver and Expenses. No course of dealing or any delay or
----------------------
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Termination Date. If the
Company fails to comply with any provision of this Warrant, the Company shall
pay to Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys' fees, including
those of appellate proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder if Holder is the prevailing party.
(c) Notices. Any notice, request or other document required or
-------
permitted to be given or delivered to the holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Purchase Agreement.
(d) Limitation of Liability. No provision hereof, in the absence of
-----------------------
affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall give rise
to any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
(e) Remedies. Holder, in addition to being entitled to exercise all
--------
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
(f) Successors and Assigns. Subject to applicable securities laws,
----------------------
this Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Holder. The provisions of this Warrant are intended to
be for the benefit of all Holders from time to time of this Warrant and shall be
enforceable by any such Holder.
(g) Indemnification. The Company agrees to indemnify and hold
---------------
harmless Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; provided,
--------
however, that the Company will not be liable hereunder to the extent that any
-------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
8
<PAGE>
(h) Amendment. This Warrant may be modified or amended or the
---------
provisions hereof waived with the written consent of the Company and the Holder.
(i) Severability. Wherever possible, each provision of this Warrant
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
(j) Headings. The headings used in this Warrant are for the
--------
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated: May ___, 2000
Qiao Xing Universal Telephone, Inc.
By: ______________________________________________
Rui Lin Wu, Chairman
9
<PAGE>
NOTICE OF EXERCISE
To: Qiao Xing Universal Telephone, Inc.
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock (the "Common Stock"), of Qiao Xing Universal Telephone, Inc.
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the exercise price in full, together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
____________________________
(Name)
____________________________
(Address)
____________________________
Dated:
______________________________
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
____________________________________________________________________.
____________________________________________________________________
Dated: ______________, ________
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ______________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
<PAGE>
PROXY This Proxy is Solicited on Behalf
of the Board of Directors
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
QIAO XING UNIVERSAL TELEPHONE, INC.
TO BE HELD JULY 21, 2000
The undersigned hereby appoints Rui Lin Wu 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
Qiao Xing Universal Telephone, Inc. held of record by the undersigned as of
the close of business on June 15, 2000, at the Special Meeting of Shareholders
to be held on Friday, July 21, 2000, or any adjournment or postponement
thereof.
<TABLE>
<S> <C> <C> <C>
1. To ratify and approve the Common Stock and Warrants FOR AGAINST ABSTAIN
Purchase Agreement dated as of December 30, 1999, and [_] [_] [_]
all transactions contemplated thereby, including the
issuance of up to $20,000,000 of our common stock and
shares issuable upon exercise of warrants to purchase
our common stock (the "Sale of Common Stock
Proposal").
2. To ratify and approve the Convertible Debenture and FOR AGAINST ABSTAIN
Warrants Purchase Agreement dated as of May 24, 2000, [_] [_] [_]
and all transactions contemplated thereby, including
the issuance of $10,000,000 of our 0% Convertible
Debentures and shares issuable upon exercise of
warrants to purchase our common stock (the "Sale of
Convertible Debentures Proposal").
</TABLE>
<PAGE>
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 IN FAVOR OF ITEM (1) AND
ITEM (2).
The undersigned hereby revokes all previous proxies relating to the shares
covered hereby and confirms all that said 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: ,
2000
_________________________
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.
