Exhibit 10.1
SETTLEMENT AND RELEASE
AGREEMENT
This Settlement and Release Agreement (this
“Agreement”), is made and entered into as of August 29,
2008, by and among PacificNet Inc., a Delaware corporation (the
“Company”), and each of Iroquois Master Fund, Ltd.,
C.E. Unterberg, Towbin Capital Partners I (n/k/a Collins Stewart),
Alpha Capital AG, Whalehaven Capital Fund Ltd., DKR Soundshore
Oasis Holding Fund, Ltd., Basso Fund Ltd., Basso Multi-Strategy
Holding Fund Ltd., and Basso Private Opportunities Holding Fund
Ltd. (each, a “ Holder ” and, collectively, the
“ Holders ”). Capitalized terms used
herein, but not otherwise defined, shall have the meanings ascribed
to such terms as set forth in the Second Amended and Restated
Variable Rate Secured Convertible Debenture due July 2009, in the
form attached hereto as Annex A , issued to each of
the Holders on the date hereof (each, a “ Second Amended
Debenture ” and, collectively, the “ Second
Amended Debentures ”).
WHEREAS, the Company and each of the Holders are
parties to that certain (i) Securities Purchase Agreement, dated
February 28, 2006 (the “ SPA ”), pursuant to
which the Company issued Variable Rate Convertible Debentures due
February 2009 (the “ Original Debentures ”) and
Common Stock Purchase Warrants (the “ Warrants
”) to each of the Holders, and (ii) Registration Rights
Agreement, dated February 28, 2006 (the “ RRA ”
and, together with the SPA, the Original Debentures and the
Warrants, the “ Transaction Documents ”);
and
WHEREAS, the Company and Iroquois Master Fund,
Ltd., C.E. Unterberg, Towbin Capital Partners I, Alpha Capital AG,
Whalehaven Capital Fund Ltd., and DKR Soundshore Oasis Holding
Fund, Ltd. are parties to the Settlement and Release Agreement
dated February 6, 2007 (the “ 2007 Settlement
Agreement ”); and
WHEREAS, in connection with the 2007 Settlement
Agreement, the Company issued an Amended and Restated Variable Rate
Convertible Debenture due March 2009 (each, an “ Amended
Debenture ” and, collectively, the “ Amended
Debentures ”) to each of the Holders; and
WHEREAS, in connection with the 2007 Settlement
Agreement, the Company issued to each of Iroquois Master Fund,
Ltd., C.E. Unterberg, Towbin Capital Partners I, Alpha Capital AG,
Whalehaven Capital Fund Ltd., and DKR Soundshore Oasis Holding
Fund, Ltd. a Variable Rate Convertible Debenture due March 2009
(each, a “ Liquidated Damages Debenture ” and,
collectively, the “ Liquidated Damages Debentures
”) (the Amended Debentures and Liquidated Damages Debentures
shall sometimes be referred to each as an “ Outstanding
Debenture ” and collectively as the “
Outstanding Debentures ”); and
WHEREAS, the Company has defaulted on its
obligations under the Outstanding Debentures; and
WHEREAS, the Company and the Holders have
reached an agreement with respect to the payment by the Company of
the outstanding balance remaining under the Outstanding Debentures;
and
WHEREAS, the parties have agreed that each of
the Outstanding Debentures will be amended and restated in
connection with this Agreement and that, in connection therewith,
the following documents, each dated as of the date hereof, shall be
executed and delivered by the applicable parties: (i) a
Security Agreement between the Company and Iroquois Master Fund,
Ltd., as agent for the Holders, in the form attached hereto as
Annex B (the “ Security Agreement
”); (ii) the assignment of payment rights agreements,
executed and delivered by the Company and each of PacificNet
Communications Limited, PacificNet Financial Services Limited, and
PacificNet Strategic Investment Holdings Limited, in the form
attached hereto as Annex C (collectively, the “
Assignment of Payment Rights Agreements ”); (iii) an
Escrow Agreement among the Company, the Holders and Continental
Stock Transfer & Trust Company, as escrow agent, in the form
attached hereto as Annex D (the “ Conversion
Shares Escrow Agreement ”); and (iv) an Agreement and
Release as to Lawsuit by and among Iroquois Master Fund, Ltd.,
Alpha Capital AG, Whalehaven Capital Fund Ltd., DKR Soundshore
Oasis Holding Fund, Ltd., Victor Tong and Tony Tong, in the form
attached hereto as Annex E (the “ Tong Suit
Agreement ” and, together with this Agreement, the Second
Amended Debentures, the New Debentures (as defined below), the
Penalty Debentures (as defined below), the Security Agreement, the
Assignment of Payment Rights Agreements, the Conversion Shares
Escrow Agreement and the Tong Suit Escrow Agreement (as defined
below), the “ 2008 Settlement Documents ”);
and
WHEREAS, the parties are interested in
maintaining a long-term good business relationship;
NOW THEREFORE, in consideration of the terms and
conditions contained in this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound hereby,
agree as follows:
1.
Annex F hereto sets forth the principal and all
accrued and unpaid interest due and payable to each Holder, through
and including the date hereof, under each Outstanding Debenture
held by it.
2. On
the date hereof, each Holder of an Amended Debenture shall
surrender its Amended Debenture to the Company and shall receive a
Second Amended Debenture registered in such Holder’s name and
in the principal amount set forth next to such Holder’s name
on Annex F hereto.
3. On
the date hereof, each Holder of a Liquidated Damages Debenture
shall surrender its Liquidated Damages Debenture to the Company and
shall receive an Amended and Restated Variable Rate Secured
Convertible Debenture due July 2009, in the form attached hereto as
Annex G (each, a “ New Debenture ”
and, collectively, the “ New Debentures ”) (the
Second Amended Debentures and New Debentures shall sometimes be
referred to each as a “ 2008 Debenture ” and
collectively as the “ 2008 Debentures ”),
registered in such Holder’s name and in the principal amount
set forth next to such Holder’s name on Annex F
hereto.
4. Upon
execution of, and as an express condition to the respective
obligations of the Holders to consummate the transactions
contemplated by, this Agreement, the Company shall make an
irrevocable cash payment to the Holders in the amount of One
Hundred and Fifty Thousand Dollars ($150,000), which shall be made
to Olshan Grundman Frome Rosenzweig & Wolosky LLP to be
distributed pro rata to the Holders based upon the outstanding
principal amount of the Second Amended Debentures held by each
Holder. Such payment shall be applied against the
outstanding principal balance due under the Second Amended
Debentures as identified on Annex F . Such
cash payment shall be made by wire transfer of immediately
available funds to the account of Olshan Grundman Frome Rosenzweig
& Wolosky LLP set forth on Annex H .
5. Upon
execution of this Agreement, the Holders shall convert, pro rata
based upon the outstanding principal amount of the Second Amended
Debentures held by each Holder after application of the $150,000
cash payment described in Section 4, an amount equal to Ten Percent
(10%) of the outstanding principal amount of the Second Amended
Debentures into common stock of the Company, based upon a
conversion price of $.75 per share based on the average of the
VWAPs for the 20 consecutive Trading Days immediately prior to the
date hereof and otherwise pursuant to the terms of the Second
Amended Debentures, and the Company shall issue and deliver to each
Holder’s account with The Depository Trust Company the shares
of common stock of the Company issuable to such Holder upon such
conversion, which shares shall be free of restrictive legends and
trading restrictions (such shares of common stock are collectively
referred to as the “ Settlement Conversion Shares
”). The Company has authorized its transfer agent
to accept a legal opinion from counsel to the Holders that the
Settlement Conversion Shares can be sold without registration and
shall be free of restrictive legends. The principal
amount of the Second Amended Debentures to be converted by, and the
number of Settlement Conversion Shares to be issued upon such
conversion to, each Holder is set forth on Annex F
. Thereafter, the Holders shall have the right to
convert the remaining obligations under the Second Amended
Debentures at the Conversion Price of Two Dollars ($2.00) per
share, subject to adjustment as provided in the Second Amended
Debentures. Except as otherwise provided by the Second
Amended Debentures, there shall be no further re-pricing of the
conversion rate so long as the Company remains in full and complete
compliance with the provisions of the Second Amended
Debentures.
6. Following
the making of the cash payment provided in Section 4 above and the
conversion provided in Section 5 above, the remaining outstanding
principal amount of each Holder’s Second Amended Debenture
shall be as set forth on Annex F .
7. The
Company and each of the Holders acknowledge and agree that a
default penalty, including penalty interest and legal fees, in the
amount of Three Million Thirty-Five Thousand Six Hundred Twenty-Two
and 96/00 dollars (US $3,035,622.96) is payable to the Holders (the
“ Penalty ”) in connection with the Outstanding
Debentures. The amount of Penalty payable to each Holder
is set forth on Annex F attached
hereto. Upon the execution of this Agreement, the
Company shall issue and deliver to each Holder, and each Holder
shall accept, a debenture in the form attached hereto as
Annex I (the “ Penalty Debenture
”), in the amount of the respective portion of the Penalty
payable to each Holder. The Penalty Debentures shall be
due and payable in full on the first date on which an Event of
Default under any of the Second Amended Debentures or the New
Debentures has occurred, which default has not been cured as
provided for thereunder. Each Transaction Document,
other than the RRA with respect to the Penalty Debentures, is
hereby amended so that the term “Debentures” includes
the 2008 Debentures and the Penalty Debentures and the term
“Underlying Shares” includes the shares of common stock
of the Company issued or issuable upon conversion of the 2008
Debentures.
8. On
the date hereof, the Company and Iroquois Master Fund, Ltd.,
individually and as agent (the “ Agent ”) for
the Holders, have entered into the Security Agreement pursuant to
which the Company has granted to the Agent a senior secured first
priority lien and security interest in the Collateral in order to
secure the prompt repayment and performance in full of all of the
Obligations (as such terms are defined in the Security Agreement),
and the Company and certain of its Subsidiaries have entered into
the Assignment of Payment Rights Agreements pursuant to which such
Subsidiaries have assigned the right to receive certain payments,
constituting part of the Collateral, to the Company.
i. The
2008 Debentures shall be subject to mandatory prepayment of
principal and interest from 100% of the cash proceeds of, or
constituting a part of, the Collateral. Except as
otherwise provided in paragraphs (iv) and (v) below, the mandatory
prepayments shall be applied against the next due monthly
amortization and interest payments under the 2008 Debentures pro
rata based upon the outstanding principal amount of the 2008
Debentures held by each Holder and, if such prepayments exceed the
amount of the next due monthly amortization and interest payments,
any remaining funds shall be applied against the following
months’ amortization and interest payments until such funds
have been exhausted.
ii. On
the date hereof, the Company has caused to be endorsed over to the
Agent each of four negotiable instruments, in the aggregate amount
of HK$18,000,000, executed by EPRO Group International Limited,
which constitute part of the Collateral (the “ Negotiable
Instruments ”), which the Agent shall submit to be cashed
as promptly as practicable on or after the respective dates
thereof. The net cash proceeds (after payment of normal
and customary bank fees and similar charges) from the Negotiable
Instrument dated September 30, 2008 (the “ First
Negotiable Instrument ”) shall be applied against the
October 15, 2008 amortization and interest payment under the 2008
Debentures (the “ First Payment
”). Notwithstanding anything to the contrary
contained in the 2008 Debentures, but subject to Section 8(vi)
hereof, the First Payment shall be made to the Holders all in
cash. If the Agent does not for any reason receive the
cash proceeds from the First Negotiable Instrument on or prior to
October 5, 2008, then the Agent shall provide the Company with
notice of such non-payment and the Company shall have until October
15, 2008 to pay to the Holders, in U.S. dollars (based on the
U.S.-Hong Kong exchange rate as reported in The Wall Street
Journal on September 30, 2008), a cash amount equal to the
amount of the First Negotiable Instrument, for application against
the First Payment.
iii. The
Company owns 5,788,000 shares of International Financial Network
Holdings Ltd., which shares constitute part of the
Collateral. The disposition of such shares, and any
proceeds received therefrom, shall be determined in good faith by
mutual agreement of the Company and the Holders.
iv. Subject
to the terms of the Security Agreement and the Assignment of
Payment Rights Agreements, upon the reduction of the principal
balance of the 2008 Debentures to below Fifty Percent (50%) of the
outstanding principal amount thereof on the date of this Agreement
(in the case of the Second Amended Debentures, the outstanding
principal amount thereof shall be determined as provided in Section
6 above), the Company shall only be required to make the monthly
payments pursuant to the amortization schedule; provided ,
however , that, until the 2008 Debentures have been paid in
full, all cash proceeds of, or constituting a part of, the
Collateral shall continue to be paid to the Agent, under the terms
of the Security Agreement and Assignment of Payment Rights
Agreements, for application, on a pro rata basis among the Holders,
against the next due monthly amortization and interest payment
under the 2008 Debentures, with any excess amounts being paid by
the Agent to the Company.
v. Pursuant
to, and subject to the satisfaction of the conditions (including,
without limitation, the Equity Conditions) set forth in, Sections 2
and/or 6(a) of the 2008 Debentures, as the case may be, the Company
may elect to pay all or part of an interest payment and/or Monthly
Redemption Amount (except, with respect to the First Payment and
the November 15, 2008 interest and amortization payment, as
otherwise provided in Section 8(ii) and 8(vi) hereof) under the
2008 Debentures in shares of Common Stock to the extent that the
cash proceeds of, or constituting a part of, the Collateral have
not been applied against such interest payment and/or Monthly
Redemption Amount. In such event, the Company shall
provide the Agent with written notice to forward any payments
received under the Security Agreement (which have not been or are
not applied to pay all or any part of an interest payment or
Monthly Redemption Amount) to the Company in the event that all or
part of such interest payment and/or Monthly Redemption Amount is
paid in Common Stock; provided, however, that if the principal
balance of the 2008 Debentures has not then been reduced to below
Fifty Percent (50%) of the outstanding principal amount thereof on
the date of this Agreement, the Agent shall continue to hold any
such funds received, for the benefit of the Holders, pursuant to
the terms of the Security Agreement for application against future
amortization and interest payments.
vi. Notwithstanding
anything to the contrary contained in the foregoing or in the 2008
Debentures, only with respect to the First Payment (but only the
portion of the First Payment in excess of the cash amount required
to be paid pursuant to Section 8(ii) above) and the November 15,
2008 amortization and interest payment under the 2008 Debentures,
if the Company desires to pay such Monthly Redemption Amount and/or
interest payment in shares of Common Stock, and all of the
conditions (other than the Equity Conditions) to the making of any
such payment in shares of Common Stock have been satisfied, the
Company shall notify the Holders in writing, prior to the
commencement of the applicable Monthly Conversion Period, of its
desire to pay such Monthly Redemption Amount and/or interest
payment in shares of Common Stock and shall specify in such notice
which Equity Conditions have not been satisfied. In such
event, each Holder shall, at least two business days prior to the
end of the applicable Monthly Conversion Period, notify the Company
in writing of its election to (i) accept all or a part (and if a
part, shall specify the amount) of such Monthly Redemption Amount
and/or interest payment in shares of Common Stock, in which case
the Company shall make the applicable payment to such Holder in
shares of Common Stock on the applicable Monthly Redemption Date
and/or Interest Payment Date and otherwise in accordance with the
terms of the 2008 Debentures (except that, in such case, the
reference to 80% in the definition of Interest Conversion Rate in
the 2008 Debentures shall be deemed to be a reference to 70%, and
the reference to 88% in the definition of Monthly Conversion Price
in the 2008 Debentures shall be deemed to be a reference to 78%)
and/or (ii) defer all or a part (and if a part, shall specify the
amount) of such Monthly Redemption Amount and/or interest payment
until the next Monthly Redemption Date and/or Interest Payment
Date, as the case may be, in which case the Monthly Redemption
Amount so deferred shall be added to the next Monthly Redemption
Amount, and interest shall continue to accrue on the outstanding
principal amount of such Holder’s 2008 Debentures (including
any deferred Monthly Redemption Amount). If a Holder
does not deliver such notice to the Company within the required
time period, such Holder shall be deemed to have elected to defer
all of the applicable Monthly Redemption Amount and/or interest
payment.
9. Upon
execution of this Agreement and receipt of the consideration
required hereunder, the Company and the Holders agree to (a) take
all steps to dismiss the involuntary bankruptcy petition filed in
the United States Bankruptcy Court for the District of Delaware,
Case No. 08-10528, (b) dismiss with prejudice the legal proceeding
captioned Iroquois Master Fund, Ltd. v. PacificNet, Inc. ,
pending in the S
