Document:

Exhibit 4.22

	

Exhibit 4.22

 

SUBSCRIPTION AGREEMENT

This SUBSCRIPTION AGREEMENT (the “Subscription Agreement”) is made as of the date set forth on the signature page between MDU COMMUNICATIONS INTERNATIONAL, INC., a Delaware corporation, with its principal offices at 60-D Commerce Way, Totowa, New Jersey 07512 (including its two wholly-owned subsidiaries as more fully described below, the “Company”), and the undersigned subscriber (the “Investor”).

WHEREAS,
  the Company desires to sell on a “best efforts-no minimum” basis up,
  up to 1,314,532 units (the “Units”), each Unit consisting of
  (i) two (2) shares of the Company’s common stock, par value $0.001 per
  share (the “Common Stock”), and (ii) one (1) warrant to acquire
  one (1) share of the Common Stock, subject to adjustment (each a “Warrant,”
  collectively the “Warrants”), in a private placement (the “Offering”)
  to be conducted by the Company, the terms of which are set forth in an Offering
  Memorandum dated May 21, 2004, including all exhibits and attachments thereto
  or incorporated by reference therein (the “Memorandum”);

WHEREAS, the Company is offering the Units pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (“Securities Act”), to “accredited investors” only, as such term is defined in Rule 501(a) of said Regulation D; and

WHEREAS, all capitalized terms used herein and not otherwise defined herein shall have the same meanings as in the Memorandum.

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto do hereby agree as follows:

 

SECTION 1

 

SUBSCRIPTION FOR UNITS

 

1.1 
   Subscription. The Investor, intending
  to be legally bound, hereby subscribes for and agrees to purchase the number
  of Units set forth upon the signature page hereof, at a purchase price of $4.20
  per Unit, on the terms and conditions described herein and in the Memorandum
  and the Company agrees to sell such Units to the Investor, upon such terms and
  conditions.

 

1.2   Purchase. 

 

(a)   The Investor hereby tenders a check made payable to the order of “MDU Communications International, Inc.” in the amount set forth on the signature page hereof, or provides such funds by wire transfer pursuant to the wire instructions contained on the signature page hereof.

 

	 
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(b)   The Investor also tenders herewith a completed copy of this Subscription Agreement, including the Investor Qualification Questionnaire and an executed signature page (included herewith).

 

(c)   All subscriptions for Units in the Offering are irrevocable when delivered, subject to acceptance by the Company and certain other conditions described in this Subscription Agreement and the Memorandum. The Company has the right to accept or reject any subscription, in whole or in part. Funds relating to all subscriptions rejected by the Company shall be returned promptly to the applicable subscriber, without interest and without any deduction. 

 

(d)   The Offering is on a “best efforts – no minimum” basis. Subscription funds will be maintained by the Company pending a determination to close on such funds. The closing (“Closing”) may be held at any time for any amount of the subscription funds prior to the termination of the Offering. The date of the Closing shall hereinafter be referred to as the “Closing Date.” There is no minimum number of Units which must be sold in order to conduct a Closing.

 

SECTION 2

 

REPRESENTATIONS, WARRANTIES AND COVENANTS

 

	 
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2.1   Investor Representations, Warranties and Covenants. The Investor hereby acknowledges, represents, warrants or covenants, as the case may be, to the Company as follows:

 

(a)   The Investor is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act, as indicated by his response set forth in the Investor Questionnaire attached hereto, and that he is able to bear economic risk of an investment in the Units.

 

(b)   The Investor has prior investment experience, including investment in non-listed and non-registered securities, or he has employed the services of an investment advisor, attorney or accountant to read all of the documents furnished or made available by the Company both to him and to all other prospective investors in the Units, including the documents filed with the Securities and Exchange Commission (“SEC”) pursuant to the Securities Act of 1934, as amended (the “Exchange Act”), and to evaluate the merits and risks of such an investment on his behalf, and that he recognizes the highly speculative nature of this investment.

 

(c)   The Investor acknowledges receipt and careful review of the Memorandum, including, but not limited to, the attachments and exhibits thereto, including the Company’s (i) Form 10-KSB for the fiscal year ended September 30, 2003 (“Form 10-KSB”), and (ii) Forms 10-QSB for the quarters ended December 31, 2003 and March 31, 2004, and hereby represents that he has been furnished by the Company during the course of this transaction with all other information regarding the Company which he had requested or desired to know, that all documents which could be reasonably provided have been made available for his inspection and review, that he has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning
the terms and conditions of the Offering, and any additional information which he had requested.

 

(d)   The Investor understands and recognizes that the purchase of the Units is highly speculative and involves a high degree of risk and that only investors who can afford the loss of their entire investment should consider investing in the Company. The Investor understands all the risks of investing in the Company, including, without limitation, that the Company has incurred losses of $2,177,707, $2,377,366 and $2,576,237, for the fiscal year ended September 30, 2003 and each of the quarters ended December 31, 2003 and March 31, 2004, respectively. The Investor has also reviewed the risk factors contained in Part I of the Form 10-KSB.

 

(e)   The Investor acknowledges that the Offering will be conducted on a “best efforts” basis, and that there is no minimum amount of Units which must be subscribed for in order to close any purchase. One or more Closings will be held at such times as agreed to by the Company and the determination as to the timing of Closing shall bear no relation to the aggregate amount of funds and could be with respect to one or more subscriptions. The Company may find it necessary to raise additional capital, of which there can be no assurance.

 

(f)   The Investor acknowledges the Memorandum has not been reviewed by the SEC or any state securities regulators. The Investor represents that the Units are being purchased for his own account, for investment and not for distribution or resale to others. The Investor agrees that he will not sell or otherwise transfer such securities unless they are registered under the Securities Act or unless an exemption from such registration is available. The Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to the Units.

 

	 
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(g)   The Investor understands that the Common Stock and Warrants comprising the Units and Common Stock issuable upon exercise of the Warrants (“Warrant Shares”) have not been registered under the Securities Act by reason of a claimed exemption under the provisions of the Securities Act which depends, in part, upon his investment intention. In this connection, the Investor understands that it is the position of the SEC that the statutory basis for such exemption would not be present if his representation merely meant that his present intention was to hold such securities for a short period, such as the capital tax gains period of tax statutes, for a deferred sale, for a market rise, assuming that a market exists, or for any other fixed period. The Investor realizes that, in the view of the SEC
, a purchase now with an intent to resell would represent a purchase with an intent inconsistent with his representation to the Company, and the SEC might regard such a sale or disposition as a deferred sale to which such exemptions are not available.

 

(h)   The Investor understands that he may never be able to liquidate his investment in the Company. Although the Company has undertaken to register under the Securities Act the Common Stock comprising Units and the Warrant Shares, there can be no assurance that such registration will ever be effective or remain effective, or that there will be any liquidity with respect to the sale of such securities, if and when registered. The Investor understands that although the Company’s Common Stock is traded on the Over The Counter Bulletin Board (the “OTC Bulletin Board”), there currently is a limited public market for such securities. Investor represents that he has sufficient liquid assets so that the illiquidity associated with this investment will not cause any undue financial difficulties o
r affect the Investor’s ability to provide for its current needs and possible financial contingencies, and that the Investor’s commitment to all high risk investments (including this one if this subscription is accepted by the Company) is reasonable in relation to the Investor’s net worth and/or annual income.

 

(i)   The Investor understands that pending an effective registration under the Securities Act, if any, the Common Stock and Warrants comprising the Units and the Warrant Shares (collectively, “Securities”) will be restricted securities as such term is defined under Rule 144 ("Rule 144") promulgated under the Securities Act. Rule 144 requires, among other conditions, a one year holding period prior to the resale (subject to certain volume limitations) of securities acquired in a non-public offering without having to satisfy the registration requirements of the Securities Act. The Investor understands that the Company must be current with respect to the reporting requirements under the Exchange Act and its dissemination to the public of any current financial or other information concerning the
Company, as required by Rule 144, as one of the conditions of its availability. The Investor understands and hereby acknowledges that the Company is under no obligation to register the Securities under the Securities Act, with the exception of certain registration rights set forth in Section 4 hereafter exclusively with respect to the Common Stock comprising the Units and the Warrant Shares The Investor further understands that the Company may, if it desires, permit the transfer of the Securities out of his name only when his request for transfer is accompanied by an opinion of counsel reasonably satisfactory to the Company that the proposed transfer does not result in a violation of the Securities Act or any applicable state "blue sky" laws. The Investor agrees to hold the Company and its directors, officers and controlling persons and their respective heirs, representatives, successors and assigns harmless and to indemnify them against all liabilities, costs and expenses incurred by them as a result of any
 misrepresentation made by him contained herein or any sale or distribution by the undersigned Investor in violation of any securities laws under the Securities Act or under the securities laws of any state or other jurisdiction.

 

(j)   The Investor understands that the Company is relying on the Investor's representations herein and the information provided by the Investor in the Investor Qualification Questionnaire attached hereto. Any information which the Investor has heretofore furnished to the Company in the Investor Qualification Questionnaire or otherwise, including, without limitation, information with respect to his financial position and business experience is correct and complete as of the date of this Subscription Agreement, and if there should be any material change in such information prior to the Closing he will immediately furnish such revised or corrected information to the Placement Agent and Company.

 

	 
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(k)   The Investor understands the tax consequences of this investment and that the contents of the Memorandum do not contain tax advice or information. The Investor confirms that it is not relying on any statements or representations of the Company or any of its agents with respect to the tax and other economic considerations of an investment in the Units. The Investor has had the opportunity to consult with the Investor's own legal, accounting, tax, investment and other advisors, who are unaffiliated with the Company or any affiliate or selling agent of the Company, with respect to the tax treatment of an investment by the Investor in the Units. The Investor also acknowledges that it is solely responsible for any of its own tax liability that may arise as a result of this investment or the transaction
s contemplated by this Agreement.

 

(l)   If the Investor is an entity, it is a corporation, limited liability company, trust or partnership or other similar entity duly organized, validly existing and in good standing under the laws of its jurisdiction. The Investor has full power and authority (corporate or otherwise) to execute, deliver and enter into this Agreement and to purchase the Units. The execution and delivery by the Investor of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate or other action on the part of the Investor. If the Investor is an individual, the Investor has the legal capacity to enter into this Agreement and is a bona fide resident of the state shown in the address set forth on the signature pages hereto. This Agreement constitutes a
legal, valid and binding obligation of the Investor, enforceable against the Investor in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy.

 

(m)   The Investor consents to the placement of a legend on any certificate or other documents evidencing the Securities substantially in the following form: 

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THIS CORPORATION, IS AVAILABLE.”

 

(n)   The address of the Investor furnished by him on the signature pages hereto is the undersigned's principal residence if he is an individual or its principal business address if it is a corporation or other entity.

 

(o)   The Investor acknowledges that if he is a Registered Representative of an NASD member firm, he must give such firm the notice required by the NASD's Rules of Fair Practice, receipt of which must be acknowledged by such firm on the signature page hereto.

 

	 
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(p)   Except as set forth in the Memorandum, no representations or warranties have been made to the Investor by the Company or any agent, employee or affiliate of the Company and in entering into this transaction, the Investor is not relying on any information, other than that contained in the Memorandum and the results of independent investigation by the Investor.

 

(q)   Such Investor either has a pre-existing personal or business relationship with the Company or any of its partners, officers, directors or controlling persons, or by reason of such Investor's business or financial experience or the business or financial experience of such Investor's professional advisors, who are unaffiliated with and who are not compensated by the Company, or any affiliate or selling agent of the Company, directly or indirectly, such Investor could be reasonably assumed to have the capacity to protect such Investor's own interests in connection with the transaction.

 

(r)   This Subscription Agreement constitutes the legal, valid and binding agreement of the Investor, enforceable against the Investor in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and by general equitable principles, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent any indemnification provisions contained in this Subscription Agreement may be limited by applicable Federal or state securities laws.

 

(s)   If the Investor is not a United States person, it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Units or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Units, Common Stock or Warrants, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Units, Common Stock or Warrants. Such Investor's subscription and payment for, and his or her continued beneficial ownership of the Units, Common Stock or Warrants, will not violate any app
licable securities or other laws of the Investor's jurisdiction.

 

	 
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(t)   The Investor also understands and agrees that, although the Company will use its best efforts to keep confidential the information provided herein, the Company may present the information provided herein to such parties as it deems advisable (a) if called upon to establish either the availability under any Federal or state securities laws of an exemption from registration of the Offering or compliance with any other legal requirement, or (b) if the contents hereof are relevant to any issue in any action, investigation, suit or proceeding to which the Company is a party, is subject, or by which it is or may be bound. Further, the Investor understands that the Offering may be reported to the SEC pursuant to the requirements of applicable Federal law and to various state securities or blue sky commis
sioners pursuant to applicable laws.

 

(u)   No court or governmental injunction, order or decree affecting the Investor and prohibiting the execution and delivery by the Investor of this Agreement and the consummation of the transactions contemplated hereby is in effect, and the terms of this Agreement do not conflict with the provision of the Certificate or Articles of Incorporation or By-laws (or comparable charter, partnership or other organizational documents) of the Investor, or conflict with, or result in a material breach or violation of, any of the terms or provisions of, or constitute (with due notice or lapse of time or both) a material default under, any material lease, loan agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which the Investor is a party.

 

(v)   No material consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, remains to be obtained or is otherwise required to be obtained by the Investor in connection with the authorization, execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, including, without limitation the purchase and sale of the Units.

 

(w)   Other than CRT Capital Group LLC (as placement agent on behalf of the Company), and any subagents it may appoint, no finder, broker, agent, financial person or other intermediary has acted on behalf of the Investor in connection with the Investor’s subscription for the Units, the consummation of this Agreement or any of the transactions contemplated hereby. The Investor has not had any direct or indirect contact with any other investment banking firm (or similar firm) with respect to the offer of the Units by the Company to the Investor or the Investor’s subscription for the Units.

 

(x)   The Investors did not (i) receive or review any advertisement, article, notice or other communication published in a newspaper or magazine or similar media or broadcast over television or radio, whether closed circuit, or generally available, with respect to the Units or (ii) attend any seminar, meeting or investor or other conference whose attendees were, to the Investor’s knowledge, invited by any general solicitation or general advertising with respect to the Units.

 

(y)   The foregoing acknowledgments, representations, warranties and covenants shall survive the Closing.

 

2.2   Representations, Warranties and Covenants of the Company. The Company hereby acknowledges, represents, warrants or covenants, as the case may be, to the Investor as follows:

 

(a)   The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has full corporate power and authority to own and hold its properties and to conduct its business. The Company is duly licensed or qualified to do business, and in good standing, in each jurisdiction in which the nature 

 

	 
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of its business requires licensing, qualification or good standing, except for any failure to be so licensed or qualified or in good standing that would not have a material adverse effect on (i) the Company and each Subsidiary (as defined below) taken as a whole, (ii) its consolidated results of operations, assets, or financial condition, (iii) its ability to perform its obligations under this Agreement, the Warrants or (iv) the Securities (a “Material Adverse Effect”).

 

(b)   The Company has two wholly-owned subsidiaries, MDU Communications (USA) Inc. and MDU Communications Inc (each, a “Subsidiary,” together, the “Subsidiaries”). Schedule 2.2(b) sets forth, with respect to each Subsidiary, its type of entity, the jurisdiction of its organization, its authorized and outstanding capital stock, partnership interests or equivalent ownership interests and the Company’s current ownership of such shares or interests. Each of the outstanding shares of capital stock of each of the Subsidiaries is duly authorized, validly issued, fully paid and nonassessable and owned by the Company, and, except as set forth on Schedule 2.2(b), is free and clear of all liens, claims, encumbrances, options, pledges and security interests
 (collectively, “Liens”) and were not issued in violation of, nor subject to, any preemptive, subscription or similar rights. There are no outstanding warrants, options, subscriptions, calls, rights, agreements, convertible or exchangeable securities or other commitments or arrangements relating to the issuance, sale, purchase, return or redemption, voting or transfer of any shares, whether issued or unissued, of any capital stock, equity interest or other securities of any Subsidiary. The Company and the Subsidiaries do not own any equity interests in any person, other than the Subsidiaries. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to own, lease and operate its properties and to conduct its business.

 

(c)   As of the date hereof, the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share. As of May 14, 2004, (i) 38,734,468 shares of Common Stock were issued and outstanding, (ii) no shares of Preferred Stock were issued and outstanding, (iii) 2,221,857 shares of Common Stock were reserved for issuance upon exercise of outstanding options issued or issuable under the Company’s 2001 Stock Option Plan, (iv) 76,115 shares of Common Stock were reserved for issuance upon exercise of outstanding options issued or issuable under the Suppliers Stock Option Plan for 1998/1999 (the “Option Plans”), (v) 1,067,265 shares of Common Stock reserved for future
issuance under the Company’s 2001 Employee Stock Purchase Plan and (vi) 3,780,247 shares of Common Stock were reserved for issuance upon the exercise of outstanding warrants. All the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and free of preemptive rights created by or through the Company. All of the shares underlying the Company’s outstanding options and warrants (“Convertible Securities”), have been duly authorized and, when issued in accordance with the agreements or documents pursuant to which such Convertible Securities were issued, will be validly issued, fully paid and nonassessable and will be free and clear of all Liens imposed by or through the Company other than restrictions imposed by this Agreement and applicable securities laws. There are no other options, warrants or other rights, convertible debt, agreements, arrangements or commitments of any character obligating the Company or any
of its Subsidiaries to issue or sell any shares of capital stock of or other equity interests in the Company. The Company is not obligated to retire, redeem, repurchase or otherwise reacquire any of its capital stock or other securities.

 

(d)   The Company has full corporate power and authority to execute, deliver and enter into this Agreement, the Warrants and the Escrow Agreement, dated the date hereof, by and among the Company, the Placement Agent and Wachovia Bank, National Association (the “Escrow Agent”) (collectively, the “Transaction Documents”) and to consummate the transactions contemplated hereby and thereby. All action on the part of the Company, its directors or 

 

	 
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stockholders necessary for the authorization, execution, delivery and performance of this Agreement and the other Transaction Documents by the Company, the authorization, sale, issuance and delivery of the Securities contemplated by this Agreement and the performance of the Company’s obligations hereunder and thereunder has been taken. The Securities to be purchased on the Closing Date have been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable and will be free and clear of all Liens imposed by or through the Company other than restrictions imposed by this Agreement and applicable securities laws. No preemptive or other rights to subscribe for or purchase equity securities of the Company exists with respect to the issuance and sale of the Securities by the Company pursuant to this Agreement or the other Tra
nsaction Documents. This Agreement and the other Transaction Documents have been duly executed and delivered by the Company and each such agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy.

(e)   (i) Included in the Company’s Form 10-KSB are true and complete copies of the consolidated audited balance sheets (the “Balance Sheets”) of the Company at September 30, 2003 and 2002, and the related consolidated audited statements of operations, changes in stockholders’ equity (deficit) and comprehensive income (loss) and cash flows for the years ended September 30, 2003 and 2002 (the “Financial Statements”), accompanied by the report of J.H. Cohn. The Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”), applied consistently with the past practices of the Company (except as may be indicated in the notes thereto), and as of their respective dates, fairly
present, in all material respects, the consolidated financial position of the Company and the results of its operations as of the time and for the periods indicated therein. The Financial Statements have been prepared and are in accordance with the accounting books and records of the Company.

(ii)   A copy of each report, schedule, effective registration statement and definitive proxy statement filed by the Company with the Commission since September 30, 2003, including, but not limited to the Company’s Forms 10-QSB for the quarters ended December 31, 2003 and March 31, 2004and Current Report on Form 8-K filed on May 18, 2004 as the documents may have been amended since the time of their filing (the “Commission Documents”), have also been made available to the Investor either by physical delivery or via the Commission’s EDGAR System. As of their respective filing dates, each Commission Document complied in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the Commission t
hereunder applicable to the Commission Documents, and no Commission Document contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective filing dates, the financial statements of the Company included in the Commission Documents complied as to form in all material respects with then applicable accounting requirements and with the published rules and regulations of the Commission with respect thereto, were prepared in accordance with GAAP, applied consistently with the past practices of the Company, and as of their respective dates, fairly presented in all material respects the financial position of the Company and the results of its operations as of the time and for the periods indicated therein (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q
SB, and Regulations S-K and S-X of the Commission). 

 

	 
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(iii)   The information contained or incorporated by reference in the Memorandum does not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading.

(iv)   Since September 30, 2003, neither the Company nor any of the Company’s Subsidiaries has incurred any liabilities or obligations of any nature, whether or not accrued, absolute, contingent or otherwise, other than liabilities (A) disclosed in the Commission Documents filed prior to the date of this Agreement, (B) adequately provided for in the Balance Sheets or disclosed in any related notes thereto, (C) not required under GAAP to be reflected in the Balance Sheets, or disclosed in any related notes thereto (D) incurred in connection with this Agreement or (E) incurred in the ordinary course of business.

(v)   Since September 30, 2003, except as disclosed in the Commission Documents, filed subsequent to that date, there has not been any material adverse change in the business, financial condition or operating results of the Company and its Subsidiaries. 

 

(f)   Except as contemplated by this Agreement or disclosed in the Commission Documents, since September 30, 2003, through the date immediately preceding the Closing Date, neither the Company nor any of its Subsidiaries has (i) issued any stock, options, bonds or other corporate securities other than pursuant to the Option Plans, (ii) borrowed any amount or incurred or became subject to any liabilities (absolute, accrued or contingent), other than current liabilities incurred in the ordinary course of business and liabilities under contracts entered into in the ordinary course of business, (iii) discharged or satisfied any lien or adverse claim or paid any obligation or liability (absolute, accrued or contingent), other than current liabilities shown on the Balance Sheets and current liabilities incurre
d in the ordinary course of business, (iv) declared or made any payment or distribution of cash or other property to the stockholders of the Company or purchased or redeemed any securities of the Company, (v) mortgaged, pledged or subjected to any lien or adverse claim any of its properties or assets, except for liens for taxes not yet due and payable or otherwise in the ordinary course of business, (vi) sold, assigned or transferred any of its assets, tangible or intangible, except in the ordinary course of business or in an amount less than $250,000, (vii) suffered any extraordinary losses or waived any rights of material value other than in the ordinary course of business, (viii) made any capital expenditures or commitments therefor other than in the ordinary course of business or in an amount less than $250,000, (ix) entered into any other transaction other than in the ordinary course of business in an amount less than $250,000 or entered into any material transaction, whether or not in the ordinary cour
se of business, (x) made any charitable contributions or pledges, (xi) suffered any damages, destruction or casualty loss, whether or not covered by insurance, affecting any of the properties or assets of the Company or any other properties or assets of the Company which could, individually or in the aggregate, have or result in a Material Adverse Effect, (xii) made any material change in the nature or operations of the business of the Company or (xiii) entered into any agreement or commitment to do any of the foregoing.

 

(g)   (i) The execution and delivery by the Company of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby will not (A) result in the violation of any provision of the Certificate of Incorporation or By-laws of the 

 

	 
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Company, (B) result in any violation of any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or governmental authority to or by which the Company or any of its Subsidiaries is bound or (C) conflict with, or result in a breach or violation of, any of the terms or provisions of, or constitute (with due notice or lapse of time or both) a default under, any lease, loan agreement, mortgage, security agreement, trust indenture or other agreement to which the Company or any of its Subsidiaries is a party or by which it is bound or to which any of its properties or assets is subject, nor result in the creation or imposition of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries, in the cases of clauses (ii) and (iii) above, only to the extent such conflict, breach, violation, default or Lien reasonably could, indiv
idually or in the aggregate, have or result in a Material Adverse Effect.

(ii)   No consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority remains to be obtained or is otherwise required to be obtained by the Company in connection with the authorization, execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, including, without limitation the issue and sale of the Units, except filings as may be required to be made by the Company after the Closing with (A) the Commission, (B) the OTC Bulletin Board and (C) state blue sky or other securities regulatory authorities.

 

(h)   The Company and its Subsidiaries have all licenses, permits and other governmental authorizations currently required for the conduct of its current business and the ownership of its properties and is in all respects complying therewith, except where the failure to have such licenses, permits and other governmental authorizations would not have a Material Adverse Effect.

 

(i)   Except as disclosed in the Company’s Commission Documents, there are no claims, actions, suits, investigations or proceedings pending or, to the Company’s knowledge, threatened against the Company and its Subsidiaries or their respective assets, at law or in equity, by or before any governmental authority, or by or on behalf of any third-party. 

 

(j)   The Company is not, and following the Closing of the Offering will not be, an “investment company” within the meaning of that term under the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder.

 

(k)   Except as disclosed in the Company’s Commission Documents, neither the Company nor any of its Subsidiaries is (i) in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party of by which it or any of its properties is bound or (ii) in violation of any order, decree or judgment of any court, arbitrator or governmental body.

 

(l)   The Company has not since September 30, 2003, received notice (written or oral) from any stock exchange or market on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the continuing listing or maintenance requirements of the exchange or market. 

 

(m)   The Company or its Subsidiaries have all trademarks, registered copyrights, service marks or trade names, permits, grants and licenses and all other intangible assets, properties and rights that are material and necessary to conduct of the business of the Company, and, there are no other trademarks, copyrights, service marks, trade names or other intangible 

 

	 
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assets, properties or rights that are material to or that are necessary for the conduct of the business of the Company (the “Intellectual Property”). The Company and its Subsidiaries, as the case may be, own all right, title and interest, or possesses adequate rights, in and to the Intellectual Property necessary to conduct the business of the Company and the Intellectual Property do not infringe on or conflict with the rights or intellectual property of third parties, and neither the Company, nor any of its Subsidiaries has received any notice contesting its right to use any such Intellectual Property. The Intellectual Property has not been and are not the subject of any pending or threatened litigation or claim of infringement, and the transactions contemplated hereby and by the Transaction Documents will not adversely affect the right, title and interest of the Company
 in and to the Intellectual Property.

 

(n)   The Company and its Subsidiaries have obtained all permits, licenses and other authorizations which are required under United States federal, state and local laws relating to pollution or protection of the environment, including laws related to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic material or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling or pollutants, contaminants or hazardous or toxic materials or wastes (“Environmental Laws”). The Company and its Subsidiaries are in compliance with all terms and conditions of the required permits, licenses and authorizations and are also in full
compliance with all other limitations, restrictions, conditions and requirements contained in the Environmental Laws or contained in any plan, except where the failure to so comply would not have a Material Adverse Effect. The Company is not aware of, nor has the Company received notice of, any events, conditions, circumstances, actions or plans which may interfere with or prevent continued compliance or which would give rise to any liability under any Environmental Laws.

 

(o)   All material agreements to which the Company and its Subsidiaries are parties and which are required to have been filed by the Company pursuant to the Securities Act, the Exchange Act and the rules and regulations thereunder have been filed by the Company with the Commission. As of the date hereof, except as disclosed in the Commission Documents, and except for those agreements that by their terms are no longer in effect, each such agreement is in full force and effect and is binding on the Company and, to the Company’s knowledge, is binding upon such other parties, in each case in accordance with its terms, and neither the Company nor, to the Company’s knowledge, any other party thereto is in material breach of or material default under any such agreement. Except as disclosed in the Com
mission Documents, the Company has not received any written notice regarding the termination of any such agreements.

 

(p)   The Company has good title to all the properties and assets reflected as owned by it in the consolidated financial statements included in the Memorandum, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such consolidated financial statements or (ii) those which are not material in amount and do not adversely affect the use made and intended to be made of such property by the Company. The Company holds its leased properties under valid and binding leases. Except as disclosed in the Memorandum, the Company owns or leases all such properties as are necessary to its operations as now conducted.

 

(q)   The Company and its Subsidiaries maintain insurance of the types, against such losses and in the amounts and with such insurers as are customary in the Company’s industry and otherwise reasonably prudent, including, but not limited to, insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by similarly situated companies, all of which insurance is in full force and effect.

 

	 
	 	12	 
	

	 

 

(r)   The Company and its Subsidiaries are in compliance in all material respects with all applicable laws and all orders of, and agreements with, any governmental authority applicable to the Company, any Subsidiary or any of their respective assets. The Company and the Subsidiaries have all permits, certificates, licenses, approvals and other authorizations required under applicable laws or necessary in connection with the conduct of their businesses, except where the failure to have such permits, certificates, licenses, approvals and other authorizations would not have a Material Adverse Effect.

 

(s)   The Company and its Subsidiaries have in all material respects filed or obtained extensions of all federal, state, local and foreign income, excise, franchise, real estate, sales and use and other tax returns heretofore required by any law to which the Company is bound to be filed by it. All material federal, state, county, local, foreign or other income taxes which have become due or payable by the Company or any of its Subsidiaries (collectively, “Taxes”), have been paid in full or are adequately provided for in accordance with GAAP on the financial statements of the applicable person. No Liens arising from or in connection with Taxes have been filed and are currently in effect against the Company or any of its Subsidiaries, except for Liens for Taxes which are not yet due or which wou
ld not have a Material Adverse Effect. No audits or investigations are pending or, to the knowledge of the Company, threatened with respect to any tax returns or Taxes of the Company or any of its Subsidiaries.

 

(t)   The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ERISA”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Company would have any material liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “pension plan” or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “Code”); and each “pens
ion plan” for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

 

(u)   The Company is not involved in any material labor dispute with its employees nor is any such dispute, to the Company’s knowledge, threatened or imminent.

 

(v)   Assuming the truth of the Investor’s representations and acknowledgments contained in Section 2.1 hereof, neither the Company nor any person acting on its behalf (other than Investor, as to whom the Company makes no representations) has offered or sold the Securities by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act. The Company has not sold the Securities to anyone other than Investor designated in Subscription Agreement and the other subscribers for the Offering. Each Share and Warrant Share certificate shall bear substantially the same legend set forth in Section 2.1(m) hereof for at least so long as required by the Securities Act.

 

(w)   Other than CRT Capital Group LLC (as placement agent on behalf of the Company), and any subagents it may appoint, no finder, broker, agent, financial person or other intermediary has acted on behalf of the Company in connection with the sale of the Units by the Company or the consummation of this Agreement or any of the transactions contemplated hereby. The Company has not had any direct or indirect contact with any other investment banking firm (or similar firm) with respect to the offer of the Units by the Company to the Investor or the Investor’s subscription for the Units.

 

	 
	 	13	 
	

	 

 

(x)   The Company is in material compliance with the Sarbanes-Oxley Act of 2002 and all requirements under the Exchange Act.

 

(y)   The foregoing acknowledgments, representations, warranties and covenants shall survive the Closing.

SECTION 3

 

TERMS OF SUBSCRIPTION

3.1   Subscription. The subscription period will begin on May 20, 2004 (the “Commencement Date”) and shall continue until the earlier of: (i) the sale of all of the Units offered in the Memorandum, or (ii) June 18, 2004, unless extended, by the Company with the consent of the Placement Agent, for up to an additional thirty (30) days (the “Termination Date”). The Units will be offered on a "best efforts-no minimum" basis, as more particularly set forth in the Memorandum. The minimum subscription per subscriber shall be twenty five thousand dollars ($25,0000); provided, however, that the Company may, in its sole discretion, accept subscriptions for fractional amounts. 

 

3.2   Delivery of Certificates. The Investor hereby authorizes and directs the Company to deliver the certificates for the Common Stock and the Warrants and, upon exercise of the Warrants, if at all, the Warrant Shares to be issued to such Investor pursuant to this Subscription Agreement to the address indicated in the Investor Qualification Questionnaire included herein.

 

SECTION 4

 

REGISTRATION RIGHTS

 

4.1   Definitions. For purposes of this Section 4:

 

(a)   The terms “register,” “registered” and “registration” refer to a registration effected by preparing and filing a registration statement or statements or similar documents in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such registration statement or document by the SEC.

 

(b)   The term “Registrable Securities” means (i) the Common Stock comprising the Shares, the Warrants and the Warrant Shares sold to the Investor (or any assignee thereof) and all other subscribers pursuant to the terms of the Memorandum and any securities issued or issuable in respect thereof in connection with, among other things, a dividend, distribution or split, recapitalization, merger, consolidation, any reorganization or other distribution with respect to or in exchange for or in replacement of the Common Stock comprising the Shares, the Warrants and the Warrant Shares and the shares of Common Stock issuable thereon and (ii) any Common Stock issued pursuant to the provisions of Section 4.2(b).

 

(c)   The term “Registration Statement” means any registration statement or comparable document of the Company under the Securities Act through which a public sale or distribution of the Company's securities may be registered (except a form exclusively for the sale or distribution of securities in connection with an employee or consultant stock option or purchase plan or for use exclusively in connection with a business combination), the prospectus contained therein and all amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement.

 

	 
	 	14	 
	

	 

 

4.2   Shelf Registration.

 

(a)   The Company shall use its best efforts to prepare and file a Registration Statement on Form S-1, Form S-2, Form S-3, Form SB-1, Form SB-2 or Form SB-3, as applicable, (“Shelf Registration”) with the SEC as soon as possible after the final closing of the Offering (“Final Closing Date”) to provide for the offer and sale of the Registrable Securities and shall cause the Shelf Registration to become effective under the Act no later than one hundred and twenty (120) days after the Final Closing Date (“Effective Date”). 

 

(b)   In the event the Shelf Registration is not declared effective by the Effective Date, the Company shall promptly, but no later than ten (10) days from the Effective Date, issue to the Investor, any designee or assignee thereof, or each then holder of the Registrable Securities (“Holder”) a number of shares of Common Stock equal to seven percent (7.0%) of the sum of the number of (i) shares of Common Stock to the Holder in the Offering and (ii) the shares of Common Stock issued or issuable upon exercise of the Warrants issued to the Holder. In addition, for each thirty (30) day period after the Effective Date that the Shelf Registration has not been declared effective (each a “Default Period”), the Company shall be obligated to issue to the Holde
r (or any assignee thereof) a number of shares of Common Stock equal to three percent (3.0%) of the sum of the number of (x) shares of Common Stock issued to the Holder in the Offering, (y) shares of Common Stock issued or issuable upon exercise of the Warrants issued to the Holder and (z) the number of Penalty Shares (as defined below) issuable pursuant to this Section 4.2(b) prior to the date of determination. Any issuances of Common Stock the Company is obligated to make for subsequent Default Periods shall be made no later than ten (10) days from the last day of such Default Period. Each share of Common Stock issued pursuant to this Section 4.2(b) shall be hereinafter referred to as a “Penalty Share.” 

 

(c)   If the Company is unable to fulfill its obligation of issuing Penalty Shares because its Certificate of Incorporation does not provide for a sufficient number of authorized shares of Common Stock, as promptly as practicable after the date upon which the Holders have a right receive any Penalty Shares pursuant to Section 4.2(b) above, the Company shall amend its Certificate of Incorporation (the “Amendment”) to increase its authorized shares of Common Stock by an amount equal to the aggregate amount of Penalty Shares due to the Holders pursuant to Section 4.2(b) above, and shall at all times keep reserved, out of the authorized and unissued shares of Common Stock, a number of shares of Common Stock sufficient to provide for the issuance of such Penalty Shares to the Holde
rs.

 

(d) 
   In the event that the Company has not, on or before
  October 31, 2004, (i) amended its Certificate of Incorporation to increase its
  authorized shares of Common Stock by an amount at least equal to the aggregate
  amount of Penalty Shares due to the Holders pursuant to Section 4.2(b) above
  and (ii) issued all such Penalty Shares to the Holders, then in lieu of the
  issuance of such Penalty Shares, the Company shall pay the Holders in cash or
  by wire transfer of immediately available funds an amount equal to (i) the greater
  of (A) $2.10 and (B) the Market Price multiplied by (ii) the total amount of
  Penalty Shares due to the Holders (each a “Penalty Payment”).
  The initial Penalty Payment shall be paid to the Holders within ten (10) business
  days of October 31, 2004. Thereafter, until such time as the Company has passed
  the Amendment, with respect to each Default Period, each Penalty Payment shall
  be paid to the Holders within ten (10) days of the last day of each Default
  Period.

 

(e)   Notwithstanding the foregoing, the Company’s obligation to issue the Penalty Shares in connection therewith shall cease (the “Penalty Termination”) one (1) year from the date hereof so long as the Company has remained current, and remains current for at least one (1) contiguous year thereafter, with respect to all of its filings required under to the Exchange Act 

 

	 
	 	15	 
	

	 

 

(the “Filings”). In the event that subsequent to the first anniversary of the date hereof and prior to the second anniversary of the date hereof, the Holders are not eligible to sell any shares of Common Stock, Warrant Shares or Warrants constituting part of the Units pursuant to Rule 144 under the Exchange Act because the Company has ceased to be current with respect to all of its Filings, the Company’s obligation to issue the Penalty Shares pursuant to Section 4(b) above shall resume with respect each Default Period during which the Company is not current with respect to its Filings. 

 

(f)   For the purpose of the computations under this Section 4, the current “Market Price” per share of Common Stock at any date shall be the average of the daily closing prices for twenty (20) consecutive trading days commencing twenty five (25) trading days before the date of such computation. The closing price for each day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in either case on the principal national securities exchange on which the shares are listed or admitted to trading, or if they are not listed or admitted to trading on any national securities exchange, but are traded in the over-the-counter market, the closing sale price of the shares of Comm
on Stock or, in case no sale is publicly reported, the average of the representative closing bid and asked quotations for the shares of Common Stock on the OTC Bulletin Board or any comparable system, or if the shares of Common Stock are not listed on the OTC Bulletin Board or a comparable system, the closing sale price of the shares of Common Stock or, in case no sale is publicly reported, the average of the closing bid and asked prices as furnished by two members of the NASD selected from time to time by the Company for that purpose.

 

4.3   Piggyback Registration. From and after the Final Closing Date and until such time as the Registrable Securities are freely saleable under Rule 144 promulgated under the Securities Act without volume limitations, if the Company shall determine to proceed with the preparation and filing of a Registration Statement in connection with the proposed offer and sale of any of its securities by it or any of its security holders (other than a registration statement on Form S 4, S 8 or other limited purpose form), the Company will give written notice of its determination to all record holders of the Registrable Securities. Upon receipt of a written request from any such holder within thirty (30) days after receipt of any such notice from the Company, the Company will, except
as herein provided, cause all the Registrable Securities owned by such holders to be included in such Registration Statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Securities to be so registered. If any registration pursuant to this Section 4.3 shall be underwritten in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section 4.3 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. The obligation of the Company under this Section 4.3 shall be unlimited as to the number of Registration Statements to which it applies.

 

4.4   Registration Procedures. If and whenever the Company is required by the provisions of Sections 4.2 or 4.3 to effect the registration of Registrable Securities under the Securities Act, the Company will:

 

(a)   use its best efforts to cause such a Registration Statement to become and remain effective for a period of eighteen (18) months; provided, however, that any Registration Statement filed pursuant to Section 4.3 may be kept effective for such lesser period of time until which all Registrable Securities included thereunder are freely salable (without restriction, except with regard to Registrable Securities held by persons deemed to be "affiliates" of the Company) under Rule 144, if applicable.

 

	 
	 	16	 
	

	 

 

(b)   prepare and file with the SEC such amendments to such Registration Statement and supplements to the prospectus contained therein as may be necessary to keep such Registration Statement effective for the period of time described in paragraph (a) above.

 

(c)   furnish to the security holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of such Registration Statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities;

 

(d)   use its best efforts to register or qualify the securities covered by the Registration Statement under such state securities or blue sky laws of such jurisdictions as such participating holders may reasonably request in writing within twenty (20) days following the original filing of such Registration Statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified;

(e)   in the event that a registration involves an underwritten offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter or such offering; 

 

(f)   notify the security holders participating in such registration, promptly after it shall receive notice thereof, of the time when the Registration Statement has become effective or a supplement to any prospectus forming a part of the Registration Statement has been filed;

 

(g)   notify such holders promptly of any request by the SEC for the amending or supplementing the Registration Statement or prospectus or for additional information;

 

(h)   notify such holders promptly of the Company’s reasonable determination that a post-effective amendment to a Registration Statement or prospectus would be appropriate;

 

(i)   prepare and file with the SEC, promptly upon the request of any such holders, any amendments or supplements to the Registration Statement or prospectus which, in the opinion of counsel for such holders (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Registrable Shares;

 

(j)   prepare and promptly file with the SEC and promptly notify such holders of the filing of such amendment or supplement to the Registration Statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; 

 

(k)   advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of the Registration Statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued;

 

	 
	 	17	 
	

	 

 

(l)   at the request of holders of a majority of the Registrable Securities included in the Registration Statement, furnish to the underwriters on the date that the Registrable Securities are delivered to underwriters for sale in connection with a registration pursuant to this Section 4 (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters and (ii) a letter dated such date, from the independent certified accountants of the Company, in form an substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters;

 

(m)   make available for inspection by any underwriters participating in an offering covering Registrable Securities, and the counsel, accountants or other agents retained by any such underwriter, all pertinent financial and other records, corporate documents, and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such underwriters in connection with such offering;

 

(n)   if the Common Stock is then listed on a national securities exchange, cause the Registrable Securities to be listed on such exchange, or if reported on NASDAQ, to be reported on NASDAQ; 

 

(o)   provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement in which Registrable Securities are included; and

 

(p)   comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder no later than forty five (45) days after the end of any twelve (12) month period (or ninety (90) days after the end of any twelve (12) month period if such period is a fiscal year) commencing on the first day of the first fiscal quarter of the Company, after the effective date of the Shelf Registration Statement, which statements shall cover said twelve (12) month period.

 

4.5   Expenses. With respect to each inclusion of Registrable Securities in a Registration Statement pursuant to Sections 4.2 and 4.3 hereof, the fees, costs and expenses of registration to be borne by the Company shall include, all registration, filing, and NASD fees; printing expenses, fees and disbursements of counsel and accountants for the Company; all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered and qualified. Fees and disbursements of counsel and accountants for the selling security holders shall be borne by the selling security holders, and security holders participating in such registration shall bear their pro rata share of the
underwriting discounts and commissions and transfer taxes.

 

4.6   Certain Obligations of Holders. Each Holder agrees that, upon receipt of any notice from the Company of the happening of (i) any event of the kind described in 4.4(f), 4.4(g), 4.4(h), 4.4(j) or 4.4(k) hereof, or (ii) a determination by the Company’s Board of Directors that it is advisable to suspend use of the prospectus for a discrete period of time due to pending corporate developments such as negotiation of a material transaction which the Company in its sole discretion after consultation with legal counsel, determines it would be obligated to disclose in the Shelf Registration, which disclosure the Company believes would be premature or otherwise inadvisable at such time or would have a material adverse effect on the Company and its stockholders, such Hold
er will forthwith discontinue disposition of such Registrable 

 

	 
	 	18	 
	

	 

 

Securities covered by the Shelf Registration or prospectus until such Holder’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 4.3(b) hereof, or until such Holder is advised in writing by the Company that the use of the applicable prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such prospectus. The period of time in which the use of a prospectus or Shelf Registration is so suspended shall be referred to as a “Black-Out Period.” The Company agrees to so advise such Holder promptly of the commencement and termination of any such Black-Out Period, and the Investor agree to keep the fact of such Black-Out Period confidential. The Company shall not impose a Black-Out Period under this Section 4.6 for more t
han thirty (30) consecutive days and not more than twice in any given twelve (12) month period; provided, that at least ninety (90) days must pass between Black-Out Periods. Notwithstanding the foregoing, the Company may suspend the effectiveness of any Shelf Registration if the Commission rules and regulations prohibit the Company from maintaining the effectiveness of a Shelf Registration because its financial statements are stale at a time when its fiscal year has ended or it has made an acquisition reportable under Item 2 of Form 8-K or any other similar situation until the earliest time in which the SEC would allow the Company to re-effect a Shelf Registration (provided that the Company shall use its reasonable best efforts to cure any such situation as soon as possible so that the Shelf Registration can be made effective at the earliest possible time).

 

4.7   Indemnification.

 

(a)   The Company will indemnify and hold harmless each holder of Registrable Securities which are included in a Registration Statement pursuant to the provisions of Sections 4.2 and 4.3 hereof, such Investor’s directors and officers, and any underwriter (as defined in the Securities Act) for such holder and each person, if any, who controls such holder or such underwriter within the meaning of the Securities Act, from and against, and will reimburse such holder and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which such holder or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statemen
t or alleged untrue statement of any material fact contained in a Registration Statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expenses arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with written information furnished by such holder, such underwriter or such controlling person specifically for use in the preparation thereof.  

  

(b)   Each holder of Registrable Securities included in a registration pursuant to the provisions of Sections 4.2 and 4.3 hereof will indemnify and hold harmless the Company, its directors and officers, any controlling person and any underwriter from and against, and will reimburse the Company, its directors and officers, any controlling person and any underwriter with respect to, any and all loss, damage, liability, cost or expense to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any prospectus contained therein or any amendment or supplem
ent thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by or on behalf of such holder specifically for use in the preparation thereof and provided further, that the maximum amount that may be recovered from any holder shall be limited to the net amount of proceeds received by such holder from the sale of the Registrable Securities.

 

	 
	 	19	 
	

	 

 

(c)   Promptly after receipt by an indemnified party under this Section 4.7 of a notice of the commencement of any action (including any governmental action) such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party hereunder, deliver to the indemnifying party a written notice of the commencement thereof. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 4.7 only to the extent prejudicial to its ability to defend such action, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to an indemnified party otherwise t
han under this Section 4. The indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if in the reasonable determination of counsel for the indemnifying party, representation of such indemnified party by the counsel obtained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of paragraph
 (a) or (b) above for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the provisions of the preceding sentence, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action or (iii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party.

 

4.8   Contribution. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 4.8 hereof to the extent permitted by law, provided that (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification pursuant to the provisions of Section 4.8 hereof, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution by an
y seller of Registrable Securities shall be limited to the net amount of proceeds received by such seller from the sale of such Registrable Securities.

 

4.9   Assignable Rights. The rights with respect to the Registrable Securities under this Section 4 shall, in addition to being for the benefit of the parties hereto, be for the benefit of and enforceable by a transferee of the Registrable Securities. The obligations of the Company contained in this Section 4 shall be binding upon any successor to the Company and continue to be in effect with respect to any securities issued by any successor to the Company in substitution or exchange for any Registrable Securities.

 

4.10   Reports Under Securities Exchange Act. With a view to making available to the holders of Registrable Securities the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit the holders of the Registrable Securities to sell securities of the Parent to the public without registration, the Company agrees to:

 

	 
	 	20	 
	

	 

 

(a)   make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times;

 

(b)   file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

 

(c)   furnish to each holder of Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested in availing the holders of any Registrable Securities of any rule or regulation of the SEC which permits the selling of any such securities without registration.

 

SECTION 5

 

CONDITIONS FOR CLOSING

5.1   Conditions of Investor's Obligations at Closing. The obligations of the Investor under this Subscription Agreement are subject to the Company's fulfillment on or before Closing of each of the following conditions:

 

(a)   Representations and Warranties. The representations and warranties of the Company contained in Section 2.2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 

 

(b)   Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Subscription Agreement that are required to be performed or complied with by it on or before the Closing.

 

(c)   Opinion of Counsel to the Company. The Investor shall have received from each of Shugart Thomson & Kilroy, P.C., counsel for the Company, and the Company’s inside counsel, their respective opinions dated as of the Closing Date and addressed to the Investor in substantially the forms attached hereto as Exhibit A1 and Exhibit A2 respectively.

 

(d)   No Injunctions; etc. No court or governmental injunction, order or decree prohibiting the purchase and sale of the Units will be in effect. There will not be in effect any law, rule or regulation prohibiting or restricting the sale or requiring any consent or approval of any person that has not been obtained to issue and sell the Units to Investor. 

 

	 
	 	21	 
	

	 

 

(e)   Waivers and Consents. The Company will have obtained all consents and waivers necessary to execute and deliver this Agreement and all related documents and agreements and to issue and deliver the Shares, the Warrants, and the Warrant Shares issuable thereon, and all consents and waivers will be in full force and effect.

 

5.2   Conditions of the Company's Obligations at Closing. The obligations of the Company to the Investor under this Subscription Agreement are subject to the Investor's fulfillment on or before the Closing of each of the following conditions by the Investor:

 

(a)   Representations and Warranties. The representations and warranties of the Investor contained in Section 2.1 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing Date.

 

(b)   Payment of Purchase Price. The Investor shall have delivered the purchase price and other documents required pursuant hereto.

 

SECTION 6

 

MISCELLANEOUS

6.1   Modification. Neither this Subscription Agreement nor any provisions hereof should be modified, discharged or terminated except by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought.

 

6.2   Notices. Any notice, demand or other communication which any party hereto may be required, or may elect, to give to anyone interested hereunder shall be sufficiently given if delivered personally or by nationally recognized overnight courier service or sent by registered or certified mail, return receipt requested, addressed to such address as may be given herein. Notices delivered personally shall be effective upon receipt by the party to which it is addressed. Notices delivered by overnight courier service shall be effective the day after deposited with such courier service. Notices delivered by mail shall be effective three (3) days after deposited with the United States Postal Service.

 

6.3   Execution. By the execution of the signature page attached hereto, the parties hereby agree to be bound by all of the terms and conditions of this Subscription Agreement, including, without limitation, the registration rights contained herein.

 

6.4   Counterparts. This Subscription Agreement may by executed through the use of separate signature pages or in any number of counterparts, and each of such counterparts shall, for all purposes, constitute one agreement binding on all the parties, notwithstanding that all parties are not signatories to the same counterpart.

 

6.5   Binding Effect. Except as otherwise provided herein, this Subscription Agreement shall be binding upon and inure to the benefit of the parties and their heirs executors, administrators, successors, legal representatives and assigns. If the Investor is more than one person, the obligation of the Investor shall be joint and several and the agreements, representations, warranties and acknowledgments herein contained shall be deemed to be made by and be binding upon each such person and his heirs, executors, administrators and successors.

 

	 
	 	22	 
	

	 

 

6.6   Entire Agreement. This instrument contains the entire agreement of the parties, and there are no representations, covenants or other agreements except as stated or referred to herein.

 

6.7   Assignability. This Subscription Agreement is not transferable or assignable by the Investor.

 

6.8   Applicable Law; Jurisdiction. This Subscription Agreement shall be governed by and construed under the internal laws of the State of New York without regard to conflict of law rules. The parties hereby submit to the exclusive jurisdiction of the courts of the State of New York located in New York County and the Federal courts located in the Southern District of New York, with respect to any action or legal proceeding commenced by either party with respect to this Subscription Agreement or the Shares. Each party irrevocably waives any objection it now has or hereafter may have respecting the venue of any such action or proceeding or the inconvenience of such forum, and each party consents to the service of process in any such action or proceeding in the manner set f
orth for the delivery of notices herein. 

 

6.9   Waiver of Jury Trial. The parties hereby waive their rights to a trial by jury in any action or proceeding involving any matter arising out of or relating to this Subscription Agreement or to the Shares.

 

IN WITNESS WHEREOF, the parties have executed this Subscription Agreement as of the acceptance date by the Company indicated below:

[signatures on following page] 

 

	 
	 	23	 
	

	 

 

	 	 	 	 
	 	 	 	 
	

	 	 	

	Signature	 	 	Signature of Co-Investor

 

	 	 	 	 
	 	 	 	 
	

	 	 	

	
Name of Investor

[please print]
	 	 	Name of Co-Investor

	 	 	 	 
	 	 	 	 
	

	 	 	

	
Social Security or Taxpayer

Identification Number of Investor
	 	 	
Social Security or Taxpayer Identification

Number of Co-Investor

 

	 	 	 	 
	 	 	 	 
	

	 	 	 
	
Number of Units Subscribed

        for at $4.20 per Unit
	 	 	
Subscription Accepted:

MDU Communications International, Inc.

By:

 

 

	 	 	 	 
	 	 	 	 
	

	 	 	

	Total Subscription Amount	 	 	
Title:

Date:

*If Investor is a Registered Representative

 

with an NASD member firm, have the following

 

	 
	 	24	 
	

	 

 

acknowledgement signed by the appropriate party:

The undersigned NASD member firm acknowledges 

receipt of the notice required by Rule 3050 of the NASD 

Conduct Rules.   

 

	 	 	 	 
	 	 	 	 
	

	 	 	
	Name of NASD Member Firm	 	 	

	 	 	 	 
	 	 	 	 
	
By:

	 	 	
	Authorized Officer	 	 	

 

 

Wire Instructions:

 

Bank:

Beneficiary:

 

MDU Communications (USA) Inc.

60-D Commerce Way

Totowa, NJ 07512

 

Account #

	

	 	25<PAGE>

                              EXHIBIT NUMBER 4(a)3

            CONTRACT FOR SUBSCRIPTION OF 2% WING ON CONVERTIBLE NOTE

THIS AGREEMENT  dated 13 January 2004   is made

BETWEEN:

(1) WING ON TRAVEL (HOLDINGS) LIMITED, a company incorporated in Bermuda whose
registered office is situated at Clarendon House, 2 Church Street, Hamilton HM
11, Bermuda and principal place of business in Hong Kong is situated at 7th
Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong (the
"COMPANY"); and

(2) CHINA ENTERPRISES LIMITED, a company incorporated under the laws of Bermuda
whose registered office is situated at Clarendon House, 2 Church Street,
Hamilton HM 11 Bermuda (the "SUBSCRIBER").

WHEREAS:

(A) The Company currently has an authorised share capital of HK$500,000,000.00
divided into 50,000,000,000 Shares and an issued share capital of
HK$183,167,327.70 divided into 18,316,732,770 Shares.

(B) On 19 April 2002 the Company issued and the Subscriber procured Million Good
(as defined below) to subscribe in cash for the 2002 Convertible Note (as
defined below) for a principal amount of HK$120,000,000.00 upon the terms and
subject to the conditions set out therein. The 2002 Convertible Note entitles
the holder to convert the principal amount thereof into the Shares at the
current conversion price of HK$0.032 per Share (subject to adjustment) from and
up to and including 19 April 2004.

(C) Million Good has exercised the conversion rights under the 2002 Convertible
Note to convert part of the principal amount of the 2002 Convertible Note into
Shares and, as at the date of this Agreement, the Company is still owing to it a
principal amount of HK$84,800,000.00 under the 2002 Convertible Note.

(D) The Company has conditionally agreed to issue the Note and the Subscriber
has conditionally agreed to subscribe for the Note upon and subject to the terms
and conditions set out in this Agreement and the Conditions.

(E) As at the date of this Agreement, the Subscriber is the beneficial owner of
5,900,000,000 Shares in the capital of the Company, representing about 32.2 per
cent of the entire issued share capital of the Company.

NOW IT IS HEREBY AGREED  as follows:

1.    INTERPRETATION

1.1   In this Agreement, including the Recitals hereto, the words and
expressions set out below shall have the meanings attributed to them below
unless the context otherwise requires:

"Accounts"                         the audited consolidated accounts of the
Company for the nine months ended 31 December 2002 set out in the published
December 2002 Annual Report of the Company;

"Announcement"                     the announcement to be made by the Company in
relation to, inter alia, this Agreement and the proposed issue of the Note,
substantially in the form annexed marked "A";

                                      197

<PAGE>

"Business Day"                     a day (excluding Saturday) on which banks in
Hong Kong are generally open for business for more than four hours;

"Certificate"                      the certificate to be issued in respect of
the Note substantially in the form set out in Schedule 1;

"Completion"                       the performance by the parties hereto of
their respective obligations under Clause 4 and Schedule 2;

"Completion Date"                  the third Business Day after fulfilment or
waiver (as the case may be) of all of the Conditions Precedent pursuant to the
terms herein or such other date as the parties hereto may agree in writing, on
which Completion is to take place;

"Concert parties"                  of a person means parties acting in concert
with that person as defined in the Takeovers Code;

"Conditions"                       the terms and conditions to be attached to or
form part of the Note (with such amendments thereto as the parties may agree),
and "Condition" refers to the relative numbered paragraph of the Conditions;

"Conditions Precedent"             the conditions precedent set out in Clause
3.1;

"Conversion Rights"                the rights attached to the Note to convert
the principal amount (or any part(s) thereof) of the Note into Shares;

"Conversion Shares"                the Shares to be issued by the Company under
the Note upon exercise of the Conversion Rights or otherwise pursuant to the
Conditions;

"2002 Convertible Note"            the 2% convertible note due 2004 in the
principal amount of HK$120,000,000.00 issued by the Company on 19 April 2002 to
Million Good pursuant to a subscription agreement dated 1 February 2002 made
between the Company and the Subscriber (the "2002 Subscription Agreement");

"Executive"                        the Executive Director for the time being of
the Corporate Finance Division of the SFC or any delegate for the time being of
the Executive Director;

"Group"                            the Company and its subsidiaries (as that
term is defined in section 2 of the Companies Ordinance (Chapter 32 of the Laws
of Hong Kong));

"Hong Kong"                        the Hong Kong Special Administrative Region
of the People's Republic of China;

"Interim Report"                   the published interim financial report of the
Company for the six months ended 30 June 2003;

"Listing Rules"                    the Rules Governing the Listing of Securities
on the Stock Exchange;

"Million Good"                     Million Good Limited, a company incorporated
in the British Virgin Islands and a wholly owned subsidiary of the Subscriber;

"Note"                             the 2% convertible note due 2007 in the
principal amount of HK$155,000,000.00 to be issued by the Company to the
Subscriber or its nominee(s) pursuant hereto;

"Notes Subscription Agreements"    the agreements of even date between the
Company and each of Capital Strategic Investment Limited, Hutchison
International Limited, Yu, Kam Yuen

                                      198

<PAGE>

                                    Lincoln, Great Honest Investment Company
                                    Limited and Citiway Investments Limited in
                                    relation to convertible notes in the
                                    aggregate principal amount of
                                    HK$195,000,000.00 to be issued to them by
                                    the Company;

"SFC"                              Securities and Futures Commission in Hong
Kong;

"Share Option Plan"                the share option scheme adopted by the
Company on 3 May 2003 under which the Company may grant options to subscribe for
Shares to full time employees, executives or officers (including executive and
non-executive directors) of the Company and its subsidiaries and any suppliers,
consultants, agents or advisers as incentives and rewards for their contribution
to the Group;

"Shares"                           the shares of HK$0.01 each in the share
capital of the Company existing on the date of this Agreement and all other (if
any) stock or shares from time to time and for the time being ranking pari passu
therewith and all other (if any) shares or stock resulting from any
sub-division, consolidation or re-classification thereof;

"Stock Exchange"                   The Stock Exchange of Hong Kong Limited;

"Takeovers Code"                   the Hong Kong Code on Takeovers and Mergers;

"Warranties"                       the representations, warranties and
undertakings of the Company contained in Clause 5 and Schedule 3; and

"HK$" and "cents"                  Hong Kong dollars and cents, respectively.

1.2   Expressions defined in the Conditions shall, unless the context otherwise
requires, have the same meanings where used herein.

1.3   The expression "Company" and "Subscriber" shall where the context permits
include their respective successors and permitted assigns and any persons
deriving title under them.

1.4   In this Agreement, unless the context requires otherwise, references to
statutory provisions shall be construed as references to those provisions as
replaced, amended, modified or re-enacted from time to time; words importing the
singular include the plural and vice versa and words importing any gender or the
neuter include both genders and the neuter; references to this Agreement or any
issue document shall be construed as references to such document as the same may
be amended or supplemented from time to time; unless otherwise stated,
references to "Clauses" and the "Schedules" are to clauses of and schedules to
this Agreement. Clause headings are inserted for reference only and shall be
ignored in construing this Agreement.

2.    SUBSCRIPTION FOR THE NOTE

2.1   Subject to fulfilment or waiver (as the case may be) of the Conditions
Precedent, the Subscriber shall subscribe or procure the subscription by its
nominee(s) of the Note at 100 per cent. of its face value and shall settle the
subscription price at Completion in accordance with paragraph 2 of Schedule 2.

2.2   Subject to fulfilment or waiver (as the case may be) of the Conditions
Precedent, the Company shall at Completion issue the Note at its full face value
to the Subscriber or such nominee(s) as the Subscriber may direct.

3.    CONDITIONS PRECEDENT

                                      199
<PAGE>

3.1   The obligations of the parties hereto to effect Completion shall be
conditional upon:

      (a) the Listing Committee of the Stock Exchange having granted (either
unconditionally or subject only to conditions to which the Company and the
Subscriber have no reasonable objection) listing of, and permission to deal in,
the Conversion Shares;

      (b) the passing of all necessary resolutions, on a poll where necessary,
by the shareholders (being, where required by the Stock Exchange or the SFC, the
independent shareholders) of the Company at general meeting to approve:

(i)   the Company's entering into this Agreement and performance of the
transactions contemplated in this Agreement including the issue of the Note and
the issue and allotment of the Conversion Shares in accordance with the Note;
and

(ii)  the grant of a waiver by the Executive in respect of the obligation of the
Subscriber and the parties acting in concert with it (if any) to make a
mandatory general offer for the Shares not already owned or agreed to be
acquired by the Subscriber or any parties acting in concert with it (if any) as
a result of the issue and subscription of the Conversion Shares upon exercise of
the conversion rights under the Note in accordance with note 1 of the "Notes on
dispensations from Rule 26" of the Takeovers Code (the "Whitewash Waiver");

      (c) the Whitewash Waiver having been obtained and not having been revoked
or amended and, where the Whitewash Waiver is subject to conditions, such
conditions being reasonably acceptable to the Subscriber and, to the extent that
any such conditions are required to be fulfilled before the Whitewash Waiver
becomes effective, they are so fulfilled;

      (d) if required, the Bermuda Monetary Authority having approved the issue
of the Note and the Conversion Shares and the transferability of the Note and
the Conversion Shares;

      (e)   all the conditions precedent (save and except such condition(s)
precedent relating to the fulfilment of all the Conditions Precedent) under each
of the Notes Subscription Agreements having been fulfilled or waived (as the
case may be) in accordance with the provisions thereof;

      (f)   there being no event existing or having occurred and no condition
being in existence which would be (after the issue of the Note) an event of
default under Condition 10 of the Conditions and no event or act having occurred
which, with the giving of notices, or the lapse or time, or both, would (after
the issue of the Note), constitute such an event of default;

      (g)   the Warranties remaining true and accurate in all material respects
and not misleading in any material respect;

      (h)   there being no occurrences of circumstances which, in the reasonable
opinion of the Subscriber, will have a material adverse effect on the financial
condition, prospects, earning, business, undertaking or assets of the Group, in
each case, taken as a whole, since the date of this Agreement; and

      (i)   all necessary approvals from the relevant governmental or regulatory
authorities in Hong Kong, Bermuda and the United States required of either the
Company or the Subscriber for the consummation of transactions contemplated in
this Agreement having been obtained and all filings having been made and waiting
periods having expired or been terminated.

3.2   The Company shall use its best endeavours to procure the fulfilment of all
the Conditions Precedent as soon as practicable and in any event on or before
the Long Stop Date (as defined in Clause 3.3). The Company shall forthwith
notify the Subscriber by notice in writing upon the fulfilment of any of the
Conditions Precedent and shall produce evidence in relation thereto to the
Subscriber's reasonable satisfaction.

                                      200
<PAGE>

3.3   If the Conditions Precedent are not fulfilled (or, in respect of the
Conditions Precedent set out in Clauses 3.1 (f), (g) and (h) above, waived by
the Subscriber in its absolute discretion) on or before 31 March 2004 (or such
later date as may be agreed in writing between the Subscriber and the Company)
("Long Stop Date"), this Agreement (save and except Clauses 3.4, 8 to 11) shall
lapse and become null and void and the parties hereto shall be released from all
obligations hereunder, save for any liability arising out of any antecedent
breaches hereof.

3.4   For the avoidance of doubt, the parties hereby acknowledge that unless and
until Completion shall have occurred in accordance with the terms hereof, none
of Million Good's or the Subscriber's rights, claims, entitlements or benefits
arising from the 2002 Convertible Note or the 2002 Subscription Agreement will
be affected, prejudiced or diminished in any manner.

4.    COMPLETION

      Completion shall take place at the offices of the Company in Hong Kong (or
at such other venue as the parties may agree) at or about 11:00 a.m. (Hong Kong
time) on the Completion Date simultaneously with completion of the Notes
Subscription Agreements, at which each party hereto shall perform or shall
procure the performance of its obligations set out in Schedule 2.

5.    REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS BY THE COMPANY

5.1   The Company hereby represents, warrants and undertakes to the Subscriber
that as at the date hereof and as at Completion, each of the statements in
Schedule 3 remains true, correct and accurate.

5.2   The Company undertakes to notify the Subscriber forthwith on any matter or
event coming to its attention prior to Completion which shows any of the
Warranties to be or to have been untrue, misleading or inaccurate in any
material respect.

5.3   The Company hereby agrees and acknowledges that the Subscriber is entering
into this Agreement in reliance on the Warranties and is entitled to treat such
representations and warranties as conditions of the Agreement. However, save and
except as expressly stipulated in Clause 5 and Schedule 3, the Subscriber hereby
expressly acknowledges and agrees that the Company has not, and shall not be
deemed to have, given any representations, warranties or undertakings in
relation to any and all of the transactions contemplated in this Agreement and
any and all such representations, warranties and undertakings are hereby
expressly excluded.

5.4   The Company hereby undertakes to indemnify and keep indemnified the
Subscriber against any damages, losses, costs, expenses (including legal costs
and expenses) or other liabilities which it may suffer or incur as a result of
or in connection with any breach of the Warranties or any of the Warranties
being untrue or misleading.

5.5   If the Company fails to perform any of its obligations (including its
obligation at Completion) under this Agreement or breaches any material terms of
the Warranties set out in this Agreement prior to Completion then without
prejudice to all and any other rights and remedies available at any time to the
Subscriber (including but not limited to the right to damages for any loss
suffered) the Subscriber may, by notice either require the Company to perform
such obligations or, insofar as the same is practicable, remedy such breach, or
to the extent it relates to the failure of the Company to perform any of its
material obligations on or prior to Completion treat the Company as having
repudiated this Agreement and rescind the same. The rights conferred upon the
Subscriber by the provisions of this Clause 5.5 are additional to and do not
prejudice any other rights the Subscriber may have. Failure to exercise any of
the rights herein conferred shall not constitute a waiver of any such rights.

5.6   The Company is deemed to have repeated all the Warranties on the basis
that such Warranties will, at all times from the date of this Agreement up to
and including the date on which all obligations (including payment obligations)
of the Company under the Note and under this Agreement have been discharged in
full, be true, complete and accurate

                                      201
<PAGE>

in all respects (with respect to facts and circumstances at such time except as
specifically provided otherwise) and such Warranties shall have effect as if
given at each of such times as well as the date of this Agreement.

5.7   The Company further undertakes to and in favour of the Subscriber that, so
long as the Note remains outstanding, it will not and will procure that no
member of the Group will, without the prior written consent of the Subscriber
(which consent may be subject to such conditions as the Subscriber sees fit to
impose) :

(a)   consolidate or amalgamate with or merge into any other person, take any
step with a view to dissolution, liquidation or winding-up or acquire all or a
substantial part of the assets of any other person;

(b)   except as expressly herein provided, sell, transfer, lease or otherwise
dispose of the whole or any substantial part of its undertaking or its property
or assets, whether by a single transaction or by a number of transactions
whether related or not;

(c)   lend any money or extend any credit, except in the ordinary course of its
business, or make any investments that would have a material adverse effect on
its financial condition or significantly change the character of its business;

(d)   except for indebtedness incurred pursuant to this Agreement and the Notes
Subscription Agreements or indebtedness incurred in the ordinary course of the
Group's business and not material in amount, incur or create any indebtedness or
give any guarantee or indemnity or act as surety in respect of any indebtedness
of any other person; or

(e)   create or permit to exist any encumbrance over all or any of its present
or future undertaking or property or its present or future revenues or assets.

6.    REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS BY THE SUBSCRIBER

6.1   The Subscriber hereby represents, warrants and undertakes that as at the
date hereof and as at Completion:

      (a) the information set out in Recital (E) is true and correct in all
respects with respect to the facts as prevailing as at the date hereof;

      (b) it is duly incorporated and validly existing under the laws of its
place of incorporation and has the authority to enter into and perform this
Agreement and that in entering into this Agreement and in performing its
obligations hereunder (including the holding of the Note and the exercising of
its rights thereunder) it does not and shall not do so in breach of any
applicable legislation; and

      (c) this Agreement constitutes valid, binding and enforceable obligations
of the Subscriber.

6.2   The Subscriber hereby agrees and acknowledges that the Company is entering
into this Agreement in reliance on the representations and warranties made by it
under Clause 6.1. However, save and except as expressly stipulated in Clause
6.1, the Company hereby expressly acknowledges and agrees that the Subscriber
has not, and shall not be deemed to have, given any representations, warranties
or undertakings in relation to any and all of the transactions contemplated in
this Agreement and any and all such representations, warranties and undertakings
are hereby expressly excluded.

7.    NOTICES

      Any notice required or permitted to be given by or under this Agreement
shall be in writing and if to the Company or the Subscriber shall be given by
delivering it to its address or facsimile number shown below:

      If to the Company to:

                                      202
<PAGE>

7th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong

            Facsimile   :    (852) 2542 0298
            Attention   :    Board of Directors

      If to the Subscriber to:

8th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong
            Facsimile   :    (852) 2810 6982
            Attention   :    Board of Directors

      or to such other address or facsimile number as the party concerned may
have notified to the other parties pursuant to this Clause and may be given by
sending it by registered post or by hand to such address or by facsimile
transmission to such facsimile number, or to such other address or facsimile
number as the party concerned may have notified to the other parties in
accordance with this Clause. Such notice shall be deemed to be served on the day
of delivery or facsimile transmission (or, if the day of delivery or
transmission is not a Business Day or if the delivery or transmission is made
after 5:00 pm Hong Kong time, it will deem to be served on the immediately
following Business Day), or in the case of registered post 48 hours after
posting, or if sooner upon acknowledgement of receipt by or on behalf of the
party to which it is addressed.

8.    COSTS AND EXPENSES

      Each party shall bear its own costs and expenses (if any) incurred by it
in connection with the preparation, negotiation and settlement of this
Agreement. Capital fees, stamp duty and all other fees and duties (if any)
relating to the issue and delivery of the Note, fulfilment of the Conditions
Precedent, allotment and issue of the Conversion Shares shall be borne by the
Company.

9.    GENERAL PROVISIONS RELATING TO AGREEMENT

9.1   Time shall be of the essence of this Agreement.

9.2   This Agreement shall be binding on and enure for the benefit of the
successors of each of the parties and (subject to the other provisions of this
Agreement and the Conditions) permitted assigns provided that the benefits and
obligations or any part thereof bestowed upon each party to this Agreement shall
not be capable of being assigned, transferred, encumbered or otherwise disposed
of save and except any assignment, transfer, encumbrance or disposal thereof in
connection with a transfer of the Note by the holder in accordance with the
Conditions.

9.3   The exercise of or failure to exercise any right or remedy in respect of
any breach of this Agreement shall not, save as provided herein, constitute a
waiver by such party of any other right or remedy it may have in respect of that
breach.

9.4   Any right or remedy conferred by this Agreement on either party for breach
of this Agreement (including without limitation the breach of any
representations and warranties) shall be in addition and without prejudice to
all other rights and remedies available to it in respect of that breach.

9.5   Any provision of this Agreement which is capable of being performed after
Completion but which has not been performed on or before Completion and all
Warranties contained in or entered into pursuant to this Agreement shall remain
in full force and effect notwithstanding Completion.

9.6   This Agreement (together with the other documents referred to herein
including, without limitation, the Note) constitutes the entire agreement
between the parties with respect to its subject matter (neither party having
relied on any representation or warranty made by the other parties which is not
contained in this Agreement) and no variation of this Agreement shall be
effective unless made in writing and signed by all the parties.

                                      203
<PAGE>

9.7   Save and except in respect of the 2002 Subscription Agreement and 2002
Convertible Note which shall continue to have full force and effect until
Completion shall have occurred and without prejudice to Clause 3.4 which shall
survive any termination of this Agreement pursuant to Clause 3.3, this Agreement
supersedes all and any previous agreements, arrangements or understandings
between the parties relating to the matters referred to in this Agreement and
all such previous agreements, understanding or arrangements (if any) shall cease
and determine with effect from the date hereof.

9.8   If at any time any provision of this Agreement is or becomes illegal, void
or unenforceable in any respect, the remaining provisions hereof shall in no way
be affected or impaired thereby.

9.9   The terms of this Agreement and the Note shall remain valid and
enforceable notwithstanding the issue and redemption or conversion of the Note
to the extent that any of the terms in this Agreement or the Note has not been
fully and properly performed or satisfied.

9.10  Subject to the requirements of the Stock Exchange and the SFC, and save
for the Announcement, neither party hereto shall make any press or other
announcements relating to this Agreement and the Note without the consent of the
other party as to the form and manner of such announcement (such consent not to
be unreasonably withheld). Any announcement or supply of information by either
party required to be made pursuant to the requirements of the Stock Exchange or
the SFC shall be issued or released only after such prior consultation with the
other party as is reasonably practicable in the circumstances.

9.11  The parties agree that they shall treat as strictly confidential all
information received or obtained by it or its employees or advisers as a result
of entering into or performing this Agreement and the Note including information
relating to the provisions of this Agreement and the Note and the negotiations
leading up to this Agreement and the Note, the subject matter thereof and,
subject to Clause 9.10, it will not at any time hereafter make use of or
disclose or divulge to any person any such information and shall use its best
endeavours to prevent the publication or disclosure of any such information.

9.12  Each of the parties agrees to do and execute or procure to be done and
executed all such further acts, deeds, documents and things as may be reasonable
and appropriate for such party to do or execute or procure to be done in order
to give full effect to the terms of this Agreement.

10.   COUNTERPARTS

      This Agreement may be executed by the parties hereto in any number of
counterparts and on separate counterparts, each of which when so executed shall
be deemed an original but all of which shall constitute one and the same
instrument and be binding on all parties.

11.   GOVERNING LAW AND JURISDICTION

      This Agreement is governed by and shall be construed in accordance with
the laws of Hong Kong.

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                                   SCHEDULE 1

                                   CERTIFICATE

                                                             Certificate No. [ ]

                        WING ON TRAVEL (HOLDINGS) LIMITED
               (Incorporated in Bermuda with limited liability)

                    TWO PER CENT. CONVERTIBLE NOTE DUE 2007

Issued pursuant to the memorandum of association and bye-laws of Wing On Travel
(Holdings) Limited (the "COMPANY") and a resolution of its board of directors
passed on [     ] 200[4] [and a resolution of the shareholders of the Company
passed on [   ] 2004].

THIS IS TO CERTIFY that [*] whose registered office is situated at [*] is the
registered holder ("NOTEHOLDER") of the above-mentioned Convertible Note
("NOTE"). The Noteholder is entitled to require the Company to convert the whole
or any part(s) of the principal amount outstanding under this Note into ordinary
shares in the capital of the Company subject to and in accordance with the terms
and conditions attached hereto which shall form an integral part of this
Certificate ("CONDITIONS").

Subject to the foregoing, the Company, for value received, promises to redeem
the Note and pay the principal sum of HK$155,000,000.00 to the Noteholder in
accordance with the Conditions.

The Company shall pay interest on the principal amount of the Note in accordance
with the Conditions.

GIVEN under the Seal of WING ON TRAVEL (HOLDINGS) LIMITED on [-], 2004.

______________________________________
Director

______________________________________
Secretary/Director

Note:

This Note cannot be transferred to bearer on delivery and is transferable only
to the extent permitted by Condition 2 of the Conditions. This Note must be
delivered to the Secretary of Wing On Travel (Holdings) Limited for cancellation
and reissue of an appropriate certificate in the event of any such transfer.

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(For endorsement in the event of partial conversion)

Date            Amount Converted           Amount Outstanding

                                      206
<PAGE>

                              TERMS AND CONDITIONS

This Note is in the principal amount of HK$155,000,000.00 and is issued by and
convertible into shares of Wing On Travel (Holdings) Limited (the "COMPANY").
This Note shall be held subject to and with the benefit of the terms and
conditions set out below. Terms defined in the agreement in respect of the issue
of convertible note dated [*] between Wing On Travel (Holdings) Limited and [ ]
shall bear the same meanings in this Note. In addition, the words and
expressions set out below shall have the meanings attributed to them below
unless the context otherwise require:

"ADJUSTMENT"                       any adjustment which may be made to the
Conversion Price pursuant to Condition 7;

"BUSINESS DAY"                     a day (except Saturday) on which banks in
Hong Kong are open for business for more than four hours;

"CCASS"                            the Central Clearing and Settlement System
operated by Hong Kong Securities Clearing Company Limited;

"CLOSING PRICE PER SHARE"          the closing price per Share for one or more
board lots of the Shares quoted on the daily quotation list of the Stock
Exchange, or, if the Stock Exchange begins to operate on an extended hours basis
and does not designate the closing price, then the last trade price of the
Shares prior to 4:00 p.m. (Hong Kong time). If such closing price cannot be
calculated for the Shares on a particular date on the foregoing bases, the
closing price per Share on such date shall be the fair market value as mutually
determined by the Company and the Noteholder. If the Company and the Noteholder
are unable to agree upon the fair market value of the Shares, then it shall be
as determined in good faith by an approved merchant bank (as defined in
Condition 7.2);

"CONDITIONS"                       the terms and conditions attached to or
endorsed on this Note and "CONDITION" refers to the relative numbered paragraph
of the Conditions;

"CONVERSION PRICE"                 the price of HK$0.02 per Share, subject to
the Adjustment;

"CONVERSION RIGHTS"                the rights attached to this Note to convert
the whole or any part(s) of the principal amount into Shares;

"CONVERSION SHARES"                the Shares to be issued by the Company under
this Note (whether upon exercise by the Noteholder of the Conversion Rights, or
otherwise pursuant to the Conditions);

"EVENTS OF DEFAULT"                shall have the meaning ascribed thereto in
Condition 10;

"EXERCISE DATE"                    a date on which a notice is given pursuant to
Condition 8.1 in respect of the exercise of the Conversion Rights in accordance
with the Conditions;

"HONG KONG"                        the Hong Kong Special Administrative Region
of the People's Republic of China;

"LISTING RULES"                    the Rules Governing the Listing of Securities
on the Stock Exchange;

"MATURITY DATE"                    has the meaning ascribed thereto in
Condition 1;

"MONTH"                            is a reference to a period starting on one
day in a calendar month and ending on the numerically corresponding day in the
next succeeding calendar month provided that if there is no numerically
corresponding day in the month in which that period ends, that period shall end
on the last day in that later month;

"NOTEHOLDER"                       the person who is for the time being the
registered holder of this Note;

"OTHER CONVERTIBLE NOTES"          the five convertible notes in the principal
amounts of HK$15,000,000.00, HK$105,000,000.00, HK$20,000,000.00,
HK$5,000,000.00 and HK$50,000,000.00 respectively issued by the

                                      207
<PAGE>

Company pursuant to the Notes Subscription Agreements;

"SHARES" the shares of HK$0.01 each in the share capital of the Company existing
on the issue date of this Note and all other (if any) stock or shares from time
to time and for the time being ranking pari passu therewith and all other (if
any) shares or stock resulting from any sub-division, consolidation or
re-classification thereof;

"STOCK EXCHANGE" The Stock Exchange of Hong Kong Limited;

"SUBSCRIPTION AGREEMENT" the agreement dated [January 13, 2004] between [China
Enterprises Limited] and the Company in respect of the issue of this Note;

"TRADING DAY" a day on which the Shares are traded on the Stock Exchange for a
minimum of 3 hours and an official closing price per Share is provided by the
Stock Exchange; and

"HK$" and "CENTS" Hong Kong dollars and cents, respectively.

The expressions "COMPANY" and "NOTEHOLDER" shall where the context permits
include their respective successors and permitted assigns and any persons
deriving title under them.

In this Note, unless the context requires otherwise:

(a) references to statutory provisions shall be construed as references to those
provisions as replaced, amended, modified or re-enacted form time to time;

(b) words importing the singular include the plural and vice versa;

(c) words importing any gender or the neuter include both genders and the
neuter;

(d) references to this Note or any issue document shall be construed as
references to such document as the same may be amended or supplemented from time
to time; and

(e) Condition headings are inserted for reference only and shall be ignored in
construing this Note.

1.    Maturity

      Subject as provided herein, the Company shall repay the outstanding
principal amount of this Note (together with all unpaid interests accrued
thereon up to and including the date of actual repayment) subject to and in
accordance with the Conditions on the third anniversary of the issue date of
this Note (the "MATURITY DATE").

2.    Status and Transfer

2.1         The obligations of the Company arising under this Note constitute
    general, unconditional, unsecured, unsubordinated obligations of the Company
    and rank, and shall rank equally among themselves and pari passu with all
    other present and future unsecured and unsubordinated obligations of the
    Company except for obligations accorded preference by mandatory provisions
    of applicable law. No application shall be made for a listing of this Note.

2.2         This Note or any part(s) thereof may be assigned or transferred to
    any third party which is not a connected person (as that term is defined in
    the Listing Rules) of the Company, subject only to compliance of the
    conditions hereunder and further subject to the conditions, approvals,
    requirements and any other provisions of or under:

(a) the Stock Exchange (and any other stock exchange on which the Shares may be
listed at the relevant time) or their rules and regulations;

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<PAGE>

(b) the approval for listing in respect of the Conversion Shares; and

(c) all applicable laws and regulations.

2.3         Any assignment or transfer of this Note shall be in respect of the
    whole or any part(s) of the outstanding principal amount of this Note. The
    Company shall facilitate any such assignment or transfer, including making
    any necessary applications to the Stock Exchange for approval.

2.4         Notwithstanding any other provisions of this Condition 2, this Note
    or any part(s) thereof shall not be transferred to any company or other
    person which is a connected person (as defined in the Listing Rules) of the
    Company.

2.5         In relation to any assignment or transfer of this Note permitted
    under or otherwise pursuant to this Condition 2:

(a) this Note or any part(s) thereof may only be transferred by execution of a
form of transfer (the "Transfer Form") in the form annexed to the Conditions by
the transferor and the transferee (or their duly authorised representatives). In
this Condition, "transferor" shall, where the context permits or requires,
include joint transferors or can be construed accordingly;

(b) this Note must be delivered to the Company accompanied by:

(i) a duly executed Transfer Form;

(ii) in the case of the execution of the Transfer Form on behalf of a
corporation by its officers, the authority of that person or those persons to do
so;

and the Company shall, within two (2) Business Days of receipt of such documents
from the Noteholder, cancel the existing certificate for this Note and issue a
new certificate for this Note or any part(s) thereof under seal of the Company
in respect of the whole or such part(s) of the principal amount of this Note so
transferred, in favour of the transferee or assignee as applicable and (if
appropriate) issue to the Noteholder a new certificate for such part of this
Note under seal of the Company in respect of any balance thereof retained by the
Noteholder; and

the Company shall maintain outside Hong Kong and give a full and complete
register of the Noteholders, the conversion, cancellation and destruction of
this Note, any replacement certificate issued in substitution for any defaced,
lost, stolen or destroyed certificate and of details of all Noteholders from
time to time.

2.6         Any reasonable legal and other costs and expenses which may be
    properly incurred by the Company in connection with any transfer or
    assignment of this Note or any part(s) thereof or any request therefor shall
    be borne by the Noteholder.

3.    Interest

3.1 Interest is payable on this Note at the rate of 2% per annum on the
principal amount of this Note outstanding from time to time accruing from the
date of issue of this Note on a daily basis and shall be calculated on the basis
of the actual number of days elapsed in a year of 365 days, including the first
day of the period during which it accrues and including the last. The interest
will, subject as provided herein, be payable by the Company once every six
months in arrears at the end of each six-month period between the date of issue
of this Note and the Maturity Date. The first payment shall be made on the date
falling six months after the date of issue of this Note.

3.2 In the event that the Noteholder has converted the whole or any part(s) of
the principal amount of this Note and upon delivery to the Company of the
Certificate for this Note, the Noteholder shall be entitled to interest in

                                      209
<PAGE>

respect of the whole or such part(s) of the principal being converted for the
period from the immediately preceding interest payment date (or the date of
issue of this Note, as the case may be) up to and including the Exercise Date.

4.    Payments

4.1   All payments by the Company hereunder shall be made in immediately
        available funds free and clear of any withholdings or deductions for any
        present or future taxes, imposts, levies, duties or other charges
        payable by the Company. In the event that the Company is required by law
        to make any such deduction or withholding from any amount paid, the
        Company shall pay to the Noteholder such additional amount as shall be
        necessary so that the Noteholder continues to receive a net amount equal
        to the full amount which it would have received if such withholding or
        deduction had not been made.

4.2   All payments by the Company hereunder shall be made, not later than 11:00
        a.m. (Hong Kong time) on the due date, by remittance to such bank
        account in Hong Kong as the Noteholder may notify the Company from time
        to time.

4.3   If the due date for payment of any amount in respect of this Note is not a
        Business Day, the Noteholder shall be entitled to payment on the next
        following Business Day in the same manner together with interest accrued
        in respect of any such delay.

4.4   The Company shall not be obliged to make any payment on the redemption of
        the outstanding principal amount of this Note until it has received the
        certificate for this Note.

4.5   If the Company defaults in the payment of any sum due and payable under
        this Note, the Company shall pay interest on such sum to the Noteholder
        from the due date to the date of actual payment in full (both before and
        after judgment) calculated at the rate of 5% per annum.

5.    Redemption

Unless previously converted in accordance with these Conditions, upon
presentation on the Maturity Date of the original of the certificate for this
Note to the Company at its address specified in Condition 15, this Note will be
redeemed by the Company at its principal amount outstanding together with
accrued interest thereon up to and including the Maturity Date in Hong Kong
Dollars as provided in Condition 3.1.

6.    Conversion

6.1 Subject to receipt by the Company of the documents referred to in Condition
8.1, the Noteholder shall have the right to convert on any Business Day on or
prior to the Maturity Date, the whole or any part(s) of the principal amount of
this Note into Shares at any time and from time to time at the Conversion Price
provided that such part of the principal amount of this Note to be converted
shall not be less than HK$250,000.00 at any one time, so that the number of
Shares which fall to be issued (subject to Condition 6.2) shall be calculated by
applying the formula :

     x
n = ---
     y

where    n = number of Conversion Shares to be issued

         x = the whole or such part(s) of the principal amount of this Note; and

         y = the Conversion Price applicable on the Exercise Date.

The Conversion Shares shall be allotted and issued in the name of the Noteholder
or such entity as it may so direct pursuant to such conversion and shall be
delivered to the Noteholder within two (2) Business Days after the date of
presentation of the original certificate for this Note.

6.2   No fraction of a Share shall be issued on conversion of this Note but
      (except in cases where any such cash

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<PAGE>

      entitlement would amount to less than HK$10.00) a cash payment will be
      made to the Noteholder in respect of such fraction. Shares issued upon
      conversion pursuant to Condition 6.1 shall rank pari passu in all respects
      with all other existing Shares outstanding at the Exercise Date and be
      entitled to all dividends and other distributions the record date of which
      falls on a date on or after the date of the conversion notice.

7     Adjustments

7.1   Subject as hereinafter provided and save and except for cases where the
      Company shall issue the Other Convertible Notes and/or any Shares upon the
      exercise of any conversion rights attaching thereto, the Conversion Price
      shall from time to time be adjusted in accordance with the following
      relevant provisions and so that if the event giving rise to any such
      adjustment shall be such as would be capable of falling within more than
      one of sub-paragraphs (a) to (i) inclusive of this Condition 7.1, it shall
      fall within the first of the applicable paragraphs to the exclusion of the
      remaining paragraphs:

(a)   If and whenever the Shares by reason of any consolidation or sub-division
      become of a different nominal amount, the Conversion Price in force
      immediately prior thereto shall be adjusted by multiplying it by the
      following fraction:

             A
            ---
             B

where:

A = the revised nominal amount; and

B = the former nominal amount.

Each such adjustment shall be effective from the close of business in Hong Kong
on the day immediately preceding the date on which the consolidation or
sub-division becomes effective.

(b)   If and whenever the Company shall issue (other than in lieu of a cash
      dividend) any Shares credited as fully paid by way of capitalisation of
      profits or reserves (including any share premium account or capital
      redemption reserve fund), the Conversion Price in force immediately prior
      to such issue shall be adjusted by multiplying it by the following
      fraction:

              C
            -----
            C + D

where:

C = the aggregate nominal amount of the issued Shares immediately before such
    issue; and

D = the aggregate nominal amount of the Shares issued in such
    capitalisation.

Each such adjustment shall be effective (if appropriate retroactively) from the
commencement of the day next following the record date for such issue.

(c)   If and whenever the Company shall make any Capital Distribution (as
      defined in Condition 7.2) (except where, and to the extent that, the
      Conversion Price falls to be adjusted under sub-paragraph (b) above) to
      holders (in their capacity as such) of Shares (whether on a reduction of
      capital or otherwise) or shall grant to such holders rights to acquire for
      cash assets of the Company or any of its subsidiaries, the Conversion
      Price in force immediately prior to such distribution or grant shall be
      adjusted by multiplying it by the following fraction:

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<PAGE>

E - F
-----
E

where:

E =   the market price (as defined in Condition 7.2) on the date on which the
      Capital Distribution or, as the case may be, the grant is publicly
      announced or (failing any such announcement) next preceding the date of
      the Capital Distribution or, as the case may be, of the grant; and

F =   the fair market value on the day of such announcement or (as the case
      may require) the next preceding day, as determined in good faith by an
      approved merchant bank, of the portion of the Capital Distribution or of
      such rights which is attributable to one Share;

Provided that:

(i)   if in the opinion of the relevant approved merchant bank, the use of the
      fair market value as aforesaid produces a result which is significantly
      inequitable, it may instead determine, and in such event the above formula
      shall be construed as if F meant the amount of the said market price which
      should properly be attributed to the value of the Capital Distribution or
      rights; and

(ii)  the provisions of this sub-paragraph (c) shall not apply in relation to
      the issue of Shares paid out of profits or reserves and issued in lieu of
      a cash dividend.

Each such adjustment shall be effective (if appropriate retroactively) from the
commencement of the day next following the record date for the Capital
Distribution or grant.

(d)   If and whenever the Company shall after the date hereof offer to holders
      of Shares new Shares for subscription by way of rights, or shall grant to
      holders of Shares any options, warrants or other rights to subscribe for
      or purchase any Shares, the Conversion Price shall be adjusted by
      multiplying the Conversion Price in force immediately before the date of
      the announcement of such offer by the following fraction:

                        H x I
                       -------
      G         +         J
      -----------------------------------
                        G + H

where:

G =  the number of Shares in issue immediately before the date of such
     announcement;

H =  the aggregate number of Shares so offered for subscription;

I =  the amount (if any) payable for the rights, options or warrants or other
     rights to subscribe for each new Share, plus the subscription price
     payable for each new Share; and

J =  the greater of either the closing price per Share on the trading day
     immediately prior to such announcement or the Conversion Price in effect
     immediately prior to the trading day immediately prior to such
     announcement.

Such adjustment shall become effective (if appropriate retroactively) from the
commencement of the day next following the record date for the offer.

(e)     (i) If and whenever the Company shall issue wholly for cash any
        securities which by their terms are convertible into or exchangeable for
        or carry rights of subscription for new Shares, and the Total Effective
        Consideration per Share (as defined below in this sub-paragraph (e))
        initially receivable for

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<PAGE>

         such securities is less than the greater of either the closing price
         per Share at the date of the announcement of the terms of issue of such
         securities or the Conversion Price in effect immediately prior to the
         date of the announcement of the terms of issue of such securities (for
         the purpose of this section (i), the "Applicable Price"), the
         Conversion Price shall be adjusted by multiplying the Conversion Price
         in force immediately prior to the issue by a fraction of which the
         numerator is the number of Shares in issue immediately before the date
         of the issue plus the number of Shares which the Total Effective
         Consideration receivable for the securities issued would purchase at
         the Applicable Price and the denominator is the number of Shares in
         issue immediately before the date of the issue plus the number of
         Shares to be issued upon conversion or exchange of, or the exercise of
         the subscription rights conferred by, such securities, at the initial
         conversion or exchange rate or subscription price. Such adjustment
         shall become effective (if appropriate retrospectively) from the close
         of business in Hong Kong on the Business Day next preceding whichever
         is the earlier of the date on which the issue is announced and the date
         on which the Company determines the conversion or exchange rate or
         subscription price.

(ii)  If and whenever the rights of conversion or exchange or subscription
      attached to any such securities as are mentioned in section (i) of this
      sub-paragraph (e) are modified so that the Total Effective Consideration
      (as defined below in this sub-paragraph (e)) per Share initially
      receivable for such securities shall be less than the greater of either
      the closing price per Share at the date of announcement of the proposal to
      modify such rights of conversion or exchange or subscription or the
      Conversion Price in effect immediately prior to the date of announcement
      of the proposal to modify such rights of conversion or exchange or
      subscription (for the purpose of this section (ii), the "Applicable
      Price"), the Conversion Price shall be adjusted by multiplying the
      Conversion Price in force immediately prior to such modification by a
      fraction of which the numerator is the number of Shares in issue
      immediately before the date of such modification plus the number of Shares
      which the Total Effective Consideration receivable for the securities
      issued at the modified conversion price would purchase at the Applicable
      Price and of which the denominator is the number of Shares in issue
      immediately before such date of modification plus the number of Shares to
      be issued upon conversion of or the exercise of the subscription rights
      conferred by such securities at the modified conversion or exchange rate
      or subscription price, such adjustment shall take effect as at the date
      upon which such modification takes effect. A right of conversion or
      subscription shall not be treated as modified for the foregoing purposes
      where it is adjusted to take account of rights or capitalisation issues
      and other events normally giving rise to adjustment of conversion or
      exchange terms.

For the purposes of this sub-paragraph (e), the "Total Effective Consideration"
receivable for the securities issued shall be deemed to be the consideration
receivable by the Company for any such securities plus the additional minimum
consideration (if any) to be received by the Company upon (and assuming) the
conversion or exchange thereof or the exercise of such subscription rights, and
the Total Effective Consideration per Share initially receivable for such
securities shall be such aggregate consideration divided by the number of Shares
to be issued upon (and assuming) such conversion or exchange at the initial
conversion or exchange rate or the exercise of such subscription rights at the
initial subscription price, in each case without any deduction for any
commissions, discounts or expenses paid, allowed or incurred in connection with
the issue.

(f)   If and whenever the Company shall issue wholly for cash any Shares at a
      price per Share which is less than the greater of either the closing price
      per Share at the date of the announcement of the terms of such issue or
      the Conversion Price in effect immediately prior to the date of the
      announcement of the terms of such issue (for the purpose of this
      sub-paragraph (f), the "Applicable Price"), the Conversion Price shall be
      adjusted by multiplying the Conversion Price in force immediately before
      the date of such announcement by a fraction of which the numerator is the
      number of Shares in issue immediately before the date of such announcement
      plus the number of Shares which the aggregate amount payable for the issue
      would purchase at the Applicable Price and the denominator is the number
      of Shares in issue immediately before the date of such announcement plus
      the number of Shares so issued. Such adjustment shall become effective on
      the date of the issue.

(g)   If and whenever the Company shall issue Shares for the acquisition of
      assets at a Total Effective Consideration per Share (as defined below in
      this sub-paragraph (g)) which is less than the greater of either

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<PAGE>

      the closing price per Share at the date of the announcement of the terms
      of such issue or the Conversion Price in effect immediately prior to the
      date of the announcement of the terms of such issue, the Conversion Price
      shall be adjusted in such manner as may be determined by an approved
      merchant bank , such adjustment to become effective on the date of issue.
      For the purposes of this sub-paragraph (g), "Total Effective
      Consideration" shall be the aggregate consideration credited as being paid
      for such Shares by the Company on acquisition of the relevant asset
      without any deduction of any commissions, discounts or expenses paid,
      allowed or incurred in connection with the issue thereof, and the "Total
      Effective Consideration per Share" shall be the Total Effective
      Consideration divided by the number of Shares issued as aforesaid.

(h)   If and whenever the average closing price per Share for the 20 consecutive
      trading days immediately preceding [     ] (being the date falling on the
      first anniversary of the date of issue of the Notes by the Company) is
      lower than the Conversion Price (the "First Average Price"), the
      Conversion Price shall be adjusted to the First Average Price, provided
      that the First Average Price shall not fall below HK$0.015. For the
      avoidance of doubt, if the First Average Price falls below HK$0.015, the
      Conversion Price shall be adjusted to HK$0.015. Such adjustment shall
      become effective on the first anniversary of the date of issue of the
      Notes by the Company. If and whenever the Shares by reason of any
      consolidation or sub-division become of a different nominal amount than
      HK$0.01 each, the floor First Average Price of HK$0.015 stated above shall
      be adjusted in the same manner as provided in Clause 7.1(a) substituting
      the Conversion Price used therein by the floor First Average Price.

(i)   If and whenever the average closing price per Share for the 20 consecutive
      trading days immediately preceding [     ] (being the date falling on the
      second anniversary of the date of issue of the Notes by the Company) is
      lower than the Conversion Price (the "Second Average Price"), the
      Conversion Price shall be adjusted to the Second Average Price, provided
      that the Second Average Price shall not fall below HK$0.015. For the
      avoidance of doubt, if the Second Average Price falls below HK$0.015, the
      Conversion Price shall be adjusted to HK$0.015. Such adjustment shall
      become effective on the second anniversary of the date of issue of the
      Notes by the Company. If and whenever the Shares by reason of any
      consolidation or sub-division become of a different nominal amount than
      HK$0.01 each, the floor Second Average Price of HK$0.015 stated above
      shall be adjusted in the same manner as provided in Clause 7.1(a)
      substituting the Conversion Price used therein by the floor Second Average
      Price.

(j)   If the Company or the Noteholder determines that an adjustment should be
      made to the Conversion Price as a result of one or more events or
      circumstances (whether or not referred to in sub-paragraphs (a) to (i)
      above) (even if the relevant event or circumstance is specifically
      excluded in the Conditions from the operation of sub-paragraphs (a) to (i)
      above), or that an adjustment should not be made (even if the relevant or
      circumstance is specifically provided for in sub-paragraphs (a) to (i)
      above), or that the effective date for the relevant adjustment should be a
      date other than that mentioned in sub-paragraphs (a) to (i) above, the
      Company or the Noteholder may, at the expense of the Company, request the
      approved merchant bank, acting as expert, to determine as soon as
      practicable (i) what adjustment (if any) to the Conversion Price is fair
      and reasonable to take account thereto and is appropriate to give the
      result which the approved merchant bank considers in good faith to reflect
      the intentions of the provisions of this Condition 7; and (ii) the date on
      which such adjustment should take effect; and upon such determination such
      adjustment (if any) shall be made and shall take effect in accordance with
      such determination, provided that an adjustment shall only be made
      pursuant to this sub-paragraph (h) if the approved merchant bank is so
      requested to make such a determination.

7.2   For the purposes of this Condition 7:

"announcement" shall include the release of an announcement to the press or the
delivery or transmission by telephone, telex or otherwise of an announcement to
the Stock Exchange and "date of announcement" shall mean the date on which the
announcement is first so released, delivered or transmitted;

"approved merchant bank" means a merchant bank of repute in Hong Kong selected
by the Company and approved by

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<PAGE>

the Noteholder for the purpose of providing a specific opinion or calculation or
determination hereunder or such merchant bank as may be appointed by the
President for the time being of The Law Society of Hong Kong upon the request of
either the Company or the Noteholder;

"Capital Distribution" shall (without prejudice to the generality of that
phrase) include distributions in cash or specie. Any dividend charged or
provided for in the accounts for any financial period shall (whenever paid and
however described) be deemed to be a Capital Distribution provided that any such
dividend shall not automatically be so deemed if it is paid out of the aggregate
of the net profits (less losses) attributable to the holders of Shares for all
financial periods after 31 December 2002 as shown in the audited consolidated
profit and loss account of the Company and its subsidiaries for each financial
period ended 31 December;

"issue" shall include allot;

"market price" mean the average of the closing price per Share for each of the
last twenty (20) Stock Exchange trading days on which dealings in the Shares on
the Stock Exchange took place ending on such trading day last preceding the day
on or as of which the market price is to be ascertained;

"reserves" includes unappropriated profits; and

"rights" includes rights in whatsoever form issued.

7.3   The provisions of sub-paragraphs (b), (c), (d), (e) and (f) of Condition
      7.1 shall not apply to:

(a)   an issue of fully paid Shares upon the exercise of any conversion rights
      attached to securities convertible into Shares or upon exercise of any
      rights (including any conversion of this Note) to acquire Shares (except a
      rights issue) provided that an adjustment (if required) has been made
      under this Condition 7 in respect of the issue of such securities or
      granting of such rights (as the case may be);

(b)   an issue of fully-paid Shares by way of capitalisation of all or part of
      any subscription right reserve, or any similar reserve which has been or
      may be established pursuant to the terms of any securities wholly or
      partly convertible into, or rights to acquire, Shares; or

(c)   an issue of Shares pursuant to a scrip dividend scheme where an amount not
      less than the nominal amount of the Shares so issued is capitalised and
      the market value of such Shares is not more than 110 per cent. of the
      amount of dividend which holders of the Shares could elect to or would
      otherwise receive in cash, for which purpose the "market value" of a Share
      shall mean the average of the closing prices such Stock Exchange dealing
      days on which dealings in the Shares took place (being not less than
      twenty (20) such days) as are selected by the directors of the Company in
      connection with determining the basis of allotment in respect of the
      relevant scrip dividend and which fall within the period of one month
      ending on the last day on which holders of Shares may elect to receive or
      (as the case may be) not to receive the relevant dividend in cash.

7.4   Any adjustment to the Conversion Price shall be made to the nearest
      one-hundredth of a cent so that any amount under 0.005 cent shall be
      rounded down and any amount of 0.005 cent or more shall be rounded up.

7.5   Notwithstanding anything contained herein, no adjustment shall be made to
      the Conversion Price in any case in which the amount by which the same
      would be reduced in accordance with the foregoing provisions of this
      Condition would be less than one-hundredth of a cent and any adjustment
      that would otherwise be required then to be made shall not be carried
      forward.

7.6   If the Company or any subsidiary of the Company shall in any way modify
      the rights attached to any share or loan capital so as wholly or partly to
      convert or make convertible such share or loan capital into, or attach
      thereto any rights to acquire, Shares, the Company shall appoint an
      approved merchant bank to consider whether any adjustment to the
      Conversion Price is appropriate (and if such approved merchant bank shall

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<PAGE>

      certify that any such adjustment is appropriate, the Conversion Price
      shall be adjusted accordingly and the provisions of Conditions 7.4, 7.5,
      7.7, 7.8, 7.9, 7.10 and 7.11 shall apply).

7.7   Whenever the Conversion Price is adjusted as herein provided the Company
      shall as soon as possible but not later than two Business Days after the
      relevant adjustment has been determined give notice of the same to the
      Noteholder (setting forth the event giving rise to the adjustment, the
      Conversion Price in effect prior to such adjustment, the adjusted
      Conversion Price and the effective date thereof).

7.8   Notwithstanding any other provision of this Condition 7, no adjustment
      shall be made which would (but for this Condition 7.8) result in the
      Conversion Price being reduced so that on conversion, Shares would fall to
      be issued at a discount to their nominal value, and in such case an
      adjustment shall be made to the effect that the Conversion Price will be
      reduced to the nominal value of the Shares.

7.9   Any adjustment to the Conversion Price shall not involve an increase in
      the Conversion Price (except upon any consolidation of the Shares pursuant
      to Condition 7.1(a)).

7.10  Every adjustment to the Conversion Price shall be certified in writing by
      an approved merchant bank (as defined in Condition 7.2).

7.11  The Company shall make available for inspection at its principal place of
      business in Hong Kong at all times after the effective date of the
      adjustment in the Conversion Price and so long as this Note remains
      outstanding, a signed copy of the certificate of the approved merchant
      bank and a certificate signed by a director of the Company setting forth
      brief particulars of the event giving rise to the adjustment, the
      Conversion Price in effect prior to the adjustment, the adjusted
      Conversion Price and the effective date thereof and shall, on request,
      send a copy thereof to the Noteholder.

8     Procedure for Conversion and Share Issue

8.1   The Conversion Rights may, subject as provided herein, be exercised on any
      Business Day, on or prior to the Maturity Date, by the Noteholder
      delivering a written notice to the Company in accordance with Condition 15
      stating the intention of the Noteholder to convert the whole or any
      part(s) of the principal amount of this Note into Shares. Any such
      conversion notice shall be in the form annexed to the Conditions.

8.2   The Company shall pay all taxes and stamp duty, issue and registration
      duties (if any) and levies and charges (if any) arising on any conversion.

(a) The Conversion Shares shall be allotted and issued by the Company, credited
as fully paid to the Noteholder or as it may direct, within two (2) Business
Days after, and with effect from, the later of the Exercise Date or the date on
which the certificate for this Note is delivered to and received by the Company.

(b)   The certificate(s) for the Conversion Shares to which the Noteholder or
      such person as it may direct shall become entitled in consequence of any
      conversion shall, if the Noteholder so requests in the notice, be
      deposited in the CCASS participant's stock account set out in the notice
      or in the absence of such request by the Noteholder, shall be issued in
      board lots to the extent possible, with one certificate for any odd lot of
      Shares arising from conversion and made available for collection at the
      Company's address specified in Condition 15, in each case, within the two
      (2) Business Days period provided for in sub-paragraph (a) above, and (if
      appropriate) the certificate for this Note with an endorsement thereon by
      a director of the Company for any balance of this Note not converted shall
      be made available for collection at the Company's address specified in
      Condition 15 within the same period.

9     Protection of the Noteholder

9.1   So long as this Note is outstanding, unless with prior written approval of
      the Noteholder :

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(a)   the Company shall from time to time keep available for issue, free from
      pre-emptive rights, out of its authorised but unissued capital, sufficient
      Shares to satisfy in full the Conversion Rights at the Conversion Price
      and all other rights for the time being outstanding of subscription for
      and conversion into Shares;

(b)   the Company shall not in any way modify the rights attached to the Shares
      as a class or attach any special restrictions thereto;

(c)   the Company shall procure that at no time shall there be in issue Shares
      of different nominal values;

(d)   other than as a result of, or in circumstances where, an offer made to
      holders of Shares to acquire all or any proportion of the Shares becoming
      unconditional the Company shall use its best endeavours to:

(i)   maintain a listing for all the issued Shares on the Stock Exchange;

(ii)  obtain and maintain a listing on the Stock Exchange for all the Conversion
      Shares issued on the exercise of the Conversion Rights; and

(iii) obtain and maintain a listing for all the Conversion Shares issued on the
      exercise of the Conversion Rights on any other stock exchange on which any
      of the Shares are for the time being listed;

and will forthwith give notice to the Noteholder in accordance with Condition 15
of the listing or delisting of the Shares by any such stock exchange;

(e)   the Company shall provide the Noteholder with a copy of its annual
      reports, annual financial statements and interim reports and all other
      statements and circulars sent by the Company to its shareholders within
      three (3) Business Days after the Company sends the same to its
      shareholders;

(f)   the Company shall ensure that all Conversion Shares issued upon conversion
      of this Note shall be duly and validly issued fully paid and registered;

(g)   as soon as possible and in any event not later than two (2) Business Days
      after the announcement of the full terms of any event which give rise to
      adjustments pursuant to Condition 7 (or, if later, as soon as the relevant
      adjustment thereunder can reasonably be determined), give notice to the
      Noteholder advising it of the date on which the relevant adjustment of the
      Conversion Price is likely to become effective and of the effect of
      exercising the Conversion Rights pending such date; and

(h)   the Company shall comply with and procure the compliance of all conditions
      imposed by the Stock Exchange or by any other competent authority (in Hong
      Kong or elsewhere) for approval of the issue of this Note or for the
      listing of and permission to deal in the Shares issued or to be issued on
      the exercise of the Conversion Rights and ensure the continued compliance
      thereof (provided in each case that the Noteholder complies with and
      satisfies all such conditions).

9.2   If an offer is made to all holders of Shares (or such holders other than
      the offeror and/or any company controlled by the offeror and/or persons
      associated or acting in concert with the offeror) to acquire all or a
      portion of the Shares and such offer comes to the knowledge of the
      Company, the Company shall forthwith give notice of such offer to the
      Noteholder and shall use all its reasonable endeavours to procure that a
      similar offer is extended in respect of this Note or in respect of any
      Shares issued on conversion of this Note during the period of the offer.

9.3   The Company shall procure that no security issued by the Company shall be
      converted into Shares or exchanged for Shares except in accordance with
      the terms of issue thereof and that no security issued by the Company
      without the right to convert into Shares or to be exchanged for shares
      shall subsequently be granted

                                      217
<PAGE>

      such rights.

9.4   The Company shall not do any act or engage in any transaction the result
      of which, having regard to the provisions of Condition 7, would be to
      reduce the Conversion Price to below the nominal amount of a Share.

9.5   The Company shall not make any reduction or redemption of share capital,
      share premium account or capital redemption reserve involving the
      repayment of money to shareholders of the Company (other than to
      shareholders of the Company having the right on a winding-up to a return
      of capital in priority to the holders of Shares) or reduce any uncalled
      liability in respect thereof unless, in any such case, the same gives rise
      (or would, but for the provisions of Condition 7(e) give rise) to an
      adjustment of the Conversion Price in accordance with Condition 7.

9.6   The Company shall not close its register of shareholders for more than ten
      (10) Business Days each year (in addition to any period required by law or
      regulation including the Listing Rules) or take any other action which
      prevents the transfer of its Shares generally unless, under the laws of
      Hong Kong and Bermuda and the bye-laws of the Company as then in effect,
      this Note may be converted legally into Shares and the Shares so converted
      may be transferred at all times during the period of such closure. The
      Company shall not take any action which prevents the conversion of this
      Note or delivery of Shares in respect thereof.

9.7   The Company hereby covenants with and undertakes to the Noteholder that,
      so long as this Note remains outstanding, copies of all press releases and
      information routinely provided or otherwise made available to shareholders
      of the Company and any public filings made to any Hong Kong regulatory
      organisation by the Company shall be sent to the Noteholder no later than
      one (1) Business Day after such information becomes publicly available.

9.8   The Company shall not issue or pay up any securities by way of
      capitalisation of profits or reserves other than (i) by the issue of fully
      paid Shares to holders of its Shares; or (ii) as mentioned in Condition
      7.3(b); or (iii) by the issue of Shares in lieu of a cash dividend in the
      manner referred to in Condition 7.3(c).

9.9   The Company shall not create or permit to be in issue any share capital
      other than the Shares, provided that nothing in this Condition 9.9 shall
      prevent any consolidation or sub-division of the Shares.

9.10  The Company shall not make any distribution in specie to holders of Shares
      unless the Noteholder is entitled to the Specie Distribution Right (as
      defined in Condition 11) in accordance with Condition 11.

9.11  The Company shall not enter into any deed, agreement, assignment,
      instrument or documents whatsoever binding on it which may result in any
      breach of any of the terms and conditions of this Note.

9.12  The Company shall not without the prior written consent of the Noteholder:

(a)   amend the terms and conditions of any of the Other Convertible Notes; or

(b)   repay the outstanding principal amount of any of the Other Convertible
      Notes or any part(s) thereof prior to its maturity.

9.13  Upon receipt of a conversion notice in respect of any of the Other
      Convertible Notes, the Company shall forthwith give notice of such
      conversion to the Noteholder together with a copy of the conversion notice
      received by it.

10    Events of default

If any of the following events ("Events of Default") occurs, the Noteholder may
give notice to the Company that this Note, on the giving of such notice, is
immediately due and payable at its principal amount then outstanding together

                                      218
<PAGE>

with interest from the date of issue of this Note up to and excluding the date
of payment: (a) the listing of the Shares (as a class) on the Stock Exchange:

(i)   ceases; or

(ii)  is suspended for a continuous period of ten (10) Business Days on each of
      which the Stock Exchange is generally open for trading due to the default
      of the Company or any of its directors, officers, employees or agents;

(b)   the Company breaches any of the Warranties (as defined in the Subscription
      Agreement) or defaults in performance or compliance with any of its
      obligations contained in the Conditions, which breach or default is
      incapable of remedy or, if capable of remedy, is not remedied within
      fourteen (14) Business Days after notice of such breach or default is sent
      from the Noteholder to the Company;

(c)   an encumbrancer takes possession or a receiver, manager or other similar
      officer is appointed of the whole or any material part of the undertaking,
      property, assets or revenues of the Company or any of its subsidiaries;

(d)   the Company or any of its subsidiaries becomes insolvent or is unable to
      pay its debts as they mature or applies for or consents to the appointment
      of any administrator, liquidator or receiver of the whole or any material
      part of its undertaking, property, assets or revenues or enters into a
      general assignment or compromise with or for the benefit of its creditors;

(e)   an order is made or an effective resolution passed for winding-up of the
      Company or any of its material subsidiaries;

(f)   the Company defaults in the payment of the principal or interest in
      respect of this Note when and as the same ought to be paid and such
      default is not remedied by the Company within three (3) Business Days of
      the due date thereof;

(g)   any other debentures, bonds, notes or other instruments of indebtedness or
      any other loan indebtedness ("Indebtedness") of the Company and its
      subsidiaries or any securities convertible into or exchangeable for shares
      ("Equity-Linked Securities") of the Company and its subsidiaries become
      prematurely repayable following a default in respect of the terms thereof
      which shall not have been remedied, or the Company or any of its
      subsidiaries defaults in the repayment of the Indebtedness or Equity
      Linked Securities at the maturity thereof or at the expiration of any
      applicable grace period thereof, or any guarantee of or indemnity in
      respect of any Indebtedness or Equity Linked Securities of others given by
      the Company or any of its material subsidiaries shall not be honoured when
      due and called upon;

(h)   a moratorium is agreed or declared in respect of any indebtedness of the
      Company or any of its subsidiaries or any governmental authority or agency
      condemns, seizes, compulsorily purchases or expropriates all or any
      material part of the assets of the Company or any of its subsidiaries; or

(i)   the Company or any of its subsidiaries consolidates or amalgamates with or
      merge into any other corporation (other than a consolidation, amalgamation
      or merger in which the Company or such subsidiary is the continuing
      corporation), or the Company or any of its subsidiaries sells or transfers
      all or substantially all of its assets,

provided that notwithstanding the foregoing, if the Company shall fail to issue
the Conversion Shares in accordance with the Conditions, the Noteholder shall be
entitled to bring an action against the Company for either specific performance
or damages. The Company will forthwith on becoming aware of any such event as is
mentioned in this Condition give notice in writing thereof to the Noteholder. At
any time after any interest amount or the principal amount of the Note has
become payable, the Noteholder may without further notice institute such
proceedings as it may think fit to enforce payment of the monies due.

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<PAGE>

11    Distribution in Specie

If the Company declares a distribution in specie other than an issue of Shares
in lieu of a cash dividend falling under Condition 7.3(c) (a "Specie
Distribution") to shareholders at any time during the period in which the
Noteholder can exercise its Conversion Rights, Noteholder will, unless an
adjustment to the Conversion Price has been made under Condition 7 in respect of
the Specie Distribution in full, be entitled to an amount (the "Specie
Distribution Right") which shall be determined as follows:

(a)   the Company and the Noteholder will forthwith on the date of announcement
      of the Specie Distribution instruct the approved merchant bank (as defined
      in Condition 7.2) to value the Specie Distribution which would have been
      payable to the Noteholder on the Shares falling to be issued if the
      Noteholder had exercised its Conversion Rights immediately prior to the
      record date for the Specie Distribution in respect of the whole or any
      part(s) of the principal amount of the Note then outstanding (the
      "Notional Specie Distribution); and

(b)   upon the determination of the approved merchant bank's valuation of the
      Notional Specie Distribution (which valuation shall be final and binding
      on both the Company and the Noteholder) the Company will pay a cash amount
      equal to the value of the Notional Specie Distribution to the Noteholder.

12    Voting

The Noteholder shall not be entitled to receive notices of, attend or vote at,
any meetings of the Company by reason only of it being the Noteholder.

13    Experts

In giving any certificate or making the Adjustment, any approved merchant bank
(as defined in Condition 7.2) appointed shall be deemed to be acting as experts
and not as arbitrators and, in the absence of manifest error, their decision
shall be conclusive and binding on the Company and the Noteholder and all
persons claiming through or under them respectively.

14    Replacement Note

14.1  If the certificate for this Note is lost or mutilated, the Noteholder
      shall notify the Company as soon as practicable and a replacement
      certificate shall be issued if the Noteholder provides the Company with a
      declaration by the Noteholder or its officer that the certificate for this
      Note had been lost or mutilated (as the case may be) or other evidence
      that the certificate for this Note had been lost or mutilated, together
      with the mutilated the certificate for this Note (if applicable).

14.2  The certificate for this Note replaced in accordance with this Condition
      shall forthwith be cancelled.

15    Notices

Any notice required or permitted to be given by delivering it to the party:

(a)   in the case of the Noteholder, at the following address:

[     ]
      Facsimile:      [     ]
      Attention:      [     ]

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<PAGE>

(b)   in the case of the Company, at the following address:
7th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong

            Facsimile :    (852) 2542 0298
            Attention :    Board of Directors

or to such other Hong Kong address or facsimile as the Company may have notified
to the Noteholder or vice versa pursuant to this Condition 15 and may be given
by sending it by registered post or by hand to such address or to such other
address as the party concerned may have notified to the other parties in
accordance with this Condition and such notice shall be deemed to be served on
the day of delivery (or on the immediately following Business Day, if the day of
delivery is not a Business Day or if the delivery or transmission is made after
5:00 p.m. Hong Kong time), or in the case of registered post 48 hours after
posting, or if sooner upon acknowledgement of receipt by or on behalf of the
party to which it is addressed, or if given or made by facsimile, when
despatched with confirmation of successful transmission (and if the deemed date
of delivery is not a Business Day, on the immediately following Business Day).
Acknowledgement in writing of receipt of a notice by or on behalf of a party,
signed or initialled by any employee of such party, shall be evidence that such
notice has been duly served in accordance with this Condition.

16    Amendment

The terms and conditions of this Note may be varied, expanded or amended by
agreement in writing between the Company and the Noteholder.

17.   Governing law and jurisdiction

This Note is governed by and shall be construed in accordance with Hong Kong law
and the Company and the Noteholder agree to submit to the non-exclusive
jurisdiction of the courts of Hong Kong in connection herewith.

                                      221
<PAGE>

                                CONVERSION NOTICE
                       [To be attached to the Conditions]

Terms defined in the agreement in respect of the issue of convertible note dated
[ ] 2004 between [ ] and [ ] and in the certificate for the Note (as may be
amended) shall bear the same meanings in this Conversion Notice.

The undersigned hereby irrevocably elects to convert the following amount of
this Note into shares of HK$0.01 each in Wing On Travel (Holdings) Limited in
accordance with the terms and conditions of the Note and the terms below.

Amount to be converted:  HK$[*]
(the Note must be attached to this notice)

Name of Noteholder:___________________________________________________________

Exercise Date:________________________________________________________________
(the date this notice is given, or deemed to be given, by the Noteholder)

Applicable Conversion Price: _________________________________________________

Name in which Shares to be issued:____________________________________________

Address of shareholder:_______________________________________________________

Signature of Noteholder:______________________________________________________

                                      222
<PAGE>

                                FORM OF TRANSFER

                       [To be attached to the Conditions]

To: Wing On (Holdings) Limited (the "COMPANY")

We are the holder of HK$[    ] in aggregate principal amount of the HK$[   ] 2%
Convertible Note due 2007 (the "NOTE") issued by the Company on [       ] 2004.

References in this Transfer Form to "CONDITIONS" are to the terms and conditions
on which the Note was issued, as the same may have been amended from time to
time pursuant to the terms thereof. Terms defined in the Conditions will have
the same meaning herein, save where the context otherwise requires.

1.    We hereby transfer [all/part] of the Note registered in our name in the
      Register to:

      _______________________________________________________________________

      of/whose registered office address is at*

      _______________________________________________________________________

      _______________________________________________________________________

      _______________________________________________________________________
      (the "TRANSFEREE")

2.    Total principal amount and Certificate number of the transferred Note:

       Total principal amount to be transferred                  ______________

Certificate number of Certificate for Note being transferred     ______________

[3.  + Total principal amount of Note to be retained:

Total principal amount to be retained                            ______________]

4.    We hereby request that a Certificate in respect of the transferred Note
(as referred to in paragraph 2 above) be issued to the person(s) whose name(s)
and address(es) are set out in paragraph 1 above and that such Certificate:

*(a)  be despatched by registered mail to the person whose name and address are
given below and in the manner specified below:

Name                 :            ___________________________

Address              :            ___________________________

                                  ___________________________

                                  ___________________________

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<PAGE>

*(b)  if no name and address are given in (a) above, be made available for
collection at the office of the Company referred to for that purpose in the
Conditions.

5.    The Certificate in respect of the transferred Note (as referred to in
paragraph 2 above) is enclosed with this Transfer Form.

[6.   + We hereby request that a Certificate in respect of the Note to be
retained by us as set out in paragraph 3 above be issued to the person(s) whose
name(s) and address(es) is/are set out below:

Name              :             ___________________________

Address           :             ___________________________

                                ___________________________

                                ___________________________

and that such Certificate:

*(a)  be despatched by registered mail to the person whose name and address are
given below and in the manner specified below:

Name              :             ___________________________

Address           :             ___________________________

                                ___________________________

                                ___________________________

*(b)  if no name and address are given above, then such certificate will be
made available for collection at the office of the Company specified or referred
to for that purpose in the Conditions.]

[7.   The registered account of the Transferee (being a HK$ account) for the
purposes of receipt of principal and interest on and any other amounts in
respect of the Note is (unless otherwise instructed by the Transferee) as
follows:

Name of Account     :           ___________________________

Account No          :           ___________________________

Sort Code           :           ___________________________

Name of Bank        :           ___________________________

Address of Bank     :           ___________________________

                                ___________________________]

*     delete as appropriate

                                      224
<PAGE>

+     complete if only transferring part of the Note of which the transferring
Noteholder is the holder, otherwise delete.

Name of Transferor       :   ___________________________

Signature of Transferor  :   ___________________________

Date                     :   ___________________________

Name of Transferee       :   ___________________________

Signature of Transferee  :   ___________________________

Date                     :   ___________________________

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<PAGE>

                                   SCHEDULE 2

                             COMPLETION REQUIREMENTS

1.    Obligations of the Company

      At Completion, the Company shall deliver to the Subscriber:

      (a) a certified copy of the board resolution of the Company approving and
authorising the execution and completion of this Agreement and the issue to the
Subscriber or its nominee(s) of the Certificate in respect of the Note for the
principal amount of HK$155,000,000.00 by the Company;

      (b) a certified copy of the shareholders' resolutions of the Company
approving the matters specified in Clause 3.1(b) and certified copies of
documentary or other evidence reasonably satisfactory to the Subscriber showing
that the Conditions Precedent (to the extent not waived) have been fulfilled;
and

      (c) a Certificate for the Note for the principal amount of
HK$155,000,000.00 duly issued in favour of the Subscriber or its nominee.

2.    Obligations of the Subscriber

      At Completion, the Subscriber shall satisfy and discharge its obligation
to pay to the Company HK$155,000,000.00 (being the subscription price of the
Note for which the Subscriber has agreed to subscribe or procure subscription
under Clause 2.1) in the following manner :

      (a) the Company shall:

            (i) give the Subscriber a direction in writing at least two (2)
Business Days prior to the Completion that the subscription price for the Note
shall be, whether as to the entirety or a sufficient portion thereof, applied to
repay the entire outstanding principal amount of the 2002 Convertible Note as at
the Completion Date; and

            (ii) at Completion pay all the interest accrued under the 2002
Convertible Note from the last interest payment date up to and including the
Completion Date in accordance with the terms of the 2002 Convertible Note by way
of cheque drawn in favour of Million Good (or as it may direct); and

      (b) the Subscriber shall against the Company's compliance with the
obligations set out in paragraph 2(a) contemporaneously deliver to the Company
on Completion the following:

            (i) the original certificate of the 2002 Convertible Note for
cancellation; and

            (ii) if and to the extent that there is any remaining balance of the
subscription price for the Note not applied in redemption of the 2002
Convertible Note as aforesaid, a cheque, dated on or before the Completion Date
and drawn on a licensed bank in Hong Kong, for an amount equal to such remaining
balance drawn in favour of the Company (or such other person as it may direct),

whereupon the 2002 Convertible Note shall be deemed to have been duly redeemed
at the principal amount and accrued interest then outstanding without any
penalty, premium or fee on the part of the Company, which shall be (and the
Subscriber shall procure the Company to be) fully and absolutely released and
discharged of any and all outstanding payment obligations and liabilities under
the 2002 Convertible Note notwithstanding any provisions thereof.

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                                   SCHEDULE 3

                                   WARRANTIES

(a)   Incorporation: the Company is duly incorporated and validly existing in
good standing under the laws of Bermuda with power to conduct its business in
the manner presently conducted and the information contained in Recitals (A) to
(C) is true and accurate. The entire existing issued share capital of the
Company is listed on the Stock Exchange. The Company is not aware of any
circumstances whereby such listing will be suspended, cancelled or revoked at
Completion.

(b)   Authorisation:

(i)   save as mentioned in this Agreement and subject to the fulfilment of the
Conditions Precedent, the Company has the full power and authority to enter into
and perform this Agreement and the directors of the Company are authorised to
issue the Note and that in entering into this Agreement, the Company does not do
so in breach of any applicable legislation or rules and this Agreement
constitutes and the Note, when issued, shall constitute valid, binding and
enforceable obligations of the Company; and

(ii)  subject to the fulfilment of the Conditions Precedent, the Company has
full power and authority to issue the Note and perform its obligations
thereunder, and in particular the Company shall at all material times have
sufficient authorised but unissued share capital for the Company to perform its
obligations under the Note (to the extent unredeemed and unconverted) and the
Conversion Shares, when issued, shall be duly authorised and shall rank pari
passu in all respects with all other existing Shares outstanding at the date of
conversion and be entitled to all dividends and distributions the record date
for which falls on a date on or after the date of the conversion notice.

(c)   Consents: subject to the fulfilment of the Conditions Precedent, all
necessary consents authorisations and approvals of any governmental agency or
regulatory body required in Bermuda or Hong Kong or any other relevant
jurisdiction for or in connection with this Agreement and the Note and the
performance of the terms hereof and thereof have been obtained or made or shall
have been obtained or made by Completion.

(d)   No Conflict: subject to the fulfilment of the Conditions Precedent, the
execution of this Agreement and the issue of the Note does not infringe and is
not contrary to any laws or regulations of any government or regulatory body of
Hong Kong or Bermuda or any other relevant jurisdiction and does not result in
any breach of the terms of the Memorandum of Association and Bye-laws of the
Company and shall not conflict with or result in a breach of any of the terms of
or constitute a default under any deed, agreement, mortgage or other obligation
to which the Company is a party or by which any of its properties or assets are
bound.

(e)   Litigation: there are no actions, suits, proceedings, arbitration or
administrative proceeding that is currently taking place or pending or
threatened against or affecting any member of the Group or any of its properties
or assets which would individually or in the aggregate have a material adverse
effect on the condition (financial or otherwise), prospects, results of
operations or general affairs of the Group taken as a whole, or on the ability
of the Company to perform its obligations under this Agreement and the Note, or
which are otherwise material in the context of the issue and delivery of the
Note.

(f)   Absence of Certain Changes: since 31 December 2002, there has been no
material adverse change in the condition (financial or otherwise), prospects,
results of operations or general affairs or prospect of the Group taken as a
whole. Since 31 December 2002 and up to the date of this Agreement, no dividend
or any other distribution has been declared, made or paid by the Company.

(g)   Financial Statements: the Accounts present a true and fair view of the
results and the state of affairs and financial position of the Group as at 31
December 2002 and for the period specified therein and the Accounts have been
prepared in accordance with generally accepted accounting principles and
practice including all applicable

                                      227
<PAGE>

statements of standard accounting practice generally applied in Hong Kong. The
Accounts make proper provision for all of the actual and contingent liabilities
of the Company or any of its subsidiaries and comply with the applicable
disclosure requirements of the Companies Ordinance (Chapter 32 of the Laws of
Hong Kong). The Interim Report presents a true and fair view of the results and
the state of affairs and financial position of the Group as at 30 June 2003 and
for the period specified therein and the Interim Report has been prepared in
accordance with all applicable statements of standard accounting practice
generally applied in Hong Kong.

(h)   Outstanding Options: save for the Share Option Plan, the 2002 Convertible
Note, the Notes Subscription Agreements, this Agreement and the convertible
notes issued by the Company as disclosed in the annual report of the Company for
the accounting period ended 31 December 2002, there are no options, rights to
acquire, or any other form of security or encumbrance on over or affecting any
part of the unissued share capital of the Company and there is no agreement or
commitment to give or create any of the foregoing and no claim has been made by
any person to be entitled to any of the foregoing.

(i)   None of the members of the Group is in breach of any rules, regulations or
requirements of the Stock Exchange in any respect.

(j)   No material outstanding indebtedness of any member of the Group has become
payable or repayable by reason of any default.

(k)   No event exists or has occurred and no condition is in existence which
would be (after the issue of the Note) an event of default under Condition 10 of
the Conditions and no event or act has occurred which, with the giving of
notices, or the lapse or time, or both, would (after the issue of the Note),
constitute such an event of default.

(l)   All information and documents supplied by the Company and its
subsidiaries, and their respective directors, solicitors, accountants or
auditors to the Subscriber relating to the Group are complete, accurate and
up-to-date in all respects.

(m)   There are no material facts or circumstances, in relation to the assets,
business or financial condition of the Company and/or any of its subsidiaries
which have not been fully and fairly disclosed in writing to the Subscriber and
which, if disclosed, might reasonably have been expected to affect the decision
of any prudent investor to enter into this Agreement.

(n)   Without the prior written consent of the Subscriber, from the date hereof
until the issue of the Note, no act will be done and no circumstances will arise
which will had the Note been issued as at the date hereof give rise to an
adjustment of the Conversion Price (as defined in the Conditions) under
Condition 7 of the Note.

(o)   The terms and conditions under the Notes Subscription Agreements are no
more favourable to the subscribers thereunder than those available to the
Subscriber hereunder and there will be no amendments to any such term or
condition without a similar amendment to this Agreement.

                                      228

<PAGE>

AS WITNESS whereof this Agreement has been duly executed on the date first above
written.

SIGNED by                   )
                        )
for and on behalf of        )
WING ON TRAVEL              )
(HOLDINGS) LIMITED              )
in the presence of:         )

SIGNED by                   )
                        )
for and on behalf of        )
CHINA ENTERPRISES LIMITED)
in the presence of:         )

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