AMENDEDAND RESTATED INVESTOR RIGHTS AGREEMENT

 

THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of June 4, 2008, by and among (i) (a) Fushi International, Inc., a Nevada corporation (the “Company”), Fushi Holdings, Inc., a Delaware corporation (“FHI”), Dalian Fushi Bimetallic Manufacturing Company Limited, a limited liability company organized and existing under the laws of the PRC (“Dalian Fushi”), Fushi International (Dalian) Bimetallic Cable Co., Ltd., a wholly foreign-owned limited liability company organized and existing under the laws of the PRC (the “WFOE”, and, together with the Company, FHI and Dalian Fushi, the “Group Companies”); (b) Mr. Fu Li (the “Controlling Shareholder”), a resident of Dalian, Liaoning Province in the People’s Republic of China (the “PRC”); and (c) Mr. Fu Li and Mr. Chris Wang Wenbing, a resident of Dalian, Liaoning Province in the PRC (together with Mr. Fu Li, the “Senior Management”) and (ii) Citadel Equity Fund Ltd. (“Citadel”). Capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Notes Purchase Agreement (as defined below).

 

 

WHEREAS, the Group Companies and Citadel have entered into that certain Notes Purchase Agreement dated as of January 24, 2007 (the “Notes Purchase Agreement”), pursuant to which the Company has agreed to issue to Citadel, and Citadel has agreed to purchase from the Company, US$40,000,000 Guaranteed Senior Secured Floating Rate Notes due 2012 (the “HY Notes”) and US$20,000,000 3.0% Guaranteed Senior Secured Convertible Notes due 2012 (the “Convertible Notes”, and together with the HY Notes, the “Notes”), which are convertible into the Company’s common stock, par value $.006 (the “Common Stock”, and, together with the Notes, the “Securities”);

 

WHEREAS, in consideration of Citadel entering into the Notes Purchase Agreement, the Company has agreed to provide certain rights set forth in the Investor Rights Agreement dated as of the January 25, 2007 (the “Original Agreement”) and

 

WHEREAS, the parties to the Original Agreement desire to amend and restate the Original Agreement in its entirety pursuant to the terms set forth in this Agreement.

 

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound by this agreement, agree to amend and restate the Original Agreement in its entirety to read as follows:

 

1. Representations and Warranties of the Group Companies, the Controlling Shareholder and the Senior Management. Each of the Group Companies, the Controlling Shareholder and the Senior Management, jointly and severally, represents and warrants that:

 

 

1.1. (i) The Controlling Shareholder is the beneficial owner, free and clear of all Liens, of 11,988,242 shares of Common Stock (of record or through a brokerage firm or other nominee arrangement), which constitutes 43.67% of the outstanding voting power of the Company’s capital stock and (ii) Mr. Chris Wang Wenbing is the beneficial owner, free and clear of all Liens, of 200,000 shares of Common Stock (of record or through a brokerage firm or other nominee arrangement), which constitutes 0.73% of the outstanding voting power of the Company’s capital stock. The Controlling Shareholder is the beneficial owner, free and clear of all Liens, of an aggregate of 87.73% of the equity interests of Dalian Fushi.

 

1.2. Each of the Group Companies, the Controlling Shareholder and each member of the Senior Management (each of the foregoing, a “Warrantor”) has full power and authority to make, enter into and carry out the terms of this Agreement. This Agreement has been duly executed and delivered by each Warrantor and constitutes the legal, valid and binding obligations of such Warrantor enforceable against such Warrantor in accordance with its terms.

 

1.3. The execution and delivery of this Agreement by each Warrantor do not, and the performance of this Agreement by such Warrantor will not: (i) conflict with or violate any law, rule regulation, order, decree or judgment applicable to any Warrantor or by which any Warrantor or any of the properties of any Warrantor is or may be bound or affected, or the Charter Documents of any Group Company; (ii) result in or constitute (with or without notice or lapse of time) any breach of or default under any contract to which any Warrantor is a party or by which any Warrantor or any of the affiliates or properties of any Warrantor is or may be bound or affected, or (iii) result in the creation of any encumbrance or restriction on any of the shares of Common Stock or equity interests in any other Group Company or properties of any Warrantor. The execution and delivery of this Agreement by each Warrantor do not, and the performance of this Agreement by each Warrantor will not, require any consent or approval of any Person.

 

1.4. Each of the Group Companies (i) has been duly organized, is validly existing and is in good standing under the laws of its jurisdiction of organization, (ii) has all requisite power and authority to carry on its business and to own, lease and operate its properties and assets, and (iii) is duly qualified or licensed to do business and is in good standing as a foreign corporation or limited liability company, as the case may be, authorized to do business in each jurisdiction in which the nature of such business or the ownership or leasing of such properties requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on (A) the properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) of the Group Companies, taken as a whole, (B) the ability of the Group Companies to perform their respective obligations under any Document or (C) the validity of any of the Documents or the consummation of any of the transactions contemplated therein (each, a “Material Adverse Effect”).

 

1.5. Except as set forth on Schedule 1.5 of the Disclosure Schedule, there are no outstanding (A) options, warrants or other rights to purchase from any Group Company, (B) agreements, contracts, arrangements or other obligations of any Group Company to issue, or (C) other rights to convert any obligation into or exchange any securities for, in the case of each of clauses (A) through (C), shares of capital stock of or other ownership or equity interests in, any Group Company. Except as otherwise contemplated by that certain voting agreement set forth in this Agreement, the Company is not a party or subject to any agreement or understanding, and, to the Company’s knowledge after due inquiry, there is no agreement or understanding with any Person that affects or relates to (i) the voting or giving of written consents with respect to any security of the Company (including, without limitation, any voting agreements, voting trust agreements, shareholder agreements or similar agreements) or the voting by a director of the Company or (ii) the sale, transfer or other disposition with respect to any security of the Company.

 

 

1.6. Each of the HY Notes and the Convertible Notes, when issued, sold and delivered in accordance with the terms thereof and for the consideration set forth herein, will be free of restrictions on transfer, other than restrictions on transfer under applicable state and federal securities laws. Assuming the accuracy of the Purchaser’s representations in Section 6 of the Notes Purchase Agreement, the Notes will be issued in compliance with applicable state and federal securities laws. The HY Notes, when issued, will be in the form contemplated by the HY Note Indenture, and the Convertible Notes, when issued, will be in the form contemplated by the Convertible Note Indenture. Each of the HY Notes and the Convertible Notes has been duly authorized by the Company and, when executed and delivered by the Company, authenticated by the Trustee and delivered to the Purchaser in accordance with the terms of the Notes Purchase Agreement and its respective Indenture, such Notes will have been duly executed, issued and delivered by the Company and will constitute legal, valid and binding obligations of the Company, entitled to the benefits of its respective Indenture, and enforceable against the Company in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally. The Guarantees have been duly authorized, and, when the Notes have been duly executed, authenticated and issued in accordance with the provisions of its respective Indenture and delivered to and paid for by the Purchaser with the Guarantee endorsed thereon by the Guarantor, will constitute the legal, valid and binding obligations of the Guarantor entitled to the benefits of such Indenture.

 

1.7. The Conversion Shares have been duly and validly authorized for issuance by the Company, and when issued pursuant to the terms of the Convertible Note Indenture, will be validly issued, fully paid and non-assessable, not subject to any preemptive or similar rights, free from all taxes, Liens, charges and security interests with respect to the issuance thereof and free of restrictions on transfer other than as expressly contemplated by the Documents.

 

1.8. Except as disclosed in the SEC Reports, there is no action, claim, suit, demand, hearing, notice of violation or deficiency, or proceeding, domestic or foreign (collectively, “Proceedings”), pending or, to the knowledge of the Company, threatened, that seeks to restrain, enjoin, prevent the consummation of, or otherwise challenges any of the Documents, any Restructuring Agreement (considered alone or with other Restructuring Agreements) or any of the transactions contemplated therein. Except as disclosed in the SEC Reports, none of the Group Companies is subject to any judgment, order or decree of which the Company has knowledge.

 

1.9. Each of the Group Companies has good and marketable title to all real property and personal property owned by it, in each case free and clear of any Liens as of the Closing Date, except such Liens as permitted under the Documents. For the real property not owned by any of the Group Companies and currently used or planned to be used for the business operations of the Group Companies, each of such Group Companies has good and marketable title to all leasehold estates in real and personal property being leased by it and, in each case free and clear of all Liens as of the Closing Date.

 

 

1.10. All Indebtedness represented by the Notes and the Guarantees is being incurred for proper purposes and in good faith. Based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, (i) the fair saleable value of the Group Companies’ assets exceeds the amount that will be required to be paid on or in respect of the Group Companies’ existing debts and other liabilities (including contingent liabilities) as they mature; (ii) the present fair saleable value of the assets of the Group Companies is greater than the amount that will be required to pay the probable liabilities of the Group Companies on their respective debt as they become absolute and mature, and (iii) the Group Companies are able to realize upon their assets and pay their debt and other liabilities (including contingent obligations) as they mature; (iv) the Group Companies’ assets do not constitute unreasonably small capital to carry on their respective businesses as now conducted and as proposed to be conducted including their respective capital needs taking into account the particular capital requirements of the business conducted by the Group Companies, and projected capital requirements and capital availability thereof; and (v) the current cash flow of each of the Group Companies, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. None of the Group Companies intends to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it or any other Group Company will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. For the purposes of this Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money or amounts owed in excess of $75,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) the present value of any lease payments in excess of $75,000 due under leases required to be capitalized in accordance with GAAP. None of the Group Companies is, or is reasonably likely to be, in default with respect to any Indebtedness and no waiver of default is currently in effect. None of the Group Companies has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien. None of the Group Companies is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of any of the Group Companies, any agreement relating thereto or any other agreement (including, but not limited to, its Charter Document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company.

 

 

2. Covenants and Agreements.

 

Unless the context requires otherwise, each Group Company hereby covenants and agrees as follows:

 

2.1. FCPA. Each Group Company and the Controlling Shareholder shall, and shall cause each Group Company, any of the Company’s Subsidiaries and their respective management to, (i) comply with the U.S. Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), including, without limitation, not making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of value to any “foreign official” (as the term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA, (ii) conduct each such company’s respective business in compliance with the FCPA, and (iii) institute and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

 

2.2. PFIC. No Group Company shall, and the Controlling Shareholder shall cause each Group Company not to, become a “passive foreign investment company” within the meaning of Section 1297 of the U.S. Internal Revenue Code of 1986.

 

2.3. OFAC. Neither any Group Company nor, to the knowledge of any Group Company, any director, officer, agent, employee, Affiliate or Person acting on behalf of any Group Company is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and no Group Company shall, and the Controlling Shareholder shall cause each Group Company not to, directly or indirectly use the proceeds of the sale of the Notes, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person or entity, for the purpose of financing the activities of any Person currently subject to any U.S. sanctions administered by OFAC.

 

2.4. Money Laundering Laws. Each of the Group Companies shall, and the Controlling Shareholder shall cause each Group Company to, conduct its operations at all times in compliance with the money laundering statutes of applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency.

 

2.5. Escrow Agreements. The Company shall at all times comply with the terms and conditions of the Offshore Escrow Agreement. The WFOE shall, and the Company and FHI shall ensure that the WFOE shall, at all times comply with the terms and conditions of the Onshore Escrow Agreement.

 

 

2.6. Other Covenants. As long as Citadel holds Convertible Notes then outstanding (including the principal amount of the Convertible Notes converted into Conversion Shares as if such conversion had not taken place and to the extent such Conversion Shares are held by Citadel at the time of calculating such percentage), the principal amount of which is at least 30% of the principal amount of the Convertible Notes then outstanding (including the principal amount of the Convertible Notes converted into Conversion Shares as if such conversion had not taken place and to the extent such Conversion Shares are held by Citadel at the time of calculating such percentage) (the “Minimum Holdings”), each Group Company hereby covenants and agrees as follows, unless Citadel otherwise provides prior written consent in its sole discretion (the term “Subsidiary” as referred to in this Agreement shall include any Subsidiary of the Company and Dalian Fushi):