SINOENERGY CORPORATION
$16,000,000 12% Guaranteed Senior Notes due
2012
and
$14,000,000 3.0% Guaranteed Senior Convertible Notes due
2012
NOTES PURCHASE AGREEMENT (THE
“AGREEMENT”)
September
1, 2007
[Abax
Lotus Ltd.
c/o
Abax Global Capital (Hong Kong) Limited
Suite
6708, 67/F Two International Finance Centre
8
Finance Street
Central,
Hong Kong SAR]
[CCIF
Petrol Limited
Kingston
Chambers, PO Box 173
Road
Town, Tortola,
British
Virgin Islands]
Ladies
and Gentlemen:
Sinoenergy
Corporation, a Nevada corporation (the “
Company ”),
the other Group Companies (as defined below) and Messrs. DENG
Tianzhou and HUANG Bo (the “
Controlling Shareholders ”),
hereby agree with the Purchaser (as defined below) as
follows:
1.
Issuance of Securities .
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(a)
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Subject
to the terms and conditions of this Agreement, the Company will, at
the Closing provided for in
Section 3 ,
(i) issue and sell to [Abax Lotus Ltd.][CCIF Petrol Limited] (the
“
Purchaser ”)
and the Purchaser will purchase from the Company, (x) [107]
1
[53]
2
of
the Company’s 12% Guaranteed Senior Notes due 2012 (the
“
Senior Notes ”)
of $100,000 principal amount each, and (y) [93]
1 [47]
2 of
the Company’s 3.0% Guaranteed Senior Convertible Notes due
2012 (the “
Convertible Notes ”,
and together with the Senior Notes, the “
Notes ”)
of $100,000 principal amount each, convertible into shares of
common stock of the Company, par value $0.001 per share (the
“
Common Stock ”),
at an initial conversion price of $3.17 per share, and (ii) cause
the Guarantor to issue the Guarantees (as hereinafter
defined).
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(b)
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Contemporaneously
with entering into this Agreement, the Company is entering into
separate Note Purchase Agreements (the “
Other Agreements ”)
substantially similar to this Agreement with each of the other
purchasers named in
Schedule I (the
“
Other Purchasers ”),
providing for the sale at the “Closing Date” (as set
forth in the Other Agreements) to each of the Other Purchasers of
the Notes specified opposite its name in
Schedule I .
Each of this Agreement and the Other Agreements is a separate
agreement and the sale and issuance of the Securities (as defined
below) is a separate sale and issuance. The Purchaser’s
obligation hereunder and the obligations of each Other Purchaser
under each Other Agreement are several and not joint obligations
and the Purchaser shall have no obligation under any Other
Agreement and no liability to any Person for the performance or
non-performance by any Other Purchaser thereunder.
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(c)
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The
Senior Notes are to be issued pursuant to the provisions of an
indenture (the “
Senior Note Indenture ”),
to be dated as of the Closing Date (as defined in
Section 3 ),
by and among the Company, the Guarantor and DB Trustees (Hong Kong)
Limited, as trustee (the “
Trustee ”),
substantially in the form attached hereto as
Exhibit A-1 ,
and the Convertible Notes are to be issued pursuant to the
provisions of an indenture (the “
Convertible Note Indenture ”,
and together with the Senior Note Indenture, the “
Indentures ”),
to be dated as of the Closing Date, by and among the Company, the
Guarantor and the Trustee, substantially in the form attached
hereto as
Exhibit A-2 .
As used herein, the term “
Securities ”
shall mean, collectively, the Notes, the Common Stock issuable upon
the conversion of the Convertible Notes (the “
Conversion Shares ”)
and the Guarantees.
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(d)
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Capitalized
terms used but not defined herein shall have the meanings given to
such terms in the Indentures.
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2.
Terms of Offering .
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(a)
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Pursuant
to the Indentures, the Company shall cause Sinoenergy Holding
Limited, a British Virgin Islands corporation (“
Sinoenergy Holdings ”),
a wholly-owned subsidiary of the Company and all direct and
indirect subsidiaries of the Company (each, a “
Guarantor ”),
but not including any direct and indirect subsidiaries of the
Company organized in the People’s Republic of China
(“
PRC ”)
unless a change in PRC law or official interpretation in PRC law
permits such guarantees without governmental approval or
registration, to irrevocably and unconditionally guarantee, on a
senior secured basis, to the Purchaser and to the Trustee the
payment and performance of the Company’s obligations under
the Documents (as defined below) (collectively, the “
Guarantees ”).
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(b)
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The
Notes and the Guarantees will be secured by:
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(i)
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a
perfected first-priority Lien on all the Company’s bank
accounts set forth on
Schedule 2(b)(i) pursuant
to a pledge and security agreement to be dated as of the Closing
Date between DB Trustees (Hong Kong) Limited, as the collateral
agent (in such capacity, the “
Account Collateral Agent ”)
and the Company, substantially in the form attached hereto
as
Exhibit B (the
“
Account Pledge Agreement ”);
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(ii)
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a
perfected first-priority Lien on all of the equity interests of the
Guarantors pursuant to a share pledge agreement to be dated as of
the Closing Date between DB Trustees (Hong Kong) Limited, as the
collateral agent (in such capacity, the “
Collateral Agent ”),
the Company and the Guarantor, substantially in the form attached
hereto as
Exhibit C (the
“
Offshore Share Pledge Agreement ”),
together with the Uniform Commercial Code financing statement, the
“
Security Documents ”).
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(c)
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The
Notes will be offered and sold to the Purchaser pursuant to
Regulation S under the Securities Act of 1933, as amended (the
“
Act ”).
Upon original issuance thereof, and until such time as the same is
no longer required under the applicable requirements of the Act,
the Notes and the Conversion Shares shall bear the legends relating
to the offer and the sale of the Notes and the Conversion Shares as
required by (i) Regulation S under the Act or (ii) any other
applicable laws or regulations relating to the issuance of the
Notes.
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(d)
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The
Purchaser will be entitled to certain investor rights as set forth
in the Investor Rights Agreement to be entered into by and among
the Company, the Controlling Shareholders, the Purchaser and the
other parties thereto, dated the Closing Date, in the form attached
hereto as
Exhibit D (the
“
Investor Rights Agreement ”).
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(e)
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The
Purchaser will be entitled to certain registration rights as set
forth in the Registration Rights Agreement to be entered into by
and among the Company and the Purchaser, dated the Closing Date, in
the form attached hereto as
Exhibit E (the
“
Registration Rights Agreement ”).
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(f)
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The
net proceeds from the sale and issuance of the Notes shall be
deposited by shareholder loan or capital contribution made by
Sinoenergy Holdings to the WFOE, and shall be deposited into a bank
account with DB Trustees (Hong Kong) Limited (or its affiliate) as
the onshore escrow agent (the “
Onshore Escrow Agent ”)
pursuant to the escrow agreement to be entered into by and among
the WFOE, the Purchaser and the Onshore Escrow Agent, dated the
Closing Date, in the form attached hereto as
Exhibit F (the
“
Escrow Agreement ”).
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(g)
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This
Agreement, the Indentures, the Notes, the Guarantees, the Security
Documents, the Investor Rights Agreement, the Registration Rights
Agreement and the Escrow Agreement are, collectively, referred to
herein as the “
Documents .”
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3.
Delivery .
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(a)
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The
delivery of the Notes to be purchased by the Purchaser shall occur
at the Shanghai office of Weil, Gotshal & Manges LLP, at 4:00
p.m., Shanghai time, at a closing (the “
Closing ”)
on September 14, 2007 or on such other Business Day thereafter as
may be agreed upon in writing by the Company and the Purchaser
(such date referred to herein as the “
Closing Date ”).
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(b)
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Subject
to the terms and conditions herein, at the Closing, the Company
shall deliver to the Purchaser one or more global certificates
representing each of the Senior Notes and the Convertible Notes,
registered in such names and denominations as the Purchaser may
request, against payment by the Purchaser of the aggregate purchase
price in the amount of $[20]
1 [10]
2 million
for the Senior Notes and the Convertible Notes (as more
specifically set forth in
Schedule A hereto)
by immediately available funds bank wire transfer to such bank
account of the Company as the Offshore Escrow Agent shall have
theretofore designated to the Company and the Purchaser pursuant to
the Offshore Escrow Agreement.
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(c)
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The
Senior Notes and the Convertible Notes, each to be represented by
one or more global certificates in book-entry form, will be
deposited on the Closing Date, by or on behalf of the Company, with
the Trustee as
common depositary for Clearstream Banking, sociėtė
anonyme (or any successor securities agency) ( “
Clearstream ”)
and Euroclear Bank, S.A./N.V. (or any successor securities clearing
agency) (“
Euroclear ”,
together with Clearstream, the “
Clearing Facilities ”),
or its designated custodian, and registered in the name of the
Trustee. The Common Stock is approved for quotation on the OTC
Bulletin Board (the “
Trading Market ”).
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4.
Representations and Warranties of the Group Companies and the
Controlling Shareholders .
Each of the Company, Sinoenergy Holdings, Qingdao Sinogas General
Machinery Company, Ltd., a wholly-owned subsidiary of Sinoenergy
Holdings, incorporated under the laws of the PRC (the
“
WFOE ”,
and together with the Company, Sinoenergy Holdings and any other
Subsidiary (as defined in
Section 4(b)(i) below),
the “
Group Companies ”),
and the Controlling Shareholders, jointly and severally, represents
and warrants to the Purchaser that, except as set forth in the
Disclosure Schedule attached hereto as
Exhibit G which
exceptions shall be deemed to part of the representations and
warranties made hereunder, the following representations and
warranties are true and correct and will on the Closing Date be
true and correct. The Disclosure Schedule shall be arranged in
sections corresponding to the numbered and lettered sections
contained in this
Section 4 .
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(a)
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SEC Reports; Financial Statements .
The Company has filed all reports, schedules, forms, statements and
other documents required to be filed by it under the Act and the
Securities and Exchange Act of 1934, as amended (the “
Exchange Act ”),
since January 1, 2007, including pursuant to Section 13(a), 13(c)
or 15(d) thereof (the foregoing materials, including the exhibits
thereto and documents incorporated by reference therein, being
collectively referred to herein as the “
SEC Reports ”)
on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration
of any such extension. As of the date of filing, in the case of SEC
Reports filed pursuant to the Exchange Act (and to the extent such
SEC Report was amended, then as of the date of filing of such
amendment), and as of the date of effectiveness in the case of SEC
Reports filed pursuant to the Act (and to the extent such SEC
Report was amended, then as of the date of effectiveness of such
amendment), the SEC Reports complied in all material respects with
the requirements of the Act and the Exchange Act and the rules and
regulations of the Securities and Exchange Commission (the
“
Commission ”)
promulgated thereunder, as applicable, and none of the SEC Reports,
as of the date of filing, in the case of SEC Reports filed pursuant
to the Exchange Act (and to the extent such SEC Report was amended,
then as to the date of filing of such amendment), and as of the
date of effectiveness in the case of SEC Reports filed pursuant to
the Act (and to the extent such SEC Report was amended, then as of
the date of effectiveness of such amendment), contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading. Except as disclosed in
Schedule 4(a) of
the Disclosure Schedule, the financial statements of the Company
included in the SEC Reports have been prepared in accordance with
the applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at
the time of filing, or if not so prepared, were corrected in a
subsequent filing with the Commission. Such financial statements
have been prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis during
the periods involved (“
GAAP ”),
except as may be otherwise specified in such financial statements,
the notes thereto or in
Schedule 4(a) of
the Disclosure Schedule, and except that unaudited financial
statements may not contain all footnotes required by GAAP, and
fairly present in all material respects the financial condition,
results of operations and cash flows of the Company and its
consolidated subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.
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(b)
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Ownership of Shares of Subsidiaries; Affiliates
.
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(i)
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Schedule 4(b)(i) of
the Disclosure Schedule contains (except as noted therein) complete
and correct lists of each individual partnership, limited liability
company, joint venture, corporation, association, trust or any
other entity or organization (collectively, a “
Person ”)
in which the Company (i) owns, directly or indirectly, a majority
of its capital stock or similar equity interests or (ii) otherwise
maintains, directly or indirectly, control over management,
operations and decision-making processes (each, a “
Subsidiary ”
and collectively, the “
Subsidiaries ”),
showing, as to each Subsidiary, the correct name thereof, the
jurisdiction of its organization, and the percentage of shares of
each class of its capital stock or similar equity interests
outstanding owned by the Company and each other
Subsidiary.
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(ii)
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All
of the outstanding shares of capital stock or similar equity
interests of each Subsidiary shown in
Schedule 4(b)(i) of
the Disclosure Schedule as being owned by the Company and its
Subsidiaries have been validly issued, are fully paid and
non-assessable and are owned, directly or indirectly, by the
Company or another Subsidiary free and clear of any Lien, except as
otherwise set forth on
Schedule 4(b)(i) of
the Disclosure Schedule.
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(iii)
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No
Subsidiary is a party to, or otherwise subject to any legal or
regulatory restriction or any agreement (other than this Agreement,
the restrictions disclosed in
Schedule 4(b)(iii) of
the Disclosure Schedule, and limitations imposed by corporate law
statutes) restricting the ability of such Subsidiary to pay
dividends out of profits or make any other similar distributions of
profits to the Company or any of its Subsidiaries that owns
outstanding shares of capital stock or similar equity interests of
such Subsidiary.
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(iv)
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Schedule 4(b)(iv) of
the Disclosure Schedule shows the correct names of the Group
Companies, the jurisdictions of their respective organization, and
the percentage of shares of each class of their respective capital
stock or similar equity interests outstanding owned by their
respective shareholders. All of the outstanding shares of capital
stock or similar equity interests of the Group Companies shown
in
Schedule 4(b)(iv) of
the Disclosure Schedule as being owned by their respective
shareholders have been validly issued, are fully paid and
non-assessable and are owned by such shareholders free and clear of
any Lien.
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(v)
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Except
pursuant to the Controlling Shareholders’ respective
ownership interests in the Company or as otherwise set forth
in
Schedule 4(b)(v) of
the Disclosure Schedule, none of the directors or executive
officers of the Group Companies holds, directly or indirectly, any
beneficial ownership interest in any of the
Subsidiaries.
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(vi)
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Except
as set forth in
Schedule 4(b)(vi) ,
the Company does not, directly or indirectly, beneficially own or
control a minority interest in any other company, partnership, or
other entity and has not entered into any joint venture or
strategic alliances.
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(vii)
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As
of the date hereof, Sinoenergy Holdings is the only Subsidiary not
organized in the PRC.
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(c)
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Organization .
Each of the Group Companies (i) has been duly organized, is validly
existing and is in good standing under the laws of its jurisdiction
of organization, (ii) has all requisite power and authority to
carry on its business and to own, lease and operate its properties
and assets, and (iii) is duly qualified or licensed to do business
and is in good standing as a foreign corporation or limited
liability company, as the case may be, authorized to do business in
each jurisdiction in which the nature of such business or the
ownership or leasing of such properties requires such
qualification, except where the failure to be so qualified would
not, individually or in the aggregate, have a material adverse
effect on (A) the properties, business, prospects, operations,
earnings, assets, liabilities or condition (financial or otherwise)
of the Group Companies, taken as a whole, (B) the ability of the
Group Companies to perform their respective obligations under any
Document or (C) the validity of any of the Documents or the
consummation of any of the transactions contemplated therein (each,
a “
Material Adverse Effect ”).
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(d)
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Capitalization and Voting Rights .
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(i)
Capital Stock .
The authorized capital of the Company consists, immediately prior
to the Closing, of (i) One Hundred Million (100,000,000) shares of
Common Stock, of which 31,183,376 shares of Common Stock are issued
and outstanding as of the date hereof, and (ii) Ten Million
(10,000,000) shares of preferred stock which, of which 5,692,308
shares are designated as series A convertible preferred stock, par
value $0.001 per share (the “
Series A Preferred Stock ”),
of which 234,689 shares of Series A Preferred Stock are issued and
outstanding as of the date hereof.
(ii)
Issued Shares .
As at the date hereof and immediately prior to the Closing, the
aggregate number of shares of Common Stock issued and which are
issuable pursuant to any exercise, conversion, exchange,
subscription or otherwise in connection with any warrants, options
(including pursuant to the Company’s stock option plan),
convertible securities (including the Series A Preferred Stock) or
any agreement to sell or issue Common Stock or securities which may
be exercised, converted or exchanged for Common Stock
(collectively, “
Fully-Diluted ”)
is 35,164,493. The Conversion Shares issuable upon conversion of
the Convertible Notes have been duly reserved for issuance, which
will constitute 11% of the Company’s Common Stock on a
Fully-Diluted basis. All of the issued and outstanding shares of
each of the Group Company’s shares as of the Closing are duly
authorized, validly issued, fully paid and non-assessable, were
issued in accordance with the registration or qualification
provisions of the Act and any relevant blue sky laws of the United
States of America or pursuant to valid exemptions therefrom and
were issued in compliance with other applicable laws (including,
without limitation, applicable PRC laws, rules and regulations) and
are not subject to any rescission right or put right on the part of
the holder thereof nor does any holder thereof have the right to
require the Company to repurchase such share capital.
(iii)
Voting and other Agreements .
Except as set forth on
Schedule 4(d)(iii) of
the Disclosure Schedule, there are no outstanding (A) options,
warrants or other rights to purchase from any Group Company, (B)
agreements, contracts, arrangements or other obligations of any
Group Company to issue, or (C) other rights to convert any
obligation into or exchange any securities for, in the case of each
of clauses (A) through (C), shares of capital stock of, or other
ownership or equity interests in, any Group Company. Except as
otherwise contemplated by that certain voting agreement set forth
in the Investor Rights Agreement, the Company is not a party or
subject to any agreement or understanding, and, to the
Company’s knowledge after due inquiry, there is no agreement
or understanding with any Person that affects or relates to (i) the
voting or giving of written consents with respect to any security
of the Company (including, without limitation, any voting
agreements, voting trust agreements, shareholder agreements or
similar agreements) or the voting by a director of the Company or
(ii) the sale, transfer or other disposition with respect to any
security of the Company.
(iv)
The
Common Stock is registered pursuant to 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which
to its knowledge is likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act,
nor has the Company received any notification that the
Commission is contemplating terminating such registration. The
Company has not, in the 12 months preceding the date hereof,
received notice from the Trading Market to the effect that the
Company is not in compliance with the requirements of the
Trading Market. The Company is, and expects to be, in
compliance with all of the listing requirements of the Trading
Market in the foreseeable future.
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(e)
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No Registration Rights .
Except as set forth on
Schedule 4(e) ,
no holder of securities of any of the Group Companies is or will be
entitled to have any registration rights with respect to such
securities.
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(f)
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Authorization .
Each of the Group Companies has all requisite corporate power and
authority to execute, deliver and perform its obligations under
each of the Documents to which it is a party and to consummate the
transactions contemplated thereby. This Agreement has been duly
authorized, executed and delivered by the Group Companies and the
Controlling Shareholders. Each of the Documents has been duly
authorized and when executed and delivered by the Group Companies
and the Controlling Shareholders (to the extent it is a party
thereto) shall constitute a legal, valid and binding obligation of
each of the Group Companies and the Controlling Shareholders (to
the extent it is a party thereto) enforceable against each of the
Group Companies and the Controlling Shareholders (to the extent it
is a party thereto) in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited
by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in
Section 8 of
this Agreement or in the Registration Rights Agreement may be
limited by applicable federal or state securities
laws.
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(g)
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Valid Issuance of Notes .
Each of the Senior Notes and the Convertible Notes, when issued,
sold and delivered in accordance with the terms thereof and for the
consideration set forth herein, will be free of restrictions on
transfer, other than restrictions on transfer under applicable
state and federal securities laws. Assuming the accuracy of the
Purchaser’s representations in
Section 6 below,
the Notes will be issued in compliance with applicable state and
federal securities laws. The Senior Notes, when issued, will be in
the form contemplated by the Senior Note Indenture, and the
Convertible Notes, when issued, will be in the form contemplated by
the Convertible Note Indenture. Each of the Senior Notes and the
Convertible Notes has been duly authorized by the Company and, when
executed and delivered by the Company, authenticated by the Trustee
and delivered to the Purchaser in accordance with the terms of this
Agreement and its respective Indenture, such Notes will have been
duly executed, issued and delivered by the Company and will
constitute legal, valid and binding obligations of the Company,
entitled to the benefits of its respective Indenture, and
enforceable against the Company in accordance with their terms,
except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally. The
Guarantees have been duly authorized, and, when the Notes have been
duly executed, authenticated and issued in accordance with the
provisions of its respective Indenture and delivered to and paid
for by the Purchaser with the Guarantees endorsed thereon by the
Guarantor, will constitute the legal, valid and binding obligations
of the Guarantor entitled to the benefits of such Indenture,
enforceable against the Guarantor in accordance with its terms,
except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights
generally.
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(h)
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Valid Issuance of Conversion Shares .
The Conversion Shares have been duly and validly authorized for
issuance by the Company, and when issued pursuant to the terms of
the Convertible Note Indenture, will be validly issued, fully paid
and non-assessable, not subject to any preemptive or similar
rights, free from all taxes, Liens, charges and security interests
with respect to the issuance thereof and free of restrictions on
transfer other than as expressly contemplated by the
Documents.
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(i)
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Compliance with Instruments .
None of the Group Companies is in violation of its respective
certificate of incorporation, by-laws or other organizational
documents (the “
Charter Documents ”).
None of the Group Companies is, nor does any condition exist (with
the passage of time or otherwise) that could reasonably be expected
to cause any of the Group Companies to be, (i) in violation of any
statute, rule, regulation, law or ordinance, or any judgment,
decree or order applicable to any of the Group Companies or any of
their properties (collectively, “
Applicable Law ”)
of any federal, state, PRC national, provincial, local or other
governmental authority, governmental or regulatory agency or body,
court, arbitrator or self-regulatory organization of applicable
jurisdictions, domestic or foreign (each, a “
Governmental Authority ”),
or (ii) in breach of or in default under any bond, debenture, note
or other evidence of indebtedness, indenture, mortgage, deed of
trust, lease or any other agreement or instrument to which any of
them is a party or by which any of them or their respective
property is bound (collectively, “
Applicable Agreements ”),
other than in each of clause (i) and (ii) such violations, breaches
or defaults that are (a) disclosed in
Schedule 4(i) of
the Disclosure Schedule or (b) not material. Except as set forth
in
Schedule 4(i) of
the Disclosure Schedule, all Applicable Agreements are in full
force and effect with respect to the Group Companies and to the
Company’s knowledge, with respect to the other parties, are
the legal, valid and binding obligations of the parties
thereto.
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(j)
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No Conflicts .
Neither the execution, delivery or performance of any of the
Documents, the issuance of any of the Securities nor the
consummation of any of the transactions contemplated therein will
conflict with, violate, constitute a breach of or a default (with
the passage of time or otherwise) under, require the consent of any
person or a Governmental Authority (other than consents already
obtained which are in full force and effect) or result in the
imposition of a Lien (other than a Lien arising under the Security
Documents and the transactions contemplated by this Agreement) on
any assets of any of the Group Companies under or pursuant to (i)
the Charter Documents, (ii) any Applicable Agreement, or (iii) any
Applicable Law, other than in each of clause (ii) and (iii) such
violations, breaches or defaults that would not, individually or in
aggregate, have a Material Adverse Effect. After consummation of
the transactions contemplated in the Documents, no Default or Event
of Default will exist under either Indenture.
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(k)
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Security Interest/Security Documents .
When executed and delivered, the Offshore Share Pledge Agreement
will create valid and enforceable first-priority security interests
in favor of the Collateral Agent in all the pledged collateral (as
described therein), which security interests will secure the
repayment of the Notes and the other obligations purported to be
secured thereby and when the Offshore Share Pledge Agreement is
filed with the Secretary of State of the State of Nevada on a
Uniform Commercial Code financing statement, in the case of the
pledge of shares in the Guarantor under the Offshore Share Pledge
Agreement, such security interests will be perfected. As of the
Closing Date, the pledgors under the Offshore Share Pledge
Agreement will own the pledged collateral described therein free
and clear of all Liens (except for Liens arising by operation of
law and Liens arising under the Offshore Share Pledge
Agreement).
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(l)
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Governmental Consents .
No filing with, consent, approval, authorization or order of, any
Governmental Authority is required for the consummation of the
transactions contemplated by the Documents, except (i) as have been
obtained or will have been obtained on or before the Closing Date,
(ii) as may be necessary to perfect security interests granted
pursuant to the Security Documents, and (iii) as may be required
under the Act or state securities laws or “Blue Sky”
laws.
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(m)
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Proceedings .
There is no action, claim, suit, demand, hearing, notice of
violation or deficiency, or proceeding, domestic or foreign
(collectively, “
Proceedings ”),
pending or, to the knowledge of the Company, threatened, that (i)
seeks to restrain, enjoin, prevent the consummation of, or
otherwise challenges any of the Documents or any of the
transactions contemplated therein or (ii) would otherwise have or
could reasonably be expected to have a Material Adverse Effect.
Except as disclosed in the SEC Reports, none of the Group Companies
is subject to any judgment, order or decree of which the Company
has knowledge.
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(n)
|
Permits .
Each of the Group Companies possesses all licenses, permits,
certificates, consents, orders, approvals and other authorizations
from, and has made all declarations and filings with, all
Governmental Authorities, presently required or necessary to own or
lease, as the case may be, and to operate their respective
properties and to carry on their respective businesses as now
conducted (“
Permits ”).
All of the Permits are valid and in full force and effect. Each of
the Group Companies has fulfilled and performed all of its
respective obligations with respect to such Permits and no event
has occurred which allows, or after notice or lapse of time could
allow, revocation or termination thereof or result in any other
material impairment of the rights of the holder of any such Permit.
None of the Group Companies has received actual notice of any
Proceeding relating to revocation or modification of any such
Permit.
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(o)
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Title to Property .
Each of the Group Companies has good and marketable title to all
real property or land use rights (which are reflected as
intangibles on the Financial Statements) and personal property
owned by it, in each case free and clear of any Liens as of the
Closing Date, except such Liens as permitted under the Documents.
For the real property not owned by any of the Group Companies and
currently used or planned to be used for the business operations of
the Group Companies, each of such Group Companies has good and
marketable title to all leasehold estates in real and personal
property being leased by it and, in each case free and clear of all
Liens as of the Closing Date.
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(p)
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Insurance .
Each of the Group Companies maintains reasonable adequate insurance
covering its material properties, operations, personnel and
business, and is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which it is engaged.
All policies of insurance insuring the Group Companies and their
respective businesses, assets, employees, officers and directors
are in full force and effect. Each of the Group Companies is in
compliance with the terms of such policies and instruments in all
material respects, and there are no claims by any of the Group
Companies under any such policy or instrument as to which any
insurance company is denying liability or defending under a
reservation of rights clause. None of the Group Companies has been
refused any insurance coverage sought or applied for, and none of
the Group Companies has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost
that could not, individually or in the aggregate, have a Material
Adverse Effect.
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(q)
|
Taxes .
All Tax returns required to be filed by each of the Group Companies
have been filed, and all such returns are true, complete and
correct in all material respects. All material Taxes that are due
from each of the Group Companies have been paid other than those
(i) currently payable without penalty or interest or (ii) being
diligently contested in good faith and by appropriate proceedings
and for which adequate reserves have been established in accordance
with GAAP. To the knowledge of the Company after due inquiry, there
are no proposed Tax assessments against any of the Group Companies.
The accruals and reserves on the books and records of each of the
Group Companies in respect of any Tax liability for any Taxable
period not finally determined are adequate to meet any assessments
of Tax for any such period. For purposes of this Agreement, the
term “
Tax ”
and “
Taxes ”
shall mean all federal, state, PRC national, provincial, local and
foreign taxes, and other assessments of a similar nature (whether
imposed directly or through withholding), including any interest,
additions to tax, or penalties applicable thereto.
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(r)
|
Intellectual Property .
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(i)
|
Each
of the Group Companies owns, or is validly licensed under, or has
the right to use, all patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
(collectively, “
Intellectual Property ”)
necessary for the conduct of its businesses and which as of the
Closing Date, will be free and clear of all Liens, except where the
failure to own, possess, or have the right to use such Intellectual
Property would not have a Material Adverse Effect. To the
Company’s knowledge, no claims or notices of any potential
claim have been asserted by any person challenging the use of any
such Intellectual Property by any of the Group Companies or
questioning the validity or effectiveness of the Intellectual
Property or any license or agreement related thereto, and, to the
Company’s knowledge, there are no facts which would form a
valid basis for any such claim. The use of such Intellectual
Property by any of the Group Companies does not and will not
infringe on the Intellectual Property rights of any other
person.
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(ii)
|
Schedule 4(r)(ii) of
the Disclosure Schedule sets forth a complete list of (i) the
Registered IP owned by or licensed to any of the Group Companies
and (ii) all other material Intellectual Property licensed to any
of the Group Companies, other than Intellectual Property that is
generally available to computer users either through the Internet
or in stores or outlets. “
Registered IP ”
means Intellectual Property that is registered, filed, or issued
under the authority of any Governmental Authority, including all
patents, registered copyrights, registered mask works, and
registered trademarks and all applications for any of the
foregoing. All Intellectual Properties owned by each of the Group
Companies are valid and enforceable and are in compliance with
formal legal requirements.
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(iii)
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Each
of the Group Companies has taken reasonable steps and measures to
establish and preserve ownership of or right to use all
Intellectual Property owned by it which it believe is material to
the operation of its business to the extent that it deems advisable
and consistent with the laws and practices of the PRC. Each of the
Group Companies has taken reasonable steps to register, protect,
maintain, and safeguard the Intellectual Property material to its
business, including any Intellectual Property that is jointly
developed with any third-parties, or any Intellectual Property for
which improper or unauthorized disclosure would impair its value or
validity, and has had executed appropriate nondisclosure and
confidentiality agreements and made all appropriate filings,
registrations and payments of fees in connection with the
foregoing. There is no infringement or misappropriation by any
other Person of any Intellectual Property of any of the Group
Companies. No proceedings or claims in which any of the Group
Companies alleges that any Person is infringing upon, or otherwise
violating, any Intellectual Property of any of the Group Companies
are pending, and none has been served, instituted or asserted by
any of the Group Companies.
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(iv)
|
Each
of the Group Companies owns all rights in and to any and all
Intellectual Property used or planned to be used by the Group
Companies, or covering or embodied in any past, current or planned
activity or service of the Group Companies, which Intellectual
Property was made, developed, conceived, created or written by any
consultant retained, or any employee employed, by the Group
Companies. No former or current employee, no former or current
consultant, and no third-party joint developer of any of the Group
Companies has any rights in any Intellectual Property made,
developed, conceived, created or written by the aforesaid employee
or consultant during the period of his or her retention by the
Group Companies which can be asserted against any Group
Company.
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(v)
|
No
Intellectual Property owned by any Group Company is the subject of
any security interest, Lien, license or other contract granting
rights therein to any other Person. Each of the Group Companies has
not (a) transferred or assigned, (b) granted an exclusive license
to or (c) provided or licensed, any Intellectual Property owned by
the Group Companies to any Person who is the subject of any
security interest, Lien, license or other contract granting rights
therein to any other Person.
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(s)
|
Internal Controls .
Each of the Group Companies maintains a system of internal
accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with
management’s general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain asset
accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets is
compared with the existing assets at quarterly intervals and
appropriate action is taken with respect to any material
differences.
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(t)
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Financial Statements .
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(i)
|
Except
as disclosed in
Schedule 4(t)(i) of
the Disclosure Schedule, the audited consolidated financial
statements and related notes of the Company contained in the Form
10-KSB for the year ended December 31, 2006 and the unaudited
consolidated financial statements and related notes in the Form
10-QSB for the six months ended June 30, 2007 (collectively, the
“
Financial Statements ”)
present fairly in all material respects the financial position,
results of operations and cash flows of the Company and its
consolidated Subsidiaries, as of the respective dates and for the
respective periods to which they apply and have been prepared in
accordance with GAAP and Item 310 of Regulation S-B. All other
financial, statistical, and market and industry-related data
included in the SEC Reports are based on or derived from sources
that the Company reasonably believes to be reliable and
accurate.
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(ii)
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Subsequent
to the date of the Company’s audited financial statements
filed for the year ended December 31, 2006, except as disclosed
therein or in any subsequent SEC Report, (i) none of the Group
Companies has incurred any liabilities, direct or contingent, that
are material, individually or in the aggregate, to the Company, or
has entered into any material transactions not in the ordinary
course of business, (ii) there has not been any material decrease
in the capital stock or any material increase in long-term
indebtedness or any material increase in short-term indebtedness of
the Group Companies, or any payment of or declaration to pay any
dividends or any other distribution with respect to the Group
Companies, and (iii) there has not been any material adverse change
in the properties, business, prospects, operations, earnings,
assets, liabilities or condition (financial or otherwise) of the
Group Companies taken as a whole; excluding any changes caused by
(x) the condition of the industry of the Company that do not
disproportionately affect the Company, (y) the failure of the
Company to meet its financial projections or (z) the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby (each of clauses (i), (ii) and (iii), a
“
Material Adverse Change ”).
To the knowledge of the Company, there is no event that is
reasonably likely to occur in the foreseeable future, which if it
were to occur, could, individually or in the aggregate, have a
Material Adverse Change.
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(u)
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Indebtedness .
All Indebtedness represented by the Notes and the Guarantees is
being incurred for proper purposes and in good faith. Based on the
financial condition of the Company as of the Closing Date after
giving effect to the receipt by the Company of the proceeds from
the sale of the Securities hereunder, (i) the fair saleable value
of the Group Companies’ assets exceeds the amount that will
be required to be paid on or in respect of the Group
Companies’ existing debts and other liabilities (including
contingent liabilities) as they mature; (ii) the present fair
saleable value of the assets of the Group Companies is greater than
the amount that will be required to pay the probable liabilities of
the Group Companies on their respective debt as they become
absolute and mature, and (iii) the Group Companies are able to
realize upon their assets and pay their debt and other liabilities
(including contingent obligations) as they mature; (iv) the Group
Companies’ assets do not constitute unreasonably small
capital to carry on their respective businesses as now conducted
and as proposed to be conducted including their respective capital
needs taking into account the particular capital requirements of
the business conducted by the Group Companies, and projected
capital requirements and capital availability thereof; and (v) the
current cash flow of each of the Group Companies, together with the
proceeds the Company would receive, were it to liquidate all of its
assets, after taking into account all anticipated uses of the cash,
would be sufficient to pay all amounts on or in respect of its
liabilities when such amounts are required to be paid. None of the
Group Companies intends to incur debts beyond its ability to pay
such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt). The
Company has no knowledge of any facts or circumstances which lead
it to believe that it or any other Group Companies will file for
reorganization or liquidation under the bankruptcy or
reorganization laws of any jurisdiction within one year from the
Closing Date. For the purposes of this Agreement, “
Indebtedness ”
shall mean (a) any liabilities for borrowed money or amounts owed
in excess of $50,000 (other than trade accounts payable incurred in
the ordinary course of business), (b) all guaranties, endorsements
and other contingent obligations in respect of Indebtedness of
others, whether or not the same are or should be reflected in the
Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of
business; and (c) the present value of any lease payments in excess
of $50,000 per annum due under leases required to be capitalized in
accordance with GAAP. None of the Group Companies is, or is
reasonably likely to be, in default with respect to any
Indebtedness and no waiver of default is currently in effect. None
of the Group Companies has agreed or consented to cause or permit
in the future (upon the happening of a contingency or otherwise)
any of its property, whether now owned or hereafter acquired, to be
subject to a Lien. None of the Group Companies is a party to, or
otherwise subject to any provision contained in, any instrument
evidencing Indebtedness of any of the Group Companies, any
agreement relating thereto or any other agreement (including, but
not limited to, its Charter Document) which limits the amount of,
or otherwise imposes restrictions on the incurring of, Indebtedness
of the Company.
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(v)
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No Stabilization .
None of the Group Companies has and, to each of its knowledge after
due inquiry, no one acting on its behalf has, since the
commencement of trading of the Common Stock on the OTC Bulletin
Board (i) taken, directly or indirectly, any action designed to
cause or to result in, the stabilization or manipulation of the
price of any security of any of the Group Companies to facilitate
the sale or resale of any of the Sec
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