Amendment to Term Credit Agreement means the Amendment to Term Credit Agreement attached to this Agreement as Exhibit A.

 

Ancillary Agreements means the Amendment to Term Credit Agreement, Preferred Shares Exchange Agreement, and Warrants.

 

Business Day means a day (a) other than a Saturday or Sunday and (b) on which commercial banks are open for business in New York, New York and Los Angeles, California.

 

Common Stock means the shares of common stock of Group.

 

Exchange Shares means the shares of Common Stock of Group issuable pursuant to the Preferred Shares Exchange Agreement.

 

Person means an individual, a partnership (general or limited), corporation, limited liability company, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust (inter vivos or testamentary), an estate of a deceased, insane or incompetent person, a quasi-governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity.

 

Preferred Shares Exchange Agreement means the Preferred Shares Exchange Agreement attached to this Agreement as Exhibit B.

 

Preferred Shares means the preferred shares of Holdings, having the rights, designation, number, powers, preferences, limitations, and restrictions set forth in Exhibit C to this Agreement.

 

Registrable Securities means the Exchange Shares and the Warrant Shares, but the term Registrable Securities excludes (i) any securities that have been publicly sold or may be immediately, freely sold without registration under the Act either pursuant to Rule 144 under the Act or otherwise, (ii) any securities sold by a person in a transaction pursuant to a registration statement filed under the Act or (iii) any securities that are at the time subject to an effective registration statement under the Act.

 

SEC means the United States Securities and Exchange Commission.

 

Shares means the Preferred Shares, Exchange Shares, and Warrant Shares.

 

Warrant Shares means the shares of Common Stock of Group issuable pursuant to the Warrant.

 

Warrant means the warrant to purchase Common Stock of Group attached to this Agreement as Exhibit D.

 

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2.                                       Exchange Transactions.

 

Subject to the terms and conditions hereof, the parties shall, on a date within two (2) Business Days after the date that the Preferred Shares may be issued under Hong Kong law or on such later date as the parties may agree, take the following actions, each of which shall be deemed to have occurred simultaneously with the others:

 

(a)                                  Holdings will issue Thirty Thousand (30,000) Preferred Shares to Lender;

 

(b)                                 Group, Holdings, Lender, and Agent will enter into the Preferred Shares Exchange Agreement;

 

(c)                                  Group will issue a Warrant to purchase Two Hundred Seventy Seven Thousand Seven Hundred Seventy Eight (277,778) Warrant Shares of Group to Lender;

 

(d)                                 The outstanding principal balance of the Term Loans (as that term is defined in the Term Credit Agreement) will be reduced from $5,000,000 to $2,000,000 and the Lender will reflect such reduction in its internal records pursuant to paragraph 2 of the Term Note (as that term is defined in the Term Credit Agreement);

 

(e)                                  The maturity date of $1,000,000 of the remaining outstanding principal amount under the Term Credit Agreement will be extended to November 4, 2007 in consideration of the payment of a $10,000 extension fee by Holdings;

 

(f)                                    The Floating Charges and the floating charges granted thereunder will terminate and Lender and Agent will take all such action is necessary to terminate those charges of record;

 

(g)                                 Group, Holdings, Lender, and Agent will enter into the Amendment to Term Credit Agreement; and

 

(h)                                 Group will pay Agent a fee of $25,000 and reimburse its legal expenses up to a maximum amount of $10,000.

 

2.                                       Representations and Warranties of Group and Holdings.

 

Holdings and Group hereby represent and warrant to Agent and Lender as follows:

 

(a)                                  Legal Status.  Holdings is a corporation with limited liability and validly existing under the laws of Hong Kong and has full power to carry on its business as it is now being conducted. Group is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has full power to carry on its business as it is now being conducted.

 

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(b)                                 Authorization and Validity.  This Agreement and the Ancillary Agreements have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof and thereof will constitute legal, valid and binding agreements and obligations of Group and Holdings, as the case may be, enforceable in accordance with their respective terms.

 

(c)                                  No Conflict.  The execution, delivery, and performance by Holdings and Group of this Agreement and the Ancillary Agreements to which they are a party do not and will not conflict with the terms of the charter documents of Holdings or Group, as the case may be; violate any provision of any judgment, decree or order of any court or governmental authority by which Holdings or Group, as the case may be, is bound, or any provision of any law or regulation applicable to Holdings or Borrower, as the case may be; or result in a breach of or constitute a default under any material contract, obligation, indenture, or other instrument to which Holdings or Group, as the case may be, is a party or by which Holdings or Group, as the case may be, may be bound.

 

(d)                                 No Consents.  The execution, delivery, and performance by Holdings and Group of this Agreement and the Ancillary Agreements to which they are a party do not and will not require any authorization, approval, or other action by, or notice to or filing with, any governmental authority, regulatory body, or any other person or entity, except such filings as may be required under Federal or state securities laws or regulations.

 

(e)                                  Reservation and Issuance of Exchange Shares and Warrant Shares.  The requisite number of Exchange Shares and Warrant Shares issuable pursuant to the Preferred Shares Exchange Agreement and the Warrants has been duly authorized and reserved for issuance and no further corporate action is required for the valid issuance of such Exchange Shares or Warrant Shares. Upon issuance pursuant to the Preferred Shares Exchange Agreement or the Warrants, the Exchange Shares and Warrant Shares, as the case may be, will be validly issued, fully paid, and non-assessable.

 

3.                                       Representations and Warranties of Lender and Agent .

 

Lender and Agent represent and warrant to Holdings and Group as follows:

 

(a)                                  Legal Status.  Lender is a corporation with limited liability and validly existing under the laws of Hong Kong and has full power to carry on its business as it is now being conducted. Agent is a limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of formation and has full power to carry on its business as it is now being conducted.

 

(b)                                 Authorization and Validity.  This Agreement and the Ancillary Agreements  have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof and thereof will constitute legal, valid and binding agreements and obligations of Lender and Agent, as the case may be, enforceable in accordance with their respective terms.

 

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(c)                                  No Conflict.  The execution, delivery, and performance by Lender and Agent of this Agreement and the Ancillary Agreements to which they are a party do not and will not conflict with the terms of the charter documents of Lender or Agent, as the case may be; violate any provision of any judgment, decree or order of any court or governmental authority by which Lender or Agent, as the case may be, is bound, or any provision of any law or regulation applicable to Lender or Agent, as the case may be, or result in a breach of or constitute a default under any material contract, obligation, indenture, or other instrument to which Lender or Agent, as the case may be, is a party or by which Lender or Agent, as the case may be, may be bound.

 

(d)                                 No Consents.  The execution, delivery, and performance by Lender and Agent of this Agreement and the Ancillary Agreements to which they are a party do not and will not require any authorization, approval, or other action by, or notice to or filing with, any governmental authority, regulatory body, or any other person or entity, except such filings as may be required under Federal or state securities laws or regulations.

 

(e)                                  Accredited Investor.  Each of Lender and Agent has such knowledge and experience in business and financial matters such that it is capable of evaluating the merits and risks of purchasing the Shares.  Each of Lender and Agent is an accredited investor as that term is defined in Rule 501 of Regulation D of the Act.

 

(f)                                    Loss of Investment.  Lenders (i) overall commitment to investments which are not readily marketable is not disproportionate to its net worth; (ii) investment in the Shares will not cause such overall commitment to become excessive; (iii) can afford to bear the loss of its entire investment in the Shares; and (iv) has adequate means of providing for its current needs and has no need for liquidity in its investment in the Shares.

 

(g)                                 Investment Intent.

 

(i)                                     Each of Lender and Agent hereby acknowledges that it has been advised that the offer and sale of the Shares covered by this Agreement and the Ancillary Agreements has not been registered with, or reviewed by, the SEC because it is intended to be a non-public offering pursuant to Section 4(2) and Rule 506 of Regulation D of the Act.  Each of Lender and Agent represents that the Shares are being, and will be, purchased for Lenders own account and not on behalf of any other person, for investment purposes only and not with a view towards distribution or resale to others. Each of Lender and Agent agrees that it will not attempt to sell, transfer, assign, pledge or otherwise dispose of all or any portion of the Shares unless they are registered under the Act or unless in the opinion of counsel an exemption from such registration is available, such counsel and such opinion to be satisfactory to Holdings or Group, as the case may be.  Each of Lender and Agent understands that the Shares have not been registered under the Act by reason of a claimed exemption under the provisions of the Act which depends, in part, upon the investment intention of Lender; and

 

(ii)                                  The Shares and any certificates issued in replacement therefor or upon conversion thereof shall bear the following legend, in addition to any other legend required by law or otherwise:

 

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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.  THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN BY THE REGISTERED OWNER FOR INVESTMENT, AND WITHOUT A VIEW TO RESALE OR DISTRIBUTION THEREOF, AND MAY NOT BE TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH TRANSFER OR DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AS AMENDED, OR THE RULES AND REGULATIONS THEREUNDER.

 

(h)                                 State Securities Laws.  Each of Lender and Agent understands that no securities administrator of any state has made any finding or determination relating to the fairness of an investment in the Shares and that no securities administrator of any state has recommended or endorsed, or will recommend or endorse, the offering of the Shares.

 

(i)                                     Access to Information.  Lender and Agent have had access to, and an opportunity to review all material and relevant information concerning Holdings and Group, its management, financial condition, capitalization, market information, properties and prospects, including all reports, registration statements, and other filings with the SEC filed since January, 2005, necessary to enable them to make an informed investment decision with respect to its investment in the Shares.  Lender and Agent each acknowledge that it has had the opportunity to ask questions of and receive answers from, and to obtain additional information from, representatives of Holdings and Group concerning the terms and conditions of the acquisition of the Shares and the present and proposed business and financial condition of Group and Holdings, and has had all such questions answered to its satisfaction and has been supplied all information requested.

 

(j)                                     Understanding of Investment Risks.    Prior to making an investment in the Shares, Lender and Agent have fully considered, among other things, the business risks enumerated in Groups Form 10-K for the year ended December 31, 2004, and any other risk factors that have been included within any reports or registration statements filed with the SEC.

 

4.                                       Registration Rights.

 

(a)           Piggyback Registration.  If Group shall determine to register for sale for cash any shares of its Common Stock, for its own account or for the account of others, other than (i) a registration relating solely to employee benefit plans or securities issued or issuable to employees, directors, or  consultants (to the extent the securities owned or to be owned by such consultants could be registered on Form S-8), (ii) a registration relating solely to a transaction pursuant to Rule 145 under the Securities Act, or (iii) a registration on Form S-4 in connection with a merger, acquisition, divestiture, reorganization or similar event, Group shall promptly give to Lender and Agent written notice thereof (and in no event shall such notice be given less than 10 Business Days prior to the filing of such registration statement), and shall, subject to Section 4(b) hereof, include in such registration (a Piggyback Registration), all of the Registrable Securities specified in a written request or requests, made within five days after

 

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receipt of such written notice from Group, by Lender or Agent. However, Group may, without the consent of the Lender or Agent, withdraw such registration statement prior to its becoming effective if Group or such other stockholders have elected to abandon the proposal to register the securities proposed to be registered thereby.

 

(b)                                 Underwriting.  If a Piggyback Registration is for a registered public offering involving an underwriting, Group shall so advise Lender and Agent in writing or as a part of the written notice given pursuant to Section 4(a) hereof.  In such event, the right of Lender to registration pursuant to Section 4(a) hereof shall be conditioned upon its participation in such underwriting and the inclusion of its Registrable Securities in the underwriting to the extent provided herein.  In the event Lender proposes to distribute its securities through such underwriting, it shall (together with Group and any other stockholders of Group distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriters selected for such underwriting by Group or selling stockholders, as applicable.  Notwithstanding any other provision of this Section 4(b), if the lead underwriter or Group determines that marketing factors require a limitation of the number of shares to be underwritten, the lead underwriter or Group may exclude some or all of the Registrable Securities from such registration and underwriting.  The Company shall so advise Lender and Agent, and the number of shares of Registrable Securities that may be included in the registration and underwriting, if any, shall be allocated as follows:

 

(i)                                     In the event of a Piggyback Registration that is initiated by Group, the number of shares that may be included in the registration and underwriting shall be allocated first to Group and then, subject to obligations and commitments existing as of the date hereof, to all selling stockholders, including Lender, who have requested to sell in the registration on a pro rata basis according to the number of shares requested to be included; and

 

(ii)                                  In the event of a Piggyback Registration that is initiated by the exercise of demand registration rights by a stockholder or stockholders of Group, then the number of shares that may be included in the registration and underwriting shall be allocated first to such selling stockholders who exercised such demand and then, subject to obligations and commitments existing as of the date hereof, to all other selling stockholders, including Lender, who have requested to sell in the registration, on a pro rata basis according to the number of shares requested to be included.

 

No Registrable Securities excluded from the underwriting by reason of marketing limitations shall be included in such registration.  If Lender or Agent disapproves of the terms of any such underwriting, it may elect to withdraw its Registrable Securities therefrom by written notice to Group and the lead underwriter.

 

(c)                                  Registration Procedures. In the event Registrable Securities of Lender are included in a registration statement (the Registration Statement) pursuant to this Section 4, Group shall:

 

(i)                                     furnish to Lender such number of copies of the Registration Statement and the prospectus included therein (including each preliminary prospectus), as it may

 

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reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities covered by such Registration Statement;

 

(ii)                                  use all commercially reasonable efforts to register or qualify the Registrable Securities covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as Lender shall reasonably request; provided, however, that Group shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction;

 

(iii)                               immediately notify the Lender and Agent at any time when a prospectus is required to be delivered under the Act, of the happening of any event as a result of which the prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required or necessary to be stated therein in order to make the statements contained therein not misleading in light of the circumstances under which they were made;

 

 (iv)                           if the common stock of Group is listed on any securities exchange or automated quotation system, Group shall use commercially reasonable efforts to list (with the listing application being made at the time of the filing of such Registration Statement or as soon thereafter as is reasonably practicable) the Registrable Securities covered by such Registration Statement on such exchange or automated quotation system;

 

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