EXHIBIT 4.39
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT ("AGREEMENT") is made on 26 January 2006, by and
among:
(1) KONGZHONG CORPORATION, a company established under the laws of the Cayman
Islands ("KONGZHONG");
(2) WANG GUI JUN (Chinese Characters), holder of the PRC identification number
[deleted*] and LI YANG (Chinese Characters), holder of the PRC
identification number [deleted*], (together, "KONGZHONG NOMINEE");
(3) SHARP EDGE GROUP LIMITED, a company established under the laws of the
British Virgin Islands ("BVI") ("SHARP EDGE");
(4) AN JIAN XING YE TECHNOLOGY (BEIJING) LIMITED (Chinese Characters), a wholly
foreign owned enterprise established under the laws of the PRC ("SHARP EDGE
WFOE");
(5) BEIJING XINRUI NETWORK TECHNOLOGY COMPANY LIMITED (Chinese Characters), a
limited liability company established under the laws of the PRC ("XINRUI");
(6) The shareholders of Xinrui as listed in Schedule 1 (collectively, "XINRUI
SHAREHOLDERS" and each, "XINRUI SHAREHOLDER");
(7) HO CHI SING, holder of the Hong Kong permanent identification number
[deleted*] and passport number [deleted*];
(8) SUN JING YE, holder of the PRC identification number [deleted*] and who is
also the president of Xinrui; and
(9) AI LI, holder of the PRC identification number [deleted*] and who is also
the vice-president of Xinrui.
KongZhong, KongZhong Nominee, Sharp Edge, Sharp Edge WFOE, Xinrui, the Xinrui
Shareholders, Ho Chi Sing, Sun Jing Ye and Ai Li are collectively referred to as
the "PARTIES", and each, a "PARTY".
RECITALS
A. Xinrui is a company engaged in the business of telecommunications value
added services, with its principal place of business in the PRC.
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* All deleted material has been separately filed with the Securities and
Exchange Commission.
B. The Xinrui Shareholders, together, own 100% of the equity interest in
Xinrui.
C. Sharp Edge is a company engaged in the business of telecommunications value
added services, with its principal place of business in the PRC.
D. Ho Chi Sing is the sole shareholder holding 1 share in Sharp Edge.
E. Sharp Edge fully owns Sharp Edge WFOE in the PRC.
F. Sharp Edge WFOE has entered into a series of arrangements with Xinrui
pursuant to the Restructuring Documents to which both Sharp Edge WFOE and
Xinrui are parties whereby, among other things, Sharp Edge WFOE enjoys all
of the economic benefits and has full control in Xinrui.
G. KongZhong is a company engaged in the business of telecommunications value
added services, with its principal place of business in the PRC.
H. It is the desire of KongZhong to enjoy all of the economic benefits and
full control that Sharp Edge WFOE enjoys in Xinrui.
I. To realize the objective in paragraph H above, KongZhong hereby intends to
purchase, and Ho Chi Sing hereby intends to sell, the shares in Sharp Edge
representing 100% of the share capital of Sharp Edge ("Sharp Edge Shares")
subject to the terms and conditions of this Agreement. Likewise, KongZhong
Nominee hereby intends to purchase, and each of the Xinrui Shareholders
hereby intends to sell, the shares in Xinrui representing 100% of the share
capital of Xinrui ("Xinrui Shares") subject to the terms and conditions of
this Agreement.
J. All of the Parties acknowledge that Sun Jing Ye and Ai Li, and their
contributions to Xinrui, are important to the success of Xinrui. It is the
intention of all of the Parties that Sun Jing Ye and Ai Li shall remain as
the core management team in Xinrui.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Definitions. For purposes of this Agreement, the following terms have the
following meanings:
"AFFILIATE" means, in respect of a Person, any other Person that, directly
or indirectly, through one or more intermediaries, Controls, is Controlled
by, or is under the common Control with, the first-mentioned Person.
"ARBITRATION CENTRE" has the meaning given to it in Clause 14.2(b) of this
Agreement.
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"AUDITOR" means Deloitte Touche Tohmatsu or any international reputable
accounting firm appointed by KongZhong.
"BALANCE SHEET DATE" means 30 September 2005.
"BOARD" means the board of Directors of Sharp Edge or, as the case may be,
the board of Directors of Xinrui, as constituted from time to time.
"BUSINESS DAY" means any day, excluding Saturdays and Sundays, on which a
bank in Hong Kong and the PRC are open for business during their normal
business hours.
"BVI COUNSEL" means Conyers Dill & Pearman, the BVI legal counsel issuing
the legal opinion with respect to Sharp Edge' for the purpose of the share
purchase contemplated in this Agreement.
"CLOSING" has the meaning set forth in Clause 5 of this Agreement.
"CLOSING CONDITIONS" has the meaning set forth in Clause 5 of this
Agreement.
"CONFIRMATION LETTER" means any letter or statement or any form of written
confirmation from each of the Operators verifying or confirming the
accounts receivables Xinrui is entitled to receive.
"CONTROL" shall be deemed to exist over a Person (a) when another Person
holds at least fifty one percent (51%) of the outstanding voting rights in
the first-mentioned Person or, (b) when the second-mentioned Person has the
right, power or ability to direct the management and policies of the
first-mentioned Person, directly or indirectly, whether through the
ownership of voting rights, by contract or otherwise or, (c) in the case
where the first-mentioned Person is a natural Person, when the
second-mentioned Person has the right, power and ability to direct,
influence or restrict the actions and decision making of the
first-mentioned Person. The terms "CONTROLLING" and "CONTROLLED" have
meanings correlative to the foregoing.
"DIRECTORS" means the directors of Sharp Edge or, as the case may be, the
directors of Xinrui, and "DIRECTOR" means any one of them.
"DISCLOSING PARTY" has the meaning given to it in Clause 9.4 of this
Agreement.
"DISCLOSURE SCHEDULE" has the meaning given to it in Clause 6 of this
Agreement.
"EARN-OUT AMOUNT" means Total Purchase Price minus the First Cash Payment
and shall:
(a) consist of the Earn-Out Cash and the Earn-Out Shares unless KongZhong
determines the Earn-Out Amount to be in the form of cash;
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(b) at all times, not exceed US$28 million.
"EARN-OUT EXCESS AMOUNT" has the meaning given to it in Clause 3.2(c)(ii)
of this Agreement.
"EARN-OUT CASH" means the amount of cash representing 70% of the Earn-Out
Amount;
"EARN-OUT SHARES" means the shares of KongZhong which:
(a) shall be ordinary shares issued by KongZhong to Ho Chi Sing at the
average closing price quoted on NASDAQ in September 2006; and
(b) represent 30% of the Earn-Out Amount.
"ENCUMBRANCE" means any liens, security interest, pledges, claims,
restrictions, equities, charges and encumbrances of any nature whatsoever.
"FINANCIAL STATEMENTS" means:
(a) subject to sub-paragraphs (b) and (c) below, the audited balance
sheets, profit and loss accounts and cash flow statements of a Group
Company, and any notes thereto;
(b) for the purpose of determining the Second Cash Payment, the unaudited
balance sheets, profit and loss accounts and cash flow statements of
Xinrui for the period from 1 October 2005 up to, and including 30 June
2006;
(c) for the purpose of determining the consecutive quarter to quarter
growth in Clause 3.1(a), the unaudited quarterly balance sheets,
profit and loss accounts and cash flow statements of Xinrui for the
Valuation Period;
(d) for the purpose of determining the distribution of dividend, the
audited balance sheets, profit and loss accounts and cash flow
statements of Xinrui for the period from 1 January 2005 up to, and
including 31 December 2005;
(e) for the purpose of determining the Net Current Assets of Xinrui, the
audited balance sheets, profit and loss accounts and cash flow
statements for the period from 1 January 2005 up to, and including 31
December 2005,
and are described in further details in Clause 13.4 of this Agreement.
"FIRST CASH PAYMENT" means US$7 million minus the Off-Set Amount.
"FORCE MAJEURE EVENT" has the meaning given to it in Clause 8.4 of this
Agreement.
"GROUP" or "GROUP COMPANIES" means Sharp Edge, Sharp Edge WFOE, Xinrui and
their respective Subsidiaries, if any, from time to time, and "GROUP
COMPANY" means any one of them.
"GROUP INTELLECTUAL PROPERTY" has the meaning given to it in Clause 6.19(a)
of this Agreement.
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"HONG KONG" means Hong Kong Special Administration of the PRC.
"INDEMNIFIABLE LOSS" has the meaning given to it in Clause 14.10 of this
Agreement.
"INDEMNITEE" have the meaning given to it in Clause 14.10 of this
Agreement.
"INTELLECTUAL PROPERTY RIGHTS" means any and all international,
domestic/local, or foreign patents, all patent rights and all applications
thereof and all reissues, re-examinations, continuations,
continuations-in-part, divisions, and patent term extensions thereof,
inventions (whether patentable or not), discoveries, improvements,
concepts, innovations, industrial models, registered and unregistered
copyrights, copyright registrations and applications, author's rights,
works of authorship (including artwork of any kind and software of all
types in whatever medium, inclusive of computer programs, source code,
object code and executable code, and related documentation), URLs, web
sites, web pages and any part thereof, technical information, know-how,
trade secrets, drawings, designs, design protocols, specifications for
parts and devices, quality assurance and control procedures, design tools,
manuals, research data concerning historic and current research and
development efforts, including the results of successful and unsuccessful
designs, databases and proprietary data, proprietary processes, proprietary
rights, technology, engineering, discoveries, formulae, algorithms,
operational procedures, trade names, trade dress, trademarks, domain names,
service marks, mask works, and registrations and applications thereof, the
goodwill of the business symbolized or represented by the foregoing,
customer lists and other proprietary information and common law rights;
"IP CONFIDENTIAL INFORMATION" has the meaning given to it in Clause 6.19(g)
of this Agreement.
"KNOWLEDGE" means best knowledge after making all due and careful inquiries
and investigation and refers to the knowledge of the directors and senior
executive officers of an entity to which knowledge is attributed.
"LAST PAYMENT DATE" has the meaning given to it in Clause 3.2(c) of this
Agreement.
"LICENSES" has the meaning given to it in Clause 6.25 of this Agreement.
"LONG-STOP DATE" has the meaning given to it in Clause 12 of this
Agreement.
"MANAGEMENT CONTROL AGREEMENT" means the management control agreement
whereby each of the Xinrui Shareholders unconditionally agrees and
undertakes to exercise its shareholding rights, interests, powers and
benefits in Xinrui in accordance with the instruction of Sharp Edge WFOE.
"MANAGEMENT TEAM" means Sun Jing Ye and Ai Li.
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"MATERIAL ADVERSE EVENT" means, with respect to the Group and/or a Group
Company, any change, event, or effect that is materially adverse to the
business, operations, assets, financial condition, prospects of the Group
and/or a Group Company or the ability of the Group and/or a Group Company
to perform its obligations contemplated under the Transaction Documents or
the validity or enforceability of the Transaction Documents.
"MATERIAL DEBTS" means the debts owed by Xinrui to several Persons and are
more fully described in Exhibit A of this Agreement.
"MATERIAL OPERATING CONTRACTS" has the meaning given to it in Clause
6.20(a)(i) of this Agreement.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System in the United States.
"NET CURRENT ASSETS" means, as at 31 December 2005:
(a) the total current assets minus the total current liabilities;
(b) the total current assets shall not include the amount of RMB6,670,000
referred to in Clause 3.4(b); and
(c) only accounts receivables verified or confirmed by the Confirmation
Letters shall be included as part of the total current assets.
"NON-DISCLOSING PARTY" has the meaning given to it in Clause 9.4 of this
Agreement.
"OFF-SET AMOUNT" means an amount of RMB3,330,000 converted into the
relevant amount denominated in US$ using the middle price exchange rate as
determined by the People's Bank of China on the payment date referred to in
Clause 3.4 of this Agreement.
"OPERATORS" means China Telecom, Chine Netcom, China Railcom, China Unicom
and China Mobile, their local branches (if any) and any other Person as the
Parties may jointly determine as an Operator, and "OPERATOR" means any of
them.
"PAID-IN AMOUNT" has the meaning given to it in Clause 13.10 of this
Agreement.
"PAID-IN DATE" has the meaning given to it in Clause 13.10 of this
Agreement.
"PARTIES" or "PARTY" have the meanings given to them in the beginning of
this Agreement.
"PAYMENT DATE" means each of the dates of which payments are made under
Clause 3.2 and Clause 3.4.
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"PAYMENT OBLIGATION" means the obligation of Xinrui to pay Sharp Edge WFOE
for the provision of technical support under the TSA.
"PERSON" means any individual, sole proprietorship, partnership, firm,
joint venture, estate, trust, unincorporated organization, association,
corporation, institution, public benefit corporation, entity or
governmental authority or other entity of any kind or nature, and in the
case of a natural Person, shall include, without limitation, such Person's
spouse, parents, children, siblings and in-laws.
"PRC" means the People's Republic of China, excluding the Hong Kong Special
Administrative Region, Macau Special Administrative Region and Taiwan.
"PRC GAAP" means the generally accepted accounting principles in the PRC
applied on a consistent basis.
"PROHIBITED MATTERS" has the meaning given to it in Clause 13.7(a) of this
Agreement.
"RESTRUCTURING DOCUMENTS" means the documents set forth in Exhibit B.
"RMB" means the lawful currency of the PRC.
"SECOND CASH PAYMENT" means an amount equals to 2.5 times Xinrui's net
profit based on the unaudited Financial Statements for the period from 1
October 2005 to 30 June 2006 (both dates inclusive) and verified and agreed
by KongZhong, and this amount shall, at all times, not exceed US$11
million.
"SECOND CASH PAYMENT EXCESS AMOUNT" has the meaning given to it in Clause
3.2(c)(i) of this Agreement.
"SHARE DISPOSITION AGREEMENT" means the agreement whereby each of the
Xinrui Shareholders unconditionally agrees and undertakes to, upon the
instruction of Sharp Edge WFOE, transfer all of its shareholding in Xinrui
to a Person designated by Sharp Edge WFOE in consideration for the
provision of technical support by Sharp Edge WFOE to Xinrui pursuant to the
TSA.
"SHARE PLEDGE AGREEMENT" means the share pledge agreement whereby each of
the Xinrui Shareholders pledges its shareholding in Xinrui to Sharp Edge
WFOE to secure the Payment Obligation of Xinrui.
"SHARES" means the Sharp Edge Shares and the Xinrui Shares.
"SHARP EDGE SHARES" has the meaning given to it in Recital I of this
Agreement.
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"SUBSIDIARY" means, with respect to any Person who is not an individual,
any corporation, partnership, or other entity, Controlled by such Person or
which is a subsidiary of another subsidiary of such Person.
"TAX" or "TAXES" or "TAXATION" means and includes all forms of tax, levy,
duty, charge, impost, fee, deduction or withholding of any nature imposed,
levied, collected withheld or assessed by any governmental authority or
other taxing or similar authority in any part of the world and includes any
interest, additional tax, penalty or other charge payable or claimed in
respect thereof.
TOTAL PURCHASE PRICE" means First Cash Payment plus Earn Out-Amount, and is
more fully described in Clause 3.1 of this Agreement.
"TRANSACTION DOCUMENTS" means this Agreement, the Xinrui Share Purchase
Agreement and the Restructuring Documents.
"TRANSACTION TERMS" has the meaning given to it in Clause 9.1 of this
Agreement.
"TSA" means the technical support agreement entered into between Sharp Edge
WFOE and Xinrui whereby among other things, Sharp Edge WFOE shall provide
certain technical support to Xinrui on an exclusive basis.
"U.S." or "UNITED STATES" means the United States of America.
"US$" means the lawful currency of the United States.
"VALUATION FINANCIAL STATEMENTS" means the Financial Statements of Xinrui
for the Valuation Period.
"VALUATION PERIOD" means the period from 1 October 2005 to 30 September
2006 (both dates inclusive).
"VERIFICATION PERIOD" has the meaning given to it in Clause 3.2(b) of this
Agreement.
"WARRANTORS" means Sharp Edge, Sharp Edge WFOE, Ho Chi Sing, Sun Jing Ye,
Ai Li, Xinrui and each of the Xinrui Shareholders.
"XINRUI PURCHASE PRICE" has the meaning given to it in Clause 3.3 of this
Agreement.
"XINRUI SHARE PURCHASE AGREEMENT" means the share purchase agreement dated
the same date as this Agreement entered into between KongZhong Nominee,
Xinrui and each of the
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Xinrui Shareholders with respect to the transfer the Xinrui Shares to
KongZhong Nominee by each of the Xinrui Shareholders and in the agreed form
shown in Schedule 2.
"XINRUI SHARES" has the meaning given to it in Recital I of this Agreement.
"2006 PROFIT OF XINRUI" means the net profit of Xinrui as shown in the
Valuation Financial Statements of Xinrui.
2. Sale and Purchase of Shares.
2.1 Sale and Purchase of Sharp Edge Shares.
Subject to the terms and conditions of this Agreement, KongZhong agrees to
purchase, and Ho Chi Sing agrees to sell, the Sharp Edge Shares, together
with all rights, interests, benefits and entitlements attaching to and
flowing from the Sharp Edge Shares, free from any Encumbrances whatsoever.
2.2 Sale and Purchase of Xinrui Shares.
Subject to the terms and conditions of this Agreement, KongZhong Nominee
agrees to purchase, and each of the Xinrui Shareholders agrees to sell, the
Xinrui Shares, together with all rights, interests, benefits and
entitlements attaching to and flowing from the Xinrui Shares, free from any
Encumbrances whatsoever.
3. Consideration for the Shares
3.1 Purchase Price for Sharp Edge Shares.
The purchase price payable for the Sharp Edge Shares ("TOTAL PURCHASE
PRICE") is 5 times 2006 Profit of Xinrui and is subject to the following
conditions:
(a) if the gross revenue and net profit of Xinrui, as shown in the
quarterly financial statements issued by KongZhong for the purpose of
KongZhong's quarter earning release, do not reflect a consecutive
quarter to quarter growth during the Valuation Period, Total Purchase
Price shall be 4.8 times 2006 Profit of Xinrui;
(b) Total Purchase Price must, at all times, not exceed US$35 million;
(c) other than the estimated revenue mentioned in sub-paragraph (d) below,
the revenue of Xinrui up to the end of the Valuation Period must be
confirmed or verified by the relevant Confirmation Letters;
(d) the estimated revenue of Xinrui as shown in the Valuation Financial
Statements for the period from 1 July 2006 up to, and including 30
September 2006 shall not exceed 5% of total reported revenue in the
same period.
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3.2 Payment terms of Total Purchase Price
Total Purchase Price shall be paid by KongZhong as follows:
(a) KongZhong shall pay the First Cash Payment to Ho Chi Sing by
electronic funds transfer to the account with the details information
as follows within fifteen (15) Business Days from the date of this
Agreement:
(i) Name of Beneficiary:
Hong Kong General Digital Group Limited
(ii) Name of Beneficiary's Bank:
The Hong Kong and Shanghai Banking Corporation Limited
(iii) Address of Beneficiary's Bank:
Des Voeux Road Central Branch
China Insurance Group Building
141 Des Voeux Road Central
Hong Kong
(iv) Account Number:
[deleted*] (for HKD current account) OR
[deleted*] (for other currency savings account)
(b) KongZhong shall pay the Second Cash Payment to Ho Chi Sing within
fifteen (15) Business Days from the date KongZhong notifies Ho Chi
Sing that KongZhong has completed verifying and agreeing to the
Financial Statement for the period from 1 October 2005 to 30 June 2006
prepared by the management of Xinrui. KongZhong shall verify the
Financial Statement within twenty (20) Business Days from the date the
Financial Statements are delivered to KongZhong by the management of
Xinrui ("VERIFICATION PERIOD"). If KongZhong were to disagree with
such Financial Statements, the disagreement must be based on
reasonable grounds, and the disagreement shall be notified to Ho Chi
Sing within the five (5) Business Days from the last date of the
Verification Period, in which case, KongZhong shall pay the Second
Cash Payment to
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* All deleted material has been separately filed with the Securities and
Exchange Commission.
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Ho Chi Sing within fifteen (15) Business Days from the date the
disagreement is finally resolved by KongZhong, Ho Chi Sing and the
management of Xinrui; and
(c) KongZhong shall pay the remaining balance of Total Purchase Price at
the last payment date ("LAST PAYMENT DATE") which is the date falling
within fifteen (15) Business Days from the date KongZhong has received
the audited Valuation Financial Statements from the Auditor. The
remaining balance of the Total Purchase Price shall be paid by
KongZhong to Ho Chi Sing in the following manners:
(i) Scenario 1
In the event that at the Last Payment Date, it is agreed by
KongZhong and Ho Chi Sing that the Second Cash Payment has
exceeded the Earn-Out Cash ("SECOND CASH PAYMENT EXCESS AMOUNT"):
(A) Ho Chi Sing shall promptly repay, and each of the Warrantors
shall procure Ho Chi Sing to promptly repay, the Second Cash
Payment Excess Amount to KongZhong no later than 5 Business
Days from the date KongZhong and Ho Chi Sing agree on the
Second Cash Payment Excess Amount;
(B) KongZhong shall issue the Earn-Out Shares to Ho Chi Sing.
The Earn-Out Shares have not been and will not be registered
under the United States Securities Act of 1933 ("SECURITIES
ACT"), and may not be offered or sold in the United States
or to any U.S. persons unless the Earn-Out Shares are
registered under the Securities Act or an exemption from the
registration requirement of the Securities Act is available;
and
(C) the Earn-Out Shares are issued subject to Clause 13.9 below.
(ii) Scenario 2
In the event that at the Last Payment Date, it is agreed by
KongZhong and Ho Chi Sing that the Earn-Out Cash exceeds the
Second Cash Payment ("EARN-OUT EXCESS Amount"):
(A) KongZhong shall pay to Ho Chi Sing the Earn-Out Excess
Amount no later than 5 Business Days from the date KongZhong
and Ho Chi Sing agree on the Earn-Out Excess Amount;
(B) KongZhong shall issue the Earn-Out Shares to Ho Chi Sing.
The Earn-Out Shares have not been and will not be registered
under the Securities Act, and may not be offered or sold in
the United States or to any U.S. persons unless the Earn-Out
Shares are registered under the
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Securities Act or an exemption from the registration
requirement of the Securities Act is available; and
(C) the Earn-Out Shares are issued subject to Clause 13.9 below.
(iii) Scenario 3
In the event that at the Last Payment Date, it is agreed by
KongZhong and Ho Chi Sing that the Earn-Out Cash equals to the
Second Cash Payment:
(A) KongZhong shall issue the Earn-Out Shares to Ho Chi Sing.
The Earn-Out Shares have not been and will not be registered
under the Securities Act, and may not be offered or sold in
the United States or to any U.S. persons unless the Earn-Out
Shares are registered under the Securities Act or an
exemption from the registration requirement of the
Securities Act is available; and
(B) the Earn-Out Shares are issued subject to Clause 13.9 below.
For the avoidance of doubt, KongZhong has the absolute discretion to
decide whether to pay the Earn-Out Amount in the form of the Earn-Out
Cash and the Earn-Out Shares, or wholly in the form of cash.
3.3 Purchase Price for Xinrui Shares.
The purchase price payable for the Xinrui Shares ("XINRUI PURCHASE PRICE")
is RMB10,000,000.
3.4 Payment terms of Xinrui Purchase Price
Xinrui Purchase Price shall be paid by KongZhong Nominee within fifteen
(15) Business Days from the date of this Agreement as follows:
(a) KongZhong Nominee shall pay an amount of RMB3,330,000 to each of the
Xinrui Shareholders by electronic funds transfer to the account with
the detailed information as follows;
(Chinese Characters): (Chinese Characters)
(Chinese Characters): (Chinese Characters)
(Chinese Characters): 839
(Chinese Characters): [deleted*]
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* All deleted material has been separately filed with the Securities and
Exchange Commission.
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(b) KongZhong Nominee shall pay the remaining amount of RMB6,670,000 to
Xinrui to be used to satisfy the outstanding debts owed to Xinrui by
the Xinrui Shareholders;
All of the Xinrui Shareholders hereby agree and acknowledge that the
payment of the remaining amount of RMB6,670,000 to Xinrui mentioned in
sub-paragraph (b) above forms part of the Xinrui Purchase Price, which
together with the amount of RMB3,330,000 mentioned in sub-paragraph (a)
above, equals to the Xinrui Purchase Price. Provided that the Xinrui
Purchase Price has been paid by KongZhong Nominee according to this Clause
3.4, all of the Xinrui Shareholders hereby covenant that they shall not,
jointly or severally, make any claim whatsoever, whether now or in the
future, against KongZhong Nominee (or KongZhong) for the payment of the
remaining amount of RMB6,670,000.
4. Condition to payment of First Cash Payment and Xinrui Purchase Price
Each of the Parties:
(a) agrees and shall procure that, simultaneously with this Agreement:
(i) each of the Xinrui Shareholders, Xinrui and KongZhong Nominee
shall enter into the Xinrui Share Purchase Agreement and sign all
other documents required for the registration of the share
transfer of Xinrui Shares with the relevant administration
industry and commerce in the PRC; and
(ii) each of the Management Team shall enter into the employment
contract and non-competition and confidentiality agreement
referred to in Schedule 6; and
(b) agrees that KongZhong has no obligation to make the payment of the
First Cash Payment and KongZhong Nominee has no obligation to make the
payment of the Xinrui Purchase Price until and unless the Xinrui Share
Purchase Agreement has been duly entered into by each of the Xinrui
Shareholders, Xinrui and KongZhong Nominee at the same date as this
Agreement.
Each of the Warrantors:
shall procure that the signature of Ho Chi Sing on the signature page
of the power of attorney attached hereto as Exhibit B 1 should have
been authenticated and notarized by a qualified Person and delivered
to KongZhong before the payment of First Cash Payment and Xinrui
Purchase Price.
5. Closing
5.1 Closing.
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The consummation of the sale and purchase of the Shares shall take place at
Llinks Law Offices, Units 16-20, 27 Floor, Tower 1, China World Trade
Center, Beijing, on the date falling twenty (20) Business Days from the
date of this Agreement or such other place and time as the Parties may
mutually agree ("CLOSING").
5.2 Closing Conditions
Before Closing can occur, unless otherwise waived by KongZhong, the
following conditions must be satisfied by the relevant Warrantor
responsible for satisfying those conditions ("CLOSING CONDITIONS") within
twenty (20) Business Days from the date of this Agreement:
(a) Transfer Conditions
(i) each of the Xinrui Shareholders has effectively transferred all
of its shareholding in Xinrui to KongZhong Nominee including
registering the share transfer contemplated in the Xinrui Share
Purchase Agreement with the relevant administration industry and
commerce in the PRC;
(ii) Ho Chi Sing has effectively transferred all of his shareholding
in Sharp Edge to KongZhong;
(b) Other Conditions
(i) Sharp Edge and Ho Chi Sing, and where relevant, a Warrantor,
shall:
(A) deliver to KongZhong the new share certificate(s)
representing the Sharp Edge Shares purchased by KongZhong
with KongZhong endorsed on the share certificate(s) as the
new owner of the Sharp Edge Shares, and any other documents
or items any Warrantor is required to deliver to KongZhong
at or prior to the Closing;
(B) enter the name of KongZhong in the register of shareholders
of Sharp Edge as the sole owner of the Sharp Edge Shares and
deliver to KongZhong a copy of such updated register of
shareholders certified as true and complete copy by the
Management Team or the Board of Sharp Edge.
(C) at Closing, deliver to KongZhong the letter(s) of
resignation of the Director(s) of Sharp Edge as at the date
of Closing and enter the names of such persons as KongZhong
may appoint as Directors of Sharp Edge in the register of
directors of Sharp Edge as Directors and deliver to
KongZhong as soon as practicable after the Closing a copy of
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such updated register of directors certified as true and
complete copy by the Management Team or the Board of Sharp
Edge.
(D) deliver to KongZhong or its legal counsel a legal opinion
issued by the BVI Counsel with respect to Sharp Edge for the
share purchase contemplated in this Agreement in the form
and substance satisfactory to KongZhong.
(ii) Xinrui and the Xinrui Shareholders, and where relevant a
Warrantor, shall:
(A) deliver to KongZhong Nominee the contribution certificate(s)
(Chinese Characters) representing the Xinrui Shares
purchased by KongZhong Nominee with KongZhong Nominee
endorsed on the contribution certificate(s) as the new owner
of the Xinrui Shares, and any other documents or items any
Warrantor is required to deliver to KongZhong Nominee at or
prior to the Closing;
(B) enter the name of KongZhong Nominee in the register of
shareholders of Xinrui as the sole owner of the Xinrui
Shares and deliver to KongZhong Nominee a copy of such
updated register of shareholders certified as true and
complete copy by the Management Team or the Board of Xinrui;
and
(C) at Closing, deliver to KongZhong Nominee the letter(s) of
resignation of the Director(s) of Xinrui as at the date of
Closing and enter the names of such persons as KongZhong
Nominee may nominate for appointment as Directors of Xinrui
in the register of directors of Xinrui as Directors and
deliver to KongZhong Nominee as soon as practicable after
the Closing a copy of such updated register of directors
certified as true and complete copy by the Management Team
or the Board of Xinrui.
(D) the new business license of Xinrui and the amended and
updated articles of association of Xinrui to reflect the
completion of the transfer of the Xinrui Shares from the
Xinrui Shareholders to KongZhong Nominee.
(iii) All of the Warrantors shall deliver to KongZhong and KongZhong
Nominee a certificate confirming that:
(A) all the representations and warranties in Clause 6 are true
in all material aspects on the date of the Closing as though
made on such date and that there are no events or occurrence
which will, with the
15
passing of time, serving of any notice, making of any
determination, fulfilling of any conditions, or a
combination of any of them, will result in a Material
Adverse Event;
(B) all of the steps or actions required to be undertaken under
the Restructuring Documents have been duly and effectively
taken to give effect to the valid restructuring contemplated
under the Restructuring Documents; and
(C) all corporate and legal proceedings taken by each Warrantor
and/or each Group Company in connection with the
transactions contemplated by the Transaction Documents and
all documents relating to these transactions which are
necessary to the signing and delivery hereof and the
performance hereunder of the obligations of such Group
Company have been duly completed; no legal action is pending
or is threatened in writing which seeks to impose liability
upon any of the Group Companies by reason of the
consummation of the transactions contemplated by the
Transaction Documents to which it is a party; all of the
conditions set forth in Clause 10 of this Agreement have
been duly satisfied.
6. Representations and Warranties of the Warrantors to KongZhong, and as the
case may be, KongZhong Nominee
As of the date of this Agreement up to, and including the Closing Date as
though made on each day and up to the Closing Date, each of the Warrantors
jointly and severally represents and warrants to KongZhong, and where
relevant, to KongZhong Nominee, except as set forth in the disclosure
schedule attached hereto as Exhibit C ("DISCLOSURE SCHEDULE"), as follows:
6.1 Sharp Edge's Corporate Organization and Authority.
Sharp Edge:
(a) is a company duly established, validly existing, authorized to
exercise all its corporate powers, rights, and privileges, and is in
good standing under the laws of BVI;
(b) has the corporate power and corporate authority to own, lease and
operate its properties and to carry on its business as is now
conducted; and has complied with its constitutional or organizational
documents in all respects, and none of the activities, agreements,
commitments, obligations or rights of Sharp Edge is ultra vires,
unauthorized or in violation of such constitutional or organizational
documents or any applicable laws;
16
(c) is qualified as a foreign corporation in all jurisdictions in which
qualification is required;
(d) has made available to KongZhong a copy of all of its directors' and
shareholders' minutes and/or resolutions. Each copy is true, correct,
up-to-date and complete and contains all amendments and all minutes of
meetings and actions taken by the shareholders and directors of Sharp
Edge since the time of establishment of Sharp Edge up to, and
including, the date of this Agreement and accurately reflects all
transactions referred to in such minutes and/or resolutions;
(e) has properly kept all books, records and registers required to be kept
by it under any applicable laws, and the copies of the constitutional
or organizational documents of Sharp Edge supplied to KongZhong are
true, accurate, up-to-date and complete;
(f) has filed or delivered all returns, particulars, resolutions and other
documents required to be filed with or delivered to any governmental
authority in respect of Sharp Edge; and
(g) has not given any powers of attorney currently in force, and there are
no outstanding authorities (express or implied) by which any Person
may enter into any contract or commitment to do anything outside the
ordinary course of business on behalf of Sharp Edge.
6.2 Sharp Edge WFOE's Corporate Organization and Authority.
Sharp Edge WFOE:
(a) is a wholly foreign-owned enterprise duly established, validly
existing and is authorized to exercise all its corporate powers,
rights, and privileges under the laws of the PRC;
(b) is duly approved by the relevant PRC governmental authorities and has
the corporate power and corporate authority to own, lease and operate
its properties and to carry on its business as is now conducted, and
as authorized to be conducted under its current business license; has
complied with its constitutional or organizational documents in all
respects, and none of the activities, agreements, commitments,
obligations or rights of Sharp Edge WFOE is ultra vires, unauthorized
or in violation of such constitutional or organizational documents or
any applicable laws;
(c) is qualified as a foreign corporation in all jurisdictions in which
qualification is required;
(d) has made available to KongZhong a copy of all of its directors' and
shareholders' minutes and/or resolutions. Each copy is true, correct,
up-to-date and complete and contains all amendments and all minutes of
meetings and actions taken by the shareholders and directors of Sharp
Edge WFOE since the time of establishment of Sharp Edge WFOE up to,
and including, the date of this Agreement and accurately
17
reflects all transactions referred to in such minutes and/or
resolutions;
(e) has been duly approved by the relevant authorities in the PRC as a
wholly foreign-owned enterprise held by Sharp Edge, and enjoys the
preferential treatment and benefits (including but not limited to the
preferential tax treatment) available generally to wholly
foreign-owned enterprises under applicable PRC laws;
(f) has properly kept all books, records and registers required to be kept
by it under any applicable laws, and the copies of the constitutional
or organizational documents of Sharp Edge WFOE supplied to KongZhong
are true, accurate, complete and up-to-date;
(g) has filed or delivered all returns, particulars, resolutions and other
documents required to be filed with or delivered to any governmental
authority in respect of Sharp Edge WFOE; and
(h) has not given any powers of attorney currently in force, and there are
no outstanding authorities (express or implied) by which any Person
may enter into any contract or commitment to do anything outside the
ordinary course of business on behalf of Sharp Edge WFOE.
6.3 Xinrui's Corporate Organization and Authority.
Xinrui
(a) is a limited liability company duly established, validly existing and
is authorized to exercise all its corporate powers, rights and
privileges under the laws of PRC;
(b) has the corporate power and corporate authority to own, lease and
operate its properties and to carry on its business as now conducted
and as is authorized to be conducted under its current business
license; has complied with its constitutional or organizational
documents in all respects, and none of its activities, agreements,
commitments, obligations or rights is ultra vires, unauthorized or in
violation of such constitutional or organizational documents or any
applicable laws;
(c) is qualified as a foreign corporation in all jurisdictions in which
qualification is required;
(d) has made available to KongZhong Nominee, or as the case may be,
KongZhong, a copy of all of its directors' and shareholders' minutes
and/or resolutions. Each copy is true, correct, up-to-date and
complete and contains all amendments and all minutes of meetings and
actions taken by the shareholders and directors of Xinrui since the
time of the establishment of Xinrui up to, and including, the date of
this Agreement and accurately reflects all transactions referred to in
such minutes and/or resolutions;
18
(e) has properly kept all books, records and registers required to be kept
by it under any applicable laws, and the copies of its constitutional
or organizational documents supplied to KongZhong Nominee, or as the
case may be, KongZhong, are true, accurate and up-to-date;
(f) has filed or delivered all returns, particulars, resolutions and other
documents required to be filed with or delivered to any governmental
authority; and
(g) has not given any powers of attorney currently in force, and there are
no outstanding authorities (express or implied) by which any Person
may enter into any contract or commitment to do anything outside the
ordinary course of business on behalf of Xinrui.
6.4 Capitalization of Sharp Edge.
(a) Capital Stock. As of the date of this Agreement, the authorized
capital of Sharp Edge consists of one (1) ordinary share, of which
exactly one (1) ordinary share has been duly and validly issued and
fully paid.
(b) Other Securities. As of the date of this Agreement and save for those
contemplated by the Transaction Documents, there are no outstanding
rights of first refusal, preemptive rights, or other rights, warrants,
options, conversion privileges, subscriptions, or other rights,
agreements or securities, either directly or indirectly, entitling the
holder thereof to purchase or otherwise acquire or to compel Sharp
Edge to increase or decrease its registered capital or to issue,
repurchase or redeem any equity securities of Sharp Edge.
(c) Shareholders. Ho Chi Sing owns all of the Sharp Edge Shares free and
clear of all Encumbrances and has valid and legal title to the Sharp
Edge Shares to transfer to KongZhong pursuant to the terms and
conditions of this Agreement.
6.5 Capitalization of Sharp Edge WFOE.
(a) Registered Capital. The total investment of Sharp Edge WFOE is
US$150,000 and the registered capital of Sharp Edge WFOE is
US$150,000. Sharp Edge at all times holds one hundred percent (100%)
of the equity interest in Sharp Edge WFOE free and clear of all
Encumbrances. Such capitalization of Sharp Edge WFOE and the ownership
of Sharp Edge WFOE by Sharp Edge have been approved by all relevant
PRC authorities, which approvals are in full force and effect and have
not lapsed or been revoked.
(b) Other Securities. There are no outstanding rights of first refusal,
preemptive rights, or other rights, warrants, options, conversion
privileges, subscriptions, or other rights, agreements or securities,
either directly or indirectly, entitling the holder thereof to
purchase or otherwise acquire or to compel Sharp Edge WFOE to increase
or decrease
19
Sharp Edge WFOE's total investment or registered capital, or to issue,
repurchase or redeem any of such registered capital.
6.6 Capitalization of Xinrui.
(a) The registered capital of Xinrui is RMB10,000,000. All of the Xinrui
Shareholders have fully paid the requisite amount into the registered
capital of Xinrui in the amount and within the time limit as required
by the relevant PRC authorities.
(b) An accurate and complete list of Xinrui's shareholders and the capital
structure is set forth in Schedule 1.
(c) The Persons identified in Clause 6.6(b) are the only Persons with
direct or indirect interests in the equity capital of Xinrui, and each
such Person holds its respective legal and valid interests in Xinrui
free and clear of all Encumbrances, except as provided under the
Restructuring Documents. None of such Persons will transfer, alienate
or dispose of any direct or indirect interest in Xinrui or create any
Encumbrance over any such interest except as required pursuant to this
Agreement or the Restructuring Documents.
(d) Save for those contemplated in the Transaction Documents, there are no
outstanding rights of first refusal, preemptive rights or other
rights, warrants, options, conversion privileges, subscriptions, or
other agreements or securities, either directly or indirectly,
entitling the holder thereof to purchase or otherwise acquire or to
compel Xinrui to increase or decrease its total investment or
registered capital or to issue, repurchase or redeem any of such
registered capital.
6.7 Subsidiaries.
(a) Save for the Subsidiaries of Sharp Edge listed in Schedule 3, Sharp
Edge is not the direct or indirect legal or beneficial owner of any
share, equity, membership, partnership or ownership interest in any
other Person.
(b) The particulars of the Subsidiaries of Sharp Edge set forth in
Schedule 3 are true and accurate in all respects and the percentage of
the share capital showed therein as owned by Sharp Edge is
beneficially owned free from all Encumbrances.
(c) There is no agreement or arrangement in force which calls for the
present or future issue or sale of, or grant to any person the right
(whether conditional or otherwise) to call for the issue, sale or
transfer of any share or loan capital of any of the Subsidiaries of
Sharp Edge (including any option, notes, warrants or other securities
or rights convertible or ultimately convertible into stock, shares or
equity interests in any of the Subsidiaries of Sharp Edge).
20
(d) At the date of this Agreement, each of Sharp Edge WFOE and Xinrui does
not have any Subsidiaries, and is not participant in any joint
venture, partnership, or other similar arrangement except for the
arrangements contemplated in the Restructuring Documents. From the
date of this Agreement up to the Closing, none of the Group Companies
will acquire any Subsidiaries or become party to any joint venture
except as may be required by the Restructuring Documents.
6.8 Financial Statements.
(a) General.
(i) The Financial Statements attached hereto as Exhibit D have been
prepared in accordance with the requirements of the relevant
statutes and on a consistent basis in accordance with the PRC
GAAP and, at all times, are consistent with and do not contravene
the accounting policy of KongZhong attached hereto as Exhibit E.
(ii) No change in the policies of accounting have been made in
preparing the accounts of each of the Group Companies for each of
the previous financial periods of each of the Group Companies
ended on the Balance Sheet Date, except as stated in the audited
balance sheets and profit and loss accounts for such period.
(iii) The Financial Statements attached hereto as Exhibit D show a
true and fair view of the assets, liabilities, capital
commitments and the state of affairs of each of the Group
Companies as at the Balance Sheet Date and of the profits and
losses of each of the Group Companies for the period concerned.
(b) Provision for liabilities, etc. Full disclosure of and adequate
provisions for bad and doubtful debts and all liabilities, actual,
contingent or otherwise and of all financial commitments in existence
at the Balance Sheet Date have been made in the Financial Statements.
(c) Extraordinary/exceptional items. The results shown by the Financial
Statements on the Balance Sheet Date have not (save for therein
disclosed) been affected by an extraordinary or exceptional or
non-recurring item or by any other circumstances rendering the profits
or losses for the period covered by the Financial Statements unusually
high or low.
(d) Provision for Taxation. The Financial Statements reserve or provide in
full for all Taxation for which a Group Company was liable at the
Balance Sheet Date, and whether or not the Group Company has or may
have any right of reimbursement against
21
any other Person, the Financial Statements have provided for in full
for any contingent or deferred liability to Taxation.
(e) Acquisition of assets. None of the Group Companies' assets has been
acquired for any consideration in excess of its net realizable value
at the date of such acquisition or otherwise than by way of an arm's
length transaction.
(f) Depreciation. The rates of depreciation adopted in the Financial
Statements were sufficient for each fixed asset of a Group Company to
be written down to nil by the end of its useful life.
(g) Books and Financial Records. All the accounts, books, registers,
ledgers and financial and other material records of whatsoever kind of
each Group Company have been fully properly and accurately kept and
completed; there are no inaccuracies or discrepancies of any kind
contained or reflected therein; and they give and reflect a true and
fair view of the financial, contractual and trading position of the
Group Company and of its plant and machinery, fixed and current assets
and liabilities (actual and contingent), debtors, creditors and
work-in-progress.
6.9 Changes since Balance Sheet Date.
(a) General Changes. Since the Balance Sheet Date:
(i) the business of each of the Group Companies has been carried on
in the ordinary course and maintained as a going concern; and
(ii) there has been no adverse change in the financial position or
trading prospects of each of the Group Companies.
(b) Specific Changes. Since the Balance Sheet Date:
(i) no Group Company has disposed of any asset (including trading
stock) other than in the ordinary course of carrying on its
business;
(ii) no Group Company has assumed or incurred any liabilities (actual
or contingent) or expenditure otherwise than in the ordinary
course of carrying on its business or entered into any
transaction which is not in its ordinary course of business;
(iii) none of the amounts under any guarantees or secured by the
mortgages, charges, liens or Encumbrance disclosed in the
Financial Statements has been increased beyond the amount shown
in the Financial Statements and no guarantee, mortgage, charge,
lien or Encumbrance has been entered into,
22
given or created since the Balance Sheet Date;
(iv) no business of any of the Group Companies has been adversely
affected by the loss of any important contract or customer or
source of supply or by any abnormal factor not affecting similar
businesses to a like extent and none of the Warrantors are aware
of any facts which are likely to give rise to any such effects;
(v) subject to Clause 13.1, no dividends, bonuses or distributions
have been declared, paid or made by any Group Company;
(vi) no Group Company has changed its financial year end;
(vii) save for resolutions copies of which have been delivered to
KongZhong (or as the case may be, KongZhong Nominee) prior to the
date of this Agreement or which are required to be passed by any
Group Company prior to Closing in order to satisfy the conditions
set out in Clause 10, no board or shareholders' resolutions of
any of the Group Companies have been passed;
(viii) there has not been any waiver or compromise granted by any
Group Company of a valuable right owned by it or of a material
debt owing to it; and
(ix) there has been no change to any material contract or agreement
which any Group Company or any of its assets is bound by or
subject to.
6.10 Taxation.
(a) General.
(i) The provisions for Taxes in the Financial Statements are
sufficient for the payment of all accrued and unpaid Taxes of
each Group Company, whether or not assessed or disputed as of the
date of each such Financial Statements. Each Group Company has
duly and punctually paid all Taxation which it has become liable
to pay and is under no liability to pay any penalty, interest,
surcharge or fine in connection with any Taxation and has
complied in all respects with all legislation relating to
Taxation applicable to it.
(ii) Each Group Company has timely made or filed all such returns,
notifications and reports, provided all such information and
documents and maintained all such records in relation to Taxation
as are required to be made or provided or maintained by it, all
such returns, notifications, reports, information, documents and
records are true and correct and none is disputed by any relevant
23
governmental authority.
(iii) Each Group Company is not and does not expect to be involved in
any dispute in relation to Taxation and there is no relevant
governmental authority which has investigated or indicated that
it intends to investigate the Tax affairs of any Group Company.
(b) Duties, etc. All duties, charges, imposts or fees payable in respect
of any assets (including trading stock) imported, exported or owned by
the Group Company have been paid in full.
(c) Payments and Interest. No Group Company is under any obligation to
make at any time any payments of interest or any annual payments for
which no relief will be received, whether as a deduction or charge on
income.
(d) Deductions and Withholdings. Each Group Company has made all
deductions in respect, or on account, of any Tax from any payments
made by it which it is obliged or entitled to make and has accounted
in full to the appropriate authority for all amounts so deducted.
(e) Overseas Business. Other than Sharp Edge, each of the Group Companies
have only carried on their trade, business or other activities in the
PRC and in addition to Clause 6.7(d), do not have any overseas
subsidiary or associated or related company (as such terms are used in
relation to Tax in any foreign country).
(f) Secondary Liability. No event, transaction, act or omission has
occurred which could result in a Group Company becoming liable to pay
or to bear any Taxation which is primarily or directly chargeable
against or attributable to any person other than the Group Company.
6.11 Changes in Net Assets. Since the Balance Sheet Date and at all times up to
the date of Closing, no material changes have occurred in the assets and
liabilities (whether actual or contingent) shown in the Financial
Statements and there has been no material reduction in the value of the net
tangible assets of any of the Group Companies on the basis of the
valuations adopted in the Financial Statements.
6.12 Assets and Liabilities.
(a) Title and Condition.
(i) The assets included in the Financial Statements or acquired since
the Balance Sheet Date (other than trading stock subsequently
disposed of in the ordinary course of business or trading stock
acquired subject to retention or reservation
24
of title by the supplier or manufacturer thereof) and all assets
used by each of the Group Companies:
(A) are legally and beneficially owned by the Group or one of
the Group Companies free from all Encumbrances;
(B) are not the subject of any agreement for lease, hire, hire
purchase or sale on deferred terms;
(C) are in the possession or under the control of the Group
Companies or one of the Group Companies; and
(D) are situated in the PRC.
(ii) The assets owned, possessed or used by the Group comprise all the
assets required to enable the Group to carry on its business in
the ordinary course.
(iii) The assets register of each Group Company comprises a complete
and accurate record of all the lands, buildings, plants,
machineries, equipment or vehicles and other assets owned or
possessed or used by the Group Company.
(iv) All assets owned or used by each Group Company are in good
repair, condition and working order, have been regularly and
properly maintained and none is dangerous, inefficient,
out-of-date, unsuitable for its intended purpose or is in need of
renewal or replacement or substantial repair.
(v) Maintenance contracts are in full force and effect in respect of
all assets of each Group Company which is normal or prudent to be
maintained by independent or specialist contractors; and in
respect of all assets which each Group Company is obliged to
maintain or repair under any leasing or similar agreement, all
such assets have been regularly maintained to the required
standard, and in accordance with safety regulations required or
prudent to be observed in relation thereto and in accordance with
the terms and conditions of any applicable leasing or similar
agreement.
(b) Book Debts.
(i) No part of the amount shown in the books of account of any Group
Company in respect of debtors is represented by debts which are
more than three months overdue for payment or by debts in respect
of arrangements made otherwise than in the ordinary course of any
such Group Company's business.
25
(ii) No debt has been released by any Group Company on terms whereby
the debtor paid less than the book value of his debt and no debt
owing to any such Group Company has been deferred, subordinated
or written off or has been proven to any extent to be
irrecoverable.
(c) General Liabilities. Except as set forth in Schedule 4, no Group
Company has any material obligations or liabilities of any nature,
whether accrued, absolute or contingent, whether liquidated or
unliquidated, and whether now due or to become due, except those
obligations or liabilities incurred in the ordinary course of business
of such Group Company.
(d) Material Debts. Except as set forth in Exhibit A, no Group Company
owes any other debts to the Persons listed in Exhibit A.
6.13 Corporate Power. Each Warrantor has all requisite legal and corporate power
and authority to execute and deliver the Transaction Documents to which it
is a party and to carry out and perform its obligations under the terms of
the Transaction Documents to which it is a party including, where
applicable to the relevant Warrantor, to transfer the Sharp Edge Shares to
KongZhong and to transfer the Xinrui Shares to KongZhong Nominee.
6.14 Authorization. All corporate action on the part of each Group Company and
its shareholders necessary for the authorization, execution, delivery, and
performance of all obligations under the Transaction Documents to which it
is a party, and, at the Closing, for the authorization, issuance, and
delivery of the Shares, has been taken. When executed and delivered by it,
and assuming that the execution and delivery by the other parties thereto
are valid and binding obligations on that other parties, the Transaction
Documents constitute legally binding and valid obligations of the Group
Company enforceable in accordance with their respective terms.
6.15 Validity of Shares. The Shares, when issued, sold, and delivered in
accordance with the terms of this Agreement, will be duly and validly
issued, fully-paid and non-assessable and will be free of any preemption or
similar rights, liens or Encumbrances.
6.16 Changes in Condition. Except as specifically contemplated by this Agreement
and pursuant to the Restructuring Documents, since the Balance Sheet Date:
(a) no Group Company has entered into any transaction except in its
ordinary course of business; (b) there has been no Material Adverse Event
with respect to any Group Company; (c) no Group Company has incurred any
Tax liability except in the ordinary course of business; (d) there has been
no resignation or termination of employment of any Management Team of any
Group Company, and there is no impending resignation or termination of
employment of any Management Team of any Group Company that, if
consummated, would constitute a Material Adverse Event; (e) there has been
no labor dispute involving any Group Company or any of its respective
employees and none is pending or threatened that could result in a Material
Adverse Event; (f)
26
there has been no waiver by any Group Company of a valuable right or debt
owing to such member which would constitute a Material Adverse Event, (g)
there has not been any satisfaction or discharge of any lien, claim, or
Encumbrance, or any payment of any obligation by any Group Company, except
in the ordinary course of business and (h) there has been no change to a
contract or arrangement by which or to which any Group Company or any of
its assets or properties is bound or subject.
6.17 Litigation. There is no action, proceeding, or investigation against any
Group Company, pending or threatened, or any basis for any such action,
proceeding, or investigation, including (without limitation) any action,
proceeding or investigation that challenges or calls into question the
validity of the Transaction Documents or the consummation of the
transactions contemplated by the Transaction Documents, or that would
result, either individually or in the aggregate, in any Material Adverse
Event. There is no judgment, decree, or order of any court in effect
against any Group Company, and none of the Group Company is in default with
respect to any order of any governmental authority to which it is a party
or by which it is bound. There is no action, suit, proceeding, or
investigation by any Group Company currently pending or which any Group
Company presently intends to initiate.
6.18 Title to Properties; Liens and Encumbrances. Each Group Company has good
and marketable title to all its properties and assets, both real and
personal, including without limitation all properties and assets as set
forth in the Financial Statements, and has good title to all its leasehold
interests, in each case free from any Encumbrance. With respect to the
properties and assets leased by a Group Company, that Group Company is in
compliance with any such leases to which it is a party, and such leases are
in full force and effect. Each Group Company owns or leases all properties
and assets necessary to conduct the business, as presently conducted and
proposed to be conducted.
6.19 Intellectual Property Rights.
(a) The Group Companies have independently developed and own or possess
sufficient legal rights to all Intellectual Property Rights (including
registrations and applications to register or renew such rights), and
licenses of any of the foregoing necessary for its business as now
conducted and as proposed to be conducted (collectively, the "GROUP
INTELLECTUAL PROPERTY"), without any infringement of the rights of
others. Schedule 5 contains true, complete and accurate lists of all
Intellectual Property Rights presently used by each Group Company or
necessary for the conduct of the Group Company's business (or the
Group's business as a whole) as currently being conducted or proposed
to be conducted, and the Group Companies own, or have the right to use
under the agreements, all the Intellectual Property Rights set out in
Schedule 5. There are no outstanding options, licenses or agreements
of any kind relating to the Group Intellectual Property, nor is any
Group Company bound by or are parties to any options, licenses or
agreements of any kind with respect to the Group Intellectual Property
of any other person or entity except, in either case, for standard
end-user agreements with
27
respect to "off-the-shelf" computer software that is generally
commercially available. Each Group Company is in compliance with all
material terms of any licenses by which it uses any Group Intellectual
Property, and each such license is in full force and effect. Each
licensor thereof is in compliance with all material terms of the
respective license. No Group Company is aware of the existence of any
fact or circumstance that would give the licensor thereof grounds
under the terms of such license to cancel, terminate or suspend such
license. There is no expectation by any Group Company that any
licenses material to the operation of the Group Companies will not be
renewed in the ordinary course of business on terms that are
commercially reasonable which will result in a Material Adverse Event.
No Group Company has received any communications alleging that it has
violated or, by conducting its businesses as presently conducted or
proposed to be conducted, would violate any of the Intellectual
Property Rights of any other person or entity. To the Knowledge of the
Warrantors, no employee of any Group Company is obligated under any
contract (including licenses, covenants or commitments of any nature)
or other agreement, or is subject to any judgment, decree or order of
any court or administrative agency, that would interfere with their
duties to the Group Companies, or that would conflict with the Group
Companies' business as presently conducted or proposed to be
conducted. To the Knowledge of the Warrantors, it is not necessary for
any Group Company to utilize any Intellectual Property Rights of any
employees of the Group made prior to employment by the Group, except
for Intellectual Property Rights that have been assigned to such Group
Company.
(b) Other than pursuant to the Transaction Documents, none of the Group
Companies or the Warrantors and the Management Team has entered into
any agreement to indemnify any other person against any charge of
infringement or misappropriation of any Group Intellectual Property.
(c) Each Group Company has taken all necessary action to protect and
preserve (i) the validity and enforceability of trade and service
marks and associated goodwill included in the Group Intellectual
Property; (ii) the enforceability of copyrights and the
confidentiality, validity and enforceability of pending patent
applications included in the Group Intellectual Property; (iii) the
validity and enforceability of patents included in the Group
Intellectual Property; and (iv) the confidentiality and enforceability
of trade secrets and the confidentiality of other proprietary
information included in the Group Intellectual Property.
(d) No trade secret or confidential information constituting Group
Intellectual Property has been used, divulged or appropriated for the
benefit of any person other than Sharp Edge, Sharp Edge WFOE or Xinrui
or otherwise to the detriment of the Group Companies, except pursuant
to appropriate non-disclosure agreements. None of the Warrantors,
Management Team, current employees or consultants of the Group
Companies has used any trade secrets or other confidential information
of any other Person in the course of work for the Group Companies,
except with the legally valid consent of such
28
Person.
(e) No Group Company has any written agreements or, to the Knowledge of
the Warrantors, any oral agreements with current or former employees
or consultants with respect to the ownership of Group Intellectual
Property, including inventions, trade secrets or other works created
by them as a result of which any such employee or consultant may have
exclusive or nonexclusive rights to any portion or part of the Group
Intellectual Property created by such individual.
(f) Each Management Team will execute an intellectual property assignment,
non-competition and confidentiality agreement with the relevant Group
Company by the date of the Closing. To the Warrantors' best Knowledge,
none of Management Team and key technical employee employed by any
Group Company, current or former officer, employee or consultant of
the Group Companies are in violation of any term of any written
employment contract, patent disclosure agreement, proprietary
information agreement, non-competition agreement, non-solicitation
agreement, confidentiality agreement, or any other similar contract or
agreement or any restrictive covenants relating to the right of any
Warrantor, Management Team, officer, employee, consultant or person to
be employed or engaged by the Group Companies, or relating to the use
of trade secrets or proprietary information of others, and no former
employer of any such person has any rights in respect of the Group
Intellectual Property.
(g) The Group does not use any processes nor is it engaged in any
activities which involve the misuse of any know-how, lists of
customers or suppliers, trade secrets, technical processes or other
confidential information ("IP CONFIDENTIAL Information") belonging to
any third party. To the Knowledge of the Warrantors, there has been no
actual or alleged misuse by any Person of any IP Confidential
Information. To the Knowledge of each of the Warrantors, none of the
Warrantors and current or former officers, employees or consultants of
the Group have disclosed to any Person any IP Confidential Information
except where such disclosure was properly made in the normal course of
the Group Companies' business and was made subject to an agreement
under which the recipient is obliged to maintain the confidentiality
of such IP Confidential Information and is restrained from further
discussing it or using it other than for the purposes for which it was
disclosed by the Group Companies.
(h) No royalty, honorarium, fees or other payments are payable by a Group
Company to any third party by reason of the ownership, possession,
sale, marketing, use or other exploitations of any Group Intellectual
Property.
(i) No government funding, facilities of any university, college or other
educational institution or research center of funding from third
parties (other than funds received in consideration of capital stock
of any Group Company or issuance of debt) was used in the development
of any Group Intellectual Property.
29
(j) No Public Software (A) was or is used in connection with the
development of any Group Intellectual Property, or (B) was or is
incorporated in whole or in part, or has been distributed in whole or
in part in conjunction with any product or serviced provided by any
Group Company. "Public Software" means any software that contains, or
is derived (in whole or in part) from any software that is distributed
as free software, open source software (such as, without limitation,
Unix or Linux) or similar licensing or distribution models, including
but not limited to, software licensed or distributed under any of the
following: (i) GNU's General Public License (GPL) or Lesser/Library
GPL (LGPL); (ii) the Artistic License (e.g. PERL); (iii) the Mozilla
Public License; (iv) the Netscape Public License; (v) the Sun
Community Source License (SCSL); (vi) the Sun Industry Standards
License (SISL); (vii) the BSD License; and (viii) the Apache License.
6.20 Contracts.
(a) Validity of Contracts.
(i) No Group Company is in breach of or has Knowledge of any breach,
any invalidity of or grounds for rescission, avoidance or
repudiation of any agreement or other transaction to which the
Group Company is a party including the contracts between
KongZhong and the relevant Operators attached hereto as Exhibit F
("MATERIAL OPERATING CONTRACTS"), nor has it received notice of
any intention to terminate any such agreement or repudiate or
disclaim any other transaction.
(ii) To the Knowledge of each of the Warrantors, no party with whom a
Group Company has entered into any agreement or arrangement,
including the Material Operating Contracts, is in default
thereunder being a default which would have a Material Adverse
Event on the Group Company and there are no circumstances likely
to give rise to any such default.
(iii) No Group Company is a party to any contract which, by reason of
the sale of the Shares or any provision of this Agreement and/or
the Transaction Agreements, gives any other contracting party the
right to terminate the contract or create or increase any
obligation on the Group Company (whether to make payment or
otherwise) to any person.
(b) Material Contracts. Other than the Material Operating Contracts, no
Group Company has material or long term contract or commitment binding
upon it including but not limited to:
(i) any contract entered into otherwise than in the ordinary course
of business;
30
(ii) any agreement or arrangement otherwise than by way of an arm's
length transaction;
(iii) any sale or purchase option or similar contract or arrangement
affecting any assets owned or used by the Group Company or by
which the Group Company is bound;
(iv) any contract which cannot readily be fulfilled or performed by
the Group Company on time or without undue or unusual expenditure
of money or effort;
(v) any agreement whereby the Group Company is, or has agreed to
become, a member of any joint venture, consortium or partnership
or other unincorporated association;
(vi) any agreement whereby the Group Company is, or has agreed to
become, a party to any distributorship or agency agreement;
(vii) any agreement with a customer which constitutes five percent
(5%) or more of the annual sales of the Group Company on an
annual basis;
(viii) any agreement with a supplier which constitutes five percent
(5%) or more of the total supply of that Group Company on an
annual basis;
(ix) any agreement pursuant to which the Group Company or any of its
subsidiaries license or obtain licenses to, or have arranged for
the development of, Intellectual Property Rights;
(x) any agreement with manufacturing subcontractors; and
(xi) any inter-company agreements and arrangements between any Group
Companies.
(c) Restrictive Agreements. Save for the Transaction Documents, there are
no agreements in force restricting the freedom of any Group Company to
provide and take goods and services or to manage its own business
affairs by such means and from and to such persons as it may from time
to time think fit.
(d) Guarantee etc. in respect of goods or services. Save for any condition
or warranty implied by law or contained in its standard terms of
business or otherwise given in the ordinary course of business, no
Group Company has given guarantee or warranty or made any
representation in respect of goods (including trading stock) or
services
31
supplied or contracted to be supplied by it or nor has it accepted any
obligation that could give rise to any liability after any such goods
or services has been supplied by it.
(e) Agreement with Shareholders. Other than the Transaction Documents,
neither Sharp Edge nor Xinrui has entered into any agreement with, or
given any undertaking or assurance to, any of its existing
shareholders or its Affiliates.
(f) Restriction on Transfer of Equity Interests by Warrantors. Other than
as required by the Transaction Documents, there are no agreements
binding on a Warrantor which prohibit or restrict the sale, disposal
or transfer of any equity securities (or any interests therein) owned
by the Warrantor.
6.21 Compliance with Other Agreements. None of the Group Companies is in
violation of any term or provision of its memorandum or articles of
association or equivalent constitutive documents as in effect at the date
of this Agreement. None of the Group Companies is in violation of any term
or provision of any indebtedness, mortgage, indenture, contract, agreement,
judgment or any decree, order, statute, rule, or regulation applicable to
the Group Company. Neither the execution nor delivery of the Transaction
Documents, nor the conduct or carrying on of the Group Companies' business
as presently conducted or proposed to be conducted, with or without the
passage of time, the fulfillment of certain conditions, the making of any
determination, or the giving of notice or a combination of any of them or
otherwise, will conflict with or result in a breach of or violate the terms
of, or constitute a default under:
(a) any provision of the memorandum or articles of association or
equivalent constitutive documents of any Group Company as in effect at
the Closing;
(b) any provision of any judgment, decree or order to which any Group
Company is a party or by which it is bound;
(c) any indebtedness, mortgage, indenture, agreement, security, contract,
obligation, commitment, covenant or instrument to which a Group
Company is a party or by which it is bound; or
(d) any statute, rule, or governmental regulation applicable to any Group
Company.
6.22 Employee Relations and Compensation Plans.
(a) General.
(i) Other than the employment agreements set forth in Schedule 6,
there are not in existence any contracts of service with
directors of the Warrantors nor any consultancy or management
agreements with the Group Companies.
32
(ii) There are not in existence any contracts of service with
employees of the Group Companies which cannot be terminated by
three months' notice or less without giving rise to any claim for
damages or compensation and no Group Company has received notice
of resignation from any key employees or directors.
(iii) There are no existing contracts of service with any employees of
any Group Company carrying remuneration and of all directors
entitled to emoluments at a rate, or (in the case of fluctuating
amounts) an average annual rate since the incorporation of such
Group Company, in excess of US$50,000 per annum per person.
(iv) The basis of the remuneration payable to the directors or
employees of any Group Company is the same or lower than that in
force at the Balance Sheet Date and Sharp Edge or Xinrui is under
no obligation nor has it made any provision to alter such basis.
(v) There are no amounts owing to any present or former directors or
employees of any Group Company other than remuneration accrued
due or for reimbursement of business expenses.
(vi) There is no agreement or understanding (contractual or otherwise)
between any Group Company and any employee or ex-employee with
respect to his employment, his ceasing to be employed or his
retirement which is not included in the written terms of his
employment or previous employment (as the case may be).
(b) Payments on termination. Save to the extent (if any) to which
provision or allowance has been made in the Financial Statements:
(i) No liability has been incurred by any Group Company for breach of
any contract of service, contract for services, payments under
any applicable laws or for any other obligations resulting from
and accruing after the termination of any contract of employment
or for services; and
(ii) No Group Company has made or agreed to make any payment or
provided or agreed to provide any benefit to any present or
former director or employee or any dependant of any such former
director or employee in connection with the actual or proposed
termination or suspension of employment or variation of any
contract of employment of any present or former director or
employee.
(c) Compliance with relevant legislation, etc. Each Group Company has in
relation to each of its employees (and, so far as relevant, to each of
its former employees):
33
(i) complied with all obligations imposed on it by, and all orders
and awards made under, all statutes, regulations, codes of
conduct and practice, collective agreements, customs and
practices relevant to the relations between it and its employees
or any trade union or the conditions of service of its employees;
and
(ii) maintained current, adequate and suitable records regarding the
service of each of its employees.
(d) Proprietary Information and Inventions Agreements. Each former and
current employee, officer and consultant of each Group Company has
executed a form of agreement which provides that all Intellectual
Property Rights which arise during the course of their employment or
engagement by the Group Company shall belong to such Group Company.
(e) Trade Union. No Group Company:
(i) has any agreement or other arrangement (binding or otherwise)
with any trade union or other body representing its employees or
any of them nor does it recognize any trade union or other body
representing its employees or any of them for negotiating
purposes; or
(ii) is involved in any industrial or trade disputes or any dispute or
negotiation regarding a claim of material importance with any
trade union or association of trade unions or organization or
body of employees and there are no circumstances likely to give
rise to any such dispute.
(f) Incentive Schemes. No Group Company has in existence nor is it
proposing to introduce any share incentive scheme, share option scheme
or profit sharing bonus or other such incentive scheme for all or any
of its directors or employees.
6.23 Transactions with Affiliates. Except as required in the Restructuring
Documents or as otherwise set forth in Schedule 7, (i) no director or
Management Team of any Group Company, no spouse, parent, sibling or
children of any such director or Management Team, and no entity Controlled
by any of the foregoing, has any agreement, understanding, proposed
transaction with, indebtedness owing to, commitments to make loans or to
extend or guarantee credit from any Group Company other than in the
ordinary course of business; and (ii) no director or Management Team of any
Group Company, no spouse, parent, sibling or children of any such director
or Management Team, and no entity Controlled by any of the foregoing, has
any direct or indirect ownership interest in any Affiliate of any Group
Company or in any firm or corporation that competes with any Group Company.
34
6.24 Governmental and Third Party Consents.
(a) Except as set forth in Schedule 8, as of Closing, no consent,
approval, order, or authorization of, or registration, qualification,
designation, declaration, or filing with, any governmental authority
on the part of any Group Company will be required in connection with
the execution, delivery and performance of the Transaction Documents
and the consummation of the transactions contemplated in the
Transaction Documents which has not already been secured or effected
prior to the Closing.
(b) Except as set forth in Schedule 8, no consent, approval, order, or
authorization of, or registration, qualification, designation,
declaration, or filing with, any state, local, or provincial
governmental authority on the part of any Group Company is required in
connection with the execution, delivery and performance of the
Transaction Documents and the consummation of the transactions
contemplated in the Transaction Documents.
6.25 Permits. Each Group Company has all franchises, permits, licenses, and any
similar governmental authority necessary for the conduct of its business as
now being conducted ("LICENSES"). Each of the Licenses is in full force and
effect and a list of such Licenses is attached hereto as Exhibit G. None of
the Group Companies is in default in any respect under any of its Licenses
and has not received any notice relating to the suspension, revocation or
modification of any such Licenses and has no Knowledge of any event or
occurrence or act or omission on the part of any Group Company or the Group
as a whole for the period from the date of this Agreement until the date of
the Closing that would or should serve as sufficient notice to the Group or
the relevant Group Company, or that would or should serve as sufficient
ground, for the suspension, revocation or modification of any such
Licenses.
6.26 Full Disclosure. Each of the Warrantors has provided KongZhong, or as the
case may be, KongZhong Nominee, with (a) all the information that
KongZhong, or as the case may be, KongZhong Nominee, has requested in
connection with deciding whether to purchase the Shares, and (b) all
information necessary to enable KongZhong, or as the case may be, KongZhong
Nominee, to make a fully informed decision as to whether or not to purchase
the Shares, all such information being true, accurate and complete in all
respects and not misleading in any material respect. The representations
and warranties contained in this Agreement and any other Transaction
Documents, certificates and other documents made or delivered in connection
herewith do not contain any untrue statement of material fact or omit to
state any material fact necessary to make the statements contained therein
or herein, in view of the circumstances under which they were made, not
misleading.
6.27 Brokers and Finders. None of the Warrantors has retained any investment
banker, broker, or finder and there are no fees or charges due or payable
to third parties (other than reasonable legal fees) in connection with the
transactions contemplated by this Agreement.
35
6.28 Prior Rights. Neither Sharp Edge nor Xinrui has granted any right to any
holder of the Sharp Edge Shares or the Xinrui Shares (other than KongZhong
and KongZhong Nominee) which is preferential in nature to the rights
exercisable by KongZhong under the Sharp Edge Shares and KongZhong Nominee
under Xinrui Shares.
6.29 Enjoyment of Economic Benefits. Sharp Edge, through Sharp Edge WFOE, enjoys
all of the economic benefits and has full control in Xinrui as derived from
the Restructuring Documents.
6.30 Due Execution and Delivery of Restructuring Documents. Each of the
Restructuring Documents to which a Warrantor is a party has been duly
executed and delivered by that Warrantor and constitutes valid and binding
obligations on that Warrantor, enforceable in accordance with their
respective terms.
6.31 Penalty. None of the Group Companies have been imposed with any form of
penalty, fines, sanctions, suspensions, monetary or otherwise, which has
not already been settled in full or set aside, and none of the Group
Companies have received any form of notice (verbal or written) with respect
to any penalty, fines, sanctions, suspensions, and to the best Knowledge of
each Group Company, it is not aware of any penalty, fines, sanctions,
suspensions that may be imposed upon it or any events, circumstances,
conditions or facts which may result in the imposition of the penalty,
fines, sanctions, suspensions upon it which will result in a Material
Adverse Event.
6.32 Non-default on non-competing agreements. None of the Management Team is in
breach of any non-competing agreements, including without any limitation,
any contract for services, contract of services or any employment contract
with any other Person.
6.33 Ownership of Shares and U.S. Residency. Ho Chi Sing represents and warrants
that he (i) is the registered and beneficial owner of all the outstanding
equity securities of Sharp Edge (including any options and warrants to
acquire such equity securities) and (ii) is a resident of Hong Kong and
(iii) is not a U.S. resident and was not a U.S. resident at any time during
the negotiations leading to this Agreement, and further that he will not be
acquiring the Earn-Out Shares for the account or benefit of a U.S. person
as defined in Rule 902(k) under the Securities Act.
7. Representations and Warranties of KongZhong, and as the case may be,
KongZhong Nominee.
As of the date hereof, KongZhong represents and warrants to the Warrantors
as follows:
7.1 Authorization. KongZhong has obtained all the relevant corporate
authorities that are required for the execution, delivery and performance
of this Agreement and KongZhong Nominee has obtained all the relevant
corporate authorities that are required for the execution, delivery and
36
performance of the Xinrui Share Purchase Agreement. When executed and
delivered by it, and assuming that the execution and delivery by the other
parties thereto are valid and binding obligations on that other parties,
this Agreement will constitute a legally valid and binding obligation of
KongZhong, and the Xinrui Share Purchase Agreement will constitute a
legally valid and binding obligation of KongZhong Nominee, both enforceable
in accordance with their terms.
7.2 Organization and Authority. It (i) is an entity duly established and
validly existing under the laws of its jurisdiction of incorporation, and
(ii) has the power and authority to enter into and (to the extent
performance is required of it) to perform the Transaction Documents to
which it is a party.
7.3 Government Approval. Except for those disclosed and specified in this
Agreement, no consent, approval, order or authorization of, or
registration, declaration or filing with any state, local or provincial
governmental authority on the part of KongZhong or KongZhong Nominee is
required in connection with the execution, delivery of the Transaction
Documents to which it is a party, and the performance of obligations
contemplated under the Transaction Documents to which it is a party.
7.4 Good Faith. Each of KongZhong and KongZhong Nominee warrants that it shall
act in good faith in the course of valuing Xinrui as provided herein.
8. Additional Covenants.
8.1 Resolutions, Contracts or Commitments. Each of the Warrantors, severally
and jointly, covenants with KongZhong, and the case may be, KongZhong
Nominee, that, except as required by this Agreement or the Transaction
Documents, no resolution of the directors, owners, members, partners or
shareholders of any Group Company shall be passed nor shall any contract or
commitment (other than commercial agreements entered into in the ordinary
course of business) be entered into from the date of this Agreement up to,
and including Closing without the written consent of KongZhong.
8.2 Notwithstanding anything to the contrary in this Agreement, except as
otherwise permitted by this Agreement or any of the Transaction Documents
or with the written consent of KongZhong, from the date of this Agreement
and at all times up to and including Closing, each of the Warrantors
undertakes, and shall cause each Group Company to comply with, the
following restrictions and requirements:
(a) carry on its business prudently in the usual and ordinary course
consistent with past practice and, subject to the compliance with
applicable laws, use its best efforts to preserve its relationships
with customers, suppliers and other third parties having business
dealings with any of the Group Companies;
37
(b) not amend, alter or repeal, whether by merger, reclassification or
otherwise any provision of its memorandum or articles of
incorporation, and other by-laws or equivalent constitutional
documents;
(c) not increase, reduce, consolidate, sub-divide or cancel its authorized
capital or total investment or issued capital or registered capital;
(d) not change its name or the name under which it carries on business;
(e) not change its jurisdiction of incorporation;
(f) not make any composition or arrangement with its creditors;
(g) not pass any resolution which would result in its winding up,
liquidation or entering into administration or receivership;
(h) not change its nature or scope (including the geographical scope) of
the business or not commence or carry on any type of business not
ancillary or deviating from its existing business; not consolidate or
merge with any other business, which is not part of its existing
business of as at the date of this Agreement;
(i) not offer, sell or issue, or enter into any agreement or issue any
instrument providing for the offer, sale or issuance (contingent or
otherwise) of, any shares or convertible securities, or any equity
securities of any of the Group Companies;
(j) not increase the number of shares available for grant or issuance
under any share option plan or other share incentive plan or
arrangement or make any amendment to or terminate any such plan or
arrangement;
(k) not make any investment or incur any commitment other than in the
ordinary course of business;
(l) not borrow any sum which when aggregated with all other outstanding
borrowings of the Group Companies exceeds US$10,000;
(m) not sell, dispose of or transfer any of its assets, business or
shares;
(n) not create any Encumbrance (other than a lien arising by operation of
law) over the whole or any part of its undertaking, property or
assets;
(o) not enter into any contract for transaction or expenditure the value
of which exceeds US$10,000 unless with the prior written consent of
KongZhong and not to enter into any
38
contract other than in the ordinary course of business and on arm's
length terms; and
(p) not make any loan or advance or give any credit (except trade credit
to customers in the ordinary course of business); not to give any
guarantee or indemnity for or otherwise secure the liabilities or
obligations of any Person.
8.3 Subsequent Disclosure. Subject to Clause 8.4, if at any time before
Closing, any of the Warrantors comes to know of any fact or event which,
save for any matter already qualified herein by specific reference to any
Schedule hereto:
(a) is in any way inconsistent with any of the representations and
warranties given by any of the Warrantors resulting in a Material
Adverse Event,
(b) suggests that any fact warranted by any of the Warrantors may not be
as warranted or may be misleading resulting in a Material Adverse
Event, and/or
(c) would be material to any decision made by KongZhong or KongZhong
Nominee of whether or not to consummate the share purchase
transactions under this Agreement and the Xinrui Share Purchase
Agreement,
(d) the Warrantor shall give immediate written notice thereof to
KongZhong, or as the case may be, KongZhong Nominee and the other
Parties and rectify the matters to the satisfaction of KongZhong
within five (5) Business Days from the date the written notice is
delivered to KongZhng or KongZhong Nominee, and in the event the
Warrantor fails to rectify the matters to the satisfaction of
KongZhong within the 5-day period, KongZhong, or as the case may be,
KongZhong Nominee, may terminate this Agreement without any penalty
whatsoever, by delivering written notice of such termination, within
fourteen (14) Business Days from the expiration of the 5-day period.
8.4 Force Majeure. Any Party shall be entitled to terminate this Agreement if
any representation or warranty contained in this Agreement is or becomes
untrue, incomplete or inaccurate as a consequence of any Force Majeure
Event between the time of signing of this Agreement up to the Closing Date.
For purposes of this Agreement, "FORCE MAJEURE EVENT" shall mean acts of
God, natural disasters, war, fire, strike, riots, change in law or any
other events which are unforseeable and cannot be overcome and cannot be
avoided by the prevented Party
9. Confidentiality and Announcements.
9.1 Disclosure of Terms. KongZhong shall have the right to disclose any
information with respect to the transactions contemplated in the
Transaction Documents at its sole discretion. Each Warrantor acknowledges
that the terms and conditions (collectively, the "TRANSACTION TERMS") of
the Transaction Documents, and all exhibits, restatements and amendments
hereto and thereto, including their existence, shall be considered
confidential information and shall not be
39
disclosed by any of the Warrantors to any third party except in accordance
with the provisions set forth below.
9.2 Permitted Disclosures. Notwithstanding anything in the foregoing to the
contrary, a Warrantor may disclose:
(i) information which was in the public domain or otherwise known to
the Warrantor before it was furnished to the Warrantor by
KongZhong, or as the case may be, by KongZhong Nominee or, after
it was furnished to the Warrantor, entered the public domain
otherwise than as a result of a breach by the Warrantor of this
Clause 9;
(ii) information the disclosure of which is necessary in order to
comply with any applicable law, the order of any court, the
requirements of a stock exchange or to obtain Tax or other
clearances or consents from any relevant authority; or
(iii) any information which has previously been disclosed by KongZhong
to any party other than to each of the Warrantors.
9.3 Legally Compelled Disclosure. In the event that any Warrantor is requested
or becomes legally compelled (including without limitation, pursuant to
securities laws and regulations) to disclose the existence of this
Agreement or any Transaction Terms in contravention of the provisions of
this Clause 9, such Party ("DISCLOSING PARTY") shall provide the other
Parties ("NON-DISCLOSING PARTY") with prompt written notice of that fact so
that the appropriate Party may seek (with the cooperation and reasonable
efforts of the other Parties) a protective order, confidential treatment or
other appropriate remedy. In such event, the Disclosing Party shall furnish
only that portion of the information that is legally required and shall
exercise reasonable efforts to obtain reliable assurance that confidential
treatment will be accorded to such information to the extent reasonably
requested by any Non-Disclosing Party.
9.4 Other Information. The provisions of this Clause 9 shall be in addition to,
and is not in substitution for, any separate nondisclosure agreement
executed by any of the Parties with respect to the transactions
contemplated in this Agreement.
10. Conditions to KongZhong's Obligations at the Closing.
The obligations of KongZhong under Clause 3 of this Agreement are subject
to the fulfillment at or before Closing of each of the following
conditions, any of which may be waived in writing by KongZhong:
10.1 Representations and Warranties. The representations and warranties of each
of the Warrantors contained in this Agreement shall be true and accurate on
and as of the Closing
40
with the same effect as if made on and as of the Closing with reference to
the facts and circumstances existing at the Closing.
10.2 Compliance Certificate. KongZhong and KongZhong Nominee shall have received
the certificate mentioned in Clause 5.2(b)(iii) from all of the Warrantors.
10.3 Performance. Each Warrantor and each Group Company shall have performed or
fulfilled all the terms, obligations, and conditions in this Agreement and
as the case may be, in the Xinrui Share Purchase Agreement, required to be
performed or fulfilled by such Warrantor before the Closing.
10.4 Qualifications. All authorizations, approvals, or permits or other
regulatory requirements, if any, of any governmental authority or
regulatory body that are required under BVI or PRC law in connection with
the lawful sale of the Shares pursuant to this Agreement shall be duly
obtained or fulfilled and shall remain effective as of the Closing.
10.5 Legal Opinion. Sharp Edge or the relevant Warrantor shall have delivered to
KongZhong or its legal counsel a legal opinion issued by a BVI Counsel in
the form and substance satisfactory to KongZhong.
10.6 Exemption from Registration. The offer and sale of the Shares hereunder
shall be exempt from the registration or qualification requirements of all
applicable securities laws and regulations.
10.7 Due Diligence. A due diligence review of the Group Companies (including but
not limited to legal, financial, management, technology, Intellectual
Property Rights, process, licenses and government regulatory due diligence)
shall have been completed to the satisfaction of KongZhong.
10.8 Newly issued License for Value-added Telecommunications Services and other
permits or licenses. Xinrui shall have obtained the newly issued License
for Value-added Telecommunications Services by the Ministry of Information
and Industry of the PRC in order to provide fixed telephone information
service and mobile information service to its customers and all other
licenses or permits which are required by the relevant governmental
authorities, laws or regulations for the business operation of Xinrui.
10.9 IPR Assignment, Non-Competition and Confidentiality Agreement; Service
Agreement. Each Management Team shall, if deemed necessary by KongZhong,
enter into an intellectual property assignment, non-competition and
confidentiality agreement with the relevant Group Company by the date of
the Closing, and copies of such agreements certified as true and complete
copy by the Management Team shall have been delivered to KongZhong and as
the case may be, KongZhong Nominee. In addition, the Management Team shall
have entered
41
into a service agreement with Xinrui, in form and substance reasonably
satisfactory to KongZhong, for a term of at least 2 years.
10.10 Restructuring Documents. Sharp Edge shall have delivered to KongZhong and
Xinrui shall have delivered to KongZhong Nominee at or before the date of
this Agreement a copy of each of the Restructuring Documents duly executed
by all parties set forth therein.
10.11 Good Standing Certificate. Sharp Edge shall have delivered to KongZhong or
its legal counsel at or before the Closing a good standing certificate with
respect to Sharp Edge issued by the Registrar of Companies of BVI for a
period at least up to and including the Closing.
10.12 Registration of Share Transfer. Xinrui and/or the Xinrui Shareholders
shall arrange for the transfer of the Xinrui Shares by the Xinrui
Shareholders to KongZhong Nominee to be registered with the relevant
administration industry and commerce in the PRC immediately following the
execution of this Agreement and the documents required for the registration
of the share transfer with the relevant administration industry and
commerce are attached hereto as Exhibit H.
10.13 Articles of Association. Sharp Edge shall take all the necessary action
to, and to enable KongZhong to, amend the articles of association of Sharp
Edge to render them consistent with the terms of this Agreement. Xinrui
shall take all the necessary action to, and to enable KongZhong Nominee to,
amend the articles of association of Xinrui to render them consistent with
the terms of this Agreement
10.14 Non-U.S. resident. The obligations of KongZhong to issue the Earn-Out
Shares are subject to the condition that Ho Chi Sing is not a U.S. resident
at the time of the issuance of the Earn-Out Shares.
11. Conditions to Obligations of Xinrui Shareholders and Ho Chi Sing at
Closing.
The obligations of Ho Chi Sing with respect to the Sharp Edge Shares, and
the obligations of the Xinrui Shareholders with respect to the Xinrui
Shares are subject to the fulfillment of each of the following conditions,
any of which may be waived in writing by Sharp Edge:
11.1 The warranties given by KongZhong under Clause 7 of this Agreement being
true and correct when made and as of the Closing; and
11.2 The covenants and agreements contained in this Agreement to be complied
with by KongZhong and as the case may be, KongZhong Nominee with respect to
the Closing have been complied with on or before the Closing.
12. Long-Stop Date.
42
In the event that any conditions to the Closing hereunder is not fulfilled
or waived within ninety (90) days of the signing of this Agreement, this
Agreement shall automatically terminate on the ninetieth date of the
signing of this Agreement ("LONG-STOP DATE"). Notwithstanding any
termination of this Agreement and notwithstanding the non-consummation of
any transaction contemplated under the Transaction Document, (i) the
obligations of the Parties specified in Clause 9, Clause 14.1, Clause 14.2,
Clause 14.3, and Clause 14.6 shall continue unimpaired and in full force
and effect, and (ii) such termination shall not relieve any Party from any
liability hereunder for any misrepresentation or for the breach of any
warranty, agreement or obligation hereunder or for any other liability
accruing under the Transaction Documents.
13. Special Covenants of the Parties.
Each of the Warrantors, the Group Companies and the Management Team
covenants to KongZhong and KongZhong Nominee as follows:
13.1 Subject to Clause 13.2 below, Xinrui shall have the right to distribute its
retained earnings as of 31 December 2005 after:
(a) using its after-tax profits firstly to offset any losses carried
forward from the previous years and secondly to set aside a portion of
its after-tax profits to fund certain reserve funds that are not
distributable as cash dividends; and
(b) all of the Material Debts are fully repaid and no Material Debts
remain outstanding. Xinrui shall distribute such retained earnings no
later than 30 September 2006. The retained earning shall be based upon
the Financial Statements for the fiscal year ending 31 December 2005
audited by the Auditor and for the purpose of this clause, the Parties
agree that KongZhong shall bear the cost relating to the auditing of
the Financial Statements for the fiscal year ending 31 December 2005.
13.2 In determining the retained earnings to be distributed pursuant to Clause
13.1 above, Xinrui must have already set aside a minimum of RMB7,000,000 in
the form of Net Current Assets for working capital and capital expenditure
purposes. For the purpose of this sub-clause, the distribution of any
retained earnings under Clause 13.1 above shall take place only after
Xinrui has set aside the amount of RMB7,000,000.
13.3 Xinrui shall at all times ensure that it has sufficient working capital
throughout the Valuation Period to carry on its business that is currently
being conducted and KongZhong shall has no obligation whatsoever with
respect to Xinrui's working capital.
13.4 Other than the Financial Statement attached hereto as Exhibit D, the
Financial Statements, including the Valuation Financial Statements, shall:
43
(a) firstly, be prepared by the management of Xinrui according to the PRC
GAAP and the accounting policies of KongZhong attached hereto as
Exhibit E;
(b) secondly, be verified and agreed upon by KongZhong;
(c) thirdly, be audited by the Auditor unless KongZhong and the Warrantors
agree to waive the audit (other than the balance sheets, profit and
loss accounts and cash flow statements of a Group Company to be used
for the Second Cash Payment and the quarterly balance sheets, profit
and loss accounts and cash flow statements of a Group Company for the
period from 1 October 2005 to 30 September 2006 (both dates inclusive)
in which case such balance sheets, profit and loss accounts and cash
flow statements shall remain unaudited). The Auditor shall deliver the
audited Financial Statements within two months from:
(i) the date the management of Xinrui has prepared such Financial
Statements; and
(ii) the date whereby all Confirmation Letters confirming the revenues
reported in the Financial Statements (except in the case of
estimated revenues) have been collected,
whichever is later, and each of the Parties agrees that the audit
results from the Auditor are final and binding on all Parties;
(d) recognize the estimated revenues in the Financial Statements in
accordance with the revenue estimation policies of KongZhong, attached
hereto as Exhibit I;
13.5 In the event that the Management Team, upon a reasonable request from the
Management Team and agreed upon by Kong Zhong, utilizes the resources of
KongZhong or, as the case may be, the resources of KongZhong Nominee,
including but not limited to not limiting to copy rights, distribution
channels, human resources and operating license of KongZhong, or as the
case may be, KongZhong Nominee, during the Valuation Period, Xinrui shall
jointly bear the cost associated to such resources with KongZhong (or, as
the case may be, KongZhong Nominee) other than the costs and expenses
incurred by Xinrui with respect to KongZhong's listing at NASDAQ, including
without limitation, costs in relation to the preparation of any audit
report or financial statements which shall be borne by KongZhong. The split
of such cost between KongZhong (or, as the case may be, KongZhong Nominee)
with Xinrui shall be borne at arm's length and Sun Jing Ye shall have the
right to negotiate and confirm the allocated cost in writing. For the
purpose of this clause, "arm's length" here means agreement between
KongZhong and Xinrui which is based on ordinary commercial term, or if
there are insufficient comparable transactions to determine whether or not
an agreement between KongZhong and Xinrui is based on ordinary commercial
terms, terms that no less favourable than the terms quoted by an
appropriate independent third party.
44
13.6 For a period of twelve (12) months after the date of Closing, each of the
Warrantors shall not and shall procure that none of its Subsidiaries,
holding companies, Affiliates or shareholders will, without the prior
written consent of KongZhong, either on its own account or in conjunction
with or on behalf of any Person, firm or company:
(a) carry on or be engaged, concerned or interested directly or indirectly
or enter into any form of arrangement, alliance, joint venture or
co-operation with any third party in any business that competes or is
likely to compete with wireless value added businesses.
(b) employ, solicit or entice away or attempt to employ, solicit or entice
away from KongZhong and/or any of its Affiliates, any of their
officers, employees or consultants employed or engaged by KongZhong
and/or any of its Affiliates.
13.7 The Management Team shall duly perform their obligations under their
respective employment contract and non-competition and confidentiality
agreement with Xinrui and under this Agreement and shall be in charge of
the daily operation and management of Xinrui using their reasonable
discretion based on their knowledge and experience provided that:
(a) at all times:
(i) the Management Team shall, and shall procure Xinrui to, comply
fully with; and
(ii) the Management Team shall ensure and/or take active steps to
assess Xinrui to ensure that the Xinrui shall not,
contravene the applicable laws and regulations, the by-laws of
Xinrui, the policies of KongZhong and the Operators (if any), the
contracts to which Xinrui is a party and the matters that are
attached hereto as Exhibit J ("PROHIBITED MATTERS");
(b) the Management Team shall, and shall procure Xinrui to, use its best
efforts to improve the financial condition and business operation of
Xinrui for the period ending 30 September 2006 to be not worse than
the financial condition and business operation of Xinrui as
represented in the representations and warranties in Clause 6 above;
(c) not borrow any sum which when aggregated with all other outstanding
borrowings of Xinrui exceeds US$10,000 unless otherwise approved in
advance in writing by KongZhong;
(d) not sell, dispose of or transfer any of the assets, business or shares
of Xinrui unless otherwise approved in advance in writing by
KongZhong;
45
(e) not create any Encumbrance (other than a lien arising by operation of
law) over the whole or any part of the undertaking, property or assets
of Xinrui unless otherwise approved in advance in writing by
KongZhong;
(f) not enter into any contract for transaction or expenditure the value
of which exceeds US$20,000 unless with the prior written consent of
KongZhong and not to enter into any contract other than in the
ordinary course of business and on arm's length terms;
(g) not make any loan or advance or give any credit (except trade credit
to customers in the ordinary course of business); not to give any
guarantee or indemnity for or otherwise secure the liabilities or
obligations of any Person unless otherwise approved in advance in
writing by KongZhong.
(h) in the event of a breach or non-compliance of any of paragraphs (a) to
(g) above, the Management Team shall be liable jointly and severally
to indemnify KongZhong, or as the case may be, KongZhong Nominee, for
any loss suffered as a result of the breach or non-compliance.
(i) In the event of any disagreement in respect of the business decision
between the Management Team and KongZhong (or as the case may be,
KongZhong Nominee), the Management Team and KongZhong (or as the case
may be, KongZhong Nominee) shall, in good faith, try to resolve the
disagreement for the benefit of Xinrui.
13.8 KongZhong shall have the right to terminate this Agreement and to be repaid
all or the portion of the Total Purchase Price that has been paid pursuant
to Clause 3 above, or renegotiate the purchase price or other terms and
conditions under this Agreement if the following events occurs during the
period commencing from the date of this Agreement up to the Last Payment
Date as stipulated in Clause 3.2:
(a) Xinrui ceases to be a party to, or to renew the Material Operating
Contracts, or ceases to hold the following licenses or permits
required for its business operation including but not limited to the
operation of its wireless value added businesses:
(i) current and valid business license of Xinrui ((Chinese
Characters) 1103021635015);
(ii) current and valid value added license of Xinrui ((Chinese
Characters) B2-20050140 and (Chinese Characters) ICP (Chinese
Characters) 031066 (Chinese Characters));
46
(iii) current and valid business operation rights with each Operator's
headquarter on a nationwide basis for wireless access protocol,
short messaging service, colour ring back tone service and
interactive voice response service.
(b) The net profit of Xinrui shown on the Financial Statements from 1
January 2006 to 30 September 30 2006 is less than US$3 million.
(c) Any of the Group Companies violates or is not in compliance with the
applicable laws and regulations, policies, rules and contract to which
the relevant Group Company is a party or subject, resulting in
penalties or fines (monetary or otherwise) or damages of RMB5,000,000
or more (if aggregated) or RMB 3,000,000 or more (for each penalty,
fine or damages) being imposed onto Xinrui.
(d) There is an unreasonable delay or a refusal or an inability by any of
the Warrantors to satisfy any or all of the Closing Conditions.
(e) If the power of attorney given by Ho Chi Sing to Sun Jing Ye as
attached hereto as Exhibit B1 is invalid or unenforceable for any
reasons including, but not limited to, reason arising from the
authenticity of the signature of Ho Chi Sing in the power of attorney.
(f) If it turns that, for any reasons whatsoever, Ho Chi Sing is not the
sole shareholder of Sharp Edge and/or Ho Chi Sing's shareholding in
Sharp Edge is not as the same as the shareholding as represented in
Clause 6 above and/or Ho Chi Sing does not have full and valid title
to the Sharp Edge Shares to be transferred to KongZhong free from any
Encumbrances and/or Sharp Edge is not duly incorporated and is not
validly existing under the laws of BVI and this Agreement is not a
valid and enforceable obligation of Sharp Edge.
13.9 Ho Chi Sing hereby covenants to KongZhong that he will hold, and will not,
and will not offer to, dispose off, or sell or transfer or part ownership
or title with, the Earn-Out Shares for a period not less than twelve (12)
months from the date the Earn-Out Shares are issued to Ho Chi Sing and
further covenants that he will not assign any of his rights under this
Agreement without KongZhong's prior written consent. In the event after the
12-month period, Ho Chi Sing intends to dispose off, or sell or transfer or
part ownership or title with, the Earn-Out Shares, as long as Ho Chi Sing
has complied with the terms of this Agreement, KongZhong undertakes to
cooperate with Ho Chi Sing in exchanging the Earn-Out Shares for American
Depository Shares in accordance with the terms of the Depository Agreement
entered into by and among KongZhong, Citibank N.A. and the Holders (as
defined therein) and Beneficial Owners (as defined therein) of American
Depository Shares; provided that all expenses related to such conversion of
the Earn-Out Shares into American Depository Shares are borne by Ho Chi
Sing. In the event that KongZhong fails to cooperate, Ho Chi Sing shall
have the right to put the
47
Earn-Out Shares to KongZhong at the average closing price quoted on NASDAQ
on the date Ho Chi Sing exercises his put option.
13.10 The parties hereto understand that it is a legal requirement that 15% of
the registered capital of Sharp Edge WFOE (US$ 22,500)("PAID IN AMOUNT")
shall be paid in by Sharp Edge prior to or on 28 February 2006 ("PAID IN
DATE"), KongZhong, each of the Warrantors, the Group Companies and the
Management Team hereby covenants respectively, in the event that the
Closing fails to take place at least ten (10) days before the Paid In Date,
as follows:
(a) KongZhong covenants to lend the Paid In Amount to Sharp Edge to be
used solely for the purpose of satisfying the paid in requirement of
Sharp Edge WFOE five (5) Business Day before the Paid In Date.
(b) Sharp Edge covenants to use the entire Paid In Amount to fulfill its
payment obligation as to the registered capital of the Sharp Edge WFOE
as contemplated in this Section 13.10;
(c) Sharp Edge covenants to repay the Paid In Amount to KongZhong on the
earlier of (i) the Long-stop Date pursuant to Clause 12 and (ii) the
date this Agreement is terminated otherwise.
14. Miscellaneous.
14.1 Governing, Law. This Agreement shall be governed by, and construed in
accordance with, the laws of Hong Kong.
14.2 Dispute Resolution
(a) Any dispute, controversy or claim arising out of or relating to this
Agreement, or the interpretation, breach, termination or validity
hereof, shall be resolved through consultation. Such consultation
shall begin immediately after one Party has delivered to the other
Party a written request for such consultation. If within 30 days
following the date on which such notice is given the dispute cannot be
resolved, the dispute shall be submitted to arbitration upon the
request of either Party with notice to the other.
(b) The arbitration shall be conducted in Hong Kong under the auspices of
the Hong Kong International Arbitration Centre ("Arbitration Centre").
There shall be three (3) arbitrators. Each disputing Party to the
dispute shall be entitled to appoint one arbitrator, and the third
arbitrator shall be jointly appointed by the disputing Parties or,
failing which the Arbitration Centre shall appoint the third
arbitrator.
(c) The arbitration proceedings shall be conducted in English. The
arbitration tribunal shall apply the UNCITRAL Arbitration Rules as
administered by the Arbitration Centre at the
48
time of the arbitration.
(d) The arbitrators shall decide any dispute submitted by the Parties to
the arbitration strictly in accordance with the substantive laws of
Hong Kong and shall not apply any other substantive law.
(e) Each Party shall cooperate with the other in making full disclosure of
and providing complete access to all information and documents
requested by the other in connection with such arbitration
proceedings, subject only to any confidentiality obligations binding
on such Party.
(f) The award of the arbitration tribunal shall be final and binding upon
the disputing Parties, and the prevailing Party may apply to a court
of competent jurisdiction for enforcement of such award.
(g) Either Party shall be entitled to seek preliminary injunctive relief
from any court of competent jurisdiction pending the constitution of
the arbitral tribunal.
14.3 Counterparts and Facsimile Execution. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. Any
counterpart or other signature delivered by facsimile shall be deemed for
all purposes as being good and valid execution and delivery of this
Agreement by that Party.
14.4 Headings. The headings of the clauses of this Agreement are for convenience
only and shall not by themselves determine the interpretation of this
Agreement.
14.5 Notices. Except as may be otherwise provided herein, all notices, requests,
waivers and other communications made pursuant to this Agreement shall be
in writing and shall be conclusively deemed to have been duly given (a)
when hand delivered to the other party; (b) when printed confirmation sheet
verifying successful transmission of the facsimile is generated by the
sender's machine, when sent by facsimile at the number set forth below (or
hereafter amended by subsequent notice to the parties hereto); (c) five (5)
Business Days after deposit in the mail as certified mail, receipt
requested, postage prepaid and addressed to the other party as set forth
below; or (d) three (3) Business Days after deposit with an overnight
delivery service, postage prepaid, addressed to the parties as set forth
below, provided that the sending party receives a confirmation of delivery
from the delivery service provider.
To: ANY OF THE WARRANTORS
A 710, Yue Tan Building, No. 2, Yue Tan Bei Jie, Xicheng District, Beijing
100045
49
Tel. No.: 8610 6808 2256
Fax No.: 8610 6808 3805
Attention: Sun Jing Ye
KONGZHONG AND/OR KONGZHONG NOMINEE
168, Xiwai Dajie, 35 floor, Tengda Building, 100044 Beijing
Tel. No.: 8857 6000
Fax No.: 8857 5893
Attention: Wang Gui Jun
Each Party making a communication hereunder by facsimile shall promptly confirm
by telephone to the Party to whom such communication was addressed each
communication made by it by facsimile pursuant hereto but the absence of such
confirmation shall not affect the validity of any such communication. A Party
may change or supplement the addresses given above, or designate additional
addresses, for purposes of this Clause 14.5 by giving the other Parties written
notice of the new address in the manner set forth above.
14.6 Amendment of this Agreement. Any provision of this Agreement may be amended
by a written instrument signed by all the Parties.
14.7 Entire Agreement; Successors and Assigns. Except as specifically referenced
in this Agreement, this Agreement, together with all Exhibits and Schedules
to this Agreement, constitute the entire contract among the Parties with
respect to the transactions and subject matters under this Agreement. Any
prior or contemporaneous agreement, discussion, understanding, or
correspondence among the Parties (including any prior representations or
warranties given by the Parties) regarding the purchase of the Shares is
superseded by this Agreement. Subject to the exceptions specifically set
forth in this Agreement, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective executors,
administrators, heirs, successors, and assigns of the Parties.
14.8 Survival of Warranties. The representations, warranties, and covenants of
each of the Warrantors contained in this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
14.9 Further Assurances. From and after the date of this Agreement, upon the
request of KongZhong, each of the Warrantors shall execute and deliver such
instruments, documents or other writings as may be necessary or desirable
to confirm and carry out and to fully give effect
50
the intent and purposes of this Agreement, or as the case may be, the
Xinrui Share Purchase Agreement.
14.10 Indemnity. The Warrantors jointly and severally agree to indemnify and
hold harmless KongZhong and KongZhong Nominee and assigns of KongZhong and
KongZhong Nominee, and KongZhong and KongZhong Nominee jointly and
severally agree to indemnify and hold harmless the Warrantors, (each of the
Party being indemnified under this clause is called an "Indemnitee"),
against any and all Indemnifiable Losses (as defined below) to such
Indemnitee, directly or indirectly, as a result of, or based upon or
arising from, or related to, any inaccuracy in or breach or nonperformance
of any of the representations, warranties, covenants or agreements made by
the relevant Party in or pursuant to this Agreement. For purposes of this
clause, "Indemnifiable Loss" means, with respect to any Indemnitee, any
action, cost, damage, disbursement, expense, liability, loss, deficiency,
diminution in value, obligation, penalty or settlement of any kind or
nature, whether foreseeable or unforeseeable, including, but not limited
to, (i) interest or other carrying costs, penalties, legal, accounting and
other professional fees and expenses reasonably incurred in the
investigation, collection, prosecution and defense of claims and amounts
paid in settlement, that may be imposed on or otherwise incurred or
suffered by such Indemnitee and (ii) any Taxes that may be payable by such
Indemnitee as a result of the indemnification of any Indemnifiable Loss
hereunder.
14.11 Fees and Expenses. Subject to Clause 14.10 above, each Party shall bear
its own costs and expenses relating to the share purchase transaction under
this Agreement and the Xinrui Share Purchase Agreement.
14.12 Severability. To the extent permitted under the applicable laws, each
provision of this Agreement shall be interpreted in such manner so as to be
effective and valid under the applicable laws, but if any provision of this
Agreement is held to be prohibited by or invalid under the applicable laws,
such provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
14.13 Prior Agreements Superseded. This Agreement supersedes all prior
agreements by or among the Parties with respect to the purchase of the
Sharp Edge Shares and the Xinrui Shares. All such prior agreements shall
lapse and terminate immediately upon the execution of this Agreement.
[Remainder of this page intentionally left blank]
51
IN WITNESS WHEREOF, the Parties to this Agreement have executed this Agreement
as of the date first written above.
KONGZHONG CORPORATION
By:
-----------------------------------
Name: Zhou Yun Fan (Chinese Characters)
Title: Chief Executive Officer
- ---------------------------------------
WANG GUI JUN
- ---------------------------------------
LI YANG
SHARP EDGE GROUP LIMITED
By:
-----------------------------------
Name: Sun Jing Ye
Title: Authorized Representative
AN JIAN XING YE TECHNOLOGY (BEIJING)
LIMITED (Chinese Characters)
By:
-----------------------------------
Name: Sun Jing Ye
Title: Authorized Representative
BEIJING XINRUI NETWORK TECHNOLOGY
COMPANY LIMITED (Chinese Characters)
By:
-----------------------------------
Name: Sun Jing Ye
Title: Authorized Representative
- ---------------------------------------
HO CHI SING (by Sun Jing Ye as
Authorized Representative)
- ---------------------------------------
SUN JING YE
- ---------------------------------------
AI LI
- ---------------------------------------
CHEN JIANJUN (Chinese Characters)
- ---------------------------------------
YING WENJIN (Chinese Characters)
- ---------------------------------------
LV QIANG (Chinese Characters)
2
- ---------------------------------------
LIU MINGHAI (Chinese Characters)
- ---------------------------------------
CHEN ZHENG (Chinese Characters)
- ---------------------------------------
GUAN SUSHENG (Chinese Characters)
GUANZHOU SHULIAN CONSULTING AND
INVESTMENT CO., LTD (Chinese Characters)
By:
-----------------------------------
Name: Yang Fei (Chinese Characters)
Title: Legal Representative
3
EXHIBIT A
MATERIAL DEBTS
Summary of Chinese-language exhibit:
Total debt outstanding to five creditors equals 5,856,841.00
EXHIBIT B
RESTRUCTURING DOCUMENTS
(a) TSA.
(b) Management Control Agreement.
(c) Share Pledge Agreement.
(d) Share Disposition Agreement.
EXHIBIT B 1
POWER OF ATTORNEY
POWER OF ATTORNEY
Principal: Ho Chi Sing
Authorized representative: Sun Jing Ye (Chinese Characters)
Whereas:
(1) Sharp Edge Group Limited is a company established under the laws of the
British Virgin Islands ("Sharp Edge").
(2) KongZhong Corporation is a company established under the laws of the
Cayman Islands.
(3) Beijing Xinrui Network Technology Company Limited (Chinese Characters),
is a limited liability company established under the laws of the PRC ("Xinrui").
(4) An Jian Xing Ye Technology (Beijing) Limited (Chinese Characters) is a
wholly foreign owned enterprise established under the laws of the PRC
("Sharp Edge WFOE").
(5) Ho Chi Sing, as the holder of the Hong Kong permanent identification
number [deleted*] and passport number [deleted*], is the sole shareholder and
sole director of Sharp Edge and the manager of Sharp Edge WFOE.
(6) Sun Jing Ye (Chinese Characters) is the holder of the PRC
identification number [deleted*].
(7) Ho Chi Sing, Sun Jing Ye, Sharp Edge, Sharp Edge WFOE, KongZhong
Corporation, Xinrui and other relevant parties will execute a Share Purchase
Agreement on 26 January 2006 for the purchase of all the outstanding shares of
Sharp Edge by KongZhong Corporation and other relevant matters ("Share Purchase
Agreement").
After reviewing the draft of the Share Purchase Agreement, Ho Chi Sing
hereby appoints Sun Jing Ye as his fully authorized representative to
a) execute and deliver the Share Purchase Agreement and any other
relevant documents that are with respect to the Share Purchase
Agreement.
b) execute all relevant resolutions of the sole shareholder and the sole
director of Sharp Edge with respect to the acts and all the matters
under the Share Purchase Agreement.
c) execute the general manager resolution of Sharp Edge WFOE with respect
to the acts and all the matters under the Share Purchase Agreement.
The appointment and authorization herein are valid from 1 January 2006
until 31 December 2006.
[Remainder of this page intentionally left blank]
- ----------
* All deleted material has been separately filed with the Securities and
Exchange Commission.
[Execution Page of the Power of Attorney]
Principal: Ho Chi Sing
Date: ______________________
Authorized representative: Sun Jing Ye (Chinese Characters)
Date: ______________________
EXHIBIT C
[Summary of Chinese-language exhibit]
DISCLOSURE SCHEDULE
1. None of the registered capital of Sharp Edge WFOE has been paid in.
2. Exceptions to 6.12(a) (i) (B):
(1) Anjian Xinye lease of 15 square meters of office space in Beijing
under a lease running from November 15, 2005 to November 14, 2006 for
a rent of RMB2.2 per square meter.
(2) Xinrui lease of 418.72 square meters of office space in Beijing under
a lease running from January 2005 to January 2006 for a rent of $16.20
per square meter per month.
EXHIBIT D
DETAILED (PROFIT)/LOSS ACCOUNT:
CURRENCY: RMB
2005 JAN-SEP 2004 JAN-DEC
YEAR TO DATE YEAR TO DATE
------------------ ------------------
IVR Revenue (8,753,278) (2,450,057)
SMS/MMS Revenue (8,443,156)
RBT Revenue (6,076,920) 0
other Revenue 0 (74,550)
------------------ ------------------
Total Gross Revenue -23,273,354 -2,524,607
Less: Sales Tax 765,978 84,952
------------------ ------------------
NET REVENUE -22,507,376 -2,439,654
Costs 6,013,872 81,353
------------------ ------------------
GROSS PROFIT (16,493,504) (2,358,301)
As % of Net Revenue 73% 97%
Staff Costs 6,166,736 1,151,976
Local travelling 428,237 147,376
Overseas travelling 0 0
Entertainment 184,599 106,169
Advertising & promotion 885,967 162,810
Communications 140,751 60,575
Lease lines rental 29,500 (0)
Professional & Audit fees 38,886 1,200
Rent & Mgt fees 1,196,069 360,671
Office administration expenses 598,629 280,984
Government fees 0 9,105
Bank charges 0 336
Bad debt 0 0
software & license fees 800 100,000
Others 24,000 1,549
------------------ ------------------
TOTAL OPERATING EXPENSES 9,694,174 2,382,752
As % of Net Revenue -43.1% -97.7%
EBITDA (6,799,330) 24,451
Depreciation & amortization 126,185 12,925
EBIT (6,673,145) 37,376
As % of Net Revenue 29.6% -1.5%
Bank interests (6,255) (10,085)
Interests expenses
PROFIT BEFORE TAX (6,679,400) 27,291
As % of Net Revenue 29.7% -1.1%
Tax
PROFIT AFTER TAX (6,679,400) 27,291
As % of Net Revenue 30% -1.1%
</Table>
EXHIBIT E
ACCOUNTING POLICIES OF KONGZHONG
(A) BASIS OF PRESENTATION
The consolidated financial statements of a Group Company have been prepared in
accordance with the PRC GAAP.
(B) BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of a
Group Company, its wholly-owned subsidiary and its variable interest entities.
All inter-company transactions and balances have been eliminated upon
consolidation.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and highly liquid investments
which are unrestricted as to withdrawal or use, and which have maturities of
three months or less when purchased.
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with PRC GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and revenues and expenses in the financial statements and
accompanying notes. Significant accounting estimates reflected in a Group
Company's financial statements include useful lives for property and equipment,
accruals for revenue adjustments, cost of revenues, other liabilities and
stock-based compensation expense.
(E) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
A Group Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on a Group Company's future financial position, results of operations, or cash
flows: changes in the overall demand for entertainment-oriented wireless
value-added services; advances and trends in new technologies and industry
standards; changes in key suppliers; changes in certain strategic relationships
or customer relationships; regulatory or other factors; risks associated with
the ability to maintain strategic relationship with the Operators; and risks
associated with a Group Company's ability to attract and retain employees
necessary to support its growth.
(F) PROPERTY AND EQUIPMENT, NET
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated on a straight-line
basis over the following estimated useful lives:
Computer and transmission equipment...................... 3 years
Furniture and office equipment........................... 3 years
Motor vehicles........................................... 3 years
Leasehold improvements................................... Over the lease term
Communication equipment.................................. 1 year
(G) IMPAIRMENT OF LONG-LIVED ASSETS
A Group Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may no
longer be recoverable. When these events occur, a Group Company measures
impairment by comparing the carrying value of the long-lived assets to the
estimated undiscounted future cash flows expected to result from the use of the
assets and their eventual disposition. If the sum of the expected undiscounted
cash flow is less than the carrying amount of the assets, a Group Company would
recognize an impairment loss based on the fair value of the assets.
(H) REVENUE RECOGNITION AND COST OF REVENUES
A Group Company's revenues are primarily derived from entertainment-oriented
wireless value-added services. Wireless value-added services revenues are
derived from providing personalized interactive entertainment, media and
community (including ring back services and downloadable ring tones, icons and
screen savers) services to telephone customers of each of China Telecom, Chine
Netcom, China Unicom, China Railcom and China Mobile and its various
subsidiaries ("OPERATOR"). Fees, established by an arrangement with an Operator
and indicated in the message received on the telephone, for these services are
charged on a transaction basis or on a monthly subscription basis, and vary
according to the type of services delivered. A Group Company recognizes all
revenues in the period in which the services are performed.
A Group Company contracts with the Operator for the transmission of wireless
value-added services as well as for billing and collection services. The
Operator provides a Group Company with a monthly statement that represents the
principal evidence that service has been delivered and triggers revenue
recognition for a substantial portion of a Group Company's revenue. In certain
instances, when a statement is not received within a reasonable period of time,
a Group Company is required to make an estimate of the revenues and cost of
revenues earned during the period covered by the statement based on internally
generated information, historical experience, verbal communication with
Operator, and/or other assumptions that are believed to be reasonable under the
circumstances.
A Group Company measures its revenues based on the total amount paid by its
customers, for which the Operator bills and collects on a Group Company's
behalf. Accordingly, the 15 - 50% service fee paid to the Operator is included
in the cost of revenues. In addition, the Operator charges a Group Company
transmission charges based on a per message fee which varies depending on the
volume of the messages sent in the relevant month, multiplied by the excess
messages sent over messages received. These transmission charges are likewise
retained by the Operator, and are reflected as costs of revenues in the
financial statements.
(I) FOREIGN CURRENCY TRANSLATION
The functional currency of a Group Company's subsidiaries including its variable
interest entities in the PRC is the Renminbi ("RMB"). Transactions denominated
in currencies other than RMB are translated into RMB at the exchange rates
quoted by the People's Bank of China ("PBOC") prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies
are translated into RMB using the applicable exchange rates quoted by the PBOC
at the balance sheet dates. The resulting exchange differences are included in
the statement of operations.
A Group Company has determined that the U.S. dollar is its functional and
reporting currency. Accordingly, assets and liabilities are translated using the
exchange rate quoted by PBOC at the last day of the Valuation Period and
consolidated statements of operations shall use the exchange rate being the
Aggregate Exchange Rate divided by 4, whereby:
"AGGREGATE EXCHANGE RATE" here means the aggregate of the exchange rates quoted
by PBOC at the last day of each of the four quarters in the Valuation Period.
Translation adjustments resulting form translation of theses consolidated
financial statements are reflected as accumulated other comprehensive income
(loss) included in the shareholders' equity.
(J) PRODUCT DEVELOPMENT EXPENSES
Product development expenses consist primarily of compensation and related costs
for employees associated with the development and programming of mobile data
content and are expensed as incurred.
(K) INCOME TAXES
Deferred income taxes are recognized for temporary differences between the tax
basis of assets and liabilities and their reported amount in the financial
statements, net operating loss carryforwards and credits by applying enacted
statutory tax rates applicable to future years. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Current income taxes are provided for in accordance with the laws of
the relevant taxing authorities.
(L) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation adjustments.
Comprehensive income (loss) is reported in the statements of shareholders'
equity.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents. The carrying values of
cash and cash equivalents approximate their fair values due to their short-term
maturities.
EXHIBIT F
[Summary of Chinese-language exhibit]
MATERIAL OPERATING CONTRACTS
List of 10 operating contracts, their major terms and the term of
validity of each.
EXHIBIT G
[Summary of Chinese-language exhibit]
LIST OF LICENSES
Business license No. 103021635015
PRC nationwide telecommunications value-added service
license No. B2-20050140
PRC telecommunications and information services business
permit No. Beijing ICP 031066
High-technology enterprise permit No. 0511024A00231
EXHIBIT H
[Summary of Chinese-language exhibit]
REGISTRATION DOCUMENTS
1. Shareholders agreement
2. Shareholders resolution
3. Amended and restated articles
4. Application to revise enterprise registration
5. New registries of shareholders, management and supervisory board
6. Xinrui Share Purchase Agreement as Schedule 2
EXHIBIT I
[Summary of Chinese-language exhibit]
REVENUE ESTIMATION POLICIES OF KONGZHONG (APPLICABLE TO AUDITED FINANCIAL
STATEMENTS ONLY)
EXHIBIT J
PROHIBITED MATTERS
(a) None of the Group Company shall, and the Management Team shall not,
manipulate directly or indirectly, the financial conditions and the
business operation of the relevant Group Company or the Group.
(b) None of the Group Companies shall, and the Management Team shall not, use
or invoke or adopt any illegal methods or ways or ideas or give any false
information or fraudulently deceive or induce any customers or users
(registered and unregistered), including without limitation, forcing the
customers or users to use the products or services of the Group Companies,
infringing any copyrights, trademarks or other intellectual property
rights, conducting any mass marketing or promotion not in compliance with
the relevant laws and regulations.
SCHEDULE 1
[Summary of Chinese-language exhibit]
XINRUI SHAREHOLDERS
List of individuals, their ID numbers, residences and invested capital:
Chen Jianjun
Ying Wenjin
Lu Qiang
Liu Minghai
Chen Zheng
Guan Shuosheng
List of units, their addresses, business registration numbers, legal
representatives, invested capital and method of investing capital:
Guangzhou Shu Lian Zi Xun Investment Co. Ltd.
SCHEDULE 2
[Summary of Chinese-language exhibit]
XINRUI SHARE PURCHASE AGREEMENTS
First agreement: Chen Jianjun, Ying Wenjin, Guan Shuosheng agree to transfer
their shares of Xinrui representing 25%, 23% and 3%, respectively, to Wang
Guijun.
Second agreement: Guangzhou Shu Lian Zixun Investment Co. Ltd., Lu Qiang, Liu
Minghai and Chen Zheng agree to transfer their shares of Xinrui representing
30%, 9%, 5% and 5%, respectively, to Li Yang.
SCHEDULE 3
SUBSIDIARIES OF SHARP EDGE
Sharp Edge Group Limited owns 100% shares in An Jian Xing Ye Technology
(Beijing) Limited (Chinese Characters)
SCHEDULE 4
GENERAL LIABILITIES OF GROUP COMPANIES
[Summary of Chinese-language exhibit]
GENERAL LIABILITIES OF BEIJING XINRUI NETWORK TECHNOLOGY COMPANY LIMITED
As at 31 December 2005
Total outstanding liabilities to five creditors (5,856,841.00)
SCHEDULE 5
INTELLECTUAL PROPERTY RIGHTS
www.xinruinet.com
SCHEDULE 6
EMPLOYMENT CONTRACT, NON-COMPETITION AND CONFIDENTIALITY AGREEMENT WITH
DIRECTORS, MANAGEMENT TEAM AND CONSULTANCY CONTRACTS
[Contracts in Chinese]
SCHEDULE 7
TRANSACTIONS WITH AFFILIATES
None.
SCHEDULE 8
[Summary of Chinese-language exhibit]
GOVERNMENTAL CONSENTS
(1) Approval from Beijing SAIC of the amended business registration of Xinrui;
(2) Approval for amendment of PRC nationwide value-added service license;
(3) Approval from tax bureau for amendment of tax registration of
Xinrui.