CANCELLATION AND ESCROW AGREEMENT
Exhibit
10.4
CANCELLATION
AND ESCROW AGREEMENT, dated May 3, 2007 (this “Agreement”),
by
and among, MILLENNIUM QUEST, INC., a Delaware corporation (the “Company”),
Halter Financial Investments, L.P., a Texas limited partnership (“HFI”),
Halter
Financial Group, L.P., a Texas limited partnership (“HFG”),
and
Securities Transfer Corporation, as escrow agent (“Escrow
Agent”).
BACKGROUND
Pursuant
to a Financial Advisory Agreement, dated February 14, 2007 (the “Financial
Advisory Agreement”),
the
Company’s subsidiary retained HFG International, Limited (“HFG
International”)
as the
Company’s exclusive financial advisor. HFG consulted on the Restructuring and
Going Public Transaction, as identified therein.
HFG
International agreed that if the Company, on a consolidated basis, reports
in
its Annual Report filed with the U.S. Securities and Exchange Commission, net
income of $12.5 million for fiscal 2008, HFG International would ensure that
HFI
and HFG cancel that number of shares that will reduce the Pubco Shareholders
Ownership Percentage, as defined in the Financial Advisory Agreement, to
5.6%.
HFI
and
HFG currently hold 100,000 shares of the Company’s Series A Convertible
Preferred Stock, which are convertible into 42,856,000 shares of the Company’s
Common Stock, constituting a total of 5.22% of the Company’s issued and
outstanding common stock, assuming
conversion of all outstanding shares of the
Company’s Series
A
Voting Convertible Preferred Stock and the
Company’s Series
B
Voting Convertible Preferred Stock into shares of common stock at the present
rate of conversion.
The
other Pubco Shareholders, as defined in the Financial Advisory Agreement, hold
1.28% of the Company’s issued and outstanding Common Stock, assuming
conversion of all outstanding shares of the
Company’s Series
A
Voting Convertible Preferred Stock and the
Company’s Series
B
Voting Convertible Preferred Stock into shares of common stock at the present
rate of conversion. In
order
to reduce the 6.5% interest owned by all of the Pubco Shareholders to a 5.6%
interest, HFI and HFG would have to tender to the Company for cancellation
a
total of 229,227 shares of the Company’s common stock upon conversion of the
Series
A
Voting Convertible Preferred Stock into common stock (taking into account the
contemplated 1-for-32.84 reverse stock split and the conversion of Series B
Voting Convertible Preferred Stock into common)
(the
“Cancellation
Shares”).
HFI,
HFG
and the Company desire to retain the Escrow Agent to act as the escrow agent
hereunder and hold the Cancellation Shares and cancel such shares or return
such
shares to HFI and HFG in accordance with this Agreement to carry out the terms
of the Financial Advisory Agreement.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual promises herein contained and for
other good and valuable consideration, the receipt and sufficiency of which
is
hereby acknowledged, the parties hereto agree as follows:
1. Definitions.
(a) Capitalized
terms used and not otherwise defined herein that are defined in the Financial
Advisory Agreement will have the meanings given such terms in the Financial
Advisory Agreement.
(b) The
following terms have the meanings ascribed to them below:
(i) “After-Tax
Net Income”
or
“ATNI”
means
the after-tax net income of the Company and its consolidated subsidiaries
prepared in accordance with GAAP consistently applied; provided in the event
that the release of the Cancellation Shares to the Company or HFG is deemed
to
be an expense or deduction from revenues/income of the Company for the
applicable year, as required under GAAP, then such expense or deduction shall
be
excluded for purposes of determining whether or not the 2008 Guaranteed ATNI
has
been achieved by the Company.
(ii) “Annual
Report”
means
the Annual Report of the Company on Form 10-K for the fiscal year ending
December 31, 2008, as filed with the Commission.
(iii) “Commission”
means
the U.S. Securities and Exchange Commission.
(iv) “Guaranteed
ATNI”
means
$12,500,000.
2. Appointment
of Escrow Agent.
The
Company, HFI and HFG hereby appoint the Escrow
Agent
as
escrow agent hereunder to act in accordance with the terms and conditions set
forth in this Agreement, and Escrow Agent hereby accepts such appointment and
agrees to act in accordance with such terms and conditions.
3. Establishment
of Escrow.
Upon
the conversion of the Series A Voting Convertible Preferred Stock held by HFI
and HFG into common stock, each of HFI and HFG shall deliver, or cause to be
delivered, to the Escrow Agent certificates evidencing the Cancellation Shares,
along with undated stock powers with Medallion guarantees (or such other signed
instrument of transfer acceptable to the Company’s Transfer Agent (as defined in
Section 5a below)).
4. Representations
of HFI and HFG.
Each of
HFI and HFG hereby represents and warrants to the Company as follows:
(a) each
has
all corporate power and authority to enter into this Agreement and to carry
out
its obligations hereunder. This Agreement has been duly executed by HFI and
HFG,
and when delivered in accordance with the terms hereof, will constitute a valid
and legally binding obligation of HFI and HFG, enforceable against them in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.
(b) HFI
and
HFG are the sole record and beneficial owners of all of the Cancellation
Shares.
(c) All
of
the Cancellation Shares are free and clear of all pledges, liens and
encumbrances. Upon any transfer of the Cancellation Shares to the Company
hereunder, the Company will receive full right, title and authority to such
Cancellation Shares or, if such shares have been converted to common stock
(such
underlying shares being referred to as the “Underlying
Shares”)
prior
to such transfer, then the Company will receive full right, title and authority
to such Underlying Shares.
(d) Performance
of this Agreement and compliance with the provisions hereof will not violate
any
provision of any applicable law.
5. Disbursement
of Cancellation Shares.
(a) If
the
After-Tax Net Income for the fiscal year ended December
31, 2008
is at
least equal to the Guaranteed ATNI, HFI and HFG shall transfer to the Company,
for no additional consideration, the Cancellation Shares, within seven Business
Days after the date which the Annual Report is filed with the Commission. If
the
Company’s audited consolidated financial statements for the fiscal year ended
December 31, 2008 specify that the Guaranteed ATNI has not been achieved, no
transfer of the Cancellation Shares shall be required by this Section 5(a)
and
all Cancellation Shares deposited with the Escrow Agent shall be returned to
HFI
and HFG within seven Business Days after the date which the Annual Report is
filed with the Commission and otherwise in accordance with this Agreement.
(b) If
the
Cancellation Shares are disbursed to the Company in accordance with this
Agreement, then the Company shall instruct the transfer agent to cancel the
Cancellation Shares. Upon written request from the Company, HFI and HFG shall
deliver to the Company a written release that releases the Company from any
obligations arising as a result of HFI’s and HFG’s ownership of the Cancellation
Shares.
(c) Within
five business days following the conversion of the Series A Voting Convertible
Preferred Stock, HFI and HFG shall deposit the Cancellation Shares into escrow
in accordance with this Agreement along with undated stock powers with Medallion
guarantees (or with such other instruments of transfer as in accordance with
the
requirements of the Company’s transfer agent), in the form and number acceptable
to the Company.
6. Duration.
This
Agreement shall terminate on the sooner of (i) the distribution of all the
Cancellation Shares or (ii) May 1, 2009. The Company agrees to promptly provide
the Escrow Agent written notice of the filing with the Commission of any
financial statements or reports referenced herein.
7. Cancellation
Shares.
If any
Cancellation Shares are deliverable to the Company in accordance with this
Agreement, HFI and HFG shall execute all such instruments of transfer (including
stock powers and assignment documents) as are customarily executed to evidence
and consummate the transfer of the Cancellation Shares from HFI and HFG to
the
Company, to the extent not done so in accordance with Section 5. Until such
time
as (if at all) the Cancellation Shares are required to be delivered pursuant
in
accordance with this Agreement, any dividends payable in respect of the
Cancellation Shares and all voting rights applicable to the Cancellation Shares
shall be retained by HFI and HFG. Should the Escrow Agent receive dividends
or
voting materials, such items shall not be held by the Escrow Agent, but shall
be
passed immediately on to HFI and HFG and shall not be invested or held for
any
time longer than is needed to effectively re-route such items to
HFG.
8. Interpleader.
Should
any controversy arise among the parties hereto with respect to this Agreement
or
with respect to the right to receive the Cancellation Shares, Escrow Agent
shall
have the right to consult and hire counsel and/or to institute an appropriate
interpleader action to determine the rights of the parties. Escrow Agent is
hereby authorized to institute an appropriate interpleader action upon receipt
of a written letter of direction executed by the parties so directing the Escrow
Agent. If Escrow Agent is directed to institute an appropriate interpleader
action, it shall institute such action not prior to thirty (30) days after
receipt of such letter of direction and not later than sixty (60) days after
such date. Any interpleader action instituted in accordance with this Section
8
shall be filed in any court of competent jurisdiction in the State of New York,
and the Cancellation Shares in dispute shall be deposited with the court and
in
such event Escrow Agent shall be relieved of and discharged from any and all
obligations and liabilities under and pursuant to this Agreement with respect
to
the Cancellation Shares and any other obligations hereunder.
9. Exculpation
and Indemnification of Escrow Agent.
(a) Escrow
Agent is not a party to, and is not bound by or charged with notice of any
agreement out of which this escrow may arise. Escrow Agent acts under this
Agreement as a depositary only and is not responsible or liable in any manner
whatsoever for the sufficiency, correctness, genuineness or validity of the
subject matter of the escrow, or any part thereof, or for the form or execution
of any notice given by any other party hereunder, or for the identity or
authority of any person executing any such notice. Escrow Agent will have no
duties or responsibilities other than those expressly set forth herein. Escrow
Agent will be under no liability to anyone by reason of any failure on the
part
of any party hereto (other than Escrow Agent) or any maker, endorser or other
signatory of any document to perform such person's or entity's obligations
hereunder or under any such document. Except for this Agreement and instructions
to Escrow Agent pursuant to the terms of this Agreement, Escrow Agent will
not
be obligated to recognize any agreement between or among any or all of the
persons or entities referred to herein, notwithstanding its knowledge thereof.
(b) Escrow
Agent will not be liable for any action taken or omitted by it, or any action
suffered by it to be taken or omitted, absent gross negligence or willful
misconduct. Escrow Agent may rely conclusively on, and will be protected in
acting upon, any order, notice, demand, certificate, or opinion or advice of
counsel (including counsel chosen by Escrow Agent), statement, instrument,
report or other paper or document (not only as to its due execution and the
validity and effectiveness of its provisions, but also as to the truth and
acceptability of any information therein contained) which is reasonably believed
by Escrow Agent to be genuine and to be signed or presented by the proper person
or persons. The duties and responsibilities of the Escrow Agent hereunder shall
be determined solely by the express provisions of this Agreement and no other
or
further duties or responsibilities shall be implied, including, but not limited
to, any obligation under or imposed by any laws of the State of New York upon
fiduciaries. THE
ESCROW AGENT SHALL NOT BE LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY (I) DAMAGES,
LOSSES OR EXPENSES ARISING OUT OF THE SERVICES PROVIDED HEREUNDER, OTHER THAN
DAMAGES, LOSSES OR EXPENSES WHICH HAVE BEEN FINALLY ADJUDICATED TO HAVE DIRECTLY
RESULTED FROM THE ESCROW AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR (II)
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSSES OF ANY KIND WHATSOEVER
(INCLUDING, WITHOUT LIMITATION, LOST PROFITS), EVEN IF THE ESCROW AGENT HAS
BEEN
ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES AND REGARDLESS OF THE
FORM
OF ACTION.
(c) The
Company, HFI and HFG each hereby, jointly and severally, indemnify and hold
harmless each of Escrow Agent, and any of their principals, partners, agents,
employees and affiliates from
and
against any expenses, including reasonable attorneys' fees and disbursements,
damages or losses suffered by Escrow Agent in connection with any claim or
demand, which, in any way, directly or indirectly, arises out of or relates
to
this Agreement or the services of Escrow Agent hereunder; except, that if Escrow
Agent is guilty of willful misconduct or gross negligence under this Agreement,
then Escrow Agent will bear all losses, damages and expenses arising as a result
of its own willful misconduct or gross negligence. Promptly after the receipt
by
Escrow Agent of notice of any such demand or claim or the commencement of any
action, suit or proceeding relating to such demand or claim, Escrow Agent will
notify the other parties hereto in writing. For the purposes hereof, the terms
"expense" and "loss" will include all amounts paid or payable to satisfy any
such claim or demand, or in settlement of any such claim, demand, action, suit
or proceeding settled with the express written consent of the parties hereto,
and all costs and expenses, including, but not limited to, reasonable attorneys'
fees and disbursements, paid or incurred in investigating or defending against
any such claim, demand, action, suit or proceeding. The provisions of this
Section 9 shall survive the termination of this Agreement, and the resignation
or removal of the Escrow Agent.
10. Compensation
of Escrow Agent.
Escrow
Agent shall be entitled to compensation for its services in the amount of
$750.00 which shall be paid by HFG. The fee agreed upon for the services
rendered hereunder is intended as full compensation for Escrow Agent's services
as contemplated by this Agreement; provided,
however,
that in
the event that Escrow Agent renders any material service not contemplated in
this Agreement, or there is any assignment of interest in the subject matter
of
this Agreement, or any material modification hereof, or if any material
controversy arises hereunder, or Escrow Agent is made a party to any litigation
pertaining to this Agreement, or the subject matter hereof, then Escrow Agent
shall be reasonably compensated by the Company for such extraordinary services
and reimbursed for all costs and expenses, including reasonable attorney's
fees,
occasioned by any delay, controversy, litigation or event, and the same shall
be
recoverable from the Company. Prior
to
incurring any costs and/or expenses in connection with the foregoing sentence,
Escrow Agent shall be required to provide written notice to the Company of
such
costs and/or expenses and the relevancy thereof and Escrow Agent shall not
be
permitted to incur any such costs and/or expenses prior to receiving written
approval from the Company, which approval shall not be unreasonably
withheld.
11. Resignation
of Escrow Agent.
At any
time, upon ten (10) days' written notice to the Company, HFI and HFG, Escrow
Agent may resign and be discharged from its duties as Escrow Agent hereunder.
As
soon as practicable after its resignation, Escrow Agent will promptly turn
over
to a successor escrow agent appointed by the Company, HFI and HFG the
Cancellation Shares held hereunder upon presentation of a document appointing
the new escrow agent and evidencing its acceptance thereof. If, by the end
of
the 10-day period following the giving of notice of resignation by Escrow Agent,
the Company, HFI and HFG shall have failed to appoint a successor escrow agent,
Escrow Agent may interplead the Cancellation Shares into the registry of any
court having jurisdiction.
12. Records.
Escrow
Agent shall maintain accurate records of all transactions hereunder. Promptly
after the termination of this Agreement or as may reasonably be requested by
the
parties hereto from time to time before such termination, Escrow Agent shall
provide the parties hereto, as the case may be, with a complete copy of such
records, certified by Escrow Agent to be a complete and accurate account of
all
such transactions. The authorized representatives of each of the parties hereto
shall have access to such books and records at all reasonable times during
normal business hours upon reasonable notice to Escrow Agent and at the
requesting party’s expense.
13. Notice.
All
notices, communications and instructions required or desired to be given under
this Agreement must be in writing and shall be deemed to be duly given if sent
by registered or certified mail, return receipt requested, or overnight courier,
to the addresses listed on the signature pages hereto.
14. Execution
in Counterparts.
This
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
15. Assignment
and Modification.
This
Agreement and the rights and obligations hereunder of any of the parties hereto
may not be assigned without the prior written consent of the other parties
hereto. Subject to the foregoing, this Agreement will be binding upon and inure
to the benefit of each of the parties hereto and their respective successors
and
permitted assigns. No other person will acquire or have any rights under, or
by
virtue of, this Agreement. No portion of the Cancellation Shares shall be
subject to interference or control by any creditor of any party hereto, or
be
subject to being taken or reached by any legal or equitable process in
satisfaction of any debt or other liability of any such party hereto prior
to
the disbursement thereof to such party hereto in accordance with the provisions
of this Agreement. This Agreement may be amended or modified only in writing
signed by all of the parties hereto.
16. Applicable
Law.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York without giving effect to the principles of conflicts of laws
thereof.
17. Headings.
The
headings contained in this Agreement are for convenience of reference only
and
shall not affect the construction of this Agreement.
18. Attorneys'
Fees.
If any
action at law or in equity, including an action for declaratory relief, is
brought to enforce or interpret the provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees from the other
party (unless such other party is the Escrow Agent), which fees may be set
by
the court in the trial of such action or may be enforced in a separate action
brought for that purpose, and which fees shall be in addition to any other
relief that may be awarded.
19. Merger
or Consolidation.
Any
corporation or association into which the Escrow Agent may be converted or
merged, or with which it may be consolidated, or to which it may sell or
transfer all or substantially all of its corporate trust business and assets
as
a whole or substantially as a whole, or any corporation or association resulting
from any such conversion, sale, merger, consolidation or transfer to which
the
Escrow Agent is a party, shall be and become the successor escrow agent under
this Escrow Agreement and shall have and succeed to the rights, powers, duties,
immunities and privileges as its predecessor, without the execution or filing
of
any instrument or paper or the performance of any further act.
[Signature
Page Follows]
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date
first above written.
| MILLENNIUM QUEST, INC. | |
|
By:/s/▇▇
▇▇▇▇
Name:
▇▇ ▇▇▇▇
Title:
Chief Executive Officer
ADDRESS:
Beihuan
Road
Junan
County
Shandong,
China
|
|
| HALTER FINANCIAL INVESTMENTS, L.P. | |
| By:/s/▇▇▇▇▇▇▇
▇. ▇▇▇▇▇▇
Name:
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title:
Chairman
ADDRESS:
▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇▇
|
|
|
HALTER
FINANCIAL GROUP, L.P.
By:/s/▇▇▇▇▇▇▇
▇. ▇▇▇▇▇▇
Name:
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title:
Chairman
ADDRESS:
▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇▇
|
|
|
ESCROW
AGENT:
SECURITIES
TRANSFER CORPORATION,
as
Escrow Agent
By:/s/
▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇.
▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇., President
Address:
▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇
Attn:
▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇.
Facsimile:
(▇▇▇) ▇▇▇-▇▇▇▇
|
|
[Signature
Page to Cancellation and Escrow Agreement]